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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





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FORM 10-K/A





Amendment No. 1





(MARK ONE)


| | x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | 
| | - | ------------------------------------------------------------------------------------ | 




For The Fiscal Year Ended December 31, 2001





| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 | 
| | - | ------------------------------------------------------------------------------- | 




For The Transition Period From
 To





Commission File No. 000-28715





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NEOFORMA, INC.


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





Delaware

77-0424252(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification
Number)3061 Zanker Rd., San Jose, CA

95134(Address of principal executive offices)

(Zip code)





(408) 468-4000


(The Registrants telephone number, including area code)





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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





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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/A or any amendment to this Form 10-K/A.  ̈





As of March 26, 2002, the aggregate market value of the
Registrants voting stock held by non-affiliates of the Registrant, based on the closing price for the Registrants common stock on The Nasdaq Stock Market on such date, was $128,071,552. This calculation does not reflect a determination
that certain persons are affiliates of the Registrant for any other purposes.





The number of shares of common
stock outstanding on March 26, 2002 was 18,506,751.





Portions of the Registrants definitive Proxy Statement
for its Annual Meeting of Stockholders held in May 2002 are incorporated by reference into this report on Form 10-K/A.





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EXPLANATORY NOTE:





THIS FORM 10-K/A IS BEING FILED FOR THE PURPOSE OF AMENDING AND RESTATING ITEMS 6, 7, 8 AND 14 TO REFLECT THE RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001
AND 2000. ALL INFORMATION IN THIS FORM 10-K/A IS AS OF DECEMBER 31, 2001 AND DOES NOT REFLECT, UNLESS OTHERWISE NOTED, ANY SUBSEQUENT INFORMATION OR EVENTS OTHER THAN THE CHANGES RELATED TO THE RESTATEMENT. SEE NOTES 17 AND 18 TO THE NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR FURTHER DISCUSSION OF SUBSEQUENT EVENTS AND THE RESTATEMENT, RESPECTIVELY.




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We make many statements in this annual report, such as statements regarding our plans, objectives, expectations and
intentions, that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We may identify these statements by the use of words such as will,
may, might, could, should, believe, expect, anticipate, intend, plan, predict, project, estimate,
potential, continue and similar expressions. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result
of various factors, including those we discuss in Managements Discussion and Analysis of Financial Condition and Results of OperationsFactors That May Affect Future Operating Results and elsewhere in this annual report. You
should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission. The forward-looking statements contained herein speak only as of the date of this annual report, and we caution you
not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this annual report. We undertake no obligation to publicly release any revisions to the
forward-looking statements to reflect circumstances or events after the date of this report.





ITEM
6.Selected Consolidated Financial Data





SELECTED CONSOLIDATED
FINANCIAL DATA





The selected consolidated balance sheet data as of December 31, 2000 and 2001, and the
selected consolidated statements of operations data for each of the years ended December 31, 1999, 2000 and 2001, have been derived from our audited financial statements appearing in this Form 10-K/A. The selected consolidated balance sheet data as
of December 31, 1997, 1998 and 1999 and the selected consolidated statements of operations data for the years ended December 31, 1997 and 1998 are derived from our audited financial statements not included in this Form 10-K/A. When you read this
selected consolidated financial data, it is important that you also read the restated consolidated financial statements and related notes included in this Form 10-K/A, 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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Year Ended December 31,1997


1998


1999


2000


2001(As restated, see Note 18 to the Notes to Consolidated Financial Statements)(in thousands, except per share amounts)CONSOLIDATED STATEMENTS OF OPERATIONS DATA:Revenue:Marketplace revenue:Related party

$











$
81


$
24,567Other










83



1,257



1,130Total Marketplace revenue










83



1,338



25,697Trading Partner Services revenue:Trading partner services










921



4,479



1,877Sales of used equipment














4,629



250Total Trading Partner Services revenue










921



9,108



2,127Total revenue










1,004



10,446



27,824Operating Expenses:Cost of equipment sold














3,544



216Cost of services














7,722



13,480Operations






627



5,941



14,035



15,675Product development


179



1,494



8,161



24,785



16,912Selling and marketing


153



1,411



16,860



51,530



28,646General and administrative


76



1,075



17,937



22,877



16,064Amortization of intangibles










715



26,557



30,098Amortization of partnership costs














29,523



75,651Costs of strategic partnership














9,345



Cost of warrant issued to recruiter










2,364







Write-off of purchased software














3,858



1,513Write-off of acquired in-process research and development














16,900



Abandoned acquisition costs














2,742



Restructuring














2,791



950Impairment of intangibles


















11,906Impairment of assets held for divestiture














13,305



81,086Write-down of non-marketable investments


















8,400Net gain on divested businesses


















(55
)Loss from operations


(408
)


(4,607
)


(50,974
)


(219,068
)


(272,718
)Other Income (Expense):Interest income






66



659



4,707



769Interest expense


(15
)


(22
)


(676
)


(1,362
)


(685
)Other income (expense)


7







(29
)


29



271Net loss

$
(416
)

$
(4,563
)

$
(51,020
)

$
(215,694
)

$
(272,363
)Net loss per share:Basic and diluted

$
(0.51
)

$
(16.53
)

$
(191.51
)

$
(25.58
)

$
(17.32
)Weighted-average sharesbasic and diluted


808



276



266



8,432



15,721Pro forma net loss per share:Basic and diluted





$
(3.55
)

$
(16.31
)

$
(24.85
)Weighted average sharesbasic and diluted






1,285



3,128



8,679




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December 31,1997


1998


1999


2000


2001(As restated, see Note 18 to the Notes to Consolidated Financial Statements)(in thousands)CONSOLIDATED BALANCE SHEET DATA:Cash, cash equivalents and short-term investments

$
32


$
812


$
46,775


$
27,693


$
14,096Working capital


(23
)


214



36,888



(1,241
)


(695
)Total assets


55



1,672



77,369



505,143



286,301Notes payable, less current portion


385



279



7,743



7,958



20,635Mandatorily redeemable convertible preferred stock






3,884



88,812







Total stockholders equity (deficit)


(390
)


(3,155
)


(31,863
)


461,086



242,474





ITEM 7.Managements Discussion and Analysis of
Financial Condition and Results of Operations





Subsequent to the issuance of the Companys
2001 consolidated financial statements, the Companys management determined that the accounting treatment initially afforded to certain transactions was not correct. This Form 10-K/A is being filed for the purpose of amending and restating the
consolidated financial statements and related notes as of and for the years ended December 31, 2000 and 2001. All information in this Form 10-K/A is as of the date of the original filing and does not reflect, unless otherwise noted, any subsequent
events other than the changes related to the restatement. See Notes 17 and 18 to the Notes to Consolidated Financial Statements for further discussion of subsequent events and the restatement, respectively. The following discussion and analysis
gives effect to the restatement.





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





Overview





Neoforma is a leading healthcare supply chain and
information solutions company. We build and operate Internet marketplaces that empower healthcare trading partners to optimize supply chain performance and we provide complementary solutions to our trading partners that enable them to increase the
value they derive from our marketplaces. Our objective is to develop the industry standard supply chain operating system for healthcare. Our solutions enable the participants in the healthcare supply chain, principally healthcare providers,
manufacturers, distributors and general purchasing organizations, or GPOs, to significantly improve business processes within their organizations and among their trading partners. These solutions consist of Web-based applications and services for
our customers, or trading partners, that are designed to accelerate and optimize their use of the marketplaces that we build for them. Our trading partners include healthcare providers, including hospitals and integrated delivery networks, or IDNs,
and GPOs, and the manufacturers and distributors that sell products and services to them. As of December 31, 2001, the Companys only Internet marketplace that was generating revenue was Marketplace@Novation.





Historically, we have offered four primary servicesShop, Auction, Planand Services. Our Shop
service provided public marketplaces where buyers could easily identify, locate and purchase new products and suppliers could access new customers and markets. Healthcare providers could use our Shopservice to purchase a wide range of
products, from disposable gloves to surgical instruments and diagnostic equipment. Our Auction service created an efficient marketplace for idle assets by enabling users to list, sell and buy used and refurbished equipment and surplus medical
products. Our Planservice provided interactive content to healthcare facility planners and designers, including 360 degree interactive photographs of rooms and suites in medical facilities




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that we believed represented industry best practices, together with floor plans and information about the products in the room. Our Services organization provides scalable and
cost-effective implementation solutions for both healthcare providers and suppliers.





In late fiscal 2000, we
decided to refocus our development efforts and internal resources on our core business of building and operating Internet marketplaces to optimize supply chain performance for our trading partners. As part of this effort, we developed a plan to
eliminate any operations that were not aligned with this core strategy. As such, in early fiscal 2001, we announced our intent to divest our Auction operations and portions of our Planoperations. In April 2001, we implemented part of
this strategy by selling USL and FDI Information Resources, LLC, or FDI, which together comprised substantially all of our Plan operations, to MDSI and Attainia, Inc., or Attainia, respectively. In September 2001, we completed the sale of our
Auctionoperations to Med-XS Solutions, Inc., or Med-XS, which completed the divestitures we had planned to execute in 2001 as part of our refocused strategy.





During the fourth quarter of 2001, in order to continue to maintain our focus on delivering core customer solutions and to increase our resource commitment to the more
scalable acute care business, we obtained board approval to begin exploring strategic alternatives for our Atlanta-based alternate site healthcare business unit, NeoMD, which consists primarily of the assets of our wholly-owned subsidiary, EquipMD.
Concurrently, we are continuing to streamline our organizational structure to increase operational efficiency in part by reallocating or eliminating internal assets focused on the alternate site healthcare business. The charge to write down the
assets of the business to our estimate of the current fair market value is reflected in our statement of operations for the period ended December 31, 2001 as impairment of assets held for divestiture. See Note 17 to the Notes to Consolidated
Financial Statements for discussion of subsequent developments related to the divestiture of the NeoMD operations.





As part of our focus on our core business and as a result of the divestiture of a number of our non-core operations discussed above, the nature and mix of our revenue shifted substantially during 2001. As a result, our revenue
streams currently consist of two primary types of revenue: marketplace revenue and trading partner services revenue. Marketplace revenue is comprised of transaction and subscription based fees paid by the buyers and the suppliers of products on our
marketplaces, as well as fees paid by marketplace sponsors such as GPOs. Trading partner services revenue in 2001 consists of revenue generated from the sale or license of applications and services that are complementary to our marketplace services.
Trading partner services revenue historically has consisted of:





| |  | setup fees from participating sellers to digitize their product information for display on our Website;
| | - | -------------------------------------------------------------------------------------------------------




| |  | subscription and transaction based fees paid by healthcare providers and suppliers for our management and disposition of their used medical equipment through
our Auction asset recovery service;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | product revenue related to the sale of medical equipment that we purchased for resale through our live and online auction services;
| | - | -----------------------------------------------------------------------------------------------------------------------------------




| |  | sponsorship fees paid by sellers of medical products and services used in planning and outfitting healthcare facilities in exchange for the right to feature
their brands and products on our now divested Plan service;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | license fees from the sale of software tools and related technical information for the equipping and planning of healthcare facilities; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------




| |  | service delivery fees for implementation and consulting services paid by users of our marketplaces.
| | - | ---------------------------------------------------------------------------------------------------




We recognize transaction fees as revenue when the seller confirms a buyers order. Marketplace subscription fees are recognized
ratably over the period of the related agreement with the applicable buyer or supplier. Setup fees have been recognized upon completion of the related services. For live and online auction services, we recognized seller transaction fees, as well as
a buyers premium, when the product was sold. Product




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revenue, representing the difference between the amount we paid for the equipment and the price paid to us on resale, was recognized when the product was shipped. As a result of our divestiture
of our Auction operations, we do not expect to recognize any revenue from live and online auction services or product revenue in 2002. Sponsorship and subscription fees related to our divested Plan operations were recognized ratably
over the period of the agreement. With respect to software licenses, license fees are recognized when the software has been delivered and there are no other contingencies related to our performance. If license fees are contingent upon our
performance subsequent to delivery, we defer recognition of such fees or the fair market value of the undelivered element requiring performance until we have completed performance. Subscription and maintenance fee revenue is recognized ratably over
the period of the service agreement. Services revenue for implementation projects are generally the result of fixed fee arrangements, and due to the nature and term of the projects, we recognize such fees on a completed contract basis. Revenue for
other services, including training and consulting, is recognized as services are performed for time and material arrangements.





We are continuing to identify new potential revenue opportunities within the scope of our core strategy of developing and operating Internet marketplaces. We have identified opportunities to develop and sell additional products and
services into our existing customer base that can provide significant value to trading partners using our marketplaces and could represent significant future revenue opportunities. In connection with this strategy, we have refocused our efforts on
identifying opportunities to license the proprietary technology that we have developed and are developing for internal use as part of our marketplace development efforts. While licensing these internally developed software and technology solutions
has been part of our core strategy, only recently has Marketplace@Novation achieved volume levels sufficient to validate our technology and enable us to pursue technology licensing opportunities. While our sale of certain software and technology
underlying our connectivity solution to GHX in August 2001 was the first such sale of our proprietary, internally developed software, we intend to continue to market our technology solutions to other marketplace providers and participants in the
healthcare industry, as well as in other vertical markets.





Both our revenue and operating expenses increased
significantly over the course of fiscal 2001. We generated increased revenue from the growth of our marketplace revenue primarily due to higher transaction and subscription fees resulting from increased volume through Marketplace@Novation. The
increase in operating expenses during 2001 was primarily due to increases in our amortization of partnership costs relating to our outsourcing and operating agreement with Novation, VHA, UHC and HPPI, impairment of assets held for divestiture
resulting from the write-down of the assets of our NeoMD business in conjunction with our plans to divest the business and increased costs incurred to write down certain non-marketable investments and intangible assets. See Note 2Recent
Accounting Pronouncementsto the Notes to Consolidated Financial Statements for discussion of the impact of the adoption of EITF No. 01-9 on related party revenue and operating expenses.





Strategic Partnerships





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




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





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





In January 2001, we entered into an amendment to the outsourcing and operating agreement which was effective as of January 1, 2001. Under the terms of the amended
outsourcing and operating agreement, Novation agreed to increase the minimum fee level it guaranteed to us, which is based on a percentage of marketplace volume processed through Marketplace@Novation. The fee level is calculated based on a tiered
fee structure under which the incremental fee per dollar of transaction volume decreases as the marketplace volume processed through Marketplace@Novation increases. This structure results in a higher blended fee percentage at lower volume levels and
a lower blended fee percentage at higher volume levels. Under the terms of the amended outsourcing and operating agreement, the payments Novation is required to make are subject to quarterly maximums. These maximums are based on a predetermined
schedule with increasing dollar amounts through 2002. Beginning in 2003 through the remaining term of the amended outsourcing and operating agreement, these maximums are calculated based on Novations financial performance, as defined. In
certain historical periods, the fees from Novation have been limited by these maximums. The amended outsourcing and operating agreement also includes modifications to revenue sharing provisions under which we agreed to share specified fees we
receive for products and services sold through or related to our marketplaces. We agreed to share with Novation revenue related to transactions through Marketplace@Novation and from our other marketplaces as well as revenue related to the
distribution or licensing of software and other technology solutions. We are not required to share revenue related to marketplaces sponsored by other GPOs, except for specified types of purchases. For the term of the amended outsourcing and
operating agreement, we are not required to share with Novation revenue related to any of the above transactions in any quarter until we have achieved specified minimum transaction fees related to Marketplace@Novation transactions. The amended
outsourcing and operating agreement also includes modifications to certain supplier recruitment and supplier implementation provisions.





In September 2001, the parties agreed to amend the amended outsourcing and operating agreement. Pursuant to this amendment, all parties agreed to expand the definition of marketplace volume to include supply chain data
captured for marketplace member purchasing when the initial transaction itself was not facilitated by our connectivity solution. As a result, we will be able to provide our trading partners within Marketplace@Novation with information relating to
all purchases made by members from suppliers that have agreed to provide this transaction data as part of their participation in Marketplace@Novation. This amendment accelerates our ability to capture critical supply chain data and will also enable
us to capture important purchasing information without first requiring full adoption of our connectivity services.





See Note 17 to the Notes to Consolidated Financial Statements for discussion of subsequent developments related to the amended outsourcing and operating agreement.




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





As a result of the
terms of the outsourcing and operating agreement and the subsequent amendments, certain executive officers of VHA, UHC and Novation sat on our board as of December 31, 2001. Such individuals included: Robert J. Baker, President and CEO of UHC; Mark
McKenna, President of Novation; Curt Nonomaque, Executive Vice President of VHA; and C. Thomas Smith, President and CEO of VHA. The compensation these individuals receive for serving on our board of directors is equivalent with the other members of
the board, is disclosed annually in our proxy statement for our annual meeting of stockholders and consists solely of annual stock option grants pursuant to the terms of our 1999 Equity Incentive Plan. According to representations made to us by VHA,
UHC and Novation, none of our directors who are officers of VHA, UHC or Novation benefit directly from the options granted to them, because any profits generated by the exercise and sale of these option shares, when and if exercised, must be
surrendered to VHA, UHC or Novation, as the case may be.





Divestitures





As a result of planned divestitures of our Auctionand USL operations, at December 31, 2000, we wrote down the assets of those
operations to our estimate of the net realizable disposal value of the operations based on their activity through that date. Additionally, we recorded an accrual for the anticipated costs to sell these operations. The total impact of these planned
divestitures on our statement of operations for the year ended December 31, 2000 was $14.0 million, which consisted of a $13.3 million reduction in the net realizable value of the assets relating to the operations to be sold, classified as an
impairment of assets held for divestiture, and $691,000 of accruals for restructuring costs, including severance for the employees of those operations and accrued rent relating to potentially idle facilities, classified as restructuring costs. In
2001, we recorded an additional restructuring charge of $600,000 to reflect additional costs relating to severance and idle facilities resulting from the divestiture of our Auction operations. As of December 31, 2001, $589,000 of the accrual
had been utilized. The remaining $702,000 accrual as of December 31, 2001 consists primarily of accrued rent relating to idle facilities formerly utilized by the divested businesses.





In April 2001, we completed the sale of substantially all of the assets of our USL operations to MDSI. Under the terms of the asset purchase agreement, we agreed to sell
substantially all of the net assets of the USL operations, totaling approximately $750,000, in exchange for $500,000 of cash delivered upon the closing and a $750,000 non-interest bearing promissory note payable in three annual installments
commencing in April 2003. This note was recorded on our books at the net present value of $533,000 as of the date of the divestiture. The net result of the transaction was a gain on the divestiture of the USL operations of $307,000.





In April 2001, we entered into an agreement to sell substantially all of the remaining assets of our Planoperations,
consisting primarily of FDI, valued at approximately $1.8 million, to Attainia, a company created by several former Neoforma employees, including the two founders of Neoforma. In consideration, we received 1,490,637 shares of Attainias Series
A Preferred Stock, valued at $0.50 per share, which resulted in consideration of $745,000 being provided to us upon closing. These shares are recorded as non-marketable investments in the accompanying consolidated financial statements. The net
result of the transaction was a loss on the divestiture of these assets of $1.1 million.





In September 2001, we
completed the sale of substantially all of the assets of our Auctionoperations, recorded at approximately $1.8 million, to Med-XS in exchange for consideration in the amount of $2.5 million. The consideration provided by Med-XS at closing on
September 5, 2001 consisted of $150,000 cash and a $2.4 million promissory note payable over two years. This note was recorded on our books at the net present value of $2.1 million as of the date of the divestiture. In addition to the consideration
discussed above, we will receive a revenue share and profit share from Med-XS on the sold business, which will be recognized when earned. The net result of the transaction was a gain on the divestiture of these assets of $872,000. As of December 31,
2001, we have received only the closing amount of $150,000 from Med-XS. In January 2002, we filed suit against




9




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Med-XS for failure to make any subsequent payments due under the promissory note. As of December 31, 2001, we believe that the full amount is collectible and as such, we have not recorded any
valuation allowance against this note. See Note 17 to the Notes to Consolidated Financial Statements for discussion of subsequent developments related to the suit against Med-XS.





As a result of the planned divestiture of our NeoMD operations, at December 31, 2001, we wrote down the assets of the operations to our estimate of the net realizable
disposal value of the operations based on its activity through that date. Additionally, we recorded an accrual for the anticipated costs to sell the operations. The total impact of this planned divestiture on our consolidated statement of operations
for the year ended December 31, 2001 was $81.4 million, which consisted of an $81.1 million reduction in the net realizable value of the assets relating to the operations to be sold, classified as an impairment of assets held for divestiture, and
$350,000 of accruals for divestiture related costs, including severance for the employees of those operations and accrued rent relating to potentially idle facilities, classified as restructuring costs. As of December 31, 2001, none of this accrual
had been utilized. See Note 17 to the Notes to Consolidated Financial Statements for discussion of subsequent developments related to the divestiture of the NeoMD operations.





Other Matters





In
August 2001, as part of our annual meeting of stockholders, the stockholders voted to approve a proposal to change our name from Neoforma.com, Inc. to Neoforma, Inc. Additionally, the stockholders voted to approve a proposal that gave the board of
directors the authority to implement a reverse stock split of our common stock at any one of three approved exchange ratios (1-for-6, 1-for-8 or 1-for-10) if it believed that it was in our best interests to do so. On August 27, 2001, we implemented
a 1-for-10 reverse split of our common stock as approved by our board of directors. All share and per share amounts, both current and historical, contained in these financial statements and the accompanying notes, have been restated to reflect the
impact of the reverse stock split.





In December 2001, we became aware of certain factors that indicated that the
value of certain assets acquired as part of our acquisition of Pharos in January 2000 had been impaired. As a result of our impairment analysis, we determined that the intangible assets relating to the acquisition, which consisted primarily of
acquired technology and intellectual property, had no future realizable value, primarily as a result of our discontinuation of the use of those technologies, combined with a lack of any identifiable market to sell those technologies. As a result, as
of December 31, 2001, we wrote off the remaining value of the intangible assets relating to the Pharos acquisition, which amounted to $11.9 million, as an impairment of intangibles.





Since inception, we have incurred significant losses and, as of December 31, 2001, had an accumulated deficit of $544.1 million. We anticipate our losses in 2002 will
decrease as compared to fiscal 2001 as a result of several factors. These factors primarily relate to anticipated reductions in non-cash charges, such as amortization of intangibles, impairment of intangibles, impairment of assets held for
divestiture and write-down of non-marketable investments, as well as anticipated increases in fees received from related parties. Historically, these fees have been reported as related party revenue. However, as a result of the application of EITF
No. 01-9, non-cash amortization of partnership costs will be offset against these fees received from related parties up to the lesser of related party revenue or amortization of partnership costs in any period, resulting in a reduction in the
amortization classified as an operating expense. We expect these fees from related parties to continue to increase over the next several quarters. See Note 2Recent Accounting Pronouncementsto the Notes to Consolidated Financial
Statements for further discussion of the application of EITF No. 01-9.





We have a limited operating history on
which to base an evaluation of our business and prospects. You must consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and
rapidly evolving markets such as the online market for the purchase and sale of new products and services used by healthcare providers, including medical supplies and equipment. To address these risks, we must, among other things, increase the
number of




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marketplaces we build and operate, expand the number of trading partners that use our marketplaces, enter into new strategic alliances, increase the functionality of our services, implement and
successfully execute our business and marketing strategy, respond to competitive developments and attract, retain and motivate qualified personnel. We may not be successful in addressing these risks, and our failure to do so could seriously harm our
business.





Results of Operations





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





Revenue





Marketplace Revenue





Related Party.    Related party marketplace revenue consists of payments for marketplace services from trading
partners or marketplace sponsors that are also significant stockholders of Neoforma. For the years ended December 31, 2000 and 2001, related party marketplace revenue consisted solely of payments from Novation to us under the minimum fee level
guarantee provisions of the outsourcing and operating agreement during those periods. This revenue increased from $81,000 for the year ended December 31, 2000 to $24.6 million for the year ended December 31, 2001 as a result of increased marketplace
volume through Marketplace@Novation, which increased from $21.6 million in 2000 to $1.2 billion in 2001. See Note 2Recent Accounting Pronouncementsto the Notes to Consolidated Financial Statements for discussion of the impact of the
adoption of EITF No. 01-9 on related party revenue.





Other.    Other marketplace
revenue consists of marketplace revenue received from trading partners, marketplace sponsors and other sources that are not related parties and generally consists of transaction based fees and subscription fees. Other marketplace revenue was $1.1
million for the year ended December 31, 2001, a 10% decrease from $1.3 million for the year ended December 31, 2000. The decrease was primarily due to the elimination of our Shop services in 2001, partially offset by an increase in revenue
from our NeoMD marketplace and from the initiation of supplier paid fees through Marketplace@Novation.





Trading Partner Services Revenue





Trading Partner
Services.    Trading partner services revenue consists of revenue generated from the sale of complementary applications and services to members and potential members of our marketplaces. Historically, trading partner services
revenue consisted of the following: setup fees to digitize product information; subscription and transaction based fees for management and disposition of used medical equipment through our asset recovery service, known as Auction; sponsorship
fees paid by sellers to feature their brands and products on our now divested Plan service; license fees from the sale of software tools and related technical information; and services revenue for implementation and consulting services paid
by users of our marketplaces. The 58% decrease in trading partner services revenue from $4.5 million for the year ended December 31, 2000 to $1.9 million for the year ended December 31, 2001 was primarily due to reduced revenue from the USL business
as a result of the sale of USL in April 2001; reduced revenue from our other Plan operations as a result of the sale of those operations to Attainia in April 2001; and reduced transaction fee revenue from our asset recovery services as a
result of the sale of the Auction operations in September 2001. These reductions were partially offset by revenue relating to the sale of RCS to GHX that was recognized during 2001. Trading partner services revenue for 2001 included $254,000
from related parties.





Sales of Used Equipment.    Sales of used equipment consisted of
the gross revenue generated from the sales of used and refurbished medical equipment that we owned as part of our Auctionservice. We had total sales of used equipment of $250,000 for the year ended December 31, 2001, a decrease from $4.6
million for the year ended December 31, 2000. The decrease is a result of fewer auctions being conducted that included owned equipment during the first half of 2001 due to our reduced focus on the Auctionoperations and the closing of the




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sale and the cessation of auction activities in September 2001. Because we have sold our Auctionoperations, we do not anticipate that we will recognize any future revenue from sales of
used equipment.





Operating Expenses





Cost of Equipment Sold.    Cost of equipment sold consists solely of the costs of owned inventory of used medical equipment held for sale as part of our Auction
operations. Cost of equipment sold decreased from $3.5 million for the year ended December 31, 2000 to $216,000 for the year ended December 31, 2001. The decrease is a result of fewer auctions being conducted that included owned equipment during the
first half of 2001 due to our reduced focus on the Auctionoperations and the closing of the sale and the cessation of auction activities in September 2001. Because of the sale of our Auction operations, we do not anticipate that we
will incur any future expense relating to cost of equipment sold resulting from the sale of used equipment.





Cost of Services.    Cost of services consists primarily of the costs to perform e-commerce readiness services and buyer and supplier implementation activities for our marketplaces. These expenditures
consist primarily of technology costs, software licenses, salaries and other personnel expenses for our services personnel and fees for independent contractors. Cost of services increased from $7.7 million for the year ended December 31, 2000 to
$13.5 million for the year ended December 31, 2001. The increase was due to the fact that the services group was created early in fiscal 2000, resulting in minimal costs for a significant portion of that period as the group was still building its
operations. Additionally, in 2001, the services organization significantly expanded both the quantity and the scope of the implementations and services it provides to our customers, resulting in further increased costs in 2001. We expect our cost of
services to increase slightly in future periods as we continue to perform e-commerce readiness services, connect both buyers and sellers to our marketplaces and support and service an increasing number of trading partners.





Operations.    Operations expenses consist primarily of expenditures for the operation and maintenance of our
marketplaces and our marketplace technology infrastructure, including customer service. These expenditures consist primarily of fees for independent contractors and consultants, technology costs, software licenses, salaries and other personnel
expenses for our operations personnel. Operations expenses increased from $14.0 million for the year ended December 31, 2000 to $15.7 million for the year ended December 31, 2001. The increase was primarily due to an increase in operations personnel
related costs, an increase in payments to third party consultants and increased expenditures for additional technology costs, such as software licenses and hardware costs, associated with the enhancement of the infrastructure of our marketplaces. We
expect our operations expenses to continue to increase as we expand our operating infrastructure and add content and functionality to our marketplaces.





Product Development.    Product development expenses consist primarily of personnel expenses, fees to consultants and contractors and technology costs associated with the
development and enhancement of our marketplace solutions and functionality. Product development expenses decreased from $24.8 million for the year ended December 31, 2000 to $16.9 million for the year ended December 31, 2001. The decrease was
primarily due to reduced costs relating to product development personnel, specifically with respect to contractors and consultants. We believe that continued investment in product development is critical to attaining our strategic objectives and, as
such, we intend to continue to invest in this area. As a result, we expect product development expenses to increase slightly in future periods. Internally generated software development costs that were potentially eligible for capitalization, after
consideration of factors such as realizable value, were not material and accordingly were expensed as incurred.





Selling and Marketing.    Selling and marketing expenses consist primarily of salaries, commissions, advertising, promotions and related marketing costs. Selling and marketing expenses decreased from $51.5
million for the year ended December 31, 2000 to $28.6 million for the year ended December 31, 2001. The decrease was primarily due to reduced sales and marketing personnel costs and a resulting reduction in expenses related to travel and attendance
at trade shows. As part of our realignment of resources to focus on our core




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business model, we have been focusing more of our available resources on marketplace implementation and integration efforts and product development. As a result, sales and marketing costs were at
significantly lower levels in 2001 as compared with 2000. We do not expect these costs to remain at these reduced levels in 2002. We recognize that sales and marketing efforts are key to establishing ourselves as a leader in our industry and in
branding our products, and as a result, we intend to continue to invest in sales and marketing activities and sell our marketplace services into the channels we have established. As a result, we expect sales and marketing costs to increase slightly
over the next several quarters.





General and Administrative.    General and
administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services and other general corporate activities. General and administrative expenses decreased from $22.9 million for the year ended
December 31, 2000 to $16.1 million for the year ended December 31, 2001. The decrease was primarily due to reduced administrative personnel costs, including finance, accounting and administrative personnel, as well as a decrease in recruiting, legal
and accounting expenses. Also, in 2000 we incurred costs resulting from preparations for our initial public offering, which occurred in January 2000. Given the organizational changes and divestitures we have made to streamline our operations and to
focus on our core strategy, we expect general and administrative expenses to continue at these lower levels in 2002.





Amortization of Intangibles.    Intangible assets include goodwill and the value of software and other intangible assets purchased in acquisitions. Intangible assets historically have been amortized on a
straight-line basis over a period of three to seven years. Amortization of intangibles increased from $26.6 million for the year ended December 31, 2000 to $30.1 million for the year ended December 31, 2001. The increase was primarily the result of
a full year of amortization on the EquipMD intangible assets in fiscal 2001, as opposed to only eight months of amortization taken in fiscal 2000 as a result of the acquisition closing at the end of April 2000. This was offset by the fact that we
incurred reduced amortization from the USL and FDI intangible assets as a result of the divestitures of those operations during the second quarter of 2001. Additionally, we incurred significantly reduced amortization relating to the General Asset
Recovery, LLC, or GAR, and National Content Liquidators, Inc., or NCL, intangible assets as a result of the write-down we took on the Auction operations in the fourth quarter of 2000 in preparation for the sale of the Auction
operations and because we amortized the reduced intangible assets for only a portion of the year as a result of the closing of the sale of the Auction operations during the third quarter of 2001. During the fourth quarter of 2001, we wrote
down the Pharos intangible assets and effectively all of the intangible assets relating to the acquisition of EquipMD as a result of our discontinuation of the use of the Pharos technology and our plans to divest the EquipMD business. As such, we
have no material acquisition related intangible assets remaining to be amortized as of December 31, 2001 and we expect to incur minimal amortization expense from acquisition related intangible assets in future periods.





Amortization of Partnership Costs.    Amortization of partnership costs represents the amortization of the
capitalized valuation of consideration given to strategic partners as part of entering into any operating relationships with those partners. As of December 31, 2001, capitalized partnership costs represented common stock, warrants and restricted
stock issued to VHA and UHC in connection with entering into the outsourcing and operating agreement with those entities and with their purchasing organization, Novation. We initially issued warrants to VHA and UHC, but subsequently canceled these
warrants and issued them restricted common stock in substitution for the canceled warrants. The value of the common stock issued is being amortized over a five year estimated useful life. The restricted common stock issued in substitution for the
warrants is being valued, and the related valuation is being capitalized, as the shares are earned. The capitalized partnership costs relating to the restricted common stock are being amortized over the term of the agreement with the healthcare
organizations that resulted in the shares being earned, generally two to three years. Amortization of partnership costs increased from $29.5 million for the year ended December 31, 2000 to $75.7 million for the year ended December 31, 2001. The
increase from fiscal 2000 was primarily the result of the amortization of a full year of




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partnership costs compared to approximately five months for the year ended December 31, 2000, as the outsourcing and operating agreement did not become effective until late July 2000. In
addition, there were incremental partnership costs capitalized during fiscal 2001 as VHA and UHC earned a portion of the restricted stock. As the period over which VHA and UHC can earn the restricted common stock extends four years from the date of
the agreement, we expect partnership costs to continue to increase as VHA and UHC earn the restricted stock. See Note 2Recent Accounting Pronouncementsto the Notes to Consolidated Financial Statements for discussion of the impact of the
adoption of EITF No. 01-9 on amortization of partnership costs. See Liquidity and Capital Resources for a further discussion of the outsourcing and operating agreement and the related cash and accounting implications.





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





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





In connection with the assumption of certain stock options granted to employees of EquipMD prior to our acquisition of EquipMD,
we recorded deferred compensation of $23.1 million, representing the difference between the estimated fair value of the common stock for accounting purposes and the option exercise price of these options at the date of announcement of the
acquisition. This amount is presented as a reduction of stockholders equity and is being amortized over the vesting period of the applicable options using an accelerated method of amortization. During the years ended December 31, 2000 and
2001, we recorded $0 and $4.9 million, respectively, in reductions of this deferred compensation as a result of employee terminations and employee attrition. We recorded amortization, net of reversals relating to forfeitures, of $9.0 million
and $8.4 million during the years ended December 31, 2000 and 2001, respectively.





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





The remaining total deferred compensation of $10.3 million at December 31, 2001 is expected to be amortized as
follows: $7.1 million during fiscal 2002, $3.1 million during fiscal 2003 and $0.1 million during fiscal 2004. The amortization expense relates to options and restricted stock awarded to employees and officers in all operating expense categories.
The amount of deferred compensation has been separately allocated to these categories in the consolidated statement of operations. The amount of deferred compensation expense to be recorded in future periods could continue to decrease if options or
restricted stock for which accrued but unvested compensation has been recorded are forfeited.





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




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





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





Restructuring.    Restructuring costs consist primarily of the costs associated with the payments to employees for severance resulting from the streamlining and reorganizing of our operations, as well as
costs related to the divestitures of certain operations, including severance for the employees of those operations and accrued rent relating to potentially idle facilities.





During the first half of 2000, we recorded a restructuring charge of $2.1 million. This charge was the result of a reorganization and streamlining of operations undertaken
to focus on two key global markets, IDNs and hospitals, and physician practices. The entire restructuring charge was related to the reduction in workforce of 80 individuals. All 80 employees were terminated under this plan during 2000, of which 35
were in sales and marketing, 4 were in general administration, 16 were in product development, 20 were in operations and 5 were in service delivery. In December 2000, we recorded a restructuring charge of $691,000 in connection with our decision to
divest our Auction and USL operations. Of the $691,000, $160,000 related to anticipated severance of 24 employees and the remainder related to idle facilities and related costs. No employees had been terminated and no amounts had been paid as
of December 31, 2000. For the year ended December 31, 2001, $221,000 was paid out in termination benefits relating to employees terminated as part of the divestiture and $268,000 was paid out for idle facilities and related costs. Of the employees
terminated, 16 were from sales and marketing and 8 were from operations. In June 2001, we recorded an additional restructuring charge of $600,000, of which $539,000 related to a revision of our estimate of the time required to sublease idle
facilities of the Auction operations and $61,000 related to severance costs for employees of the Auction operations. At December 31, 2001, none of this amount had been paid. The remaining accrual balance is expected to be utilized by
the end of 2003.





In December 2001, we recorded a restructuring charge of $350,000 in connection with the decision
to divest the EquipMD subsidiary. Of the $350,000, $311,000 related to anticipated severance of 7 employees and $39,000 related to idle facilities and related costs. None of the accrual had been utilized at December 31, 2001. The remaining accrual
balance is expected to be utilized by the end of 2002.





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





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





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




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During the fourth quarter of 2001, in order to continue to maintain our focus on
delivering core customer solutions and to increase our resource commitment to the acute care business, we obtained board approval to begin exploring strategic alternatives for the divestiture of our NeoMD operations. These operations consist
primarily of the assets of our wholly-owned subsidiary, EquipMD. As a result of this review, we wrote down the assets of these operations to the estimated net realizable disposal value based on the activity through December 31, 2001. We wrote down
the assets, which primarily consisted of goodwill and other intangible assets, by $81.1 million to reflect our estimate of their realizable disposal value as of December 31, 2001.





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





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





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





Other Income (Expense).    Other income
(expense) consists of interest and other income and expense. Interest income decreased from $4.7 million for the year ended December 31, 2000 to $769,000 for the year ended December 31, 2001. The decrease in interest income was due to the decrease
in our average net cash and cash equivalents balance as a result of our utilization of cash to fund our operations in fiscal 2000 and 2001. Interest expense decreased from $1.4 million for the year ended December 31, 2000 to $685,000 for the year
ended December 31, 2001. The decrease in interest expense was due primarily to the fact that we capitalized interest of $1.1 million in 2001 related to purchased software being configured for use in our marketplace platform which was not yet placed
in service. Total interest incurred in 2001 before capitalized interest was $1.8 million. Other income increased from $29,000 for the year ended December 31, 2000 to $271,000 for the year ended December 31, 2001. This increase in other income was
primarily the result of the forgiveness of $500,000 of debt under our note payable to the original owner of the GAR business in 2001. This $500,000 was forgiven by the former owner of the GAR business in connection with the termination of his
employment during fiscal 2001.





Income Taxes.    As of December 31, 2001, we had
federal and state net operating loss carryforwards of $340.0 million and $249.0 million, respectively, which will be available to reduce future taxable income. These net operating loss carryforwards expire on various dates through 2021. A valuation
allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset due to our lack of earnings history. Federal and state tax laws impose significant restrictions on the amount of the
net operating loss carryforwards that we may utilize in a given year. See Note 15 to the Notes to Consolidated Financial Statements.




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Year Ended December 31, 1999 as Compared to Year Ended December 31, 2000





Revenue





Marketplace Revenue





Related Party.    Related
party marketplace revenue consists of payments for marketplace services made from trading partners or marketplace sponsors that are also significant stockholders in Neoforma. For the year ended December 31, 2000, related party marketplace revenue
was comprised solely of payments from Novation to us under the minimum fee level guarantee provisions of the outsourcing and operating agreement during that period. This revenue increased from $0 for the year ended December 31, 1999 to $81,000 for
the year ended December 31, 2000. This increase was due to the fact that the operating and outsourcing agreement was not entered into until the middle of fiscal 2000. As a result, there was no such revenue in 1999, as compared to those amounts
generated from Novation in 2000. See Note 2Recent Accounting Pronouncementsto the Notes to Consolidated Financial Statements for discussion of the impact of the adoption of EITF No. 01-9 on related party revenue.





Other.    Other marketplace revenue consists of marketplace revenue received from trading partners, marketplace
sponsors and other sources that are not related parties and generally consists of transaction based fees and subscription fees. Such revenue was $1.3 million for the year ended December 31, 2000, an increase from $83,000 for the year ended December
31, 1999. The increase was primarily due to higher Shoptransaction fees as well as revenue recognized from our NeoMD marketplace that resulted from our acquisition of EquipMD in early 2000.





Trading Partner Services Revenue





Trading Partner Services.    Trading partner services revenue consists of revenue generated from the sale of complementary products and services to members and potential
members of our marketplaces. Historically, Trading Partner Services revenue consisted of the following: setup fees to digitize product information; subscription and transaction based fees for management and disposition of used medical equipment
through our asset recovery service, known as Auction; sponsorship fees paid by sellers to feature their brands and products on our now divested Plan service; license fees from the sale of software tools and related technical
information; and service delivery fees for implementation and consulting services paid by users of our marketplaces. The increase in trading partner services revenue from $921,000 for the year ended December 31, 1999 to $4.5 million for the year
ended December 31, 2000 was due to several factors, including: revenue as a result of the acquisition of the USL business in 2000; increased revenue from the sale of software licenses and support as a result of our acquisition of FDI at the end of
1999; sponsorship revenue from manufacturers for placement of their products on our Plan Website in 2000; and increased revenue from transaction fees paid for our Auction asset recovery services.





Sales of Used Equipment.    Sales of used equipment consisted of the gross revenue generated from the sales of
used and refurbished medical equipment that we owned as part of our Auction service. We had total sales of used equipment of $4.6 million for the year ended December 31, 2000, as compared to $0 for the year ended December 31, 1999. The
increase from fiscal 1999 is due to the fact that Auction activity for periods prior to fiscal 2000 consisted solely of sales of consigned medical equipment, which we did not own. As a result, revenue related to consigned equipment was
recognized, net of settlement costs, as transaction fees and was included in trading partner services revenue. In fiscal 2000, as part of our acquisition of some of the assets of NCL, the Auction service expanded the scope of its operations
to include hospital liquidations in which we purchased and took title to the used equipment of a hospital being liquidated in order to sell that equipment through the Auction channel. The sales of used equipment in fiscal 2000 related to used
equipment and supplies. As we took title and risk of loss on the equipment, the revenue was reported at the gross sales value, with the related costs being reflected in cost of equipment sold in our consolidated statements of operations.




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Operating Expenses





Cost of Equipment Sold.    Cost of equipment sold consists of the costs of owned inventory of used medical equipment held for sale as part of our
Auction operations. Cost of equipment sold increased from $0 for the year ended December 31, 1999 to $3.5 million for the year ended December 31, 2000. The increase from fiscal 1999 is due to the fact that Auction activity for periods
prior to fiscal 2000 consisted solely of sales of consigned medical equipment, which we did not own. As a result of our acquisition of some of the assets of NCL, the Auction service expanded the scope of its operations to include hospital
liquidations in which we purchased and took title to the used equipment of a hospital being liquidated in order to sell that equipment through the Auction channel. As we took title and risk of loss on the equipment, the related costs were
reflected as cost of equipment sold in our consolidated statements of operations.





Cost of
Services.    Cost of services consists primarily of the costs to perform e-commerce readiness services and buyer and supplier implementation activities for our marketplaces. These expenditures consist primarily of technology
costs, software licenses, salaries and other personnel expenses for our services personnel and fees for independent contractors. Cost of services increased from $0 for the year ended December 31, 1999 to $7.7 million for the year ended December 31,
2000. The increase was due to the fact that we did not perform any of these services until 2000, and thus there were no costs relating to these services during fiscal 1999.





Operations.    Operations expenses consist primarily of expenditures for the operation and maintenance of our marketplaces and our marketplace
technology infrastructure, including customer service. These expenditures consist primarily of fees for independent contractors and consultants, technology costs, software licenses, salaries and other personnel expenses for our operations personnel.
Operations expenses increased from $5.9 million for the year ended December 31, 1999 to $14.0 million for the year ended December 31, 2000. The increase was primarily due to an increase in operations personnel costs and an increase in payments to
third party consultants. These increases were primarily due to hiring personnel, increased expenditures for digitizing and inputting content and technology costs, primarily software licenses and hardware costs, associated with the enhancement of the
infrastructure of our marketplaces.





Product Development.    Product development
expenses consist primarily of personnel expenses, fees to consultants and contractors and technology costs associated with the development and enhancement of our marketplace solutions and functionality. Product development expenses increased from
$8.2 million for the year ended December 31, 1999 to $24.8 million for the year ended December 31, 2000. These increases primarily related to fees paid to contractors and consultants as well as costs of additional personnel being hired as part of
the development of our Shop and Auction platforms and subsequent development of our broader marketplace platforms. Internally generated software development costs that were potentially eligible for capitalization, after consideration
of factors such as realizable value, were not material and accordingly were expensed as incurred.





Selling and
Marketing.    Selling and marketing expenses consist primarily of salaries, commissions, advertising, promotions and related marketing costs. Selling and marketing expenses increased from $16.9 million for the year ended
December 31, 1999 to $51.5 million for the year ended December 31, 2000. The increase was primarily due to increases in salaries and commissions, expenses related to travel, expenses related to advertising and attendance at trade shows and expenses
incurred in connection with our strategic alliance with Novation, VHA and UHC. These increases were primarily due to significant expansion of our sales and marketing efforts and the hiring of additional sales and marketing personnel.





General and Administrative.    General and administrative expenses consist of expenses for executive
and administrative personnel, facilities, professional services and other general corporate activities. General and administrative expenses increased from $17.9 million for the year ended December 31, 1999 to $22.9 million for the year ended
December 31, 2000. The increase was primarily due to an increase in executive and administrative personnel costs related to our chief executive officer, who was hired in mid-year 1999, and four of our executive officers, who were hired in 2000.
These officers, as well as additional finance, accounting and administrative




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personnel, were on hand for all or most of 2000, but not for any or all of 1999. Additionally, we experienced an increase in recruiting, legal and accounting expenses, primarily related to our
initial public offering and subsequent mergers and acquisitions activity, and an increase in expenses related to other consultants, all of which resulted from our growth in fiscal 2000.





Amortization of Intangibles.    Intangible assets include goodwill and the value of software and other intangible assets purchased in
acquisitions. Intangible assets historically have been amortized on a straight-line basis over a period of three to seven years. Amortization of intangibles increased from $715,000 for the year ended December 31, 1999 to $26.6 million for the year
ended December 31, 2000. The increase was a result of a full year of amortization incurred on the acquisition of GAR in August 1999 and FDI in November 1999, as well as the amortization of intangibles relating to our acquisitions of Pharos in
January 2000, USL in March 2000, EquipMD in April 2000 and some of the assets of NCL in July 2000.





Amortization of Partnership Costs.    Amortization of partnership costs represents the amortization of the capitalized valuation of consideration given to strategic partners as part of entering into any
operating relationships with those partners. As of December 31, 2000, capitalized partnership costs represented common stock, warrants and restricted stock issued to VHA and UHC, in connection with entering into the outsourcing and operating
agreement with those entities and with their purchasing organization, Novation. We initially issued warrants to VHA and UHC, but subsequently canceled these warrants and issued them restricted stock in substitution for the canceled warrants. The
value of the common stock issued is being amortized over a five year estimated useful life. The restricted common stock issued in substitution for the warrants is being valued, and the related valuation is being capitalized, as the shares are
earned. The capitalized partnership costs relating to the restricted common stock are being amortized over the term of the agreement with the healthcare organization which resulted in the shares being earned, generally two to three years. For the
year ended December 31, 2000, total amortization of partnership costs was $29.5 million. As we did not enter into the outsourcing and operating agreement until July 2000, there was no amortization of partnership costs for the year ended
December 31, 1999. See Note 2Recent Accounting Pronouncementsto the Notes to Consolidated Financial Statements for discussion of the impact of the adoption of EITF No. 01-9 on amortization of partnership costs.





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





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





In connection with the assumption of certain stock options granted to employees of
EquipMD prior to our acquisition of EquipMD, we recorded deferred compensation of $23.1 million, representing the difference between the estimated fair value of the common stock for accounting purposes and the option exercise price of these options
at the date of announcement of the acquisition. This amount is presented as a reduction of stockholders equity and is being amortized over the vesting period of the applicable options using an accelerated method of amortization. We recorded
amortization of deferred compensation related to these options of $9.0 million during the year ended December 31, 2000.





Cost of Warrant Issued to Recruiter.    For the year ended December 31, 1999, we recorded $2.4 million related to the valuation of a warrant issued to an executive search firm in connection with
services rendered in the search for our chief executive officer. No such costs were incurred in the year ended December 31, 2000.




19




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Write-Off of Purchased Software.    During the year
ended December 31, 2000, we expensed $3.9 million related to the write-off of purchased software licenses that we identified were no longer being utilized. There were no such write-offs in the year ended December 31, 1999.





Write-Off of Acquired In-Process Research and Development.    During the year ended
December 31, 2000, we expensed $1.9 million and $15.0 million, respectively, related to the write offs of acquired in-process research and development in connection with the Pharos acquisition and the EquipMD acquisition. There were no such
write-offs during the year ended December 31, 1999.





Abandoned Acquisition
Costs.    Abandoned acquisition costs in 2000 consisted primarily of legal, accounting, investment banking and other costs incurred as a result of the termination of the merger agreements with Eclipsys and Healthvision.
Abandoned acquisition costs were $2.7 million for the year ended December 31, 2000. There were no such costs during the year ended December 31, 1999.





Restructuring.    Restructuring costs consist primarily of the costs associated with the payments to employees for severance resulting from the streamlining and reorganizing
of our operations in the first half of fiscal 2000, as well as costs related to the divestitures of certain operations, including severance for the employees of those operations and accrued rent relating to potentially idle facilities.





During the first half of 2000, we recorded a restructuring charge of $2.1 million. This charge was the result of a
reorganization and streamlining of operations undertaken to focus on two key global markets, IDNs and hospitals, and physician practices. The entire restructuring charge was related to the reduction in workforce of 80 individuals. All 80
employees were terminated under this plan during 2000, of which 35 were in sales and marketing, 4 were in general administration, 16 were in product development and 20 were in operations and 5 were in service delivery. In December 2000, we
recorded a restructuring charge of $691,000 in connection with our decision to divest our Auction and USL operations. Of the $691,000, $160,000 related to anticipated severance of 24 employees and the remainder related to idle facilities and
related costs. No employees had been terminated and no amounts had been paid as of December 31, 2000. The remaining accrual balance is expected to be utilized by the end of 2003. There were no such costs during the year ended December 31, 1999.





Other Income (Expense).    Other income (expense) consists of interest and other
income and expense. Interest income for the year ended December 31, 2000 was $4.7 million compared to $659,000 for the year ended December 31, 1999. The increase in interest income was due to an increase in our average net cash and cash equivalents
balance as a result of preferred stock financing in October 1999 and our initial public offering in January 2000. Interest expense increased from $676,000 for the year ended December 31, 1999 to $1.4 million for the year ended December 31,
2000, primarily as a result of the interest associated with significantly higher levels of leases and notes payable outstanding throughout the year ended December 31, 2000. Other income for the year ended December 31, 2000 was $29,000. Other expense
for the year ended December 31, 1999 was $29,000.





Income Taxes.    As of December
31, 2000, we had federal and state net operating loss carryforwards of $266.9 million and $217.5 million, respectively, which will be available to reduce future taxable income. These net operating loss carryforwards expire on various dates
through 2020. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset due to our lack of earnings history. Federal and state tax laws impose significant
restrictions on the amount of the net operating loss carryforwards that we may utilize in a given year. See Note 15 to the Notes to Consolidated Financial Statements.





Liquidity and Capital Resources





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




20




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December 31, 2001, we had outstanding bank, other borrowings and notes payable of $25.8 million, and we had $14.1 million of cash and cash equivalents and $1.5 million of restricted cash.





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





In April 2001, we
entered into a $25 million revolving credit agreement with VHA. Under the credit agreement, as amended in February 2002, until May 31, 2003, we are able to borrow funds up to an amount based on a specified formula dependent on the gross volume of
transactions through Marketplace@Novation. Funds that we borrow under this credit agreement bear interest at a rate of 10% per year and are secured by substantially all of our assets. All amounts outstanding under this line of credit, both principal
and interest, are due and payable on May 31, 2003, if not repaid sooner. In the event that we (i) sell any of our stock as part of an equity financing, (ii) obtain funding in connection with a debt financing or other lending transaction that is
either unsecured or subordinate to the lien of VHA under the credit agreement or (iii) enter into a debt financing or other lending transaction secured by assets we owned as of the date we entered into the credit agreement, then the maximum of $25
million we could potentially borrow under the credit agreement will be reduced by an amount equal to the cash proceeds we receive from any of these transactions. As of December 31, 2001, we had outstanding borrowings of $19.0 million under the line
of credit and remaining available funds of $6.0 million.





In May 2001, we entered into a leasing facility with
CapitalWerks, LLC, or CapitalWerks, to provide us with a $10.2 million lease line facility to finance the purchase of capital equipment, software and other assets. Based on the terms of the facility, we had until November 30, 2001 to draw down
against the lease line, at which time any amount unused under the facility was to be no longer available. Amounts financed under the lease line bear interest at 9.9% and are payable in monthly installments over 60 months. At the end of the lease
line term, when CapitalWerks had not made available to us any amounts under the lease line, they agreed to extend the lease line for six months, until April 30, 2002. We believe, however, based on subsequent conversations with CapitalWerks, and
notwithstanding that a small borrowing was made in the amount of approximately $80,000 subsequent to December 31, 2001, that CapitalWerks will not be able to fulfill its obligations to us to make available further borrowings under the lease line of
credit on the terms agreed to in May 2001. We are currently in discussions with CapitalWerks regarding what we believe to be their failure to fund their commitments under the lease line, and CapitalWerks has made alternate credit proposals to us, to
which we have not agreed. We cannot assure you that we will be able to reach any agreement with CapitalWerks or that any further funding will be made available to us. See Note 17 to the Notes to Consolidated Financial Statements for discussion of
subsequent developments related to this matter.





In May 1999, Comdisco provided us with a $2.0 million
subordinated loan to provide working capital. We agreed to pay Comdisco principal and interest at a rate of 12.5% per annum in 36 equal monthly installments, commencing in July 1999. This loan is secured by all of our assets. In connection with this
loan, we issued Comdisco a warrant to purchase 22,881 shares of common stock at $11.80 per share. As of December 31, 2001, the outstanding balance on the note was approximately $325,000.





In July 1999, Comdisco provided us with a $2.5 million loan and lease facility to finance computer hardware and software equipment. Amounts borrowed to purchase hardware
bear interest at 9% per annum and are payable in 48 monthly installments consisting of interest only payments for the first nine months and principal and interest payments for the remaining 36 months, with a balloon payment of the remaining
principal payable at maturity. Amounts borrowed to purchase software bear interest at 8% per annum and are payable in 30 monthly installments consisting of interest only payments for the first four months and principal and interest payments for the
remaining 26 months, with a balloon payment of the remaining principal payable at maturity. The computer equipment purchased with the proceeds of the loans secures this facility. In connection with this facility, we issued Comdisco a warrant to
purchase 13,771 shares of our Series D preferred stock, which converted into 13,771 shares of our common stock upon the closing of our IPO, at an exercise price of $11.80 per share. As of December 31, 2001, we had outstanding $1.0 million in
borrowings under this facility.




21




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In August 1999, in connection with the GAR acquisition, we issued a promissory
note in the principal amount of $7.8 million payable monthly over five years bearing interest at a rate of 7% per year. In July 2001, we modified the terms of this promissory note in exchange for the release of the security interest the note holder
had in the assets of our Auctionoperations. Per the revised terms of the note, we repaid $750,000 of the balance of the note in August 2001, and an additional $500,000 was forgiven by the note holder. The remaining balance due on the
promissory note is to be paid in equal monthly installments, with interest accruing at 7% per year, over the subsequent 30 months. As of December 31, 2001, the outstanding balance on the note was approximately $2.4 million.





As part of the acquisition of EquipMD, we assumed a note payable in the amount of $1.8 million, which is related to EquipMDs
purchase of Central Point Services LLC. The note bore interest at a rate of 7.5% per year and was payable in eight quarterly installments, after which the unpaid principal balance and accrued interest became due and payable in January 2002. At
December 31, 2001, the remaining principal balance was approximately $300,000 and we have subsequently repaid the entire amount.





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





In July 2000, as part of the acquisition of certain assets of NCL, we issued a promissory note to each of the four principals of NCL in
the amount of $62,500 each. These notes are payable in twenty-four equal monthly installments, with the first payment due on August 15, 2000. As of December 31, 2001, the total balance of the four notes was $71,000. In addition, as part of the
acquisition, we also agreed to pay $250,000 on July 14, 2002, two years from the closing date of the acquisition. This payment is to be distributed in equal amounts of $62,500 to each of the four principals of NCL. As of December 31, 2001, no
payments have been made against this commitment.





Future maturities of principal on the loans and notes payable as
of December 31, 2001 are as follows (in thousands):





2002

$
5,1642003


20,5402004


95$
25,799





In connection with our operating lease on our corporate
headquarters in San Jose, California, we established a letter of credit in the amount of $2.0 million payable to our landlord to secure our obligations under the lease. Under the terms of the lease, which allow for reductions in the amount of the
letter of credit over time as we fulfill our obligations under the lease, we have reduced the letter of credit to $1.5 million at December 31, 2001. The letter of credit is secured by balances in our investment accounts.





In May 1999, we entered into an agreement with ECRI, a non-profit health services research agency focusing on healthcare technology. The
agreement provided us with content from ECRIs database of information about medical products and manufacturers and a license to use elements of its classification system. In addition, the agreement provided for joint marketing activities and
collaboration in the development of Plansdatabase of product and vendor information. This agreement required us to make revenue sharing payments to ECRI during the three-year term of the agreement and for two years following expiration
or termination of the agreement based on a percentage of revenue derived from our Planservice. During the second and third years of the term of the agreement, we were required to pay to ECRI a minimum nonrefundable fee equal to $600,000 per
year, which would be credited against any revenue sharing payments payable to ECRI. As a result of our reduced focus and ultimate discontinuation of our Planservices, we negotiated an immediate termination of our operating agreement with
ECRI. Under the terms of the final settlement, we were obligated to make aggregate payments of $425,000 through February 2002, at which point our obligations under the agreement cease. As of December 31, 2001, we had paid $225,000 of the remaining
obligation and have subsequently repaid the remaining $200,000 which was accrued at December 31, 2001.




22




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In March 2000, we entered into an agreement with Ariba under which we have the
right to offer Aribas ORMX procurement solution to users of our marketplace. We paid Ariba a substantial upfront fee for use of the ORMX procurement solution and, under the terms of the agreement, we agreed to pay specified fees for
transactions occurring through Aribas network. We are currently in dispute with Ariba with regards to the terms of the agreement and our obligations to make payments to Ariba. As of December 31, 2001, we have not accrued any amounts under this
agreement.





In May 2000, as part of the termination of the proposed mergers with Eclipsys and Healthvision, we
entered into a strategic commercial relationship with Eclipsys and Healthvision that includes a co-marketing and distribution arrangement between us and Healthvision. Under the terms of the arrangement, we purchased a license to utilize
Eclipsys eWebIT enterprise application technology to enhance the integration of legacy applications with our e-commerce platform technology. Additionally, we committed to utilize their professional services organizations to assist in this work
at a minimum of $4.3 million over a four-year period. We are currently in dispute with Healthvision and Eclipsys over this arrangement regarding our obligation to utilize their services. As of December 31, 2001, we had utilized $1.6 million of these
professional services.





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





Net cash used in operating activities was
$45.4 million, $68.1 million and $25.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. Net cash used in operating activities for the year ended December 31, 2001 related primarily to funding net operating losses and a
decrease in accounts payable, which were partially offset by increases in accrued expenses and deferred revenue. Net cash used in operating activities for the year ended December 31, 2000 related primarily to funding net operating losses and
increases in restricted cash, accounts receivable and prepaid expenses and other current assets, which were partially offset by increases in accounts payable and accrued expenses. Net cash used in operating activities for the year ended December 31,
1999 related primarily to funding net operating losses and an increase in prepaid expenses and other current assets, which were partially offset by increases in accounts payable and accrued expenses.





Net cash used in investing activities was $3.6 million, $27.1 million and $36.9 million for the years ended December 31, 2001, 2000 and
1999, respectively. Net cash used in investing activities for the year ended December 31, 2001 related primarily to the purchase of equipment to operate our marketplaces, which was partially offset by net sales of marketable investments. Net cash
used in investing activities for the year ended December 31, 2000 related primarily to the purchase of equipment to operate our marketplaces and cash paid in connection with the acquisitions of Pharos, USL, EquipMD and NCL, which were partially
offset by net sales of marketable investments. Net cash used in investing activities for the year ended December 31, 1999 related primarily to the purchase of equipment to operate our marketplaces, the purchase of non-marketable investments,
purchases of marketable investments and cash paid in connection with the acquisition of GAR.




23




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Net cash provided by financing activities was $40.5 million, $92.5 million and
$87.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. Net cash provided by financing activities for the year ended December 31, 2001 related primarily to net proceeds from common stock issuances of $29.4 million and from
draws on our line of credit of $19.0 million, which were partially offset by $8.8 million in repayment of notes payable. Net cash provided by financing activities for the year ended December 31, 2000 related primarily to the proceeds from our
initial public offering of our common stock in January 2000, partially offset by repayments of notes payable. Net cash provided by financing activities for the year ended December 31, 1999 related primarily to the proceeds from the issuance of
mandatorily redeemable convertible preferred stock, proceeds from the issuance of notes payable and proceeds from the issuance of common stock, which were partially offset by repayments of notes payable.





We currently anticipate that our available funds, consisting of cash and cash equivalents, combined with those funds available to us
through our line of credit and other sources, will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least the next 12 months. Our future long-term capital needs will depend significantly on the rate
of growth of our business, the timing of expanded service offerings, the success of these services once they are launched and our ability to adjust our operating expenses to an appropriate level if the growth rate of our business is slower than
expected. Buyers and suppliers of products and services used by healthcare providers might not accept our business model of providing Internet and electronic marketplaces for the purchase and sale of such products and services and, as a result, we
may not succeed in increasing our revenue to the extent necessary to be cash flow positive during 2002 and beyond. Any projections of future long-term cash needs and cash flows are subject to substantial uncertainty. If our available funds and cash
generated from operations are insufficient to satisfy our long-term liquidity requirements, or if an event of default occurs under our credit agreement with VHA and we are required to repay all outstanding indebtedness under the credit agreement, we
would need to seek additional sources of funding, such as selling additional equity or debt securities or obtaining additional lines of credit. We would also likely need to curtail expansion of our services, including reductions in our staffing
levels and related expenses, or potentially liquidate selected assets. If our management decides that it is in our best interest to raise cash to strengthen our balance sheet, broaden our investor base, increase the liquidity of our stock or for any
other reason, we may decide to issue equity or debt, even if all of our current funding sources remain available to us. If we issue additional securities to raise funds, those securities may have rights, preferences or privileges senior to those of
the rights of our common stock and our stockholders may experience dilution. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all.





Recent Accounting Pronouncements





In April 2001,
the Emerging Issues Task Force, or EITF, reached a consensus on EITF No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendors Products, effective for periods beginning after December
15, 2001. EITF No. 00-25 addresses whether consideration from a vendor to a reseller is (i) an adjustment of the selling prices of the vendors products and, therefore, should be classified as an offset against revenue when recognized in the
vendors statement of operations or (ii) a cost incurred by the vendor for assets or services received from the reseller and, therefore, should be classified as a cost or expense when recognized in the vendors statement of operations. In
November 2001, the EITF reached a consensus on EITF No. 01-9, Accounting for Consideration Given by Vendor to a Customer (Including a Reseller of the Vendors Products), which is a codification of EITF No. 00-14, Accounting
for Certain Sales Incentives, EITF No. 00-22, Accounting for Points and Certain Other Time- or Volume-Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future and EITF No.
00-25. As a result of the application of EITF No. 01-9, effective beginning the quarter ended March 31, 2002, certain costs associated with equity consideration provided in connection with our outsourcing and operating agreement with Novation, VHA,
UHC and HPPI, historically classified as operating expenses, will be offset against related party revenue from those parties. This treatment will result in the classification of non-cash amortization of partnership costs as an offset against related
party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any period. Any amortization of partnership




24




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costs in excess of related party revenue in any period will continue to be classified as an operating expense. The following table summarizes the pro forma impact the application of EITF No. 01-9
will have on our Consolidated Statements of Operations:





Year Ended December
31,2000


2001Revenue:Related party marketplace revenue

$
81


$
24,567Related party trading partner services revenue






254Offset of amortization of partnership costs


(81
)


(24,821
)Total pro forma related party revenue

$



$
Amortization of Partnership Costs:Amortization of partnership costs

$
29,523


$
75,651Offset to related party revenue


(81
)


(24,821
)Total pro forma amortization of partnership costs reported as operating expenses

$
29,442


$
50,830





Upon adoption of EITF No. 01-9, the amortization of partnership
costs reported as operating expenses will be reflected as an adjustment to reconcile net loss to cash from operating activities in the Consolidated Statements of Cash Flows. Under EITF No. 01-9, the Company will account for the fees paid by Novation
under the terms of the outsourcing and operating agreement as if they were payments made for the equity consideration provided to VHA and UHC as opposed to payments for services. As a result, these fees that are offset by amortization of partnership
costs will be reported as a cash flow from financing activities in our Consolidated Statements of Cash Flows. As reclassifications, these changes will have no impact on our loss from operations, net loss, net loss per share or total cash flow. See
Note 2Recent Accounting Pronouncementsto the Notes to Consolidated Financial Statements for further discussion of the application of EITF No. 01-9.





In July 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations. SFAS No. 141 requires the use
of the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The adoption of SFAS No. 141 did not have a significant impact on our financial position, results of
operations or cash flows.





In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which becomes effective for fiscal years beginning after December 15, 2001. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other acquired intangible assets. It addresses how intangible assets that
are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS No. 142 also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in the financial statements. Under SFAS No. 142, goodwill and certain other acquired intangible assets with indefinite lives are no longer subject to amortization. Intangible assets
with finite lives will continue to be amortized. We do not expect the adoption of this pronouncement in 2002 to have a significant impact on our financial position, results of operations or cash flows.





In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
addresses significant issues relating to the implementation of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and requires that long-lived assets that are to be disposed of
by sale are measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all




25




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components of an entity with operations that (i) can be distinguished from the rest of the entity and (ii) will be eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 becomes effective for fiscal years beginning after December 15, 2001 and its provisions are to be applied prospectively. We believe the adoption of this pronouncement in 2002 will not have a significant impact on our financial position,
results of operations or cash flows.





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





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;
| | - | --------------------




| |  | estimating the allowance for doubtful accounts receivable and notes receivable;
| | - | -------------------------------------------------------------------------------




| |  | estimating litigation reserves and other accrued liabilities; and
| | - | -----------------------------------------------------------------




| |  | valuation of intangible assets and non-marketable investments.
| | - | --------------------------------------------------------------




Revenue Recognition





We
derive our revenue from marketplace applications and services and from related trading partner applications and services. Marketplace revenue consists primarily of transaction-based fees and subscription-based fees. Trading partner services revenue
primarily has consisted of software license and maintenance fees, sponsorship fees, subscription fees and implementation fees. As described below, significant management judgments and estimates must be made and used in connection with the revenue
recognized in any accounting period. Material differences might result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.





Transaction Fees.    Transaction fee revenue represents the negotiated percentage of the purchase price or
gross marketplace volume of products sold through Marketplace@Novation at the time an order originated by a purchaser is confirmed or accepted by the supplier. The gross marketplace value of a transaction is the price of a product as agreed to by
the buyer and the supplier. We recognize 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 purchaser because, among other things, we do not:





| |  | establish the prices of products paid by buyers;
| | - | ------------------------------------------------




| |  | 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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | bear the credit and collections risk of the purchaser to the supplier; and
| | - | --------------------------------------------------------------------------




| |  | bear the risk that the product will be returned.
| | - | ------------------------------------------------




Subscription Fees.    Subscription fee revenue historically has related primarily to our USL operations, which generated subscription revenue from customers who purchased
6-month, 12-month and 24-month subscriptions to their Web based healthcare supply chain periodicals and data management services. Currently, we are generating subscription fees from buyers and suppliers on our marketplaces that prefer to pay a
single annual subscription fee to participate in any given marketplace instead of transaction fees. In all cases, we recognize subscription fees ratably over the period of the subscription agreement, as that is generally the period over which the
services are performed.





Software License and Maintenance Fees.    While we have had
relatively immaterial amounts of software license revenue to date, we anticipate that we will generate increased software license revenue in future periods. We apply the provisions of Statement of Position No. 97-2, Software




26




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Revenue Recognition, as amended by Statement of Position No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain Transactions to all
transactions involving the sale of software products and hardware transactions where the software is not incidental. For hardware transactions where software is not incidental, we will not bifurcate the fee and we will not apply separate accounting
guidance to the hardware and software elements. For hardware transactions in which no software is involved, we will apply the provisions of Staff Accounting Bulletin No. 101, Revenue Recognition.





We recognize revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered,
the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. We generally deem that delivery has occurred when the product has been delivered to a common carrier, at which time title and risk of loss passes to
the customer.





At the time of the transaction, we assess whether the fee associated with our revenue transactions
is fixed and determinable and whether or not collection is reasonably assured. We assess whether the fee is fixed and determinable based on the payment terms associated with the transaction. If a significant portion of a fee is payable under
extended payment terms, we account for the fee as not being fixed and determinable. In these cases, we recognize revenue as the fees become due.





We assess the likelihood of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from
our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.





For arrangements with multiple elements (for example, undelivered maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the undelivered elements. Based on this approach, we defer a portion of revenue from the arrangement fee that is equivalent to the fair value of the undelivered elements.





We recognize revenue for maintenance services ratably over the contract term. Our training and consulting
services are billed based on hourly rates, and we generally recognize revenue as these services are performed. However, at the time we enter into a transaction, we assess whether or not any services included within the arrangement require us to
perform significant work, either to alter the underlying software or to build additional complex interfaces so that the software performs as the customer requests.





Sponsorship Fees.    Sponsorship fees were generated in fiscal 2000 and early fiscal 2001 as a result of our Plan operations, under which
healthcare manufacturers paid fees to sponsor portions of our Website. In turn, our Website would showcase their products and key marketing information about their company. With the divestiture of our Planoperations in 2001, we do not
anticipate generating any sponsorship fee revenue in future periods. We recognized sponsorship fee revenue as services were performed and billable according to the terms of the service arrangements.





Implementation Fees.    We generally recognize implementation fees, as they relate to the implementation of our
e-commerce solution, ratably over the term of the underlying agreement. As we perform services in connection with the implementation of software products, we recognize revenue on a completed contract basis.




27




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See Note 2Recent Accounting Pronouncementsto the Notes to
Consolidated Financial Statements for a discussion of the impact of EITF No. 01-9 on our reported revenue.





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 specifically analyzes accounts receivable and analyzes 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. Management also performs additional periodic analysis of the financial condition of debtors for
which we hold notes receivable. If the financial condition of our customers or debtors were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Our accounts receivable balance was $1.4
million, net of allowance for doubtful accounts of $206,000, as of December 31, 2001. As of December 31, 2001, our notes receivable balance was $2.9 million, for which no allowance has been provided.





Estimating Litigation Reserves and Other Accrued Liabilities





Managements current estimated range of liability related to our pending litigation is based on claims for which our management is able to estimate the amount and
range of loss. As additional information becomes available, we will assess the potential liability related to our pending litigation and revise our estimates. Such 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, 2001, we had accrued $478,000 for potential liabilities related to our pending litigation.





Valuation of Intangible Assets and Non-Marketable Investments





We assess the impairment of identifiable intangible assets, which currently consist of capitalized partnership costs, 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:





| |  | loss of a major supplier or marketplace sponsor;
| | - | ------------------------------------------------




| |  | significant underperformance relative to expected historical or projected future operating results;
| | - | ---------------------------------------------------------------------------------------------------




| |  | significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
| | - | -------------------------------------------------------------------------------------------------------------




| |  | significant negative industry or economic trends;
| | - | -------------------------------------------------




| |  | significant decline in our stock price for a sustained period; and
| | - | ------------------------------------------------------------------




| |  | our market capitalization relative to net book value.
| | - | -----------------------------------------------------




If we determine that the carrying value of intangible assets, which currently consist of capitalized partnership costs, may not be recoverable based upon the existence of one or more of the above
indicators of impairment, we would 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, amounted to $234.4 million as of December 31, 2001.




28




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Non-marketable investments were $745,000 as of December 31, 2001, which was made
up of a minority interest in one entity. We have invested and may continue to invest in companies having operations or technology in areas within our strategic focus. If we believe an investment has experienced a decline in market value that is
other than temporary, we would record an investment impairment charge. Future adverse changes in market conditions or poor operating results of the entities underlying the investments could result in a reduction in, or an inability to recover, the
carrying value of the investments that may not be reflected in an investments current carrying value, thereby possibly requiring an impairment charge in the future.




29




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NEOFORMA, INC.





QUARTERLY CONSOLIDATED FINANCIAL DATA


(As reported prior to restatement, see Note
18 to the Notes to Consolidated Financial Statements)


(Unaudited)





For the Quarters EndedMarch 31, 2000


June 30, 2000


September 30, 2000


December 31, 2000


March 31, 2001


June 30, 2001


September 30, 2001


December 31, 2001(in thousands, except per share amounts)Consolidated Statements of Operations Data:Revenue:Marketplace revenue:Related party

$







$
1


$
80


$
2,000


$
3,763


$
7,433


$
11,371Other


137



326



495



299



270



256



307



297Total Marketplace revenue


137



326



496



379



2,270



4,019



7,740



11,668Trading Partner Services revenue:Trading partner services


1,015



1,400



1,493



571



542



587



282



466Sales of used equipment


76



492



2,737



1,324







237



13



Total Trading Partner Services revenue


1,091



1,892



4,230



1,895



542



824



295



466Total revenue


1,228



2,218



4,726



2,274



2,812



4,843



8,035



12,134Operating Expenses:Cost of equipment sold


22



142



2,398



982







216







Cost of services






898



2,759



4,590



4,394



3,695



3,767



2,361Operations


3,714



3,377



3,169



3,257



3,915



4,220



3,820



3,827Product development


6,131



6,127



6,403



5,938



5,554



4,436



4,124



3,524Selling and marketing


12,153



17,041



12,750



11,272



10,262



7,576



6,062



4,799General and administrative


8,161



7,393



5,276



5,092



5,009



4,844



4,047



3,744Amortization of intangibles


1,311



8,086



8,149



8,154



7,809



7,205



7,168



7,092Amortization of partnership costs










11,958



18,533



18,978



19,453



19,267



19,573Write-off of acquired in-process research and development


3,000



15,000























Abandoned acquisition costs






2,742























Restructuring






2,100























Impairment of intangibles






























13,116Impairment of assets held for divestiture














14,446















81,486Write-down of non-marketable investments


























3,000



5,400(Gain)/loss on divested business






















621



(879
)


Loss from operations


(33,264
)


(60,688
)


(48,136
)


(69,990
)


(53,109
)


(47,423
)


(42,341
)


(132,788
)Other Income (Expense):Interest income


1,508



1,458



938



560



321



158



60



70Interest expense


(221
)


(330
)


(345
)


(393
)


(303
)


(315
)


(337
)


(871
)Other income (expense)










21



67



(132
)


(79
)


652



(188
)Net loss

$
(31,977
)

$
(59,560
)

$
(47,522
)

$
(69,756
)

$
(53,223
)

$
(47,659
)

$
(41,966
)

$
(133,777
)Net loss per share:Basic and diluted

$
(7.70
)

$
(10.23
)

$
(4.57
)

$
(5.28
)

$
(3.56
)

$
(3.02
)

$
(2.64
)

$
(8.33
)Weighted average sharesbasic and diluted


4,152



5,822



10,392



13,213



14,947



15,782



15,907



16,058Pro forma net loss per share:*Basic and diluted

$
(6.14
)Weighted average sharesbasic and diluted


5,207


---

|* | Pro forma numbers assume the automatic conversion of outstanding shares of convertible preferred stock, which occurred upon the closing of the Companys
initial public offering.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------






30




---

NEOFORMA, INC.





QUARTERLY CONSOLIDATED FINANCIAL DATA, AS RESTATED*


(Unaudited)





For the Quarters EndedMarch 31, 2000


June 30, 2000


September 30, 2000


December 31, 2000


March 31, 2001


June 30, 2001


September 30, 2001


December 31, 2001(in thousands, except per share amounts)Consolidated Statements of Operations Data:Revenue:Marketplace revenue:Related party

$



$



$
1


$
80


$
2,000


$
3,763


$
7,433


$
11,371Other


137



326



495



299



270



256



307



297Total Marketplace revenue


137



326



496



379



2,270



4,019



7,740



11,668Trading Partner Services revenue:Trading partner services


1,015



1,400



1,493



571



542



587



282



466Sales of used equipment


76



492



2,737



1,324







237



13



Total Trading Partner Services revenue


1,091



1,892



4,230



1,895



542



824



295



466Total revenue


1,228



2,218



4,726



2,274



2,812



4,843



8,035



12,134Operating Expenses:Cost of equipment sold


22



142



2,398



982







216







Cost of services






1,235



2,169



4,318



4,127



3,491



3,370



2,492Operations


4,303



3,127



3,445



3,160



4,040



4,354



3,599



3,682Product development


6,212



6,309



6,587



5,677



5,128



4,434



3,888



3,462Selling and marketing


14,031



15,727



11,291



10,481



10,205



7,323



5,704



5,414General and administrative


6,326



6,951



4,652



4,948



4,492



4,478



3,614



3,480Amortization of intangibles


1,472



8,292



8,387



8,406



7,945



7,435



7,397



7,321Amortization of partnershipcosts










11,307



18,216



18,698



18,878



19,008



19,067Costs of strategic partnership










9,345



















Write-off of purchased software


10











3,848



32



283



1,019



179Write-off of acquired in-process research and development


1,900



15,000























Abandoned acquisition costs






2,742























Restructuring






2,100







691







600







350Impairment of intangibles






























11,906Impairment of assets held for divestiture














13,305















81,086Write-down of non-marketable investments


























3,000



5,400(Gain)/loss on divested business






















817



(872
)


Loss from operations


(33,048
)


(59,407
)


(54,855
)


(71,758
)


(51,855
)


(47,466
)


(41,692
)


(131,705
)Other Income (Expense):Interest income


1,623



1,515



983



586



345



196



113



115Interest expense


(292
)


(353
)


(369
)


(348
)


(88
)


(49
)


(276
)


(272
)Other income (expense)


10



(3
)


(8
)


30



(185
)


(5
)


634



(173
)Net loss

$
(31,707
)

$
(58,248
)

$
(54,249
)

$
(71,490
)

$
(51,783
)

$
(47,324
)

$
(41,221
)

$
(132,035
)Net loss per share:Basic and diluted

$
(7.51
)

$
(10.02
)

$
(5.09
)

$
(5.49
)

$
(3.44
)

$
(3.00
)

$
(2.58
)

$
(8.21
)Weighted average sharesbasic and diluted


4,220



5,813



10,665



13,029



15,054



15,788



15,960



16,083Pro forma net loss per share:**Basic and diluted

$
(6.09
)Weighted average sharesbasic and diluted


5,209


---

|* | See Note 18 to the Notes to Consolidated Financial Statements for discussion of the restatement.
|- | ------------------------------------------------------------------------------------------------

|** | Pro forma numbers assume the automatic conversion of outstanding shares of convertible preferred stock, which occurred upon the closing of the Companys
initial public offering.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



31




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Factors That May Affect Future Operating Results





The risks described below are not the only ones we face. Additional risks not presently known to us, or that we currently deem immaterial,
may also impair our business operations. Our business, financial condition or results of operations may be seriously harmed by any of these risks.





If our trading partners do not accept our business model of providing Internet and electronic marketplaces for the purchase and sale of products and services used by healthcare providers, demand for our applications and services
may not develop and the price of our common stock may decline





We have focused our efforts on building and
operating Internet and electronic marketplaces that aggregate buyers and suppliers of products and services used by healthcare providers, including medical supplies and equipment. This business model is new and unproven and depends upon buyers and
sellers in this market adopting a new way to purchase and sell products and services. If buyers and sellers of products and services used by healthcare providers do not accept our business model, demand for our applications and services may not
develop and the price of our common stock could decline. Buyers and suppliers could be reluctant to accept our relatively new and unproven approach, which may not be consistent with their existing internal organization and procurement processes.
Buyers and suppliers may prefer to use traditional methods of buying and selling products and services, such as using paper catalogs and interacting in person or by phone with representatives of manufacturers or distributors. Even if buyers and
suppliers accept the Internet or other electronic communications as a means of buying and selling products, they may not accept e-commerce marketplaces for conducting this type of business generally, or our marketplaces specifically. Instead, they
may choose to establish and operate their own purchasing systems or exchanges to buy or sell products and services. For example, a group of large suppliers of medical products, including Abbott Laboratories, Baxter International, Inc., GE Medical
Systems, Johnson & Johnson and Medtronic, Inc., have created a healthcare exchange, called GHX, for the purchase and sale of medical products. In 2001, GHX purchased a business-to-business exchange for the purchase and sale of pharmaceuticals
and medical-surgical products, devices and other laboratory products and services formed by four large distributors of medical products, AmerisourceBergen Corporation, Cardinal Health Inc., Fisher Scientific International Inc. and McKesson HBOC,
Inc. Reluctance of buyers and suppliers to use our marketplaces would seriously harm our business. Additionally, if suppliers do not accept our fee model, we may not be able to increase our revenue, which would have a serious negative impact on our
business.





We have a history of losses, anticipate incurring losses in the foreseeable future and may never achieve profitability





We have experienced losses from operations in each period since our inception, including a net loss of $272.4
million for the year ended December 31, 2001. In addition, as of December 31, 2001, we had an accumulated deficit of $544.1 million. We have not achieved profitability, and while we expect to generate positive cash flow from our operations in the
first fiscal quarter of 2002, which we refer to as earnings before income taxes, depreciation and amortization, or EBITDA, profitability, we may thereafter incur substantial operating losses, primarily as a result of increases in costs and expenses
relating to executing our strategy of building and operating Internet marketplaces for our trading partners. As a result, we may not be able to sustain EBITDA profitability throughout the remainder of 2002 and thereafter. Even if we do achieve and
sustain EBITDA profitability, we will not achieve GAAP profitability unless we are able to significantly increase our revenue while adequately controlling our operating expenses. We cannot assure you that we will ever be profitable on a GAAP basis.





Our operating results are volatile and difficult to predict, and if we fail to meet the expectations of investors or securities
analysts, the market price of our common stock will likely decline





Our revenue and operating results are
likely to fluctuate significantly from quarter to quarter because of a number of factors. These factors include:





| |  | the amount and timing of payments to our strategic and technology partners;
| | - | ---------------------------------------------------------------------------



32




---

| |  | the timing of and expenses incurred in enhancing our marketplaces for new trading partner services;
| | - | ---------------------------------------------------------------------------------------------------

| |  | the number of new trading partners that sign up to use our marketplaces and our ability to connect them to our marketplaces;
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | the timing and size of any future acquisitions;
| | - | -----------------------------------------------

| |  | changes in the fees we charge users of our services;
| | - | ----------------------------------------------------

| |  | budgetary fluctuations of purchasers of medical products, supplies and equipment; and
| | - | -------------------------------------------------------------------------------------

| |  | changes in general economic, political and market conditions, especially in light of recent terrorist activities.
| | - | -----------------------------------------------------------------------------------------------------------------




Fluctuations in our operating results may cause us to fail to meet the expectations of investors or securities analysts. If this were to
happen, the market price of our common stock would likely decline.





In addition, as a result of our limited
operating history, the emerging nature of our market and the evolving nature of our business model, we have had difficulty accurately forecasting our revenue. We may be unable to adjust our spending in a timely manner to compensate for any
unexpected revenue shortfalls. Accordingly, a failure to meet our revenue projections would have an immediate and negative impact on operating results.





We rely on our relationship with our strategic partners to drive participation in our marketplaces





We expect to rely significantly on our relationship with Novation and, to a lesser extent, our relationship with Medbuy, along with other strategic allies such as GHX, to bring buyers and suppliers to our marketplaces. Under our
amended outsourcing and operating agreement, Novation is our exclusive agent for signing up suppliers to participate in Marketplace@Novation, subject to limited exceptions. Accordingly, we rely on Novation to attract suppliers to
Marketplace@Novation and, if Novation is unable to attract a sufficient number of suppliers, the value of Marketplace@Novation to buyers will be substantially decreased and our business will suffer.





Under the amended outsourcing and operating agreement, we must meet detailed functionality and service level requirements. If we are
unable to achieve these required levels of functionality within a required time period, we may be required to pay significant liquidated damages or the agreement could be terminated, which would seriously harm our business and financial results.





Because we have focused our development efforts and internal resources to building and operating Internet marketplaces and because we
have a limited operating history in this new and rapidly evolving market, you may have difficulty assessing our business and future prospects





In late 2000, we decided to refocus our development efforts and internal resources to our core business of building and operating Internet marketplaces for our trading partners. Because we have focused
our business efforts in this manner and have a limited operating history in this business, it is difficult to evaluate our business and our future prospects. For example, it is difficult to predict whether we will succeed in increasing the number of
marketplaces that we operate, the number of trading partners that utilize our marketplaces or the revenue we will derive from our marketplaces. We currently derive the substantial majority of our revenue from Marketplace@Novation, and, because of
the lack of penetration into the Canadian marketplace, we are currently in discussions with Medbuy to restructure our relationship and our strategy in the Canadian marketplace. These are the only two marketplaces that we currently operate and we
have not yet succeeded in establishing additional marketplaces. Our business will be seriously harmed, and may fail entirely, if we do not successfully execute our business strategy or if we do not successfully address the risks we face. In
addition, because of our limited operating history, we believe that period-to-period comparisons of our revenue and results of operations are not meaningful.




33




---




If we are unable to obtain additional financing for our future capital needs, we may be unable to
develop new Internet or electronic marketplaces or enhance the functionality of our existing marketplaces, expand our operations, respond to competitive pressures or continue our operations





As of December 31, 2001, we had approximately $14.1 million of cash and cash equivalents and $1.5 million of restricted cash, and approximately $25.8 million in
outstanding borrowings and notes payable, including $19.0 million outstanding under our credit agreement with VHA.





Even if our line of credit with VHA remains available to us, we may need to raise additional funds within the next twelve months if, for example, we do not generate significantly increased revenue from our marketplaces, experience
larger than anticipated operating losses or pursue additional acquisitions. We believe that it would be difficult to obtain additional financing on favorable terms, if at all. We may try to obtain additional financing by issuing shares of our common
stock, which could dilute our existing stockholders and may cause our stock price to decline. If we cannot raise needed funds on acceptable terms, or at all, we may not be able to develop new marketplaces or enhance our existing marketplaces, expand
our operations, respond appropriately to competitive pressures or continue our operations.





If an event of default
were to occur under the VHA credit agreement, VHA could terminate the credit agreement and declare all amounts outstanding thereunder to be immediately due and payable. If this were to occur, we would likely need to obtain an alternate source of
funding, such as another credit line or an equity or debt financing, to repay amounts due under the credit agreement. If we were unable to obtain alternate funding under these circumstances, our business would be seriously harmed and we could be
forced to cease operations. Although we entered into a lease line of credit in May 2001 with CapitalWerks, we have had very limited success in accessing any funds under this line of credit, and we may not be able to access any funds from this line
of credit in the future.





Because of our relationship with Novation, other GPOs may be reluctant to engage us to build new
marketplaces





We believe that we must establish relationships with GPOs in addition to Novation to increase
our ability to build new marketplaces. GPOs represent groups of buyers in the negotiation of purchasing contracts with sellers and, consequently, have the ability to significantly influence the purchasing decisions of their members. Our relationship
with Novation could make it more difficult to attract other GPOs to engage our services. The inability to enter into and maintain favorable relationships with other GPOs and the hospitals they represent could impact the breadth of our customer base
and could harm our growth and revenue. One of the largest GPOs, Premier Inc., has a long-term, exclusive agreement for e-commerce services with one of our competitors, medibuy.com, Inc.





We must continue to develop the capability to integrate our marketplaces with enterprise software systems of buyers and suppliers of products and services used by healthcare organizations
and continue to enable our marketplaces to support customer-specific pricing, or these entities may choose not to utilize our marketplaces, which would harm our business





If we do not maintain and expand the functionality and reliability of our marketplaces, buyers and suppliers of products used by healthcare providers may not use our
marketplaces. We must continue to develop the capability to integrate our marketplaces with enterprise software systems used by many suppliers of products and by many large healthcare organizations. We may incur significant expenses in developing
these capabilities and may not succeed in developing them in a timely manner. In addition, developing the capability to integrate our marketplaces with suppliers and buyers enterprise software systems will require the continued
cooperation of and collaboration with the companies that develop and market these systems. Suppliers and buyers use a variety of different enterprise software systems provided by third-party vendors or developed internally. This lack of uniformity
increases the difficulty and cost of developing the capability to integrate with the systems of a large




34




---

number of suppliers and buyers. Failure to provide these capabilities would limit the efficiencies that our marketplaces provide and may deter many buyers and suppliers from using our
marketplaces, particularly large healthcare organizations.





To realize the benefits of our agreements with
Novation and Medbuy, we will be required to integrate the systems of the healthcare organizations purchasing through Novations and Medbuys programs. If the costs required to integrate these systems are substantially higher than
anticipated, we may not realize the full benefit of these agreements.





If we were delayed or unable to integrate
the systems of these organizations, our revenue would be adversely affected. In addition, under the Novation and Medbuy agreements, we must meet detailed functionality and service level requirements. To the extent we are unable to or are delayed in
providing this functionality, we may be unable to attract buyers and suppliers to our marketplaces, and our revenue may be adversely affected. We will be required to incur significant costs in providing functionality to our marketplaces and in
integrating buyers and suppliers to our marketplaces prior to receiving any transaction fee revenue, and we may never generate sufficient revenue to offset these costs.





If our systems are unable to provide acceptable performance as the use of our marketplaces increases, we could lose trading partners that use our marketplaces, and we would have to spend capital to
expand and adapt our network infrastructure, either of which could harm our business and results of operations





We have processed a limited number and variety of transactions on our marketplaces compared to the number and variety we expect to process in the future. Our systems may not accommodate increased use while providing acceptable
overall performance. We must continue to expand and adapt our network infrastructure to accommodate additional trading partners and increased marketplace volumes, which will be expensive. If our systems do not continue to provide acceptable
performance as use of our marketplaces increases, our reputation may be damaged and we may lose trading partners that use our marketplaces.





We expect that a significant portion of the products and services used by healthcare providers that are sold through our marketplaces will come from a limited number of key manufacturers and distributors, and the loss of a key
manufacturer or distributor could result in a significant reduction in the revenue we generate





We expect that
a significant portion of the products to be sold through and revenue to be generated from our marketplaces will come from a limited number of key manufacturers and distributors or as a result of purchases made from these manufacturers and
distributors. If any of these key manufacturers or distributors cease doing business with us, the revenue we generate through our marketplaces would be significantly reduced. Our supplier agreements are nonexclusive and, accordingly, these suppliers
can sell their products, supplies and equipment to buyers directly or through our competitors.





We may make acquisitions, which could
harm our profitability, put a strain on our resources or cause dilution to our stockholders





We may decide
that it would be in our best interests to make acquisitions to acquire new technologies, expand our product offering, or for other reasons. Integrating newly acquired organizations and technologies into our company could be expensive, time consuming
and may strain our resources. In addition, we may lose current users of our marketplaces if any acquired companies have relationships with competitors of our users. Consequently, we may not be successful in integrating any acquired businesses or
technologies and may not achieve anticipated revenue and cost benefits. In addition, future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses
related to intangible assets, any of which could harm our business.




35




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If we do not timely add product information to our marketplaces or if that information is not
accurate, our reputation may be harmed and we may lose users of our marketplaces





We have undertaken to enter
product information into our database and categorize the information for search purposes. If we do not do so in a timely manner, we will encounter difficulties in expanding our marketplaces. Timely entering of this information in our database
depends upon a number of factors, including the format of the data provided to us by suppliers and our ability to accurately enter the data in our product database, any of which could delay the actual entering of the data. If we fail to input data
accurately, our reputation could be damaged, we could lose users of our marketplaces, and we may incur liability.





Additionally, we have undertaken to cross-reference our product information with appropriate vendor and contract identifiers to ensure that we can properly track the transactions we process. Failure to adequately develop this
cross-reference over time could impede our ability to grow our marketplace volume and collect fees from suppliers.





We face
significant competition, and if we are unable to compete effectively, we may be unable to maintain or expand the base of buyers and suppliers of products using our marketplaces and we may lose market share or be required to reduce prices





The healthcare supply chain market is rapidly evolving and highly competitive. Our competitors are diverse
and offer a variety of solutions directed at various segments of the healthcare supply chain. Competitors include:





| |  | e-commerce providers that currently have or have announced plans for online marketplaces targeted at the healthcare supply chain, including medibuy.com, Inc.
and Broadlane, Inc. and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | healthcare exchanges that have been formed by suppliers, namely GHX, which was founded by five healthcare manufacturers;
| | - | ------------------------------------------------------------------------------------------------------------------------

| |  | suppliers that have created their own Websites that offer e-commerce functions to their customers for the sale of their products and services;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | enterprise resource application software vendors that offer solutions in the healthcare market, such as Lawson, McKesson, Oracle, PeopleSoft, and SAP AG;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | vendors establishing electronic marketplaces and procurement capabilities, including Ariba and Commerce One, Inc.; and
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | supply chain software vendors, including Manugistics Group, Inc. and Logility, Inc.
| | - | -----------------------------------------------------------------------------------




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





| |  | brand recognition;
| | - | ------------------

| |  | number of buyers using their services and the volume of their purchases;
| | - | ------------------------------------------------------------------------

| |  | level of bias, or perceived bias, towards particular suppliers;
| | - | ---------------------------------------------------------------

| |  | existing relationships;
| | - | -----------------------

| |  | compatibility with suppliers existing distribution methods;
| | - | ------------------------------------------------------------

| |  | the amount of the fees charged to suppliers;
| | - | --------------------------------------------

| |  | functionality, ease of use and convenience;
| | - | -------------------------------------------

| |  | ability to integrate their services with suppliers existing systems and software; and
| | - | --------------------------------------------------------------------------------------

| |  | quality and reliability of their services.
| | - | ------------------------------------------




In addition, we believe that companies in our market compete to provide services to buyers based on:





| |  | brand recognition;
| | - | ------------------

| |  | breadth, depth and quality of product offerings;
| | - | ------------------------------------------------

| |  | ease of use and convenience;
| | - | ----------------------------

| |  | number of suppliers available through their marketplace;
| | - | --------------------------------------------------------

| |  | ability to integrate their services with buyers existing systems and software;
| | - | -------------------------------------------------------------------------------

| |  | quality and reliability of their services; and
| | - | ----------------------------------------------

| |  | customer service.
| | - | -----------------



36




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





| |  | enter into strategic or commercial relationships with larger, more established healthcare, medical products and Internet companies;
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | secure services and products from suppliers on more favorable terms;
| | - | --------------------------------------------------------------------

| |  | devote greater resources to marketing and promotional campaigns;
| | - | ----------------------------------------------------------------

| |  | secure exclusive arrangements with buyers that impede our sales; and
| | - | --------------------------------------------------------------------

| |  | devote substantially more resources to Website and systems development.
| | - | -----------------------------------------------------------------------




Our current and potential competitors services may achieve greater market acceptance than ours. Our existing 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 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 make more attractive offers to buyers 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 buyer and supplier base or retain our current buyers and suppliers. We may not be able to compete successfully against our competitors, and competition could
seriously harm our revenue, gross margins and market share.





If we are unable to maintain our strategic alliances or enter into new
alliances, we may be unable to increase the attractiveness of our marketplaces or provide satisfactory services to users of our marketplaces





Our business strategy includes entering into strategic alliances with leading technology and healthcare-related companies to increase the number of marketplaces we build and operate, increase the
number of trading partners that utilize our marketplaces, increase the number and variety of products and services that we offer and provide additional functionality, services and content to our trading partners. We may not succeed in entering into
new strategic alliances, and even if we do succeed, we may not achieve our objectives through these alliances. For example, we are currently in discussions with Medbuy to restructure our relationship and our strategy in the Canadian marketplace, and
we may not succeed in restructuring this relationship in a manner that is satisfactory to us. In addition, we have not yet succeeded in establishing new strategic alliances to increase the number of marketplaces that we build and operate. Our
alliances do not, and future relationships may not, afford us any exclusive marketing or distribution rights.





Many of these companies have multiple relationships and they may not regard us as significant for their business. These companies may pursue relationships with our competitors or develop or acquire services that compete with our
services. In addition, in many cases these companies may terminate these relationships with little or no notice. If any existing alliance is terminated or we are unable to enter into new alliances with leading technology and healthcare-related
companies, we may be unable to increase the attractiveness of our marketplaces or provide satisfactory services to buyers and suppliers of products and services.





If we are not able to increase recognition of the Neoforma brand name, our ability to attract users to our marketplaces will be limited





We believe that recognition and positive perception of the Neoforma brand name in the healthcare industry are important to our success. We intend to continue to invest in
advertising and publicity efforts in the future. However, we may not achieve our desired goal of increasing the awareness of the Neoforma brand name. Even if recognition of our name increases, it may not lead to an increase in the number of users of
our marketplaces or an increase the number of our trading partners.




37




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If participating suppliers on our marketplaces do not provide timely and professional delivery of
products and services, buyers may not continue using our marketplaces





Suppliers deliver the products and
services sold through our marketplaces to buyers. If these suppliers fail to make delivery in a professional, safe and timely manner, then our marketplaces will not meet the expectations of buyers, and our reputation and brand will be damaged. In
addition, deliveries that are non-conforming, late or are not accompanied by information required by applicable law or regulations could expose us to liability or result in decreased adoption and use of our marketplaces.





If suppliers do not provide us with timely, accurate, complete and current information about their products and comply with government regulations, we may be
exposed to liability or there may be a decrease in the adoption and use of our marketplaces





If suppliers do
not provide us in a timely manner with accurate, complete and current information about the products they offer, promptly update this information when it changes and provide us with accurate and timely invoicing data, our database will be less
useful to buyers. We cannot guarantee that the product information available from our marketplaces will always be accurate, complete and current, or that it will comply with governmental regulations. This could expose us to liability if this
incorrect information harms users of our services or results in decreased adoption and use of our marketplaces. We also rely on suppliers using our marketplaces to comply with all applicable governmental regulations, including packaging, labeling,
hazardous materials, health and environmental regulations and licensing and record keeping requirements. Any failure of our suppliers to comply with applicable regulations could expose us to civil or criminal liability or could damage our
reputation.





Because some of the participants in our marketplaces are stockholders or are affiliated with our stockholders or have
strategic relationships with us, we may find it difficult to attract competing companies, which could limit the breadth of products offered on and users of our marketplaces





Some participants in our marketplaces are our stockholders or are affiliated with our stockholders or have strategic relationships with us. For example, VHA and UHC, the
owners of Novation, own approximately 5.8 million and 1.7 million shares of our common stock, respectively. In addition, VHA and UHC own approximately 3.1 million shares and 0.6 million shares, respectively, of restricted common stock which was
subject to restrictions upon issuance, and of which a portion is still subject to those restrictions. As of December 31, 2001, VHA and UHC owned 48.2% and 11.9%, respectively, of our outstanding shares of common stock assuming they earned all the
remaining unearned shares of restricted stock. These relationships may deter other GPOs, suppliers or users, particularly those that compete directly with these participants, from participating in our marketplaces due to perceptions of bias in favor
of one party over another. This could limit the number of marketplaces we operate, the array of products offered on our marketplaces, damage our reputation and limit our ability to maintain or increase the number of our trading partners.





We may be subject to litigation for defects in products supplied by sellers using our marketplaces, and this type of litigation may
be costly and time consuming to defend





Because we facilitate the sale of products by sellers using our
marketplaces, we may become subject to legal proceedings regarding defects in these products, even though we generally do not take title to these products. Any claims, with or without merit, could:





| |  | be time-consuming to defend;
| | - | ----------------------------

| |  | result in costly litigation; or
| | - | -------------------------------

| |  | divert managements attention and resources.
| | - | --------------------------------------------



38




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If we are unable to attract qualified personnel or retain our executive officers and other key
personnel, we may not be able to compete successfully in our industry





Our success depends on our ability to
attract and retain qualified, experienced employees. We may not be able to compete effectively to retain and attract employees. As a result, our employees may seek employment with larger, more established companies or companies they perceive to have
better prospects. Should we fail to retain or attract qualified personnel, we may not be able to compete successfully in our industry, and our business would be harmed.





We believe that our ability to successfully execute our business strategy will depend on the continued services of executive officers and other key employees. Our executive
employment agreements do not prevent these executives from terminating their employment at any time. As a result, our employees, including these executives, serve at-will and may elect to pursue other opportunities at any time. The loss of any of
our executive officers or other key employees could harm our business.





Our growth and organizational changes have placed a strain on
our systems and resources, and if we fail to successfully manage future growth and organizational changes, we may not be able to manage our business efficiently and may be unable to execute our business plans





We have grown rapidly and will need to continue to grow our business to execute our strategy. Our total number of employees grew from six
as of December 31, 1997 to 196 as of December 31, 2001, although the number of employees has not grown consistently. For example, in May 2000, we reduced the number of our employees from approximately 330 to approximately 250, and the number of our
employees has declined since that time largely due to the divestitures of some of our operations. These changes, and the growth in the number of our trading partners and marketplace volume through our marketplaces, have placed significant demands on
management as well as on our administrative, operational and financial resources and controls. Any future growth or organizational changes would likely cause similar, and perhaps increased, strain on our systems and controls.





Securities class action lawsuits in which we have been named relating to investment banking practices in connection with our initial public
offering may prove costly to defend, and if we are found liable, may expose us to financial liability greater than we are able to sustain





In July 2001, we were named as a defendant in two securities class action lawsuits filed in federal court in the Southern District of New York relating to our IPO by stockholders who purchased our
common stock during the period from January 24, 2000, to December 6, 2000. Since that time, additional lawsuits have been filed asserting federal securities claims arising from our IPO. The lawsuits also name certain of the underwriters, Merrill
Lynch, Pierce, Fenner & Smith, Bear Stearns, and Fleet Boston Robertson Stephens, as well as our Chairman and CEO and our former CFO, as defendants. The lawsuits contain substantially identical allegations, which are that the prospectus and the
registration statement for the IPO failed to disclose that the underwriters solicited and received excessive commissions from investors, and that some investors in the IPO agreed to buy more shares of our common stock in the secondary market, at
predetermined prices, in a scheme to artificially inflate the price of our common stock. Although we believe that the claims made against us and our current and former employees in these suits are without merit, they could be time consuming and
costly to defend, divert management attention and resources and require us to pay significant damages.





Our infrastructure and systems
are vulnerable to natural disasters and other unexpected events, and if any of these events of a significant magnitude were to occur, the extent of our losses could exceed the amount of insurance we carry to compensate us for any losses





The performance of our server and networking hardware and software infrastructure is critical to our business
and reputation and our ability to process transactions, provide high quality customer service and attract




39




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and retain users of our services. Currently, our infrastructure and systems are located at one site with Exodus, a division of Cable and Wireless Plc, in Sunnyvale, California, which is an area
susceptible to earthquakes. We also have a fail-over system for marketplace transaction processing located in Atlanta, Georgia.





Our systems and operations are vulnerable to damage or interruption from human error, terrorist attacks, natural disasters, power loss, telecommunications failures, break-ins, sabotage, computer viruses, intentional acts of vandalism
and similar events. We do not yet have a formal disaster recovery plan, although it is our intention to formulate one. In addition, we may not carry sufficient business interruption insurance to compensate us for losses that could occur.





If we are unable to safeguard the security and privacy of the confidential information of the trading partners that use our
marketplaces, these users may discontinue using our marketplaces





A significant barrier to the widespread
adoption of e-commerce is the secure transmission of personally identifiable information of Internet users as well as other confidential information over public networks. If any compromise or breach of security were to occur, it could harm our
reputation and expose us to possible liability. We use SSL, or secure sockets layer, an Internet security technology, at appropriate points in the transaction flow and encrypt information on our servers to protect user information during
transactions, and we employ a security consulting firm that periodically tests our security measures. Despite these efforts, a party may be able to circumvent our security measures and could misappropriate proprietary information or cause
interruptions in our operations. We may be required to make significant expenditures to protect against security breaches or to alleviate problems caused by any breaches and under certain contracts with marketplace participants would be liable for
contractual damages due to security breaches.





If we are unable to protect our intellectual property, our competitors may gain access
to our technology, which could harm our business





We regard our intellectual property as critical to our
success. If we are unable to protect our intellectual property rights, our business would be harmed. We rely on trademark, copyright and trade secret laws to protect our proprietary rights. We have applied for registration of several marks including
NEOFORMA and associated logos. Our trademark registration applications may not be approved or granted, or, if granted, may be successfully challenged by others or invalidated through administrative process or litigation.





We may be subject to intellectual property claims and if we were to subsequently lose our intellectual property rights, we could be unable to operate our
current business





We may from time to time be subject to claims of infringement of other parties
proprietary rights or claims that our own trademarks, patents or other intellectual property rights are invalid. Any claims regarding our intellectual property, with or without merit, could be time consuming and costly to defend, divert management
attention and resources or require us to pay significant damages. License agreements may not be available on commercially reasonable terms, if at all. In addition, there has been an increase in the number of patent applications related to the use of
the Internet to perform business processes. Enforcement of intellectual property rights in the Internet sector will become a greater source of risk as the number of business process patents increases. The loss of access to any key intellectual
property right, including use of the Neoforma brand name, could result in our inability to operate our current business.





If we lose
access to third-party software incorporated in our marketplaces, we may not be able to operate our marketplaces





We currently rely on software that we have licensed from a number of suppliers. For example, we use software that we license from iPlanet, Inc. to provide part of our Website infrastructure, we use software that we license from
Oracle to support the underlying database needs of our marketplaces, we use software that we




40




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license from i2 Technologies to further enable us to offer our trading partners the ability to automate and streamline the procurement process and we also license Gentran software from Sterling
Commerce for the processing of order transactions from our customers. We will continue to rely on commercial software vendors where appropriate to speed the delivery of our solutions, while reducing the costs of custom code development and
maintenance. These licenses may not continue to be available to us on commercially reasonable terms, or at all. In addition, the licensors may not continue to support or enhance the licensed software. In the future, we expect to license other third
party technologies to enhance our services, to meet evolving user needs or to adapt to changing technology standards. Failure to license, or the loss of any licenses of, necessary technologies could impair our ability to operate our marketplaces
until equivalent software is identified, licensed and integrated or developed by us. In addition, we may fail to successfully integrate licensed technology into our services or to adapt licensed technology to support our specific needs, which could
similarly harm development and market acceptance of our services.





Regulation of the Internet is unsettled, and future regulations
could inhibit the growth of e-commerce and limit the market for our services





A number of legislative and
regulatory proposals under consideration by federal, state, local and foreign governmental organizations may lead to laws or regulations concerning various aspects of the Internet, such as user privacy, taxation of goods and services provided over
the Internet and the pricing, content and quality of services. Legislation could dampen the growth in Internet usage and decrease or limit its acceptance as a communications and commercial medium. If enacted, these laws and regulations could limit
the market for our services. In addition, existing laws could be applied to the Internet, including consumer privacy laws. Legislation or application of existing laws could expose companies involved in e-commerce to increased liability, which could
limit the growth of e-commerce.





Federal and state legislation and regulation affecting the healthcare industry could severely
restrict our ability to operate our business





We are subject to federal and state legislation and regulation
affecting the healthcare industry. Existing and new laws and regulations applicable to the healthcare industry could have a material adverse effect on our ability to operate our business. Legislation governing the distribution of health information
has been proposed at both the federal and state level. For example, the Health Insurance Portability and Accountability Act of 1996 mandates the use of standard transactions and identifiers, prescribed security measures and other provisions within
two years after the adoption of final regulations by the Department of Health and Human Services, or HHS. Some of the transactions at our marketplaces may involve surgical case kits or purchases of products for patient home delivery; these products
may contain patient names and other health information subject to laws governing the distribution of health information. It may be expensive to implement security or other measures designed to comply with any new legislation. Moreover, we may be
restricted or prevented from delivering health information electronically. Other legislation currently being considered at the federal level could also negatively affect our business. Because we represent that our marketplaces meet these regulatory
requirements, our success will also depend on other healthcare participants complying with these regulations. A federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state laws, prohibit payments that are
intended to induce the acquisition, arrangement for or recommendation of the acquisition of healthcare products or services. The application and interpretation of these laws are complex and difficult to predict and could constrain our financial and
marketing relationships, including but not limited to our fee arrangements with suppliers or our ability to obtain supplier company sponsorship for our products. The GPO industry is currently being subjected to a limited scope audit by
the HHS Office of Inspector General to determine compliance with the Medicare/Medicaid anti-kickback law; in addition, The New York Times has begun a publishing a series of articles critical of the GPO industry. Finally, a United States Senate
Subcommittee has announced its intent to hold hearings in April 2002 regarding possible abuses by the GPO industry. Because anything detrimental to the core business of our GPO partners could adversely impact our business, negative substantive
findings by any of these or future investigations could potentially impact our business and consequently our stock price.




41




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If there are changes in the political, economic or regulatory healthcare environment that affects the
purchasing practice or operation of healthcare organizations, or if there is consolidation in the healthcare industry, we could be required to modify our services or to interrupt delivery of our services





The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Regulation of the
healthcare organizations with which we do business could impact the way in which we are able to do business with these organizations. In addition, factors such as changes in reimbursement policies for healthcare expenses, consolidation in the
healthcare industry and general economic conditions affect the purchasing practices and operation of healthcare organizations. Changes in regulations affecting the healthcare industry, such as any increased regulation by the Food and Drug
Administration of the purchase and sale of medical products, could require us to make unplanned enhancements of our services, or result in delays or cancellations of orders or reduce demand for our services. Federal and state legislatures have
periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise
change the environment in which healthcare industry providers operate. We do not know what effect any proposals would have on our business.





Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As the healthcare industry consolidates, competition to provide
services to industry participants will become more intense and the importance of establishing a relationship with each industry participant will become greater. These industry participants may try to use their market power to negotiate fee
reductions of our services. If we were forced to reduce our fees, our operating results could suffer if we cannot achieve corresponding reductions in our expenses.





Our stock price and those of other technology companies have experienced extreme price and volume fluctuations, and, accordingly, our stock price may continue to be volatile, which could negatively
affect your investment





The trading price of our common stock has fluctuated significantly since our initial
public offering in January 2000 and is significantly below the original offering price. An active public market for our common stock may not be sustained in the future. Many factors could cause the market price of our common stock to fluctuate,
including:





| |  | variations in our quarterly operating results;
| | - | ----------------------------------------------

| |  | announcements of technological innovations by us or by our competitors;
| | - | -----------------------------------------------------------------------

| |  | introductions of new services by us or by our competitors;
| | - | ----------------------------------------------------------

| |  | departure of key personnel;
| | - | ---------------------------

| |  | the gain or loss of significant strategic relationships or trading partners;
| | - | ----------------------------------------------------------------------------

| |  | changes in the estimates of our operating performance or changes in recommendations by securities analysts; and
| | - | ---------------------------------------------------------------------------------------------------------------

| |  | market conditions in our industry and the economy as a whole.
| | - | -------------------------------------------------------------




In addition, stocks of technology companies have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to these
companies operating performance. Public announcements by companies in our industry concerning, among other things, their performance, accounting practices or legal problems could cause fluctuations in the market for stocks of these companies.
These fluctuations could lower the market price of our common stock regardless of our actual operating performance.





ITEM
8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The financial statements required
pursuant to this item are included in Item 14 of this Annual Report on Form 10-K/A and are presented beginning on page F-49.




42




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PART IV





ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K





(a)(1)    Index To Consolidated Financial Statements





The following
Consolidated Financial Statements of the Registrant are filed as part of this report:





Reports of Independent Public AccountantsConsolidated Balance Sheets as of December 31, 2001 and 2000 (as restated)Consolidated Statements of Operations for the Years ended December 31, 2001 (as restated), 2000 (as restated) and
1999Consolidated Statements of Changes in Stockholders Equity (Deficit) for the Years ended December 31, 2001 (as
restated), 2000 (as restated) and 1999Consolidated Statements of Cash Flows for the Years ended December 31, 2001 (as restated), 2000 (as restated), and
1999Notes to Consolidated Financial Statements





(a)(2)    Index to Consolidated Financial
Statement Schedules





The following Consolidated Financial Statement Schedule of the Registrant is filed as part of
this report:





Schedule IIValuation and Qualifying Accounts and Reserves





Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the accompanying consolidated
financial statements or Notes thereto.





(a)(3)    Index to Exhibits





Incorporated by ReferenceExhibit No. Filed Herewith

Exhibit

Form

File No.

Filing Date

Exhibit No. as Filed2.01

Securities Purchase Agreement, dated July 16, 1999, by and among the Registrant, Neoforma, GAR, Inc., General Asset Recovery, LLC, Erik Tivin and Fred Tivin.
Certain schedules have been omitted and will be provided to the Commission upon request.

S-1

333-89077

October 15, 1999

2.012.02

Agreement for Purchase of Assets, dated November 18, 1999, by and among the Registrant, FDI Information Resources, Inc. and FDI Information, LLC. Certain
schedules have been omitted and will be provided to the Commission upon request.

S-1

333-89077

December 2, 1999

2.022.03

Agreement and Plan of Merger, dated as of December 23, 1999, by and among the Registrant, Pharos Technologies, Inc. and Minimee, Inc.

S-1

333-89077

January 12, 2000

2.032.04

Agreement and Plan of Merger, dated March 24, 2000, between the Registrant and EquipMD, Inc. and Augustacorp, Inc.

8-K



April 3, 2000

2.12.05

Agreement and Plan of Merger, dated March 30, 2000, among the Registrant, NeoIII Acquisition Corp. and Eclipsys Corporation (including Voting Agreement
Exhibits).

8-K



April 4, 2000

2.12.06

Agreement and Plan of Merger, dated March 30, 2000, between the Registrant and HEALTHvision, Inc. (including Exhibits A and B).

8-K



April 4, 2000

2.2




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Incorporated by ReferenceExhibit No. Filed Herewith

Exhibit

Form

File No.

Filing Date

ExhibitNo. asFiled2.07

Purchase Agreement by and among the Registrant, Neoforma GAR, Inc., Med XS Solutions, Inc. and Med-XS Asset Services, Inc., dated July 30, 2001 (Certain
schedules have been omitted and will be provided to the Commission upon request).

8-K



September 20, 2001

2.12.08

First Amendment to Purchase Agreement by and among the Registrant, Neoforma GAR, Inc., Med XS Solutions, Inc. and Med-XS Asset Services, Inc., dated September
5, 2001.

8-K



September 20, 2001

2.23.01

Form of Fourth Amended and Restated Certificate of Incorporation.

DEF14A



June 29, 2000

Annex D3.02

Form of Certificate of Amendment to Fourth Amended and Restated Certificate of Incorporation of the Registrant.

DEF14A



July 14, 2001

Appendices B and D-33.03

Restated Bylaws of the Registrant, as adopted on November 12, 1999.

S-1

333-89077

December 12, 1999

3.034.01

Form of Specimen Certificate for Registrants common stock.

S-1

333-89077

December 12, 1999

4.014.02

Amended and Restated Registration Rights Agreement, dated June 30, 2000.

10-K

X

April 17, 2001

4.024.03

Amendment No. 1 to Registration Rights Agreement, dated January 25, 2001.

10-K

X

April 17, 2001

4.034.04

Warrant to purchase common stock of the Registrant issued to Heidrick & Struggles Inc., dated September 9, 1999.

S-1

333-89077

December 2, 1999

4.034.05

QuickStart Warrant to purchase Series C preferred stock of the Registrant, dated June 25, 1998, issued to Silicon Valley Bank, and amended thereto, dated March
5, 1999.

S-1

333-89077

October 15, 1999

4.044.06

Warrant Agreement to Purchase Series D Preferred Stock of the Registrant, dated May 12, 1999, issued to Comdisco, Inc.

S-1

333-89077

October 15, 1999

4.054.07

QuickStart Warrant to purchase Series D preferred stock of the Registrant, dated July 20, 1999, issued to Silicon Valley Bank.

S-1

333-89077

October 15, 1999

4.06




44




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Incorporated by ReferenceExhibit No. Filed Herewith

Exhibit

Form

File No.

Filing Date

Exhibit No. as Filed4.08

Warrant Agreement to Purchase Series D Preferred Stock of the Registrant, dated as of July 7, 1999, issued to Comdisco, Inc.

S-1

333-89077

October 15, 1999

4.0710.01*

Form of Indemnity Agreement between the Registrant and its directors and officers.

S-1

333-89077

October 15, 1999

10.0110.02*

Neoforma, Inc. 1997 Stock Plan.

S-1

333-89077

October 15, 1999

10.0210.03*

Neoforma.com, Inc. 1999 Equity Incentive Plan, as adopted November 12, 1999.

S-1

333-89077

December 23, 1999

10.0310.04*

Neoforma.com, Inc. 1999 Employee Stock Purchase Plan, as adopted November 12, 1999.

S-1

333-89077

December 23, 1999

10.0410.05+

Development and License Agreement, dated May 14, 1999, between Emergency Care Research Institute and the Registrant.

S-1

333-89077

January 13, 2000

10.0510.06*

Employment Agreement, dated July 1, 1999, between Robert J. Zollars and the Registrant.

S-1

333-89077

December 22, 1999

10.0910.07

Promissory Note for $7,800,000, dated August 1999, payable to Erik Tivin.

S-1

333-89077

October 15, 1999

10.1510.08

Subordinated Loan and Security Agreement, dated May 12, 1999, between Comdisco, Inc. and the Registrant.

S-1

333-89077

December 2, 1999

10.1710.09

Subordinated Promissory Note for $2,000,000, dated May 27, 1999, payable to Comdisco, Inc.

S-1

333-89077

October 15, 1999

10.1810.10

Loan and Security Agreement, dated July 7, 1999, between Comdisco, Inc. and the Registrant.

S-1

333-89077

October 15, 1999

10.1910.11

Hardware Secured Promissory Note for $1,032,001.98, dated September 3, 1999, payable to Comdisco, Inc.

S-1

333-89077

October 15, 1999

10.2010.12

Softcost Secured Promissory Note for $240,363.61, dated January 3, 1999, payable to Comdisco, Inc.

S-1

333-89077

October 15, 1999

10.2110.13*

Offer letter, dated July 28, 1999, with Daniel A. Eckert.

S-1

333-89077

December 2, 1999

10.2710.14

Industrial Building Lease, dated as of November 15, 1999, by and between the Registrant and Centerpoint Properties Trust.

S-1

333-89077

December 23, 1999

10.2810.15

Common Stock and Warrant Agreement, dated as of March 30, 2000, between the Registrant and VHA Inc. (including Exhibits A and B).

8-K



April 4, 2000

99.110.16

Common Stock and Warrant Agreement, dated as of March 30, 2000, between the Registrant and University HealthSystem Consortium (including Exhibit
A).

8-K



April 4, 2000

99.210.17

Termination Agreement, dated as of May 24, 2000, among the Registrant, NeoIII Acquisition Corp., Eclipsys Corporation, HEALTHvision, Inc., Novation, LLC, VHA
Inc., University HealthSystem Consortium and Healthcare Purchasing Partners International, LLC.

8-K



May 31, 2000

99.1




45




---

Incorporated by ReferenceExhibit No. Filed Herewith

Exhibit

Form

File No.

Filing Date

Exhibit No. as Filed10.18

Amended and Restated Common Stock and Warrant Agreement, dated as of May 24, 2000, between the Registrant and VHA Inc. (including Exhibits A and
B).

8-K



May 31, 2000

99.210.19

Amended and Restated Common Stock and Warrant Agreement, dated as of May 24, 2000, between the Registrant and University HealthSystem Consortium (including
Exhibits A and B).

8-K



May 31, 2000

99.310.20

Amendment to Amended and Restated Common Stock and Warrant Agreement, dated as of October 18, 2000, between the Registrant and VHA Inc.

8-K



October 19, 2000

99.110.21

Sublease Agreement, dated March 7, 2000, between the Registrant and Seagate Technology, Inc.

10-Q



May 15, 2000

10.110.22+

Outsourcing and Operating Agreement, dated March 30, 2000, between the Registrant, Novation, LLC, VHA Inc., University HealthSystem Consortium and Healthcare
Purchasing Partners International, LLC.

10-Q



May 15, 2000

10.310.23*

Second Amendment to Employment Agreement between Robert J. Zollars and the Registrant.

10-K



April 17, 2001

10.2910.24*

Offer letter for Andrew L. Guggenhime, dated January 14, 2000.

10-K



April 17, 2001

10.3010.25*

Offer letter for Steven E. Kane, dated May 30, 2000.

10-K



April 17, 2001

10.3110.26*

Offer letter for Steven J. Wigginton, dated December 2, 1999.

10-K



April 17, 2001

10.3210.27+

Public Marketplace License Agreement, dated December 29, 2000, by and between i2 Technologies, Inc. and the Registrant.

10-K



April 17, 2001

10.3410.28+

Application Service Provider Agreement, dated December 29, 2000, by and between i2 Technologies, Inc. and the Registrant.

10-K



April 17, 2001

10.3510.29+

Services Agreement, dated December 29, 2000, by and between i2 Technologies, Inc. and the Registrant.

10-K



April 17, 2001

10.3610.30

Common Stock Purchase Agreement, dated December 29, 2000, by and between i2 Technologies, Inc. and the Registrant.

10-K



April 17, 2001

10.3710.31

Common Stock Purchase Agreement, dated as of January 25, 2001, by and between the Registrant and VHA Inc.

10-Q



May 15, 2001

10.110.32

Common Stock Purchase Agreement, dated as of January 25, 2001, by and between the Registrant and University Healthsystem Consortium.

10-Q



May 15, 2001

10.210.33

Amendment to Amended and Restated Common Stock and Warrant Agreement, dated as of January 25, 2001, by and between the Registrant and University Healthsystem
Consortium.

10-Q



May 15, 2001

10.310.34+

Second Amended and Restated Outsourcing and Operating Agreement, dated as of January 1, 2001, by and among the Registrant, Novation LLC, VHA Inc., University
Healthsystem Consortium and Healthcare Purchasing Partners International, LLC.

10-Q



May 15, 2001

10.4




46




---

Incorporated by ReferenceExhibit No. Filed Herewith

Exhibit

Form

File No.

Filing Date

Exhibit No. as Filed10.35+

Asset Purchase Agreement, dated March 31, 2001, by and between Medical Distribution Solutions, Inc., Neoforma.com, Inc. and Neoforma Lifeline,
Inc.

10-Q



August 13, 2001

10.1710.36

Promissory Note from Med-XS Asset Services, Inc. payable to the Registrant.

8-K



September 20, 2001

2.310.37

Security Agreement made by Med-XS Asset Services, Inc. and Med XS Solutions, Inc. in favor of the Registrant.

8-K



September 20, 2001

2.410.38+

Three Way Assignment Agreement by and among the Registrant, Med-XS Asset Services, Inc. and Novation LLC.

8-K



September 20, 2001

2.510.39+

Integrated Solution Agreement, dated August 28, 2001, by and between Global Healthcare Exchange, LLC and Neoforma, Inc.

10-Q



November 14, 2001

10.110.40+

First Amendment to the Second Amended and Restated Outsourcing and Operating Agreement, effective July 1, 2001.

10-Q



November 14, 2001

10.210.41+

Credit Agreement by and between the Registrant and VHA Inc. effective as of April 16, 2001.

10-K



March 28, 2002

10.4110.42

First Amendment to Credit Agreement by and between the Registrant and VHA Inc. dated February 13, 2002.

10-K



March 28, 2002

10.4221.1

Subsidiaries.

10-K



April 17, 2001

21.123.1

Consent of Arthur Andersen LLP, independent public accountants.

10-K



March 28, 2002

23.123.2

Consent of Deloitte & Touche LLP, independent public accountants.

X24.1

Power of Attorney.

10-K



March 28, 2002

24.199.1

Registrants Letter to the Securities and Exchange Commission regarding Arthur Andersen LLPs confirmation of its compliance with audit
standards.

10-K



March 28, 2002

99.1


---

|+ | Indicates that portions of this agreement were granted confidential treatment by the Commission.
|- | ------------------------------------------------------------------------------------------------




|* | Indicates a management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------------------




Other financial statement schedules are omitted because the information called for is not required or is shown either in the financial statements or the notes thereto.





(b)    Reports on Form 8-K





None.





(c)    Exhibits





The Registrant hereby files as part of this Annual Report on
Form 10-K/A the exhibits listed in Item 14(a)(3) above. Exhibits which are incorporated herein by reference can be inspected and copied at the public




47




---

reference facilities maintained by the Commission, 450 Fifth Street, NW, Room 1024, Washington, D.C. and at the Commissions regional offices at 219 South Dearborn Street, Room 1204,
Chicago, Illinois; 26 Federal Plaza, Room 1102, New York, New York and 5757 Wilshire Boulevard, Suite 1710, Los Angeles, California. Copies of such material can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street,
NW, Washington, D.C. 20549, at prescribed rates.





(d)    Financial Statement Schedules





The Registrant hereby files as part of this Annual Report on Form 10-K/A the consolidated financial statement
schedules listed in Item 14(a)(2) above.




48




---




SIGNATURES





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





Date:    December 13, 2002





NEOFORMA, INC.By:

/s/    ANDREW L.
GUGGENHIMEAndrew L. Guggenhime Chief Financial
Officer





Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:





Signature

Title

Date/s/    ROBERT J.
ZOLLARS Robert J. Zollars

Chief Executive Officer (Principal Executive Officer)

December 13, 2002/s/    ANDREW L.
GUGGENHIME Andrew L. Guggenhime

Chief Financial Officer (Principal Financial and Accounting Officer)

December 13, 2002/s/    CURT NONOMAQUE* Curt Nonamaque

Director

December 13, 2002/s/    MARK
MCKENNA* Mark McKenna

Director

December 13, 2002/s/    RICHARD D. HELPPIE* Richard D. Helppie

Director

December 13, 2002/s/    JEFFREY HILLEBRAND* Jeffrey Hillebrand

Director

December 13, 2002/s/    ANDREW J. FILIPOWSKI*
Andrew J. Filipowski

Director

December 13, 2002/s/    MICHAEL MURRAY* Michael Murray

Director

December 13, 2002




49




---

Signature

Title

Date/s/    ROBERT J. BAKER* Robert J. Baker

Director

December 13, 2002/s/    C. THOMAS SMITH* C. Thomas Smith

Director

December 13, 2002





*By:

/s/    ANDREW L. GUGGENHIMEAttorney-in-fact




50




---

Certifications





I, Robert J. Zollars, Chief Executive Officer of Neoforma, Inc., certify that:





1.    I have reviewed
this annual report on Form 10-K/A of Neoforma, Inc.;





2.    Based on my knowledge, this annual report does not
contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
annual report; and





3.    Based on my knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.





Date: December 13, 2002


/s/    ROBERT J.
ZOLLARSRobert J. Zollars Chief
Executive Officer




51




---




Certifications





I, Andrew L. Guggenhime, Chief Financial Officer of Neoforma, Inc., certify that:





1.    I have reviewed this annual report on Form 10-K/A of Neoforma, Inc.;





2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual report; and





3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this annual report.





Date: December 13, 2002


/s/    ANDREW L. GUGGENHIMEAndrew L. GuggenhimeChief Financial Officer




52




---




NEOFORMA, INC.





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





PageReports of Independent Public Accountants

F-2Consolidated Balance Sheets, As Restated

F-4Consolidated Statements of Operations, As Restated

F-5Consolidated Statements of Changes in Stockholders Equity (Deficit), As Restated

F-6Consolidated Statements of Cash Flows, As Restated

F-9Notes to Consolidated Financial Statements

F-11




F-1




---




REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





To the Board of Directors and Stockholders of


Neoforma, Inc.:





We have audited the accompanying consolidated balance sheets of Neoforma, Inc. (the Company) and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders equity (deficit), and cash flows for the years then ended. Our audits also included the financial statement schedule listed in Item 14(a)(2) for
the years ended December 31, 2001 and 2000. These financial statements and financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements and financial
statement schedules based on our audits. The consolidated statements of operations, changes in stockholders equity (deficit), and cash flows of the Company for the year ended December 31, 1999 were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 13, 2002. Those auditors reported on such financial statements prior to the restatement referred to below.





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





In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the Company and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the
information set forth therein.





As discussed in Note 18, the accompanying 2001 and 2000 consolidated financial
statements have been restated.





/s/    DELOITTE &
TOUCHE LLP





San Jose, California


December 10, 2002




F-2




---




The following is a copy of the previously issued report of Arthur Andersen LLP,
which has ceased operations and which report has not been reissued in connection with this Form 10-K/A, on the consolidated balance sheets of Neoforma, Inc. and subsidiaries at December 31, 2001 and 2000 and the related consolidated statements of
operations, changes in stockholders equity (deficit) and cash flows for each of the three years in the period ended December 31, 2001. Arthur Andersen LLP reported on such financial statements prior to the restatement discussed in Note 18.





REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





To Neoforma, Inc.:





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





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





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





Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission
rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements taken as a whole.





/s/     ARTHUR ANDERSEN LLP





San Jose, California


February 13, 2002







F-3




---




NEOFORMA, INC.





CONSOLIDATED BALANCE SHEETS


(in thousands, except per share amounts)





December 31,2000


2001(As restated, see Note 18)AssetsCurrent assets:Cash and cash equivalents

$
22,530


$
14,096Restricted cash, current portion


500



500Short-term investments


5,163



Accounts receivable, net of allowance for doubtful accounts of $384 and $206 in 2000 and
2001,respectively


2,343



1,377Prepaid expenses and other current assets


3,480



3,739Deferred debt costs, current portion


413



175Total current assets


34,429



19,887Property and equipment, net


28,673



26,955Intangibles, net of amortization


127,410



311Capitalized partnership costs, net of amortization


303,731



234,352Non-marketable investments


8,400



745Restricted cash, less current portion


1,500



1,000Other assets


818



3,051Deferred debt costs, less current portion


182



Total assets

$
505,143


$
286,301Liabilities and Stockholders EquityCurrent liabilities:Notes payable, current portion

$
8,089


$
5,164Accounts payable


21,942



4,661Accrued payroll


2,986



4,708Other accrued liabilities


1,856



4,152Deferred revenue


797



1,897Total current liabilities


35,670



20,582Deferred rent


279



499Deferred revenue, less current portion


150



2,111Notes payable, less current portion:Due to related party






19,000Other


7,958



1,635Total notes payable, less current portion


7,958



20,635Commitments and contingencies (Notes 5 and 6)Stockholders equity:Common Stock $0.001 par value:Authorized  300,000 shares at December 31, 2001Issued and outstanding: 13,676 and 16,589 shares at December 31, 2000 and 2001, respectively


14



17Warrants


8,290



80Additional paid-in capital


762,523



803,239Notes receivable from stockholders


(6,857
)


(6,407
)Deferred compensation


(31,134
)


(10,344
)Accumulated other comprehensive loss


(3
)


(1
)Accumulated deficit


(271,747
)


(544,110
)Total stockholders equity


461,086



242,474Total liabilities and stockholders equity

$
505,143


$
286,301





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




F-4




---




NEOFORMA, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share amounts)





Years ended December 31,1999


2000


2001(As restated, see Note 18)Revenue:Marketplace revenue:Related party (see Note 2)

$



$
81


$
24,567Other


83



1,257



1,130Total Marketplace revenue


83



1,338



25,697Trading Partner Services revenue:Trading partner services


921



4,479



1,877Sales of used equipment






4,629



250Total Trading Partner Services revenue (see Note 2)


921



9,108



2,127Total revenue


1,004



10,446



27,824Operating expenses:Cost of equipment sold






3,544



216Cost of services






7,722



13,480Operations


5,941



14,035



15,675Product development


8,161



24,785



16,912Selling and marketing


16,860



51,530



28,646General and administrative


17,937



22,877



16,064Amortization of intangibles


715



26,557



30,098Amortization of partnership costs (see Note 2)






29,523



75,651Costs of strategic partnership






9,345



Cost of warrant issued to recruiter


2,364







Write-off of purchased software






3,858



1,513Write-off of acquired in-process research and development






16,900



Abandoned acquisition costs






2,742



Restructuring






2,791



950Impairment of intangibles










11,906Impairment of assets held for divestiture






13,305



81,086Write-down of non-marketable investments










8,400Net gain on divested businesses










(55
)Total operating expenses


51,978



229,514



300,542Loss from operations


(50,974
)


(219,068
)


(272,718
)Other income (expense):Interest income


659



4,707



769Interest expense


(676
)


(1,362
)


(685
)Other income (expense)


(29
)


29



271Net loss

$
(51,020
)

$
(215,694
)

$
(272,363
)Net loss per share:Basic and diluted

$
(191.51
)

$
(25.58
)

$
(17.32
)Weighted average shares  basic and diluted


266



8,432



15,721Pro forma net loss per share:Basic and diluted

$
(16.31
)

$
(24.85
)Weighted average shares  basic and diluted


3,128



8,679





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




F-5




---




NEOFORMA, INC.





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)


(in
thousands, except per share amounts)





Preferred Stock








Additional Paid-In Capital


Notes Receivable From Shareholders





Accumulated Other Comprehensive Loss





Total Stockholders Equity (Deficit)Series A

Series B

Common Stock





Deferred Compensation



Accumulated Deficit



Comprehensive LossShares

Amount

Shares

Amount

Shares


Amount

WarrantsBALANCE, December 31, 1998

900

$
1

286

$


120


$
1

$
7

$
1,926


$
(10
)

$
(47
)

$



$
(5,033
)

$
(3,155
)

$
(4,563
)Repayment of note receivable from stockholder

























60















60Common stock issued as a result of options exercised at $1.00 to $70.00 per share











1,286



1





9,114



(8,295
)














820Common stock repurchased at $1.00 per share











(1
)








(1
)


















(1
)Valuation of options issued to consultants





















850



















850Valuation of shares received for issuance to consultants





















8



















8Issuance of warrants to purchase common stock


















10






















10Valuation of preferred stock warrants issued to lender in conjunction with debt


















1,240






















1,240Valuation of common stock issued to consultants











1









641



















641Valuation of warrants to purchase common stock issued to consultant at $0.10 per share


















2,364






















2,364Common stock issued in connection with the acquisition of the assets of FDI Information Resources, LLC
(FDI)











35









3,149



















3,149Deferred compensation





















60,552







(60,552
)










Unrealized losses on available for sale securities

































(40
)






(40
)

$
(40
)Amortization of deferred compensation





























13,211











13,211Net loss





































(51,020
)


(51,020
)


(51,020
)BALANCE, December 31, 1999

900

$
1

286

$


1,441


$
2

$
3,621

$
76,239


$
(8,245
)

$
(47,388
)

$
(40
)

$
(56,053
)

$
(31,863
)

$
(51,060
)




F-6




---




NEOFORMA, INC.





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)


(in
thousands, except per share amounts)





Preferred Stock






Warrants


Additional Paid-In Capital


Notes Receivable
from Stockholders


Deferred Compensation


Accumulated Other Comprehensive Income/(Loss)


Accumulated Deficit


Total Stockholders Equity (Deficit)


Comprehensive Income(Loss)Series A


Series B

Common StockShares


Amount


Shares


Amount

Shares


AmountBALANCE, December 31, 1999

900


$
1


286


$


1,441


$
2

$
3,621


$
76,239


$
(8,245
)

$
(47,388
)

$
(40
)

$
(56,053
)

$
(31,863
)

$
(51,060
)Repayment of notes receivable from stockholders





























245















245Interest accrued on notes receivable from stockholders





























(246
)














(246
)Common stock issued as a result of options exercised at $1.00 to $70.00














14










112



















112Common stock repurchased at $1.00 to $70.00














(190
)









(2,181
)


1,907















(274
)Valuation of options issued to consultants

























212



















212Valuation of warrants issued to consultants





















67























67Conversion of Preferred Stock to common stock

(900
)


(1
)

(286
)




3,999



4






88,769



















88,772Issuance of common stock for Initial Public Offering net of issuance costs of $9.3 million














805



1






95,336



















95,337Common stock issued in connection with exercise of warrant, net of shares repurchased














70






(3,563
)


3,563



















Common stock issued and Notes receivable from stockholders assumed in connection with the acquisition of Pharos
Technologies, Inc. (Pharos)














198










22,000



(518
)














21,482Common stock issued in connection with the acquisition of U.S. Lifeline, Inc. (USL)














6










2,769



















2,769Common stock issued in connection with the acquisition of EquipMD, Inc. (EquipMD)














437










133,615



















133,615Common stock issued in connection with the acquisition of certain assets of National Content Liquidators,
Inc.














30










2,162



















2,162Common stock issued to VHA Inc. (VHA) and University Health System Consortium (UHC) in connection with the Outsourcing
Agreement














5,755



6






291,325



















291,331Valuation of warrants earned by VHA and UHC





















41,925























41,925Common stock issued to UHC in connection with exercise of warrant














188






(9,072
)


9,072



















Conversion of VHA warrants to Restricted Common Stock














905



1


(24,688
)


24,687



















Deferred compensation on options issued to employees

























4,656







(4,656
)










Deferred compensation on options to purchase common stock assumed as part of the acquisition of EquipMD

























23,053







(23,053
)










-Reduction in amortization of deferred compensation as a result of employee attrition

























(3,733
)


















(3,733
)Reduction in deferred compensation as a result of employee attrition

























(8,374
)






8,374











Amortization of deferred compensation

































34,189











34,189Change in deferred compensation as a result of option accounted for under variable plan accounting

























(1,400
)






1,400











Common stock issued under the employees stock purchase plan














18










641



















641Unrealized gain on available for sale securities





































37







37



37Net loss









































(215,694
)


(215,694
)


(215,694
)BALANCE,December 31, 2000*




$






$


13,676


$
14

$
8,290


$
762,523


$
(6,857
)

$
(31,134
)

$
(3
)

$
(271,747
)

$
461,086


$
(215,657
)


---

|* | Activity for the years ended December 31, 2000 and 2001 has been restated. See Note 18 for further discussion of this restatement.
|- | ----------------------------------------------------------------------------------------------------------------------------------



F-7




---

NEOFORMA, INC.


STATEMENTS OF
CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) (Continued)


(in thousands, except per share amounts)





Preferred StockSeries A

Series B

Common Stock

Warrants


Additional Paid-In Capital


Notes Receivable
from Stockholders


Deferred Compensation


Accumulated Other Comprehensive Income/(Loss)


Accumulated Deficit


Total Stockholders' Equity


Comprehensive Income(Loss)Shares

Amount

Shares

Amount

Shares


AmountBALANCE, December 31, 2000*



$




$


13,676


$
14

$
8,290


$
762,523


$
(6,857
)

$
(31,134
)

$
(3
)

$
(271,747
)

$
461,086


$
(215,657
)Repayment of notes receivable from stockholders


























156















156Interest accrued on notes receivable from stockholders


























(95
)














(95
)Common stock issued as a result of options exercised at $1.00 to $11.88











33










235



















235Common stock repurchased at $1.00 to $70.00











(65
)









(316
)


215















(101
)Common stock issued for cash as part of an equity financing at $16.90 per share, net of issuance costs of
$1,062











1,805



2






29,436



















29,438Common stock issued in connection with exercise of warrant, net of shares repurchased











4






(47
)


47



















Restricted Common Stock issued to employees in lieu of cash bonuses











37










873



















873Valuation of Restricted Stock earned by VHA and UHC











482



1






6,272



















6,273Write-off of uncollectible note receivable from stockholder


























174















174Conversion of UHC warrants to Restricted Common Stock











377






(8,163
)


8,163



















Restricted common stock awards issued to employees











186










3,602







(3,602
)










Reversal of amortization of deferred compensation as a result of employee terminations






















(887
)


















(887
)Reduction in deferred compensation as a result of employee terminations






















(7,233
)






7,233











Amortization of deferred compensation






























17,159











17,159Common stock issued under the employees stock purchase plan











54










524



















524Unrealized gain on available for sale securities


































2







2



2Net loss






































(272,363
)


(272,363
)


(272,363
)BALANCE, December 31, 2001*



$




$


16,589


$
17

$
80


$
803,239


$
(6,407
)

$
(10,344
)

$
(1
)

$
(544,110
)

$
242,474


$
(272,361
)


---

|* | Activity for the years ended December 31, 2000 and 2001 has been restated. See Note 18 for further discussion of this restatement.
|- | ----------------------------------------------------------------------------------------------------------------------------------




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




F-8




---

NEOFORMA, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)





Years ended December 31,1999


2000


2001(As restated, see Note 18)Cash flows from operating activities:Net loss

$
(51,020
)

$
(215,694
)

$
(272,363
)Adjustments to reconcile net loss to net cash used in operating activities:Restricted common stock issued to employees










873Write-off of note receivable










174Amortization resulting from issuance of Series E preferred stock in connection with prepaid consulting
services


269



1,293



Common stock issued in connection with consulting services


7







Valuation of common stock options issued in connection with consulting services


1,484



212



Valuation of common stock reserved for future issuance in connection with consulting services


8







Valuation of warrants to purchase common stock in exchange for consulting services


2,364



67



Forgiveness of note payable in connection with acquisition










(500
)Provision for doubtful accounts






524



898Accrued interest on stockholder notes receivable






(246
)


(95
)Depreciation and amortization of property and equipment


980



8,162



8,577Amortization of intangibles


715



26,557



30,098Costs of strategic partnership financed through note payable






6,000



Amortization of partnership costs






29,523



75,651Amortization of deferred compensation


13,211



30,456



16,272Amortization of deferred debt costs


236



420



420Write-off of purchased software






3,858



1,513Write-off of acquired in-process research and development






16,900



Write-down of intangible assets related to anticipated divestitures






13,305



81,086Impairment of intangibles










11,906Write-down of non-marketable investments










8,400Net gain on divested businesses










(55
)Change in assets and liabilities, net of acquisitions:Restricted cash






(2,000
)


500Accounts receivable


(151
)


(2,443
)


(34
)Prepaid expenses and other current assets


(2,385
)


(2,877
)


661Other assets






1,063



(392
)Accounts payable


6,738



14,233



(17,269
)Accrued liabilities and accrued payroll


1,678



2,266



4,324Deferred revenue


77



64



3,770Deferred rent






279



220Net cash used in operating activities


(25,789
)


(68,078
)


(45,365
)Cash flows from investing activities:Purchases of marketable investments


(23,550
)


(6,621
)


(2,681
)Proceeds from the sale or maturities of marketable investments






25,206



7,825Cash surrendered with divested businesses, net of cash proceeds received










(166
)Proceeds from repayment of notes receivable relating to divestitures










150Cash paid for the acquisition of GAR, net of cash acquired


(1,800
)






Cash paid for the acquisition of Pharos, net of cash acquired






(500
)


Cash paid for the acquisition of USL, net of cash acquired






(3,107
)


Cash paid for the acquisition of EquipMD, net of cash acquired






(3,868
)


Cash paid for the acquisition of certain assets of NCL, net of cash acquired






(553
)


Purchase of non-marketable investments


(2,500
)


(5,900
)


Purchases of property and equipment


(9,009
)


(31,796
)


(8,699
)Net cash used in investing activities


(36,859
)


(27,139
)


(3,571
)Cash flows from financing activities:Proceeds from the issuance of notes payable


4,434







Proceeds from draws under line of credit










19,000Repayments of notes payable


(1,550
)


(3,608
)


(8,750
)Proceeds from the issuance of Series D mandatorily redeemable convertible preferred stock, net of issuance
costs


11,986







Proceeds from the issuance of Series E and E-1 mandatorily redeemable convertible preferred stock, net of issuance
costs


71,380







Collections of notes receivable from stockholders


60



245



155Cash received related to options exercised






112



236Proceeds from the issuance of common stock under the employee stock purchase plan






641



524Common stock repurchased, net of notes receivable issued to common stockholders






(272
)


(101
)Proceeds from the issuance of common stock, net of issuance costs and notes receivable issued to common
stockholders


818



95,337



29,438Net cash provided by financing activities


87,128



92,455



40,502Net increase (decrease) in cash and cash equivalents


24,480



(2,762
)


(8,434
)Cash and cash equivalents, beginning of period


812



25,292



22,530Cash and cash equivalents, end of period

$
25,292


$
22,530


$
14,096Supplemental disclosure of cash flow information:Cash paid during the period for interest

$
439


$
869


$
658




F-9




---




NEOFORMA, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


(in thousands)





Years ended December 31,1999

2000

2001(As restated, see Note 18)Supplemental schedule of noncash financing activities:Issuance of warrants and restricted stock

$
2,364

$
41,925

$
6,273Issuance of common stock for notes receivable

$
8,295

$
Issuance of warrants to purchase mandatorily redeemable convertible preferred stock

$
1,240

$


$
Issuance of note payable to related party in connection with acquisition of GAR

$
7,800

$


$
Issuance of common stock in connection with the acquisition of FDI

$
3,150

$


$
Reduction of deferred compensation resulting from employee terminations

$


$
8,374

$
7,233Deferred compensation related to acquisition of EquipMD

$


$
23,053

$
Reduction of deferred compensation related to an option grant under variable plan accounting

$


$
1,400

$
Conversion of preferred stock to common stock

$


$
88,772

$
Issuance of common stock in connection with acquisition of Pharos

$


$
22,000

$
Issuance of common stock in connection with the acquisition of USL

$


$
2,769

$
Issuance of common stock in connection with the acquisition of EquipMD

$


$
133,615

$
Issuance of common stock in connection with partnership agreements

$


$
291,331

$
Issuance of common stock in connection with the acquisition of certain assets of NCL

$


$
2,162

$
Note payable issued in connection with establishing strategic partnership

$


$
6,000

$
Non-marketable investment received in divestiture

$


$
745

$
Notes receivable from common stockholders cancelled in repurchase of common shares

$


$
1,907

$
215Cancellation of note payable as part of divestiture

$


$


$
500Issuance of restricted stock to employees

$


$


$
3,602





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




F-10




---




NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





1.    DESCRIPTION OF BUSINESS:





Neoforma, Inc. (the Company) builds and
operates Internet marketplaces for trading partners in the healthcare industry, including providers (hospitals and physicians offices) and suppliers (distributors and manufacturers). The Companys supply chain technology solutions enable
the participants in the healthcare supply chain market, principally providers, manufacturers, distributors and group purchasing organizations, to significantly improve business processes within their organizations and among their trading partners.





In March 1996, the Company was incorporated as Neoforma, Inc., in the state of California, for the purpose of
providing business-to-business e-commerce services for the medical products, supplies and equipment marketplace. In November 1998, the Company re-incorporated in the state of Delaware. In September 1999, the Company changed its name to Neoforma.com,
Inc. In January 2000, the Company completed its initial public offering of its common stock on the Nasdaq National Market. In August 2001, the Company changed its name to Neoforma, Inc.





Since inception, the Company has incurred significant losses, and, as of December 31, 2001, had an accumulated deficit of $544.1 million. The Company anticipates that
currently available funds, consisting of cash and cash equivalents, combined with those funds available through its line of credit with VHA Inc. (VHA) and other sources, will be sufficient to meet anticipated needs for working capital and capital
expenditures through at least the next 12 months. The Companys future long-term capital needs will depend significantly on the rate of growth of its business, the timing of expanded service offerings, the success of these services once they
are launched and the Companys ability to adjust its operating expenses to an appropriate level if the growth rate of its business is slower than expected. Any projections of future long-term cash needs and cash flows are subject to substantial
uncertainty. If available funds and cash generated from operations are insufficient to satisfy its long-term liquidity requirements, the Company may seek to sell additional equity or debt securities, obtain additional lines of credit, curtail
expansion of its services, including reductions in its staffing levels and related expenses, or potentially liquidate selected assets. The Company cannot be certain that additional financing will be available on favorable terms when required, or at
all.





2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:





Principles of Consolidation





The consolidated
financial statements include the accounts of the Company and its wholly owned subsidiaries, General Asset Recovery, LLC (GAR), Pharos Technologies, Inc. (Pharos), U.S. Lifeline, Inc. (USL) and EquipMD, Inc. (EquipMD), for the periods such
subsidiaries were wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.





Use of Estimates





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





Reverse Stock Split





On August 13, 2001, as part of the Companys annual meeting of
stockholders, the stockholders voted to approve a proposal that gave the Companys board of directors the authority to implement a reverse stock split of the Companys common stock at any one of three approved exchange ratios (1-for-6, 1-
for-8, or 1-for-10) if the




F-11




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




board believed that it was in the Companys best interests to do so. On August 27, 2001, the Company implemented a 1-for-10 reverse split of its common stock as approved by the board of
directors. All share and per share amounts, both current and historical, contained in these financial statements and the accompanying notes, have been restated to reflect the impact of the reverse stock split.





Reclassifications





Certain reclassifications have been made to the historical consolidated financial statements to conform to the 2001 presentation.





Revenue Recognition





The Company derives its revenue from marketplace services and from
other related trading partner applications and services. Marketplace services revenue are generated by transaction fees and subscription based fees for the use of our applications and use of services. Trading partner services revenue primarily has
consisted of software license and maintenance fees, sponsorship fees, subscription fees and implementation fees.





Transaction Fees.    Transaction fee revenue represents the Companys negotiated percentage of the purchase price or gross marketplace volume at the time an order which was originated by a purchaser of
medical equipment or supplies is confirmed or accepted by the supplier. The gross marketplace value of a transaction is the price of a product as agreed to by the purchaser and the supplier. The Company reports transaction fees on a net basis, as
the Company does not believe that it acts as a principal in connection with orders to be shipped or delivered by a supplier to a purchaser because, among other things, the Company does not:





| |  | establish the prices of products paid by purchasers;
| | - | ----------------------------------------------------




| |  | take title to products to be shipped from the supplier to the purchaser, nor does it take title to or assume the risk of loss of products prior to or during
shipment;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | bear the credit and collections risk of the purchaser to the supplier; and
| | - | --------------------------------------------------------------------------




| |  | bear the risk that the product will be returned.
| | - | ------------------------------------------------




Subscription Fees.    Subscription fee revenue is recognized ratably over the period of the subscription agreement.





Software License and Maintenance Fees.    For software license and maintenance revenue, the Company applies the provisions of Statement of
Position (SOP) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9 Modification of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain Transactions to all transactions involving the sale of
software products and hardware transactions where the software is not incidental. For hardware transactions where software is incidental, the Company does not bifurcate the fee and does not apply separate accounting guidance to the hardware and
software elements. For hardware transactions where no software is involved, the Company applies the provisions of Staff Accounting Bulletin No. 101 Revenue Recognition.





The Company recognizes revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and
determinable and collection of the resulting receivable is reasonably assured. Delivery generally occurs when the product has been delivered to a common carrier, at which time title and risk of loss passes to the customer.




F-12




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







At the time of the transaction, an assessment is done as to whether
the fee associated with our revenue transactions is fixed and determinable and whether or not collection is reasonably assured. The Company also assesses whether the fee is fixed and determinable based on the payment terms associated with the
transaction. If a significant portion of a fee is due outside normal payment terms, the fee is accounted for as not being fixed and determinable. In these cases, revenue is recognized as the fees become due.





For arrangements with multiple obligations (for example, undelivered maintenance and support), revenue is allocated to each component of
the arrangement using the residual value method based on the fair value of the undelivered elements. As such, revenue is deferred from the arrangement fee equivalent to the fair value of the undelivered elements.





Revenue for maintenance services is recognized ratably over the contract term. Training and consulting services are billed based on hourly
rates, and revenue is generally recognized as these services are performed. However, at the time of entering into a transaction, the Company assesses whether or not any services included within the arrangement require significant work either to
alter the underlying software or to build additional complex interfaces so that the software performs as the customer requests.





Sponsorship Fees.    Sponsorship fees revenue is recognized as services are performed and billable according to the terms of the service arrangement.





Implementation Fees.    Implementation fees, as they relate to the implementation of the Companys e-commerce solution, are generally
recognized ratably over the term of the underlying agreement. As the Company performs services for implementation of software products, the Company recognizes revenue on a completed contract basis.





During fiscal 2001, the Company ceased its Auction and Plan operations. Revenue generated by the Companys
Auction operations was derived from transaction fees paid or payable by suppliers of medical products on the Companys Website and from consigned inventory sold at live auctions and online auctions. In addition, Auction revenue
included gross sales of purchased inventory, with the direct costs of such purchased inventory being shown in cost of equipment sold in the consolidated statements of operations. Revenue generated by the Companys Plan operations was
derived primarily from sponsorship and subscription fees. The Company will not derive any future revenue from its Auction and Plan operations as a result of the divestiture of these operations.





See Recent Accounting Pronouncements for a discussion of the impact of EITF No. 01-9 on the Companys reported revenue.





Major Customers





On a revenue generated per marketplace basis, the Companys Marketplace@Novation represented approximately 0%, 1% and 90% of the Companys total revenue for the years ended December 31, 1999, 2000 and 2001, respectively.
Total amounts paid by Novation, LLC (Novation) to the Company in revenue was $0, $81,000 and $24.6 million for the years ended December 31, 1999, 2000 and 2001, respectively.




F-13




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The following customers accounted for 10% or more of total
outstanding receivables as of:





December 31,2000


2001Customer A

21
%

*Customer B

15
%

*


---

|* | Customer accounted for less than 10%.
|- | -------------------------------------




Cash and Cash Equivalents





Cash and cash equivalents consist of cash in banks, investments
in money market accounts, treasury bills, commercial paper and marketable securities with original maturities of three months or less and are stated at fair market value.





Restricted Cash





In connection with an operating lease
entered into in fiscal 2000 relating to the Companys corporate headquarters in San Jose, California, the Company established a letter of credit in the amount of $2.0 million payable to the landlord, securing the Companys obligation under
the lease. The letter of credit is secured by balances in the Companys investment accounts and is classified as restricted cash in the accompanying consolidated balance sheets. During the year ended December 31, 2001, the Company reduced the
balance of the letter of credit to $1.5 million as allowed under the terms of the lease.





Investments





The Company accounts for debt and equity investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Instruments. Accordingly, all of the Companys short-term and long-term investments are classified as available-for-sale and stated at fair market value.





Investments with maturities greater than ninety days and less than one year are classified as short-term investments. Investments with
maturities greater than one year are classified as long-term investments.





The difference between amortized cost
(cost adjusted for amortization of premiums and accretion of discounts which are recognized as adjustments to interest income) and fair value, representing unrealized holding gains and losses on short-term and long-term investments, are recorded as
a separate component of stockholders equity until realized. The Companys policy is to record debt securities as available-for-sale because the sale of such securities may be required before maturity. Any gains or losses on the sale of
debt securities are determined on a specific identification basis.





Realized gains and losses are netted and
included in interest income in the accompanying consolidated statements of operations. At December 31, 2001, the Companys available-for-sale securities are all due within one year.




F-14




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Cash equivalents, restricted cash and short-term investments are all
due within one year and were as follows by major security type:





December 31, 2000Amortized Cost

Aggregate Fair Value

Unrealized Holding Loss(in thousands)Debt securities issued by states of the United States and political subdivisions of the states

$
8,350

$
8,350

$
Corporate debt securities


15,527


15,524


(3
)$
23,877

$
23,874

$
(3
)





December 31, 2001Amortized Cost

Aggregate Fair Value

Unrealized Holding
Loss(in thousands)Debt securities issued by states of the United States and political subdivisions of the states

$
4,295

$
4,294

$
(1
)Corporate debt securities


3,276


3,276


$
7,571

$
7,570

$
(1
)





Investments classified as cash equivalents and restricted cash
amounted to $18.7 million and $7.6 million at December 31, 2000 and 2001, respectively.





Accounts Receivable





Accounts receivable consists primarily of amounts to be collected from purchasers of services rendered, or in the case of the
Companys live auction services, amounts due from purchasers for services rendered or for product purchased. Accounts receivable is recorded net of allowance for doubtful accounts.





Property And Equipment





Property and equipment
are stated at cost, and are depreciated on a straight-line basis over the estimated useful lives of the assets, ranging from two to four years. Leasehold improvements are amortized, using the straight-line method, over the shorter of the lease term
or the useful lives of the improvements. Purchased software is capitalized at cost when purchased and amortized over the license period commencing once the software is placed in service. Direct costs to place purchased software into service are
capitalized and depreciated over the same period as the software. Internal costs incurred to develop software for use in operations which were potentially eligible for capitalization were not material and accordingly, were expensed as incurred and
are included in product development costs in the accompanying consolidated statements of operations. Repairs and maintenance costs are expensed as incurred. Capitalized interest is included in property and equipment under the provisions of SFAS No.
34, Capitalization of Interest Cost. Total interest incurred, before amounts capitalized, in the years ended December 31, 2000 and 2001, was $1.4 million and $1.8 million, respectively, of which approximately $0 and $1.1 million at
December 31, 2000 and 2001, respectively, was capitalized. The Company will amortize these amounts over the same period as the related assets are being depreciated.




F-15




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NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







As of December 31, 2000 and 2001, property and equipment consisted of
the following (in thousands):





2000


2001Computer and equipment

$
12,094


$
14,925Software


19,799



21,666Furniture and fixtures


2,275



2,133Leasehold improvements


2,374



2,44836,542



41,172Less: Accumulated depreciation and amortization


(7,869
)


(14,217
)Property and equipment, net

$
28,673


$
26,955





Intangibles





Intangibles consist of acquired assembled work force, customer lists, software, developed technology and goodwill which represents the amount of the purchase price in
excess of the fair value of net assets in the acquisitions of GAR, FDI Information Resources, LLC (FDI), Pharos, USL, EquipMD and National Content Liquidators, Inc. (NCL). Historically, the intangibles have been amortized on a straight-line basis
over a period of 3 to 7 years.





Intangible assets include the following:





December 31,2000


2001(in thousands)Assembled work force

$
450


$
Software


550



Developed technology


1,400



Customer lists


15,000



311Goodwill


135,324



152,724



311Less: Accumulated amortization


(25,314
)


$
127,410


$
311





As of December 31, 2000, the Company had formally adopted a plan to
divest itself of its GAR, NCL and USL subsidiaries, as none of these subsidiaries were aligned with the core business of the Company going forward. Additionally, as of December 31, 2001, the Company formally adopted a plan to divest itself of
EquipMD as part of its ongoing focus on the Companys core business. As a result of the divestitures, the Company reassessed the value of each subsidiary based primarily on the expected sales price of the respective businesses. The resulting
write-downs of the intangibles balance of approximately $13.3 million related to the Auction operations and $81.1 million related to EquipMD in 2000 and 2001, respectively, was a direct result of the revised valuation of each of the
businesses in light of the divestitures (see Note 8 for further discussion).





As of December 31, 2001, the Company
performed an assessment of the carrying value of the Pharos intangible assets. The absence of a readily identifiable market value for the technology and other intangible assets acquired, combined with certain other events and the termination of the
Companys internal use of the




F-16




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NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




technology acquired, led the Company to the conclusion that the carrying value of the intangibles was impaired and therefore, not recoverable as of December 31, 2001. As a result, an impairment
charge of $11.9 million was recorded during the fourth quarter of 2001.





Capitalized Partnership Costs





Capitalized partnership costs consists primarily of capitalized charges related to the issuances of common stock and restricted common
stock in connection with an outsourcing and operating agreement entered into by the Company during the fiscal year 2000 and is shown net of accumulated amortization (see Note 16 for discussion of both the outsourcing and operating agreement and the
related costs that have been capitalized).





Non-Marketable Investments





In December 1999, the Company purchased 526,250 shares of common stock of CarePortal.com, LLC (CarePortal), formerly known as IntraMedix, LLC (IntraMedix), a privately held
corporation, in exchange for $2.5 million in cash. CarePortal is a company that provides procurement services related to the distribution of geriatric care products to the nursing home community. CarePortal is a related party to GeriMedix, a
supplier with which the Company had an agreement to perform e-commerce services. On May 26, 2000, the Company issued a 30-day note receivable to CarePortal in the amount of $1.0 million, evidenced by a promissory note bearing interest at a rate of
8% per annum. On August 8, 2000 the Company exercised its option to convert the promissory note into shares of CarePortal common stock. Additionally, the Company invested $1.5 million in CarePortal in exchange for common stock. In November 2000, the
Company issued a 30-day note receivable to CarePortal in the amount of $400,000, evidenced by a promissory note bearing interest at a rate of 11% per annum. On December 31, 2000 the Company exercised its option to convert the promissory note into
shares of CarePortal common stock. As of December 31, 2000, the Company owned CarePortal common stock representing an ownership percentage of approximately 9.6% of the total outstanding common stock of CarePortal. The Company accounts for its
investments in CarePortal using the cost method.





Due to uncertainties regarding the financial position of
CarePortal, the resulting decline in the Companys estimate of the fair market value of this investment and the Companys belief that the decline in value was not temporary in nature, the Company concluded that the investment in CarePortal
had no future realizable value as of December 31, 2001. As such, during the fourth quarter of 2001, the Company wrote off its $5.4 million investment in CarePortal.





In March 2000, the Company purchased 600,000 shares of the Series D preferred stock of Pointshare, Inc. (Pointshare), a privately held corporation, in exchange for $3.0
million. Pointshare is a company that provides on-line business-to-business administrative services to healthcare communities. The Companys ownership represented approximately 2% of the Pointshare common shares outstanding at the time of the
investment and as of December 31, 2000, assuming a 1:1 conversion ratio of preferred stock to common stock. The Company accounts for this investment using the cost method.





In September 2001, the Company received notice from Pointshare that it was in the process of selling its remaining assets and winding down its operations. Based on the
Companys subsequent discussions with Pointshares management, the Company felt that it was highly unlikely that it would recover any material portion of its initial investment. As such, the Company wrote off its $3.0 million investment in
Pointshare during the third quarter of 2001.





In April 2001, as part of the divestiture of the Companys
Plan operations, the Company received 1,490,637 shares of Series A Preferred Stock in Attainia, Inc. (Attainia) as part of the consideration paid by Attainia for




F-17




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




their purchase of certain portions of the Companys Plan operations. These shares were valued at $0.50 per share and resulted in a total investment in non-marketable securities of
approximately $745,000 being recorded (see Note 8 for further discussion of this transaction).





Impairment of Long-lived Assets





The Company periodically evaluates the recoverability of long-lived assets in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. The Company has recorded impairment charges relating to the divestitures of the GAR, NCL, USL and EquipMD subsidiaries (see Note 8 for further discussion).





The Company evaluates the current and forecasted utilization of its purchased software licenses. As a result of these evaluations, the
Company identified certain software licenses that were no longer being utilized. The Company recorded impairment charges of $3.9 million and $1.5 million in 2000 and 2001, respectively, to write off these assets.





Product Development Costs





Product development costs include expenses incurred by the Company to develop and enhance the Companys Website and related Website services. Non-software related product development costs are expensed as incurred.





The Company accounts for internally generated software development costs in accordance with SFAS No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Capitalization of eligible product development costs begins upon the establishment of technological feasibility, which the Company has defined as completion of a working
model. Internally generated costs which were eligible for capitalization, after consideration of factors such as realizable value, were not material for the years ended December 31, 1999, 2000 and 2001 and, accordingly, all internally generated
software development costs have been charged to product development expense in the accompanying consolidated statements of operations.





Stock Based Compensation





The Company has adopted the disclosure provisions of SFAS No.
123, Accounting for Stock-Based Compensation, which establishes a fair value method of accounting for stock-based compensation plans. As allowed under the provisions of SFAS No. 123, the Company applies Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock option plans. The Company follows the provisions of SFAS No. 123 for options granted to consultants and non-employees. For
stock based compensation related to stock option issuances, the Company has historically amortized such expenses on an accelerated basis utilizing the multiple option approach.





In March 2000, the FASB issued Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensationan
Interpretation of APB Opinion No. 25 (FIN No. 44). FIN No. 44 addresses the application of APB No. 25 to clarify, among other issues: (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 became effective as of July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. To the extent FIN No. 44 covers events occurring during the period after
December 15, 1998 or January 12, 2000, but before the effective date of July 1, 2000, the




F-18




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




effects of applying the interpretation should be recognized on a prospective basis from July 1, 2000. The adoption of FIN No. 44 did not have a material effect on the Companys financial
position or results of operations.





Comprehensive Income (Loss)





Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a period from non-owner sources. For the years ended December 31, 1999, 2000 and 2001, the
Company recorded $40,000 of unrealized holding losses, $37,000 of unrealized holding gains and $2,000 of unrealized holding gains, respectively. The Company has integrated the presentation of comprehensive income (loss) with the accompanying
consolidated statements of changes in stockholders equity (deficit).





Segment Information





Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. The Company identifies its operating segments based on business activities, management responsibility and geographical location. During the years ended December 31, 1999, 2000 and 2001, the Company operated in a single
business segment building and operating e-commerce marketplaces for healthcare providers and suppliers in the medical product, supplies and equipment industry in the United States. Management uses one measurement for evaluating profitability and
does not disaggregate its business for internal reporting.





Basic and Diluted Net Loss Per Share and Pro Forma Basic and Diluted Net
Loss Per Share





Basic net loss per share on a historical basis is computed using the weighted-average number
of shares of common stock outstanding. Diluted net loss per common share was the same as basic net loss per share for all periods presented since the effect of any potentially dilutive securities is excluded, as the securities are anti-dilutive as a
result of the Companys net losses. The total number of weighted average shares that are excluded from the diluted loss per share calculation relating to these securities was approximately 3.4 million, 4.8 million and 2.7 million shares for the
years ended December 31, 1999, 2000 and 2001, respectively.





Pro forma basic and diluted net loss per common share
is computed by dividing net loss by the weighted average number of common shares outstanding for the appropriate period (excluding shares subject to repurchase) plus the weighted average number of common shares resulting from the automatic
conversion of outstanding shares of convertible preferred stock, which occurred upon the closing of the Companys initial public offering.




F-19




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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





Year Ended December 31,1999


2000


2001Net loss

$
(51,020
)

$
(215,694
)

$
(272,363
)Basic and diluted:Weighted average shares of common stock outstanding


585



9,203



16,020Less: Weighted average shares of common stock subject to repurchase


(319
)


(771
)


(299
)Weighted average shares used in computing basic and diluted net loss per share


266



8,432



15,721Basic and diluted net loss per common share

$
(191.51
)

$
(25.58
)

$
(17.32
)Pro forma:Net loss

$
(51,020
)

$
(215,694
)Shares used above


266



8,432Pro forma adjustment to reflect weighted average effect of assumed conversion of convertible preferred
stock


2,862



247Weighted average shares used in computing pro forma basic and diluted net loss per share


3,128



8,679Pro forma basic and diluted net loss per share

$
(16.31
)

$
(24.85
)





Recent Accounting Pronouncements





In April 2001, the Emerging Issues Task Force (EITF) reached a consensus on EITF No. 00-25, Vendor Income Statement Characterization
of Consideration Paid to a Reseller of the Vendors Products, effective for periods beginning after December 15, 2001. EITF No. 00-25 addresses whether consideration from a vendor to a reseller is (i) an adjustment of the selling prices
of the vendors products and, therefore, should be classified as an offset against revenue when recognized in the vendors statement of operations or (ii) a cost incurred by the vendor for assets or services received from the reseller and,
therefore, should be classified as a cost or expense when recognized in the vendors statement of operations. In November 2001, the EITF reached a consensus on EITF No. 01-9, Accounting for Consideration Given by Vendor to a Customer
(Including a Reseller of the Vendors Products), which is a codification of EITF No. 00-14, Accounting for Certain Sales Incentives, EITF No. 00-22, Accounting for Points and Certain Other Time- or
Volume-Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future and EITF No. 00-25. As a result of the application of EITF No. 01-9, effective beginning the quarter ended March 31, 2002, certain costs
associated with equity consideration provided in connection with the Companys outsourcing and operating agreement with Novation, VHA, University HealthSystem Consortium (UHC) and Healthcare Purchasing Partners International, LLC (HPPI),
historically classified as operating expenses, will be offset against related party revenue from those parties. This treatment will be presented on a retroactive basis for all periods and will result in the classification of non-cash amortization of
partnership costs as an offset against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any period. Any amortization of partnership
costs in excess of related party revenue in any period will




F-20




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




continue to be classified as an operating expense. The following table summarizes the impact the pro forma application of EITF No. 01-9 will have on the Companys Consolidated Statements of
Operations:





Year Ended December
31,2000


2001Revenue:Related party marketplace revenue

$
81


$
24,567Related party trading partner services revenue






254Offset of amortization of partnership costs


(81
)


(24,821
)Total pro forma related party revenue

$



$
Amortization of Partnership Costs:Amortization of partnership costs

$
29,523


$
75,651Offset to related party revenue


(81
)


(24,821
)Total pro forma amortization of partnership costs reported as operatingexpenses

$
29,442


$
50,830





Upon adoption of EITF No. 01-9, the amortization of partnership
costs reported as operating expenses will be reflected as an adjustment to reconcile net loss to cash from operating activities in the Consolidated Statements of Cash Flows. Under EITF No. 01-9, the Company will account for the fees paid by Novation
under the terms of the outsourcing and operating agreement as if they were payments made for the equity consideration provided to VHA and UHC as opposed to payments for services. As a result, these fees that are offset by amortization of partnership
costs will be reported as a cash flow from financing activities in the Companys Consolidated Statements of Cash Flows. As reclassifications, these changes will have no impact on the Companys loss from operations, net loss, net loss per
share or total cash flow.





In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No.
141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The adoption of SFAS No. 141 did not have a significant impact on the Companys
financial position, results of operations or cash flows.





In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets, which becomes effective for fiscal years beginning after December 15, 2001. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other acquired intangible assets. It
addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS No. 142 also addresses how
goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under SFAS No. 142, goodwill and certain other acquired intangible assets with indefinite lives are no longer subject
to amortization. Intangible assets with finite lives will continue to be amortized. The Company does not expect the adoption of this pronouncement in 2002 to have a significant impact on the Companys financial position, results of operations
or cash flows.





In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 addresses significant issues relating to the implementation of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and requires that
long-lived assets that are to be disposed of by sale are measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with
operations that (i) can be distinguished from the rest of the entity and (ii) will be




F-21




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NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 becomes effective for fiscal years beginning after December 15, 2001 and its provisions are to be
applied prospectively. The Company believes the adoption of this pronouncement in 2002 will not have a significant impact on its financial position, results of operations or cash flows.





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





In July 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. SPAS No. 145 becomes effective for fiscal years beginning after May
15, 2002. The Company does not expect the adoption of SFAS No. 146 to have a significant impact on the Companys financial position, results of operations or cash flows.





3.    NOTES RECEIVABLE FROM STOCKHOLDERS





In July 1999, the Company made two loans to Robert J. Zollars, Chairman and Chief Executive Officer of the Company, in connection with his exercise of stock options granted to him under the terms of his employment agreement. The
loans were made pursuant to two secured full recourse promissory notes in the principal amounts of $162,079 and $356,629, both with interest compounded quarterly on the unpaid balances at a rate of 5.70% per year. In January 2002, both promissory
notes were amended to extend the repayment obligations by modifying the repayment terms of the promissory notes to be due upon the earlier of (i) July 2004, (ii) the third anniversary of the effective date of the initial public offering of
Neoformas common stock, (iii) 90 days after the termination of employment with Neoforma or (iv) immediately upon any transfer of any of the shares relating to the exercised stock options.





In September 1999, the Company made a loan to Daniel A. Eckert, President and Chief Operating Officer of the Company, in connection with his exercise of stock options
granted to him under the terms of his employment agreement. The loan was made pursuant to two secured full recourse promissory notes in the principal amounts of $124,750 and $99,800, both with interest compounded quarterly on the unpaid balances at
a rate of 5.85% per year. In January 2002, both promissory notes were amended to extend the repayment obligation by modifying the repayment terms of the promissory notes to be due upon the earlier of (i) five years from the stock option grant date,
(ii) the third anniversary of the effective date of the initial public offering of Neoformas common stock, (iii) 90 days after the termination of employment with Neoforma or (iv) immediately upon any transfer of any of the shares relating to
the exercised stock options.





As of December 31, 2001, the Company had an additional $5.7
million of notes receivable from stockholders, consisting of one note from a former executive officer of the Company in the amount of $4.9 million, due no later than December 2003, and several other notes totaling approximately $800,000 due on
varying dates through January 2005 from current and former employees of the Company.





4.    LOANS AND NOTES
PAYABLE





In May 1999, the Company entered into a subordinated loan agreement (the
loan agreement) with a lender under which it can borrow up to $2.0 million. The loan agreement bears interest at 12.5% and expires in July 2002. The loan agreement was secured by all of the assets of the Company at the time the loan was made. In
addition, the Company issued a warrant to purchase 22,881 shares of Series D preferred stock at an exercise price of $11.80 per share. At December 31, 2001, the remaining unpaid principal balance was $325,000.





In July 1999, the Company entered into a $2.5 million loan/lease facility with a lender to finance computer
hardware and software equipment. Amounts borrowed to purchase hardware bear interest at 9% per annum and are payable in 48 monthly installments consisting of interest-only payments for the first nine months and principal and interest payments for
the remaining 39 months, with a balloon payment of the remaining principal payable at maturity. Amounts borrowed to purchase software bear interest at 8% per annum and are payable in 30 monthly installments consisting of interest-only for the first
four months and principal and interest for the remaining 26 months, with a balloon payment of the remaining principal payable at maturity. The computer equipment purchased with the proceeds of the loans secures this facility. In connection with this
facility, the




F-22




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Company issued the lender a warrant to purchase 13,771 shares of Series D preferred stock at $11.80 per share (see Note 13). At December 31, 2001, the outstanding balance under this facility was
$1.0 million.





In August 1999, in connection with the GAR acquisition, the Company issued a promissory note in the
principal amount of $7.8 million payable monthly over five years that bears interest at a rate of 7% per annum. In July 2001, the Company modified the terms of this promissory note in exchange for the release of the security interest the note holder
had in the assets of the Auction operations. Per the revised terms of the note, $750,000 of the balance was paid in August 2001, and an additional $500,000 was forgiven by the note holder. The remaining balance due on the promissory note is
to be paid in equal monthly installments, with interest accruing at 7% per annum, over the subsequent 30 months. As of December 31, 2001, the outstanding balance on the note was approximately $2.4 million.





As part of the purchase of EquipMD, the Company assumed a note payable in the amount of $1.8 million, which is related to EquipMDs
purchase of Central Point Services, LLC. The note bears interest at 7.5% per annum and is payable in eight quarterly installments, after which the unpaid principal balance and accrued interest become due and payable through January 2002. At December
31, 2001, the remaining principal balance was $300,000.





In July 2000, the Company entered into an unsecured
promissory note with its investment bankers in the amount of $6.0 million. The note was payable in four quarterly payments of $1.5 million, commencing on January 1, 2001. In April 2001, the Company and its bankers amended the terms of the note such
that the remaining balance was payable in two installments: the first $2.0 million payable in May 2001 and the remaining $2.5 million payable in April 2002. At December 31, 2001, the remaining balance on the note was $2.5 million.





In July 2000, as part of the acquisition of certain assets of NCL, the Company issued a non-interest bearing promissory note to
each of the four principals of NCL in the amount of $62,500 each. The notes are payable in 24 equal monthly installments, commencing on August 15, 2000. As of December 31, 2001, the balance of these four notes was $71,000. In addition, as part of
the acquisition, the Company also agreed to pay $250,000 on July 14, 2002, two years from the closing date of the acquisition. This payment is to be distributed in equal amounts of $62,500 to each of the four principals of NCL. As of December 31,
2001, no payments have been made against this commitment.





In April 2001, the Company entered into a $25.0 million
revolving credit agreement with VHA. Under the credit agreement, until May 31, 2002, the Company is able to borrow funds up to an amount based on a specified formula dependent on the gross volume of transactions through Marketplace@Novation. Any
funds that the Company borrows under this credit agreement will bear interest at a rate of 10% per annum and will be secured by substantially all of the Companys assets. In the event that the Company (i) sells any of its stock as part of an
equity financing, (ii) obtains funding in connection with a debt financing or other lending transaction that is either unsecured or subordinate to the lien of VHA under the credit agreement or (iii) enters into a debt financing or other lending
transaction secured by assets the Company owned as of the date the Company entered into the credit agreement, then the maximum of $25.0 million the Company could potentially borrow under the credit agreement will be reduced by an amount equal to the
cash proceeds the Company receives from any of these transactions. As of December 31, 2001, the Company had outstanding borrowings of $19.0 million under the line of credit, and remaining available funds of $6.0 million. On February 13, 2002, the
Company and VHA executed an amendment to the credit agreement, which modified the credit agreement to extend both the availability and the maturity date of the revolving credit line through May 31, 2003. All other terms of the credit agreement
remained unchanged.




F-23




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Future maturities of principal on the loans and notes payable as of
December 31, 2001 are as follows (in thousands):





2002

$
5,1642003


20,5402004


95$
25,799





5.    COMMITMENTS





The Company leases its various office facilities under operating leases. Rent expense for the years ended December 31, 1999, 2000 and 2001
was $793,000, $4.5 million and $2.5 million, respectively.





Future minimum obligations under non-cancelable
operating leases are as follows (in thousands):





2002

$
3,4712003


3,0692004


3,0972005


3,1322006


3,2422007


832$
16,843





In October 2000, the Company entered into a sublease agreement
whereby the Company was subleasing to a third party corporation approximately 27% of the space in the building which serves as the Companys headquarters. In 2000 and 2001, the Company received $324,000 and $1.1million, respectively, in
sublease payments from the third party corporation. The sublease committed this third party to make sublease payments to the Company totaling $2.2 million and $1.7 million in 2002 and 2003, respectively. In late 2001, this corporation notified the
Company that due to financial difficulties, it would be unable to comply with the terms of its sublease commitment in 2002 and 2003. As a result, the Company entered into a settlement agreement with the tenant corporation on January 2, 2002 whereby
the Company retained the security deposits and other amounts securing the sublease obligation, the Company received payment of an additional $325,000 from the tenant corporation as a settlement, the Company retained effectively all of the furniture
and leasehold improvements present in the subleased space and the tenant corporation agreed to vacate the facility and release any claim on it as of the that date. The funds received from the tenant corporation have been booked as a deposit and will
be amortized over the term of the terminated sublease agreement as a reduction in the Companys rent expense each period.





In May 2000, as part of the termination of the proposed mergers with Eclipsys Corporation (Eclipsys) and Healthvision, Inc. (Healthvision), the Company entered into a strategic commercial relationship with Eclipsys and Healthvision
that includes a co-marketing and distribution arrangement between the Company and Healthvision. Under the terms of the arrangement, the Company purchased a license to utilize Eclipsys eWebIT enterprise application technology to enhance the
integration of legacy applications with the Companys  e-commerce platform technology. Additionally, the Company committed to utilize their professional services organizations to assist in this work at a minimum of $4.3 million over a
four-year period. The Company is




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NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




currently in dispute with Healthvision and Eclipsys over this arrangement regarding the Companys obligation to utilize their services. As of December 31, 2001, the Company had utilized $1.6
million of these professional services.





In May 1999, the Company entered into an agreement with a non-profit
health services research organization (the Organization), which allows the Company to use content from the Organizations database of information about medical products and manufacturers and obtain a license to use elements of its
classification system. Additionally, the agreement provides for joint marketing activities and collaboration in the creation of a database of product and vendor information. This agreement also requires the Company to make revenue sharing payments
to the Organization during the three-year term of the agreement and for two years following expiration or termination of the agreement with respect to revenue derived from the Companys Plan service. During the second and third years,
the Company is required to pay a nonrefundable fee of $600,000 per year, in equal monthly installments, which shall be credited against any revenue sharing profits payable. In May 2001, as a result of the Companys divestiture of the majority
of the Plan services, combined with the Company narrowing its strategic focus on its marketplace business, the Company entered into a Settlement and Release Agreement with the Organization to terminate the agreement. The settlement agreement
terminated the initial agreement with the Organization effective March 14, 2001, including all revenue sharing and fee requirements, in exchange for a commitment by the Company to pay $425,000 over the next 12 months in four installments of
$125,000, $75,000, $25,000 and $200,000 payable on May 31, 2001, September 1, 2001, December 15, 2001 and February 15, 2002, respectively. As of December 31, 2001 the first three payments required under the settlement agreement totaling $225,000 had
been made and the Company had accrued for the remaining $200,000 balance.





In October 1999, the Company entered
into a three-year agreement with a consulting firm (the Consultant), which was a stockholder as a result of the Series E financing, in which the Consultant agreed to introduce the Companys services to appropriate clients, based on their
interests, and to incorporate the Companys services into certain of its service offerings. The agreement also provides for joint marketing activities. In consideration, the Company has agreed to make payments to the Consultant in an aggregate
amount of up to approximately $2.0 million, as well as a percentage of specified Neoforma e-commerce transaction revenue and other payments. The Company has also agreed to utilize the Consultants services on a preferred basis for systems
integration, development, infrastructure, process improvement and consulting assistance, totaling at least $1.5 million of services from the Consultant, at a discount from the Consultants standard fees. For the year ended December 31, 2000,
the Company recorded expenses amounting to $1.7 million related to services provided by the Consultant under this agreement. No expenses were incurred related to these services for fiscal 1999 and 2001.





In November 1999, the Company entered into a co-branding agreement with a corporation. Under the agreement, the corporation had an
obligation to transfer to the Companys Website all listings of new and used medical products offered for sale through the corporations Website (on an exclusive basis to the extent the corporation has the right to do so), and the Company
had an obligation to transfer to the corporation all listings of used and excess laboratory products offered for sale on the Companys Website (on an exclusive basis to the extent the Company has the right to do so). The parties also agreed to
establish links between their respective Websites. In addition, the corporation had an obligation to develop and maintain a co-branded career center and a co-branded training and education center, and to provide the Company with specified content
created for its medical online communities. This corporation also had the non-exclusive right to sell sponsorships on the Companys Plan service and the exclusive right to sell advertising on the co-branded sites. Under this agreement,
the Company agreed to pay this corporation $2.0 million of development and promotional fees over the first two years of this agreement. In February 2001, the Company entered into an amendment to this agreement whereby the Company was relieved of
substantially all of its remaining obligations to pay any development or




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NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




promotional fees, and under which the corporation was relieved of certain obligations, including the exclusivity of its relationship with the Company.





In July 1999, as part of the employment agreement entered by and between the Companys Chief Executive Officer (CEO) and the Company,
the CEO is eligible to receive a moving assistance loan up to $2.5 million. The loan is to be forgiven in equal monthly installments from the date of closing on his new home through June 30, 2003. In December 2001, the Company and the CEO agreed to
modify the terms of the loan to provide for funding of the loan in December 2001, and for the forgiveness to occur in semi-annual installments through June 30, 2003. As of December 31, 2001, the full amount of $2.5 million was funded and outstanding
under the loan.





6.    LITIGATION





In July 2001, the Company was named as a defendant in two securities class action lawsuits filed in federal court in the Southern District of New York related to its
initial public offering (IPO), on behalf of those who purchased stock from January 24, 2000 to December 6, 2000. These complaints in these actions are virtually identical and have since been consolidated. The lawsuits also named certain of the
underwriters involved in the IPO, including Merrill Lynch, Pierce, Fenner & Smith, Bear Stearns and FleetBoston Robertson Stephens, as well as Neoformas Chairman and Chief Executive Officer, Robert Zollars, and Neoformas former Chief
Financial Officer, Frederick Ruegsegger, as defendants. 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. The complaints allege that the prospectus and the registration statement for the IPO failed to disclose that the underwriters allegedly solicited and received excessive commissions from investors and that some investors in the IPO
allegedly agreed with the underwriters to buy additional shares in the aftermarket in order to artificially inflate the price of Neoformas stock. Neoforma and its officers are named in the suits pursuant to Section 11 of the Securities Act of
1933. The complaints seek unspecified damages, rescissory damages to members of the class that no longer hold Neoforma stock, interest, attorney and expert fees and other litigation costs. The Company plans to vigorously defend these actions.





On January 11, 2002, the Company filed suit against Med XS Solutions, Inc. and Med-XS Asset Services, Inc.
(Med-XS) in the United States District Court, Northern District of Illinois, Eastern Division (No. 02C 0295) for the failure of Med-XS to make payments under a $2.4 million promissory note. Med-XS executed the promissory note as partial payment for
the purchase of assets of the Companys subsidiary, Neoforma GAR, Inc., which had provided Auctionservices. Prior to filing of the suit, the Company had accelerated all principal payments under the promissory note, due to Med-XSs
failure to make scheduled payments under the promissory note, and made demand to Med-XS for the entire $2.4 million. Defendants have made a counterclaim to the suit, alleging breach of contract, fraud, and breach of implied covenant of good faith
and fair dealing. The Company has filed a motion to dismiss the counterclaims. See Note 17 for discussion of subsequent developments related to this matter.





7.    ACQUISITIONS





GAR





In August 1999, the Company acquired substantially all of the assets of GAR, a live auction house and asset management company focused on medical products. The
acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values on the
acquisition date. The results of operations of GAR are included in the Companys consolidated statements of operations from the date of acquisition. According to the terms of the agreement, a segment of GARs operations related to the
auction of non-medical industrial products was sold back to one of the original owners of GAR for nominal consideration. Accordingly, the revenue and direct costs associated with the industrial operations have been eliminated in the pro forma tables
presented below.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The total purchase price of approximately $9.7 million consisted of
$1.7 million in cash, a note payable of $7.8 million, the assumption of $100,000 of liabilities and acquisition-related expenses of $100,000. In the initial allocation of the purchase price, $25,000 was allocated to tangible assets and $9.7 million
was allocated to intangible assets as goodwill. Prior to the impairment as discussed in Note 8, the goodwill was being amortized over an estimated useful life of seven years. The note payable is due over a five-year period and bears interest at a
rate of 7% per annum.





FDI





In November 1999, the Company acquired certain assets of FDI, a company in the business of developing and licensing equipment planning software. Under the terms of the agreement, the Company acquired
the rights to software and certain customer contracts. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the intangible assets acquired and liabilities assumed on the basis of
their respective fair values on the acquisition date. The results of operations of FDI are included in the Companys consolidated statements of operations from the date of acquisition.





The total purchase price of approximately $3.4 million consisted of 35,000 shares of common stock valued at $3.2 million, estimated assumed liabilities of approximately
$97,000 and estimated acquisition-related expenses of approximately $112,000. In the allocation of the purchase price, $550,000, $100,000 and $2.7 million were allocated to acquired software, assembled workforce and trade names, and goodwill,
respectively. Prior to the sale of these assets as discussed in Note 8, the acquired software, assembled workforce and trade names and goodwill were being amortized over an estimated useful life of three years.





The unaudited pro forma results of operations of the Company, GAR and FDI for the year ended December 31, 1999, assuming the acquisitions
took place at the beginning of this period, are as follows (in thousands, except per share amounts):





For the Year
Ended December 31, 1999Revenue

$
2,764Net loss

$
(53,193
)Basic and diluted net loss per share

$
(199.67
)





Pharos





In January 2000, the Company acquired Pharos, a developer of content management software that facilitates the locating, organizing and updating of product information in an
online marketplace. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the intangible assets acquired and liabilities assumed on the basis of their respective fair values on
the acquisition date. The results of operations of Pharos are included in the Companys consolidated statements of operations from the date of acquisition.





The total purchase price of approximately $22.8 million consisted of approximately 200,000 shares of common stock valued at $22.0 million, forgiveness of a loan outstanding to Pharos of $500,000,
estimated assumed liabilities of approximately $164,000 and estimated acquisition-related expenses of approximately $230,000. Of the shares issued to the previous owners of Pharos, approximately 70,000 were subject to repurchase rights which lapse
over the vesting period of the original terms of the shares, which specify a vesting period of four years. As of December 31, 2001, approximately 7,000 of these shares were subject to repurchase. In the initial allocation of the purchase price,
$750,000, $1.9 million, $1.4 million, $250,000 and $18.6 million were allocated to tangible assets, acquired in-process research and development, developed technology,




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NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




assembled workforce and goodwill, respectively. The acquired in-process research and development was expensed upon consummation of the acquisition. Prior to the impairment as discussed in Note 8,
the developed technology was being amortized from the point that the technology was put to productive use over an estimated useful life of three years and the goodwill was being amortized over an estimated useful life of five years.





In connection with the acquisition of Pharos, we allocated $1.9 million of the purchase price to in-process research and
development projects. These allocations represent the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet
reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date.





We allocated values to the in-process research and development based on an assessment of the research and development projects. The value assigned to these assets was
limited to significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction of the Pharos next-generation technologies.





The value assigned to in-process research and development was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by Pharos and its competitors.





The nature of the efforts to develop the acquired in-process technology into commercially viable products and services principally related
to the completion of planning, designing, coding, prototyping and testing activities that were necessary to establish that the developmental Pharos technologies met their design specifications including functional, technical and economic performance
requirements. Anticipated completion dates ranged from six to nine months, at which times Pharos expected to begin selling the developed products. Development costs to complete the research and development were estimated at approximately $2.0
million.





Pharos primary in-process research and development projects involved designing new technologies
and an application platform for a next generation content syndication solution, including enterprise application integration. The estimated revenue for the in-process projects was expected to peak within three years of acquisition and then decline
as other new products and technologies were expected to enter the market.





Operating expenses were estimated based
on historical results and managements estimates regarding anticipated profit margin improvements. Due to purchasing power increases and general economies of scale, estimated operating expense as a percentage of revenues were expected to
decrease after the acquisition.





The rates utilized to discount the net cash flows to their present value were
based on the estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth, profitability and developmental projects, discount rates of 35 to 40% were appropriate for the in-process
research and development, and discount rates of 20% were appropriate for the existing products and technology. These discount rates were commensurate with Pharos stage of development and the uncertainties in the economic estimates described
above.




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NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







USL





In March 2000, the Company acquired USL, a healthcare content company. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. The results of operations of USL are included in the Companys consolidated statements of
operations from the date of acquisition.





The total purchase price of approximately $7.2 million consisted of
approximately 6,000 shares of common stock valued at $2.8 million, $3.5 million in cash and estimated assumed liabilities of approximately $924,000. In the initial allocation of the purchase price, $799,000, $700,000 and $5.7 million were allocated
to tangible assets, subscriber base and goodwill, respectively. Prior to the impairment as discussed in Note 8, the goodwill and the subscriber base were being amortized over useful lives of five and three years, respectively.





EquipMD





In April 2000, the Company acquired EquipMD, a business-to-business procurement company serving the physician market. The acquisition was accounted for as a purchase. Accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed on the basis of their respective fair values on the date of the acquisition. The results of operations of EquipMD are included in the Companys consolidated statements of operations from the date of acquisition.





The total purchase price of approximately $141.7 million consisted of approximately 440,000 shares of the
Companys common stock valued at approximately $126.4 million, 27,000 vested options valued at approximately $7.2 million and estimated assumed liabilities and acquisition costs of $8.1 million. In addition, the Company assumed approximately
81,000 unvested options. In the initial allocation of the purchase price, $1.5 million, $100,000, $15.0 million, $110.1 million and $15.0 million were allocated to tangible assets, assembled workforce, customer lists, goodwill and acquired
in-process research and development, respectively. Prior to the impairment as discussed in Note 8, the intangible assets were being amortized over an estimated useful life of five years.





In connection with the acquisition of EquipMD, we allocated approximately $15.0 million of the purchase price to in-process research and development projects. This
allocation represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological
feasibility, and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date.





At the acquisition date, EquipMD was conducting design, development, engineering and testing activities associated with the completion of a real-time commerce engine. The projects under development at
the valuation date represented next-generation technologies that were expected to address emerging market demands for healthcare related business-to-business e-commerce.





At the acquisition date, the technologies under development were approximately 60% complete based on engineering man-month data and technological progress. EquipMD had
spent approximately $1.2 million on the in-process projects, and expected to spend approximately $1.0 million to complete all phases of the research and development. Anticipated completion dates ranged from three to nine months, at which time we
expected to begin benefiting from the developed technologies.





In making its purchase price allocation, management
considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items, an assessment of overall contributions, as well as project risks. The value assigned to purchased in-process technology was
determined by estimating the




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NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value.
The revenue projection used to value the in-process research and development was based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by us and
our competitors. The resulting net cash flows from such projects were based on managements estimates of cost of sales, operating expenses and income taxes from such projects.





Aggregate revenue for the developmental EquipMD products was estimated to grow at a compounded annual growth rate of approximately 100% for the five years following
introduction, assuming the successful completion and market acceptance of the major research and development programs. The estimated revenue for the in-process projects was expected to peak within three years of acquisition and then decline sharply
as other new projects and technologies were expected to enter the market.





The rates utilized to discount the net
cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental projects, a discount rate of 40% was
considered appropriate for the in-process research and development. These discount rates were commensurate with EquipMDs stage of development and the uncertainties in the economic estimates described above.





If these projects are not successfully developed, our sales and ability to achieve profitability may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become impaired.





The estimates used by
us in valuing in-process research and development relating to the Pharos and EquipMD acquisitions were based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable. Our assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the projected results. Any such variance may result in a material adverse effect on our financial
condition and results of operations.





NCL





In July 2000, the Company acquired certain assets of NCL, an asset management company focused on healthcare facility liquidations and the resale of used medical products. The acquisition was accounted
for using the purchase method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. The results of operations of NCL are
included in the Companys consolidated statements of operations from the date of acquisition. The total purchase price of approximately $3.2 million consisted of approximately 30,000 shares of common stock valued at $2.2 million, $500,000 in
cash and $500,000 in notes payable to the principals of NCL. In the initial allocation of the purchase price, the full $3.2 million was allocated to goodwill, as there were no material tangible assets acquired. Prior to the impairment as discussed
in Note 8, the goodwill was being amortized over an estimated useful life of seven years.





The pro forma results
of operations of the Company, GAR, FDI, Pharos, USL, EquipMD and NCL for the twelve months ended December 31, 1999 and 2000, assuming the acquisitions took place at the beginning of the respective periods, are as follows (in thousands, except per
share amounts):





Twelve Months Ended December 31,1999


2000Revenue

$
4,705


$
12,274Net loss

$
(85,799
)

$
(227,240
)Basic and diluted net loss per share

$
(96.03
)

$
(26.42
)




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NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







8.    DIVESTITURES





In the fourth quarter of 2000, the Companys management, working with the Board of Directors, finalized a plan to refocus the
Companys operations on the building and operating of Internet marketplaces for trading partners. As part of this process, the Company announced its intention to divest itself of two of its operations that were not aligned with that strategy.
The operations to be divested were Auction, which consisted primarily of GAR and the assets acquired from NCL, the USL subsidiary. As of December 31, 2000, the Companys management had received approval from the Board of Directors for
its plan to divest the Company of these two operations.





As a result of this plan, as of December 31, 2000, the
Company wrote down the assets of both operations to the estimated net realizable disposal value at December 31, 2000 by recording an impairment charge of $13.3 million. As of December 31, 2000, the operations to be divested had total tangible assets
of $1.7 million, total liabilities of $843,000 and intangible assets of $16.1 million. In connection with these planned divestitures, in 2000, the Company recorded $691,000 of restructuring charges for anticipated divestiture related costs including
severance and accrued rent relating to idle facilities. In 2001, the Company recorded an additional restructuring charge of $600,000 to reflect additional costs relating to severance and idle facilities resulting from the divestiture of its
Auction operations. As of December 31, 2001, the remaining accrual relating to these restructuring charges was $702,000.





In April 2001, the Company completed the sale of substantially all of the assets of USL, the Companys healthcare content subsidiary and part of its Planoperations, to Medical Distribution Solutions, Inc. (MDSI) for
consideration totaling $1.25 million. Per the terms of the asset purchase agreement entered into by and between the Company and MDSI, the Company agreed to sell to MDSI substantially all of the assets and certain liabilities of the USL operations,
resulting in net assets of approximately $750,000 in book value being transferred. The purchase price was comprised of $500,000 of cash delivered to the Company upon the closing and a $750,000 non-interest bearing promissory note payable to the
Company in three annual installments commencing in April 2003. This note was recorded on the companys books at the net present value of $533,000 as of the date of the divestiture. In addition, the Company will receive a revenue share from MDSI
on certain types of sales. The net result of the transaction to the Company was a gain on the divestiture of these assets of approximately $307,000. As of December 31, 2001, the full amount of the promissory note remained outstanding, none of which
is due during fiscal 2002.





In April 2001, the Company entered into an agreement to sell to Attainia substantially
all of the remaining assets of the Companys Planoperations, which consisted of those assets that the Company acquired as part of the acquisition of certain assets of FDI in November 1999. The Company agreed to sell to Attainia
approximately $1.8 million of net assets and to provide free office space to Attainia in the Companys corporate headquarters for up to six months, as well as to provide access to $227,000 of working capital to Attainia in the form of a
short-term promissory note. This note bears interest at 8% and is payable in installments over the 15 months subsequent to the closing of the transaction. As of December 31, 2001, all $227,000 of the note remained outstanding, and the full amount
was classified as prepaid expenses and other assets and is due during fiscal 2002. In connection with the sale, Attainia issued to the Company 1,490,637 shares of its Series A Preferred Stock, which was valued at $0.50 per share, resulting in
consideration of $745,000 being provided to the Company upon closing. These shares are recorded in the non-marketable investments section of the accompanying balance sheet as of December 31, 2001. In addition, the Company will receive a revenue
share from Attainia on certain types of sales. The net result of the transaction to the Company was a loss on the divestiture of these assets of approximately $1.1 million.




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NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







In July 2001, the Company entered into an agreement to sell
substantially all of the assets of the Companys Auctionoperations, recorded at approximately $1.8 million, to Med XS Solutions, Inc. (Med-XS) in exchange for consideration in the amount of $2.5 million. Under the amended purchase
agreement, the consideration provided to the Company by Med-XS consisted of $150,000 cash delivered to the Company at closing and a $2.4 million promissory note payable to the Company over two years from the date of closing, which was September 5,
2001. This note was recorded on the Companys books at the net present value of $2.1 million as of the date of the divestiture. In addition, the Company will receive a revenue share and profit share from Med-XS on the sold operations, which
will be recognized when earned. The net result of the transaction to the Company was a gain on the divestiture of these assets of approximately $872,000. In January 2002, the Company filed suit against Med-XS for non-payment of amounts due under the
note. As of that date, the Company had not received any payments from Med-XS beyond the $150,000 delivered at closing. As the Company believes its case is strong, it believes the note is fully collectible and as such, no valuation allowance has been
recorded against the note as of December 31, 2001. As of December 31, 2001, approximately $1.5 million of this note is classified as long-term and $609,000 as short-term in the accompanying consolidated balance sheet. See Note 17 for discussion of
subsequent developments related to this matter.





During the fourth quarter of 2001, in order to continue to
maintain its focus on delivering core customer solutions and to increase the resource commitment to its more scalable, higher return acute care business, the Company obtained board approval to begin exploring strategic alternatives for the
divestiture of the Companys NeoMD operations. These operations consist primarily of the assets of the Companys wholly-owned subsidiary, EquipMD. As a result of this plan, the Company wrote down the assets of these operations to the
estimated net realizable disposal value at December 31, 2001. The assets, which primarily consisted of goodwill and other intangible assets, were written down by approximately $81.1 million to the Companys current estimate of their realizable
disposal value as of December 31, 2001. Additionally, the Company booked an accrual, classified as restructuring costs, of $350,000 for anticipated post-divestiture costs including severance and accrued rent relating to idle facilities. As of
December 31, 2001, none of the $350,000 accrual had been utilized. See Note 17 for discussion of subsequent developments related to the divestiture of the NeoMD operations.





9.    DEFERRED COMPENSATION





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





In connection with the assumption of certain stock options granted to employees of EquipMD prior to the acquisition of EquipMD, the Company recorded deferred compensation of $23.1 million, representing the difference between the
estimated fair value of the common stock for accounting purposes and the exercise price of these options at the date of announcement of the acquisition. This amount is presented as a reduction of stockholders equity and is being amortized over
the vesting period of the applicable options using an accelerated




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NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




method of amortization. During the years ended December 31, 2000 and 2001, the Company recorded $0 and $4.9 million, respectively, in reductions of this deferred compensation as a result of
employee attrition in this business. The Company recorded amortization of this deferred compensation, net of reversals relating to forfeitures, of $9.0 million and $8.4 million during the years ended December 31, 2000 and 2001, respectively.





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





The remaining deferred compensation of $10.3 million at December 31, 2001 will be amortized as follows: $7.1 million during fiscal 2002, $3.1 million during fiscal 2003 and
$0.1 million during fiscal 2004. As the amortization expense relates to options and restricted stock awarded to employees across all operating expense reporting categories, the amount of deferred compensation amortization expense has been allocated
to those categories in the consolidated statement of operations based on the reporting category in which the salary and other compensation of each individual responsible for the initial deferred compensation balance is classified.





10.    ABANDONED ACQUISITION COSTS





On March 30, 2000, the Company entered into agreements to acquire Eclipsys and Healthvision as part of entering into the outsourcing and operating agreement with Novation.





On May 24, 2000, the Company, Eclipsys and Healthvision agreed by mutual consent to terminate the proposed mergers, and instead the
Company entered into a strategic commercial relationship with Eclipsys and Healthvision that includes a co-marketing and distribution arrangement between the Company and Healthvision. The arrangement includes the use of Eclipsys eWebIT
enterprise application integration technology and professional services to enhance the integration of legacy applications with the Companys e-commerce platform.





As a result of the termination of the mergers, certain acquisition-related costs the Company incurred during the due diligence and acquisition process, including investment
banker fees, legal advisory fees and financial and accounting fees, no longer had any realizable future value. As such the Company expensed all such costs in the second quarter of the year ended December 31, 2000. As of December 31, 2000, there was
no accrual remaining relating to the abandoned acquisition costs.





11.    RESTRUCTURING





During the first half of 2000, the Company recorded a restructuring charge of $2.1 million. This charge was the result of a
reorganization and streamlining of operations undertaken to focus on two key global markets, IDNs and hospitals, and physician practices. The entire restructuring charge was related to the reduction in workforce of 80 individuals. All 80 employees
were terminated under this plan during 2000, of which 35 were in sales and marketing, 4 were in general administration, 16 were in product development, 20 were in operations and 5 were in services delivery.





In December 2000, the Company recorded a restructuring charge of $691,000 in connection with the Companys decision to divest its
Auction and USL operations. Of the $691,000, $160,000 related to anticipated




F-33




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




severance of 24 employees and the remainder related to idle facilities and related costs. No employees had been terminated and no amounts had been paid as of December 31, 2000. For the year ended
December 31, 2001, $221,000 was paid out in termination benefits relating to employees terminated as part of the divestiture and $268,000 was paid out for idle facilities and related costs. Of the employees terminated, 16 were from sales and
marketing and 8 were from operations. In June 2001, the Company recorded an additional restructuring charge of $600,000, of which $539,000 related to a revision of the Companys estimate of the time required to sublease idle facilities of the
Auction operations and $61,000 related to severance costs for employees of the Auction operations. At December 31, 2001, none of this amount had been paid. The remaining accrual balance is expected to be utilized by the end of 2003.





In December 2001, the Company recorded a restructuring charge of $350,000 in connection with its decision to
divest its EquipMD subsidiary. Of the $350,000, $311,000 related to anticipated severance of 7 employees and $39,000 related to idle facilities and related costs. None of the accrual had been utilized at December 31, 2001. The remaining accrual
balance is expected to be utilized by the end of 2002.





Components of the restructuring accrual as of December 31,
2001 were as follows (in thousands):





Employee Severance


Cost of Idle Facilities


Other


TotalBalance at January 1, 2000

$



$



$



$
Restructuring charges recorded during fiscal 2000


2,260



386



145



2,791Payments


(2,100
)










(2,100
)Balance at December 31, 2000


160



386



145



691Restructuring charges recorded during fiscal 2001


372



578







950Payments


(221
)


(268
)


(100
)


(589
)Balance at December 31, 2001

$
311


$
696


$
45


$
1,052





12.    STOCKHOLDERS EQUITY





Preferred Stock





The Company is authorized to issue up to 11,860,000 shares of preferred stock, each with a par value of $0.001 per share. The preferred stock may be issued from time to time in one or more series. The board of directors is authorized
to determine the rights, preferences, privileges and restrictions on these shares. As of December 31, 2001, no shares of preferred stock were outstanding.





Common Stock





On July 26, 2000, the Company amended and restated its certificate
of incorporation to increase the number of authorized shares of its common stock to 300,000,000.





As of December
31, 2001, the Company has reserved the following shares of common stock for future issuance as follows (in thousands):





Stock Option Plans

2,148Conversion of warrants outstanding

4Employee Stock Purchase Plan

1052,257




F-34




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







In January 2000, the Company completed its initial public offering of
805,000 shares of its common stock, which raised $104.7 million. Proceeds, net of underwriters discount of $7.3 million and offering costs of $2.0 million, amounted to $95.4 million.





13.    WARRANTS





In June 1998, the
Company issued a warrant to purchase 4,500 shares of Series C preferred stock at an exercise price of $7.70 per share in conjunction with a loan agreement. The warrant is exercisable immediately and expires June 25, 2003. The fair value of the
warrant at the date of issuance was determined to be $7,000 and was estimated using the Black-Scholes valuation model. This amount is being recognized as additional interest expense over the expected life of the loan agreement.





In May 1999, the Company issued a warrant to purchase 22,881 shares of Series D preferred stock at an exercise price of $11.80
per share in conjunction with a loan agreement. The warrant is exercisable immediately and expires May 12, 2006. The fair value of the warrant at the date of issuance was determined to be $640,000 and was estimated using the Black-Scholes valuation
model. This amount is being recognized as additional interest expense over the expected life of the loan agreement.





In July 1999, the Company issued a warrant to purchase 1,000 shares of Series D preferred stock at an exercise price of $11.80 per share in conjunction with a loan agreement. The warrant is exercisable immediately and expires July
20, 2004. The fair value of the warrant at the date of issuance was determined to be $40,000 and was estimated using the Black-Scholes valuation model. This amount is being recognized as additional interest expense over the expected life of the loan
agreement.





In July 1999, the Company issued a warrant to purchase 13,771 shares of Series D preferred stock at
$11.80 per share in connection with an equipment lease line. The warrant is exercisable immediately and expires July 7, 2006. The fair value of the warrant at the date of issuance was determined to be $559,000 and was estimated using the
Black-Scholes valuation model. This amount is being recognized as additional interest expense over the expected life of the lease line.





In September 1999, the Company issued to a retained executive search firm a warrant to purchase 43,662 shares of the Companys common stock at an exercise price of $1.00 per share. The warrant is exercisable immediately
and expires on September 9, 2009. The fair value of the warrant was determined to be $2.4 million and was estimated using the Black-Scholes valuation model. This expense is included in cost of warrant issued to recruiter for the year ended December
31, 1999.





In January 2000, the Company issued to a retained advertising firm a warrant to purchase 2,000 shares
of common stock at an exercise price of $200.00 per share. The fair value of the warrant was determined to be $9,000 and was estimated using the Black-Scholes valuation model. This expense is included in operating expenses for the year ended
December 31, 2000.





In January 2000, the Company issued to a retained executive search firm a warrant to purchase
2,000 shares of common stock at an exercise price of $70.00 per share. The fair value of the warrant was determined to be $58,000 and was estimated using the Black-Scholes valuation model. This expense is included in operating expenses for the year
ended December 31, 2000.




F-35




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







14.    STOCK OPTIONS





1997 Stock Plan





The Company, under the 1997 Stock Plan (the 1997 Plan), reserved approximately 1.5 million shares of common stock. The stock was reserved for the Companys employees, directors and consultants. The term of each option was stated
in the option agreement and was not to exceed 10 years after the grant date. If the optionee owned stock representing more than 10% of the Companys voting power, the term of the option was not to exceed 5 years after the grant date.





Option pricing was no less than 85% of the fair market value per share on the date of the grant. If the optionee
owned stock representing more than 10% of the Companys voting power the option price was not to be less than 110% of the fair market value per share on the date of the grant. If the stock option was an incentive stock option, then the price
for the stock could not be less than 100% of the fair market value per share on the date of the grant.





Any option
granted was to be exercisable at such times and under such conditions as determined by the Board of Directors. However, for most options, 25% of the shares subject to the option vested 12 months after the vesting commencement date, and 1/48of the shares vested each month thereafter. Options under the 1997 Plan were exercisable immediately, subject to
repurchase rights held by the Company, which lapsed over the vesting period as determined.





The
Companys right of repurchase lapsed at a rate determined by the board of directors. However, for most options the Companys right to repurchase lapsed at a rate of 25% of the shares after the first 12 months and 1/48of the shares, per month, after the vesting commencement date.





1999 Equity Incentive Plan





In November 1999, the board of directors approved the 1999 Equity Incentive Plan (the 1999 Plan) to replace the 1997 Stock Plan. The Company has reserved approximately 500,000 shares of common stock for issuance under the 1999 Plan,
and the number of shares reserved for issuance under this plan was increased to include shares of the Companys common stock reserved under the 1997 Plan that were not issued or subject to outstanding grants on the date the IPO was completed.
The 1999 Plan stipulates that the amount authorized will automatically be increased each year by the number of shares required to increase the total shares available for future grants under the plan to an amount equal to 5% of the Companys
total outstanding shares as of December 31 of the preceding year. Incentive stock options may only be granted to employees under the 1999 Plan, and they must be granted at an option price no less than 100% of the fair market value of the common
stock on the date of grant. If the optionee owns stock representing more than 10% of the Companys outstanding voting stock, incentive stock options must be granted at an option price no less than 110% of the fair market value of the common
stock on the date of grant. Nonqualified stock options may be granted to employees, officers, directors, consultants, independent contractors or advisors to the Company, and must be granted at an option price no less than 85% of the fair market
value of the common stock on the date of grant. All options granted under the 1999 Plan carry a maximum term of 10 years from the date of grant, and shall be exercisable at such times and under such conditions as determined by the board of directors
at the date of grant. However, for most options, 1/4of the shares subject to the option shall vest 12 months
after the vesting commencement date, and 1/48of the shares subject to the option shall vest each month
thereafter.




F-36




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Activity under the 1997 and 1999 Plans was as follows (in thousands,
except per share amounts):





Outstanding OptionsShares Available For
Grant


Number


Weighted- Average Exercise PriceBalance, December 31, 1998

27


101


$
0.87Authorized for issuance under the 1997 Plan

1,266






Authorized for issuance under the 1999 Plan

500






Granted

(811
)

811


$
18.79Granted outside of the Plans(a)




840


$
10.46Exercised




(1,285
)

$
7.14Repurchased

1


(1
)

$
1.00Canceled

81


(81
)

$
2.00Balance, December 31, 1999

1,064


385


$
38.13Granted

(1,471
)

1,471


$
45.84Granted outside the Plans(a)




4


$
130.00Exercised




(14
)

$
7.99Repurchased

82





$
5.63Canceled

359


(362
)

$
63.19Balance, December 31, 2000

34


1,484


$
52.84Authorized

755






Granted

(1,061
)

1,061


$
8.41Exercised




(34
)

$
6.97Repurchased

39





$
3.48Canceled

457


(457
)

$
42.48Restricted stock grants

(223
)





Balance, December 31, 2001

1


2,054


$
39.37


---

|(a) | During the years ended December 31, 1999, and 2000, the Company granted options to purchase common stock to certain Company executives, directors, and
consultants. Such options were issued outside of the 1997 and 1999 Plans. All non-plan options carry a maximum term of 10 years from the date of grant, and shall be exercisable at such times and under such conditions as determined by the board of
directors at the date of grant. However, for most non-plan options, 1/4of the shares subject to the option
shall vest 12 months after the vesting commencement date, and 1/48of the shares subject to the option shall
vest each month thereafter.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




In April 2000, as part of the acquisition of
EquipMD, the Company assumed outstanding options to purchase 107,550 shares of common stock at exercise prices ranging from $28.64 to $41.37. As a result of certain employee terminations during 2001, 14,757 of these options were cancelled. As of
December 31, 2001, 81,467 of the shares underlying the remaining options outstanding were vested but none of the options had been exercised.





The Company accounts for the Plans under the provisions of APB No. 25 and related interpretations. Had compensation expense for the stock option plans been determined consistent with SFAS No. 123, the
Company would have recorded stock compensation expense of $22.5 million, $33.3 million and $15.9 million in the years




F-37




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




ended December 31, 1999, 2000 and 2001, respectively. As a result, net losses would have amounted to the following pro forma amounts (in thousands, except per share data):





Year Ended December 31,1999


2000


2001Net loss as reported

$
(51,020
)

$
(215,694
)

$
(272,363
)Net loss pro forma

$
(60,311
)

$
(218,543
)

$
(272,025
)Net loss per share as reported

$
(191.51
)

$
(25.58
)

$
(17.32
)Net loss per share pro forma

$
(226.40
)

$
(25.92
)

$
(17.30
)





The weighted-average fair value of options granted during the years
ended December 31, 1999, 2000 and 2001 was $46.00, $32.40 and $6.47 respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions: risk-free interest
rates ranging from 1.96 to 6.81 percent; expected dividend yields of zero percent for all three periods; an average expected life of 3.5 years; and expected volatility of 70%, 70% and 80% for the years ended December 31, 1999, 2000 and 2001.





The following table summarizes all stock options outstanding and exercisable as of December 31, 2001 (shares in
thousands):





Options Outstanding

Options ExercisableExercise Price

Number

Weighted- Average Remaining Contractual Life (Years)

Weighted- Average Exercise Price

Number

Weighted- Average Exercise Price$1.00 to $7.07

512

9.46

$
6.55

64

$
3.55$7.50 to $8.75

593

9.03

$
8.39

127

$
8.35$11.56 to $29.38

322

8.85

$
19.40

110

$
23.10$30.00 to $60.00

481

8.41

$
37.46

256

$
39.86$65.00 to $638.75

239

8.14

$
80.26

194

$
80.022,147

8.87

$
24.11

751

$
39.36





During October 1999, the board of directors approved a change in
the 1997 Plan providing for the exercise of options prior to an employees vesting date. Additionally, during fiscal 1999, the Company allowed certain officers of the Company to exercise certain options that were granted outside the 1997 and
1999 Plans prior to their vesting date. In January 2000, as part of the acquisition of Pharos, the Company assumed certain options that had been exercised in advance of their vesting. At December 31, 2000 and 2001, approximately 426,000 and 195,000
shares previously issued relating to options exercised prior to their vesting date were subject to repurchase at a weighted-average price of $2.07 and $1.88 per share, respectively.





1999 Employee Stock Purchase Plan





In November 1999, the
Board of Directors approved the 1999 Employee Stock Purchase Plan (the ESPP) which became effective on January 24, 2000. The Company has reserved 75,000 shares of common stock for issuance under the ESPP, and the terms of the ESPP stipulate that
amount will automatically be increased each year by shares equal to the amount necessary such that the total shares available for issuance under the plan is equal to 1% of the total outstanding shares of common stock as of December 31 of the
preceding year. Pursuant to this provision of the ESPP, an additional 101,896 shares were authorized for issuance under the plan on




F-38




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




January 1, 2001. Subject to certain eligibility requirements, employees may elect to withhold up to a maximum of 15% of their cash compensation for participation in the ESPP. Each offering period
under the ESPP will be two years in duration and will consist of four six-month purchase periods. The first offering period commenced on January 24, 2000 at which time price quotations were available for the Companys common stock on the Nasdaq
National Market with subsequent purchasing periods commencing on February 1 and August 1 of each year. The purchase price for common stock purchased under this plan will be 85% of the lesser of the fair market value of our common stock on the first
day of the applicable offering period or the last day of the purchase period. Total shares purchased by employees under the ESPP for the years ended December 31, 2000 and 2001 were 17,737 shares and 54,331 shares, respectively.





15.    INCOME TAXES





The Company accounts for income taxes pursuant to the provisions of SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined using the current applicable enacted tax rate and provisions of
the enacted tax law.





Due to the Companys loss position, there was no provision for income taxes for the
years ended December 31, 1999, 2000 and 2001.





At inception, the Company elected S-Corporation status. As of
January 1, 1998, the Company elected C-Corporation status for Federal and state purposes. As a result, the Company is not entitled to any tax benefits associated with the period prior to C-Corporation election.





At December 31, 2001, the Company had cumulative net operating loss carryforwards of approximately $340.0 million and approximately $249.0
million for Federal and state income tax purposes, respectively, expiring in various years ending through 2021.





At December 31, 2001, the Company had cumulative credit carryforwards of approximately $1.0 million and approximately $2.0 million for Federal and state income tax purposes, respectively. These credits are subject to expiration
through various periods through 2021.





The Tax Reform Act of 1986 contains provisions which may limit the net
operating loss and credit carryforwards to be used in any given year upon the occurrence of certain events, including a significant change in ownership. Because of carryforward limitations, these net operating losses and credits may expire before
being utilized.





The estimated tax effects of significant temporary differences and carryforwards that give rise
to deferred income tax assets are as follows (in thousands):





December 31,2000


2001Temporary differences:Accrued/reserves

$
1,733


$
2,528Fixed asset basis


1,807



1,384Stock compensation


2,873



2,740Deductible goodwill/other intangibles


4,518



Other






3,436Net operating loss carryforwards


106,255



133,674Tax credits


1,504



2,267Gross deferred tax assets


118,690



146,029Gross deferred tax liabilities


(5,924
)


(127
)Valuation allowance


(112,766
)


(145,902
)$



$





F-39




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Due to uncertainty surrounding the realization of the deferred tax
attributes in future years, the Company has recorded a valuation allowance against its net deferred tax assets.





Included in the deferred tax assets before valuation allowance are approximately $19.5 million of cumulative tax benefits related to equity transactions, which will be credited to stockholders equity if and when realized.





The provision for income taxes at the Companys effective tax rate differed from the benefit from income
taxes at the statutory rate due mainly to the increase in valuation allowance and no benefit of the operating losses was recognized.





The provision for income taxes differs from the expected tax benefit amount computed by applying the statutory federal income tax rate of 35% to loss before taxes as follows:





For The Years Ended December
31,1999


2000


2001Federal statutory rate

(35.0
)%

(35.0
)%

(35.0
)%State taxes, net of Federal benefit

(4.4
)

(5.9
)

(5.9
)Change in valuation allowance

28.4


27.1


20.2Stock compensation

10.2


5.8


2.4Tax credits

1.4


(0.3
)

(0.3
)Non deductible goodwill




4.1


4.4In-process R&D




3.2


Non deductible impairment




1.0


14.2Other

(0.6
)




0.0
%

0.0
%

0.0
%





16.    RELATED PARTY TRANSACTIONS





On July 26, 2000, the Companys stockholders voted to approve the amended outsourcing and operating agreement (the Agreement) entered
into among the Company and Novation, VHA, UHC and HPPI on May 24, 2000. Under the terms of the Agreement, the Company agreed to develop and manage an e-commerce marketplace (Marketplace@Novation) to be used by VHA, UHC and HPPI member healthcare
organizations as their primary purchasing tool for medical equipment and supplies. Novation agreed to serve as a contracting agent for the Company by recruiting, contracting and managing relationships with manufacturers and distributors servicing
healthcare providers on the Companys behalf. VHA and UHC agreed to provide marketing support for Marketplace@Novation, guarantee Novations obligations under the Agreement and agreed to enter into certain exclusivity provisions contained
in the Agreement.





In consideration for the services agreed to be rendered, the Company issued warrants to VHA and
UHC to purchase up to 3,084,502 shares and 751,943 shares, respectively, of the Companys common stock, at an exercise price of $0.10 per share. Vesting on the warrants is performance based, and is driven by historical gross purchasing levels
of VHA and UHC member healthcare organizations that enter into commerce agreements with the Company to use Marketplace@Novation. Additionally, Neoforma issued to VHA and UHC 4,626,753 shares and 1,127,915 shares, respectively, of the Companys
common stock, which are subject to certain voting restrictions.





On July 26, 2000, once stockholder approval was
obtained for the Agreement and the related issuance of shares, the common stock discussed above was issued to VHA and UHC. The common stock was issued in consideration for their entering into the Agreement, and the total valuation of those shares of
$291.3 million was




F-40




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




capitalized. This amount has been recorded in capitalized partnership costs in the accompanying consolidated balance sheets, and is being amortized over the estimated beneficial life of five
years. Due to the performance criteria on the warrants, the valuation of the warrants was not calculated until earned. The valuation of warrants earned was calculated using the Black-Scholes pricing model using a risk free interest rate of 5.8%,
expected dividend yield of zero, an average life equal to the remaining term of the outsourcing agreement and volatility of 70%. The valuation was recorded as earned in the capitalized partnership costs account in the accompanying consolidated
balance sheets. The portion of the charge that relates to the warrant shares earned for each healthcare organization was amortized over the life of the agreement signed between the Company and that healthcare organization (generally between 2-3
years). As of December 31, 2001, VHA and UHC had earned a total of 2.0 million of the shares resulting in a total valuation of $48.2 million being capitalized in capitalized partnership costs. As of December 31, 2001, the Company has recorded total
amortization of capitalized partnership costs of $105.2 million.





On October 18, 2000, the Company entered into an
agreement with VHA to replace the warrant issued to VHA to purchase up to 3,084,502 shares of its common stock with 3,084,502 shares of restricted common stock. On January 25, 2001, the Company entered into an agreement with UHC to replace the
warrant issued to UHC to purchase up to 563,957 shares of its common stock with 563,957 shares of restricted common stock. In each case, the restrictions on the stock are identical to the vesting performance criteria that were in place on the
warrant, and thus there will be no change in the accounting treatment relating to the restricted common stock versus the warrant.





On December 31, 2000, the Company entered into a three-year software license agreement and a series of related agreements regarding maintenance, consulting and services with i2 Technologies, Inc. (i2). Under these agreements, the
Company and i2 will collaborate on product development, marketing, sales and service activities. These agreements also provide for revenue sharing from the Company to i2 commencing immediately on services and applications sales, and commencing in
2002 on other marketplace related revenue. Additionally, the agreements contain revenue sharing provisions under which i2 will share revenue with the Company for products and services it sells in the healthcare vertical market.





On January 25, 2001, the Company entered into stock purchase agreements with VHA and UHC to purchase shares of the
Companys common stock. VHA and UHC purchased 1,183,432 and 325,443 shares, respectively, at a price of $16.90 per share. Including i2 Technologies, Inc., which participated in the strategic financing, purchasing 295,858 shares, the Company
raised a total of approximately $30.5 million prior to costs associated with the sale of the shares, which were approximately $1.1 million.





Concurrent with the financing, the Company also amended the Agreement (the Amendment), effective on January 1, 2001. Under the terms of the Amendment, Novation agreed to increase the minimum fee level
it guaranteed to the Company under the Agreement, which guaranteed minimum fee level is based on a percentage of marketplace volume processed through Marketplace@Novation. The fee level is calculated based on a tiered fee structure under which the
incremental fee per dollar of transaction volume decreases as the marketplace volume through Marketplace@Novation increases. This structure results in a higher blended fee percentage at lower volume levels and a lower blended fee percentage at
higher volume levels. Under the terms of the Amendment, the payments Novation is required to make are subject to quarterly maximums. These maximums are based on a predetermined schedule with increasing dollar amounts through 2002. Beginning in 2003
through the remaining term of the Amendment, these maximums are calculated based on Novations financial performance, as defined. In certain historical periods, the fees from Novation have been limited by these maximums. See Note 2 for
discussion of customer concentration and the amounts paid by Novation to the Company under this minimum fee level guarantee during fiscal 2000 and 2001. The Amendment also included




F-41




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




modifications to certain revenue sharing, supplier recruitment and supplier implementation provisions of the original agreement.





In September 2001, the Company, Novation, VHA, UHC and HPPI agreed to amend the Amendment. Pursuant to this amendment, all parties agreed to expand the definition of
marketplace volume to include supply chain data captured for marketplace member purchasing when the initial transaction itself was not facilitated by the Companys connectivity solution. As a result, the Company will be able to provide its
trading partners within Marketplace@Novation with information relating to all purchases made by members from suppliers that have agreed to provide this transaction data as part of their participation in Marketplace@Novation. This amendment
accelerates the Companys ability to capture critical supply chain data and will also enable the Company to capture important purchasing information without first requiring full adoption of its connectivity services.





As a result of the terms of the Outsourcing Agreement and the subsequent amendments between the Company and VHA, UHC and Novation, certain
executive officers of VHA, UHC and Novation sat on the board of the Company as of December 31, 2001. Such individuals were: Robert J. Baker, President and CEO of UHC; Mark McKenna, President of Novation; Curt Nonomaque, Executive Vice President of
VHA; and C. Thomas Smith, President and CEO of VHA.





See Note 17 for discussion of subsequent developments related
to this matter.





17.    SUBSEQUENT EVENTS





Divestiture of NeoMD





In March
2002, the Company entered into a purchase agreement to sell substantially all of the assets of the Companys NeoMD operations to MedAccess, Inc., a corporation founded by certain previous employees of the Companys NeoMD operations, in
exchange for consideration totaling $192,000. The Company agreed to sell all NeoMD net assets valued at approximately $348,000, which primarily consisted of the EquipMD contract portfolio, in exchange for $95,000 of cash paid shortly after closing
and the forgiveness of $97,000 of severance related liabilities the Company was obligated to pay to the founders of MedAccess, Inc. In addition, the Company will receive a share of revenue generated by the sold assets. The net result of the
transaction to the Company was a loss of $156,000. See Note 8 for further information related to this matter.





CapitalWerks





In May 2001, the Company entered into a leasing facility with CapitalWerks,
LLC (CapitalWerks) to provide the Company with a $10.2 million lease line facility to finance the purchase of capital equipment, software and other assets. After several unsuccessful attempts by the Company to access the line of credit, on April 14,
2002, the Company sent to CapitalWerks notification of termination of the line of credit agreement and a demand for repayment of the initial access fee the Company had paid to open the line of credit. The Company believes that
CapitalWerks did not ever have any intention of fulfilling its obligations required under the line of credit agreement and therefore breached the agreement. The Company is actively engaged in efforts to




F-42




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




obtain repayment of this access fee and accrued interest from CapitalWerks, which ultimately may involve the initiation of legal proceedings.





MedContrax and Med-ecorp Asset Purchase





On July 9, 2002, the Company acquired substantially all of the assets of data management companies MedContrax, Inc. and Med-ecorp, Inc. for approximately $1.5 million in cash through a bankruptcy
auction.





Settlement of Med-XS Litigation





On September 26, 2002, the Company entered into a confidential settlement agreement with Med-XS to settle the suit the Company had filed against Med-XS and the subsequent
counterclaim that Med-XS filed against the Company. The Company recorded a write-down of $1.1 million at that time to reflect the collectible value of the note based on the terms of the settlement agreement. See Note 6 for additional discussion of
this matter.





Amendment to Outsourcing and Operating Agreement





Effective September 2002, the Company, Novation, VHA, UHC and HPPI amended and restated the Agreement (the Revised Amended Outsourcing
Agreement). As stated above, the payments that Novation is required to make are subject to quarterly maximums. These quarterly maximums are based on a predetermined fee schedule through 2002. Among other changes, the amendment reduced the quarterly
maximums for the third and fourth quarters of 2002. In the third quarter of 2002, the fees received from Novation were reduced by these revised maximums. Effective in 2003, the quarterly maximums for a given year will be based on Novations
estimated financial performance, as defined, for the subsequent year. Any difference in the calculated quarterly maximums that results from differences between Novations estimated and actual financial performance will increase or decrease
subsequent period quarterly maximums. Additionally, under the Revised Amended Outsourcing Agreement, the scope of Novations rights to view marketplace level data was reduced to data from Novation and HPPI sponsored marketplaces only. Also,
Novation now only has the exclusive right to recruit suppliers for Novation and HPPI sponsored marketplaces and not for any other marketplaces.





18.    RESTATEMENT





Subsequent to the issuance of the Companys
2001 consolidated financial statements, the Companys management determined that the accounting treatment initially afforded to the following transactions was not correct: forfeiture of unvested stock options whereby the compensation expense on
the stock options was being recognized on an accelerated amortization method, the recording of an impairment loss on certain purchased software, the accounting treatment related to certain costs incurred in connection with establishing a strategic
relationship that were capitalized and the accounting for the valuation of restricted stock issued to related parties.





As permitted by generally accepted accounting principles, the Company recognizes compensation expense on stock options on an accelerated method. Under the accelerated method, if an employee forfeits his/her stock options,
compensation expense related to unvested stock options recorded in previous periods should be adjusted by decreasing compensation expense in the period of forfeiture. Previously, the Company had not given accounting recognition to these forfeitures.





During the years ended December 31, 2000 and 2001, the Company ceased using certain software. However, the
Company did not give accounting recognition to this event. In addition, depreciation of the software equipment should have ceased as of the date the Company ceased using the software equipment in its operations.




F-43




---



NEOFORMA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







During 2000, the Company capitalized certain deal costs, primarily
investment banking fees, incurred in connection with the negotiation of its outsourcing and operating agreement (see Note 16). These costs, which were being amortized over 5 years, should have been expensed when incurred.





Also, the Company incorrectly calculated the value of restricted stock earned by related parties and the related amortization of
partnership costs associated with this restricted stock (see Note 16).





Finally, the Company also determined that
(i) it had over accrued for certain expenses, (ii) it had incorrectly accounted for certain stockholder notes receivable, (iii) it had not recorded stock compensation related to termination of employment in the period of termination, (iv) it should
have capitalized interest expense related to the development of its marketplace platform, (v) it had not amortized an intangible asset acquired in 2000 and (vi) the allocation of the purchase price to the assets acquired and liabilities assumed in
certain acquisitions required revision to correctly reflect the fair value of certain intangible assets including the amount allocated to acquired in-process research and development expensed upon acquisition. The Company also made other corrections
to its consolidated financial statements for the years ended December 31, 2000 and 2001.





In addition, the Company
has made certain reclassifications to the prior year financial statements. These reclassifications primarily relate to the classification of (i) restricted cash, (ii) long-term debt and (iii) non-current prepaid software maintenance contract
expenses.





The consolidated financial statements for the years ended December 31, 2000 and 2001 contained herein
have been restated to incorporate all of these adjustments and reclassifications.




F-44




---




The following are reconciliations of the Companys results of operations
from financial statements previously filed to the restated and consolidated financial statements (in thousands, except per share amounts):





Consolidated Balance Sheet as of December 31, 2000





As Previously Reported


Adjustments


As RestatedAssetsCurrent assets:Cash and cash equivalents

$
22,597


$
(67
)

$
22,530Restricted cash, current portion






500



500Short-term investments


7,163



(2,000
)


5,163Accounts receivable, net of allowance for doubtful accounts


2,299



44



2,343Prepaid expenses and other current assets


3,770



(290
)


3,480Deferred debt costs, current portion


413







413Total current assets


36,242



(1,813
)


34,429Property and equipment, net


32,529



(3,856
)


28,673Intangibles, net of amortization


127,799



(389
)


127,410Capitalized partnership costs, net of amortization


308,330



(4,599
)


303,731Non-marketable investments


8,400







8,400Restricted cash, less current portion






1,500



1,500Other assets


456



362



818Deferred debt costs, less current portion


182







182Total assets

$
513,938


$
(8,795
)

$
505,143Liabilities and Stockholders EquityCurrent liabilities:Notes payable, current portion

$
8,089


$



$
8,089Accounts payable


22,744



(802
)


21,942Accrued payroll


3,106



(120
)


2,986Other accrued liabilities


2,303



(447
)


1,856Deferred revenue


947



(150
)


797Total current liabilities


37,189



(1,519
)


35,670Deferred rent






279



279Deferred revenue, less current portion






150



150Notes payable, less current portion


7,958







7,958Stockholders equity:Common Stock


13



1



14Warrants


11,733



(3,443
)


8,290Additional paid-in capital


761,374



1,149



762,523Notes receivable from stockholders


(7,112
)


255



(6,857
)Deferred compensation


(32,346
)


1,212



(31,134
)Accumulated other comprehensive loss


(3
)






(3
)Accumulated deficit


(264,868
)


(6,879
)


(271,747
)Total stockholders equity


468,791



(7,705
)


461,086Total liabilities and stockholders equity

$
513,938


$
(8,795
)

$
505,143




F-45




---




Consolidated Balance Sheet as of December 31, 2001





As Previously Reported


Cumulative Effect of Prior Year Changes


Adjustments


As RestatedAssetsCurrent assets:Cash and cash equivalents

$
15,663


$
(67
)

$
(1,500
)

$
14,096Restricted cash, current portion






500







500Short-term investments






(2,000
)


2,000



Accounts receivable, net of allowance for doubtful accounts


1,377



44



(44
)


1,377Prepaid expenses and other current assets


4,357



(290
)


(328
)


3,739Deferred debt costs, current portion


175











175Total current assets


21,572



(1,813
)


128



19,887Property and equipment, net


29,127



(3,856
)


1,684



26,955Intangibles, net of amortization


311



(389
)


389



311Capitalized partnership costs, net of amortization


241,530



(4,599
)


(2,579
)


234,352Non-marketable investments


745











745Restricted cash, less current portion






1,500



(500
)


1,000Other assets


2,951



362



(262
)


3,051Total assets

$
296,236


$
(8,795
)

$
(1,140
)

$
286,301Liabilities and Stockholders EquityCurrent liabilities:Notes payable, current portion

$
5,164


$



$



$
5,164Accounts payable


5,592



(802
)


(129
)


4,661Accrued payroll


4,708



(120
)


120



4,708Other accrued liabilities


4,680



(447
)


(81
)


4,152Deferred revenue


1,764



(150
)


283



1,897Total current liabilities


21,908



(1,519
)


193



20,582Deferred rent






279



220



499Deferred revenue, less current portion


2,111



150



(150
)


2,111Notes payable, less current portion:Due to related party


19,000











19,000Other


1,635











1,635Total notes payable, less current portion


20,635











20,635Stockholders equity:Common Stock


17



1



(1
)


17Warrants


3,688



(3,443
)


(165
)


80Additional paid-in capital


806,556



1,149



(4,466
)


803,239Notes receivable from stockholders


(6,143
)


255



(519
)


(6,407
)Deferred compensation


(11,042
)


1,212



(514
)


(10,344
)Accumulated other comprehensive loss


(1
)










(1
)Accumulated deficit


(541,493
)


(6,879
)


4,262



(544,110
)Total stockholders equity


251,582



(7,705
)


(1,403
)


242,474Total liabilities and stockholders equity

$
296,236


$
(8,795
)

$
(1,140
)

$
286,301




F-46




---




Consolidated Statement of Operations for the Year Ended December 31, 2000





As Previously Reported


Adjustments


As RestatedRevenue:Marketplace revenue:Related party

$
81


$



$
81Other


1,257







1,257Total Marketplace revenue


1,338







1,338Trading Partner Services revenue:Trading partner services


4,479







4,479Sales of used equipment


4,629







4,629Total Trading Partner Services revenue


9,108







9,108Total revenue


10,446







10,446Operating expenses:Cost of equipment sold


3,544







3,544Cost of services


8,247



(525
)


7,722Operations


13,517



518



14,035Product development


24,599



186



24,785Selling and marketing


53,216



(1,686
)


51,530General and administrative


25,922



(3,045
)


22,877Amortization of intangibles


25,700



857



26,557Amortization of partnership costs


30,491



(968
)


29,523Costs of strategic partnership






9,345



9,345Write-off of purchased software






3,858



3,858Write-off of acquired in-process research and development


18,000



(1,100
)


16,900Abandoned acquisition costs


2,742







2,742Restructuring


2,100



691



2,791Impairment of assets held for divestiture


14,446



(1,141
)


13,305Total operating expenses


222,524



6,990



229,514Loss from operations


(212,078
)


(6,990
)


(219,068
)Other income (expense):Interest income


4,464



243



4,707Interest expense


(1,289
)


(73
)


(1,362
)Other income


88



(59
)


29Net loss

$
(208,815
)

$
(6,879
)

$
(215,694
)Net loss per share:Basic and diluted

$
(24.87
)





$
(25.58
)Weighted average shares  basic and diluted


8,395







8,432Pro forma net loss per share:Basic and diluted

$
(24.12
)





$
(24.85
)Weighted average shares  basic and diluted


8,658







8,679




F-47




---




Consolidated Statement of Operations for the Year Ended December 31, 2001





As Previously Reported


Adjustments


As RestatedRevenue:Marketplace revenue:Related party

$
24,567


$



$
24,567Other


1,130







1,130Total Marketplace revenue


25,697







25,697Trading Partner Services revenue:Trading partner services


1,877







1,877Sales of used equipment


250







250Total Trading Partner Services revenue


2,127







2,127Total revenue


27,824







27,824Operating expenses:Cost of equipment sold


216







216Cost of services


14,217



(737
)


13,480Operations


15,782



(107
)


15,675Product development


17,638



(726
)


16,912Selling and marketing


28,699



(53
)


28,646General and administrative


17,644



(1,580
)


16,064Amortization of intangibles


29,274



824



30,098Amortization of partnership costs


77,271



(1,620
)


75,651Write-off of purchased software






1,513



1,513Restructuring






950



950Impairment of intangibles


13,116



(1,210
)


11,906Impairment of assets held for divestiture


81,486



(400
)


81,086Write-down of non-marketable investments


8,400







8,400Net gain on divested businesses


(258
)


203



(55
)Total operating expenses


303,485



(2,943
)


300,542Loss from operations


(275,661
)


2,943



(272,718
)Other income (expense):Interest income


609



160



769Interest expense


(1,826
)


1,141



(685
)Other income


253



18



271Net loss

$
(276,625
)

$
4,262


$
(272,363
)Net loss per share:Basic and diluted

$
(17.65
)





$
(17.32
)Weighted average shares  basic and diluted


15,674







15,721




F-48




---




SCHEDULE II





VALUATION AND QUALIFYING ACCOUNTS


(in thousands)





Balance At Beginning of the Period

Additions Charged to Expense

Write- offs


Other

Balance at End of PeriodAllowance for Doubtful Accounts December 31,1999

$


$


$



$
4

$
42000

$
4

$
440

$
(129
)

$
69

$
3842001

$
384

$
851

$
(1,029
)

$


$
206












---




INDEX TO EXHIBITS





Exhibit Number

Exhibit Title23.2

Consent of Deloitte & Touche LLP, independent public accountants.