NEOFORMA INC/CA/ - 10-K Annual Report

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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.

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 this document and the accompanying consolidated financial statements and footnotes, have been restated to reflect the impact of the reverse stock split.

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, including the Quarterly Reports on Form 10-Q that we will file in 2002. 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.

Neoforma is a leading healthcare supply chain and information solutions company. We build and operate Internet marketplaces that empower our customers, or 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. The healthcare market has a number of characteristics that make it suited for Internet-based marketplace solutions and a standardized supply chain operating system, including its large size, high degree of fragmentation, significant inefficiencies, industry cost pressures and highly complex pricing structures. Our solutions enable the participants in the healthcare supply chain, principally healthcare providers, manufacturers, distributors and group purchasing organizations, or GPOs, to significantly improve business processes within their organizations and among their trading partners. Using our solutions, these organizations can improve efficiencies, increase revenue, reduce costs and improve capital allocation.

Our solutions consist of Web-based applications and services for our 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.

Our primary business objectives are aligned with those of our trading partners. We seek to enable our trading partners to reallocate and redirect excess costs in their supply chain to their strategic priorities, reduce the time their employees spend on non-productive activities and reduce a significant portion of the capital investment they currently make in redundant and isolated supply chain-related technologies.

On October 18, 2001, we announced our intent to explore strategic alternatives for our alternate site care business unit, NeoMD, which consists primarily of the assets acquired from EquipMD, Inc., or EquipMD, in April 2000, to maintain our focus on delivering core trading partner solutions and to increase our resource commitment to our more scalable acute care business. In addition, we announced we were streamlining our organizational structure to enable us to increase our operational efficiency while continuing to deliver high-quality service to our trading partners.

We believe optimized supply chain performance is possible only when each step in the supply chain process is streamlined, accelerated and tightly connected to the processes that precede and follow it. For example, traditionally, when a hospital runs low on a product, such as a syringe, a manual and paper-based process has been required to replace or replenish that product. A nurse, supplier sales representative or inventory clerk must complete a paper request for a replacement product and deliver, via interoffice mail or fax, that requisition to the purchasing department. The requisition then is passed to the hospital buyer who will first check, if possible, whether the product is in stock elsewhere in the hospital. If that is not the case, he or she will check the paper contracts on file, if available, to ensure that the product is priced properly and then will consult a paper catalog to obtain product number and ordering information. When these steps are completed, the buyer will complete a purchase order and fax or phone that order to the supplier of that product.

This order will be received by a manufacturer or distributor that will return a paper-based confirmation of the order, aggregate that paper order with all of the other paper orders from that hospital, secure the product from the warehouse and ship that product to the hospital. At that time, the manufacturer or distributor may fax an advance shipping notice to the hospital. The hospital will receive the product at its loading dock, document the number of products actually received, forward that information to accounts payable and deliver the product to the department that ordered it. Accounts payable will manually compare the purchase order, the products received and the invoice sent by the manufacturer or distributor to ensure that the quantities and prices match, often referred to as a three-way match. If the quantities and prices match, accounts payable will write a check to the manufacturer or distributor. If they do not, then the accounts payable clerk must review the order with the purchasing department and the manufacturer or distributor to resolve the discrepancy before payment can be made.

While healthcare providers, manufacturers, distributors and GPOs have made considerable efforts and progress in improving how products, information and money are managed within their organizations, they have not achieved significant levels of progress among their organizations. The average large hospital uses as many as 50,000 stock keeping units, or SKUs, or unique products, from over 2,000 suppliers to deliver patient care and support ancillary operations. The average large GPO manages as many as 300 to 400 contracts with several hundred suppliers for over 200,000 products. The average large manufacturer or distributor services hundreds of hospitals and several thousand locations to which they ship over 250,000 SKUs. The institutional challenge these organizations have faced in streamlining their internal operations is difficult, but it is even more challenging to organize and manage the combined product, information and money that flow among them. Because of these challenges, we believe there is a need for a standardized supply chain operating system that leverages the Internet and enables trading partners to optimize their individual supply chains and that facilitates the inter-enterprise information exchange between all trading partners, which we believe is required to optimize the entire healthcare supply chain. Prior to the advent of the Internet, technology that would allow the disparate systems used by the various trading partners to communicate together did not exist.

We offer two broad groups of solutions to enable the development of an industry standard supply chain operating system for healthcare: Marketplace Solutions and Trading Partner Services. We believe these solutions, which consist of Web-based applications and services, will enable our healthcare trading partners, including healthcare providers and GPOs and the manufacturers and distributors that sell products and services to them, to optimize their individual and collective supply chain performance, extend the investments they have made individually to improve supply chain operations and enable a much greater degree of collaborative commerce among them.

Marketplace Solutions consist of the Web-based applications, connectivity and integration services, sales, training, customer support and ongoing maintenance we provide to our marketplace participants. These Marketplace Solutions and the associated applications, including NeoConnect, Access Manager, Order Manager, Report Manager, Sourcing Catalog, Contract Viewing and Product Update Manager, will provide a comprehensive supply chain solution for a broad range of activities and offer trading partners a single platform for driving inter-enterprise information exchange. Generally speaking, our Marketplace Solutions are intended to be delivered to a broad set of both buyers and suppliers, include the participation of an industry sponsor such as a GPO or buying group and are priced on a volume or usage basis. The Marketplace Solutions provide a communications and decision support platform and include applications targeted at the common needs of all trading partners.

NeoConnect is a core component of our Marketplace Solutions. It provides the tools, interfaces and methodologies to integrate our marketplaces with the legacy systems of both buyers and suppliers. NeoConnect facilitates business transactions between the legacy systems of these buyers and suppliers by supporting industry standard business document formats, including EDI and XML. We believe NeoConnect is an industry-leading solution for rapid trading partner integration, a key competitive advantage to building marketplace volume. We have developed interfaces to numerous materials and enterprise management systems, supplier ordering systems and industry-leading value-added networks, or VANs. A VAN is a private network provider or a turnkey communications line that is hired by a company to facilitate EDI or to provide other network services. In addition to the technical elements of NeoConnect, our customer support organization provides value-added services that include monitoring just-in-time cut-off compliance and resolving trading partner specific communication errors.

Access Manager controls the services and functions each user can perform within a Neoforma-powered marketplace. This application is similar to, though much more complicated than, the password-based process an individual would use to access a consumer Website. Each potential user in the healthcare provider organization, manufacturer organization, distributor organization and/or GPO must be profiled to determine his or her appropriate and specific level of access to, and use of, our marketplaces. This profile contains information such as level of authority, product selection and information access. Access Manager enables us to customize our marketplace solutions and provide customer-specific access within a shared and scalable application. Access Manager is supported by our Trading Partner Registry, which profiles the various supplier, provider and GPO locations and classifications while supporting broader industry standards initiatives aimed at accurate trading partner identification, such as the Health Industry Number, or HIN. The HIN was created as a universal identification number between trading partners that identifies the specific healthcare facility as well as specific locations and/or departments within that facility.

Order Manager allows buyers and suppliers to view the status of an order that has been transmitted through one of our marketplaces. All transaction documents related to an order are dated, time stamped and viewable online. These transaction documents include the purchase order, purchase order confirmation, advance shipping notice, invoice and other key communications between buyer and supplier. All transactional documents are translated into a common data format for display in Order Manager, enabling a single view for multiple trading partner relationships. For both supplier and hospital customers, Order Manager also provides an exceptions dashboard that quickly identifies needed action areas, such as backordered items, substituted items or price discrepancies.

Report Manager provides access to marketplace data and analysis tools designed to bring value to healthcare providers, suppliers and GPOs, enabling these organizations to improve their business processes, make better decisions and improve performance in their supply chains. Report Manager allows for downloaded or online access. The reports deliver information to manage service levels and product standardization, identify price discrepancies, product discrepancies and product savings opportunities and also provide consolidated and detailed views of product usage, pricing and purchasing activity, including off-contract buying, within the hospital organization and across the IDN or group of hospitals. The number of reports available and the breadth of data that can be examined through Report Manager continue to increase. We expect to continue to expand the scope of reports and analytics used by our customers through training and their ongoing usage, along with continued development of both standard reports and online analytical access.

Our Sourcing Catalog provides healthcare providers with a comprehensive source for researching product information, identifying suppliers and developing their own list of products. These lists of products can be downloaded for sharing or for use in other systems. Our Sourcing Catalog contains more than 200,000 SKUs and continues to expand as more suppliers leverage this channel for communicating accurately with their customers. Suppliers can directly add, edit and upload their product catalog, including product identification, images and units of measure, or use our services to do some or all of this work. For all trading partners, the Sourcing Catalog represents the definitive repository for product information that can be used to support commerce, drive standardization and inform customers. We encourage the adoption of standards to ease product identification in healthcare and, as such, our Sourcing Catalog supports an industry taxonomy and universal product number, or UPN.

Contract Viewing provides healthcare providers with a method for researching existing and potential GPO pricing agreements, identifying the pricing applicable to their organizations and understanding what is involved in executing one of these agreements. Contextually linked to the Sourcing Catalog, Contract Viewing offers hospital materials managers a unique and important tool for optimizing their supply portfolios. GPOs can use Contract Viewing to educate and inform healthcare providers and market their contract portfolios, while leveraging the information provided by suppliers in the Sourcing Catalog to simplify the process for healthcare providers. Suppliers can influence the degree to which their products are contracted, through ongoing enhancements and updates to the information presented in both the Contract Viewing and Sourcing Catalog solutions.

We expect Product Update Manager, when available, to be the first application in our new Collaboration Solution suite that will enable multiple parties, including the healthcare provider, manufacturer, distributor and GPO, to communicate, negotiate and agree on provider eligibility and product information across the healthcare supply chain. Product Update Manager will allow hospitals and distributors to collaborate online to initiate product and price changes, establish effective dates, manage workflow and maintain an audit history of agreed upon prices. By handling this process online, hospitals and suppliers should experience significant reductions in phone or fax processes and exceptions related to price or product information. Product Update Manager, along with future releases of the Collaboration Solution suite, will offer our trading partners the ability to better manage their internal and external business processes.

Through our Trading Partner Services, we offer solutions for both healthcare providers and suppliers that are segmented to serve specific needs of our trading partners. For example, we may offer a certain solution for large IDNs and another for small rural hospitals, or a solution for large distributors and another for small specialty manufacturers. Currently, our Trading Partner Services provide integration and professional services, Web services, connectivity services, technology licensing and hosted or behind-the-firewall application sales. These services generally are priced on a subscription, license or statement-of-work basis. Our Trading Partner Services are offered to extend the value of our marketplaces. For example, our Trading Partner Services are designed to improve provider or supplier preparedness to engage in e-commerce, address an internal systems or infrastructure deficiency and provide a competitive alternative to extensive internal software purchases and implementation.

Our current Trading Partner Services consist of Item Data Readiness, Custom Connectivity, Catalog Data Readiness, Technology Licensing and hosted solutions for Inventory and Materials Management. We expect to continue to expand the portfolio of Trading Partner Services available to our provider, manufacturer, distributor and GPO customers in response to their prioritized needs. In some cases, we will develop and/or offer these services using our own resources, and in others, we will enter into relationships with industry-leading companies to leverage our trading partner relationships, marketplace data and customer support organization to help bring these companies’ solutions to our installed base of customers. We expect to continue to expand the services available to our trading partners for the management of intra-enterprise information that ultimately drives inter-enterprise communications.

Through our relationship with InSource Healthcare Solutions, Inc., or InSource, a data management company, we provide data management services to healthcare providers for data scrubbing, rationalization, categorization and analysis. The ability for hospitals and their materials managers to maintain accurate and clean information for medical and surgical products in an item master is a significant challenge. A typical item master includes products that a hospital no longer purchases, multiple listings for the same product, inaccurate manufacturer catalog numbers, unclear product descriptions, duplicate entries and multiple units of measure. These issues can cause pricing errors, result in excess inventory and add numerous manual steps to the ordering process. The correction or reconciliation of these errors by a materials manager or hospital typically requires significant attention and resources, resulting in further inefficiencies.

Our experts work with hospital staff to understand their business processes and requirements. We then work with InSource to apply our customers’ unique requirements to deliver an up-to-date, cleansed item master with information that can be used in the materials management, operating room and other systems within the healthcare provider organization. Further, we provide training to the hospital staff to maintain a clean item file or, if our customer chooses, we provide ongoing maintenance of the cleansed item file. A clean item master results in more accurate purchase orders, improved inventory tracking and reduced time required to correct mistakes, and serves as a platform to drive product standardization throughout the organization.

We assist healthcare providers in utilizing their current system infrastructure and maximizing the value of previous technology and business system investments. Our connectivity solutions address the limitations of their current infrastructure by providing applications and services that provide data and information in a more timely, accurate and efficient manner. By incorporating our technology into existing systems, we help healthcare providers improve the management of their business operations and reduce the time and resources required to complete their tasks. In addition, we provide system connectivity and e-commerce capabilities that allow healthcare providers to perform many functions such as data warehousing and online communications to remote sites.

We provide catalog data preparation, cleansing, categorization and maintenance for suppliers that either cannot perform these tasks themselves or prefer to leverage our expertise rather than developing it internally. Suppliers can use the resultant data in their other e-business initiatives. Providing these services also increases the value of our marketplaces by accelerating the breadth and depth of product information available to hospital buyers.

We have developed certain technologies in support of our marketplace business that are not available from commercial software vendors. Certain of these technologies developed for internal use can be leveraged by other exchange or marketplace providers, both in healthcare and in other vertical markets, to support their core operations. Where appropriate, we will seek to license portions of our infrastructure to these other enterprises. For example, in 2001, we licensed our Rapid Connectivity Solution, or RCS, to Global Healthcare Exchange, LLC, or GHX. We will also seek licensing opportunities with third party software vendors who wish to remarket our technologies through their sales organizations.

We have entered into a relationship with Revelocity Corporation, or Revelocity, a company that provides Internet based inventory and materials management services to healthcare providers. This relationship enables us to provide these services to healthcare providers over the Internet and to develop and deploy vendor managed inventory solutions that can be offered to both healthcare provider and supplier trading partners. We plan to integrate these solutions with our Marketplace Solutions, providing a direct link between the ordering of products and their receipt and consumption information.

Our solutions are designed to enable our customers, principally healthcare providers, manufacturers, distributors and GPOs, to significantly improve business processes within their organizations and among their trading partners. We connect these trading partners to each other via our marketplaces, aggregate data based on their business transactions and convert this data into usable information. This information provides our customers with the ability to better manage their operations and make better business decisions that drive efficiencies between the various trading partners. We have built our solutions to be flexible, open and compatible with existing and planned industry standards to enable our participating trading partners to embrace and extend their existing information technology infrastructure and strategy. We have designed our solutions so that their implementation is as minimally invasive and disruptive to existing business processes as possible. Using our applications and services, our trading partners can improve their business processes, increase revenue, reduce

Our key hospital alliance trading partners are VHA, and University HealthSystem Consortium, or UHC. VHA is a nationwide network of more than 2,200 leading community-owned healthcare organizations and their physicians. It comprises 26% of the nation’s community hospitals. UHC represents 75% of the academic medical centers in the U.S. and is an alliance of 87 academic medical centers and 110 associate members.

As of December 31, 2001, we had agreements with 657 VHA, UHC and Healthcare Purchasing Partners International, LLC, or HPPI, member hospitals. These agreements name us as the hospitals’ exclusive e-commerce provider. Our participation agreements with healthcare providers require each healthcare provider to conduct 50% of its available purchasing through Marketplace@Novation within a specified time period. Our hospitals customers include some of the leading hospitals and IDNs in the U.S.

As of December 31, 2001, we had agreements with 171 manufacturers and distributors to support their participation in Marketplace@Novation. Our current suppliers include a number of leading manufacturers and distributors and represent a broad range of product categories, including medical supplies, surgical supplies, pharmaceuticals, diagnostic imaging products, laboratory products, capital equipment, dietary and food products and business products.

In general, our agreements with these suppliers provide for the payment to us of a fee equal to a negotiated percentage of the purchase price of products that are sold through our marketplaces. In many instances, partly as a result of the business relationship between Novation, LLC, or Novation, and certain suppliers, Novation has opted to pay these fees associated with Marketplace@Novation on behalf of the supplier. In 2001, we introduced a new marketplace services fee model to suppliers that is based on the dollar volume of products each supplier sells to signed providers, including those that have not yet been implemented to Marketplace@Novation.

Our GPO trading partners are Novation and Medbuy Corporation, or Medbuy. Novation is a leading supply management company in healthcare and serves the purchasing needs of more than 2,300 member healthcare organizations of VHA and UHC. Novation, which is owned by VHA and UHC, has indicated that it manages more than $19.4 billion in annual purchases for VHA and UHC, as well as the members of HPPI. Medbuy is the largest national medical GPO in Canada. According to Medbuy, its members purchase approximately $137 million (USD) annually under Medbuy contracts. Collectively, these GPOs have agreements with approximately 500 manufacturers and distributors. While we continue to believe that our relationship with Medbuy will provide important access to the Canadian market, to date this relationship has developed more slowly than we initially anticipated.

We enter into alliances with leading technology and healthcare-related organizations to enhance the portfolio of applications and services that we offer to our trading partners, collaborate on research and development, increase usage of our marketplaces and extend our sales and marketing resources. We have entered into strategic alliances in the following areas:

We have entered into strategic relationships with Novation and Medbuy, the sponsors of our two acute care focused marketplaces, Marketplace@Novation and Canadian Health Marketplace, or CHM, respectively. Both marketplace sponsors are established healthcare industry participants. We believe that strategic alliances with established industry participants accelerate adoption of our marketplaces.

Marketplace@Novation is sponsored by Novation, the U.S.’s leading healthcare GPO, and its owners, VHA and UHC. VHA and UHC’s member healthcare organizations purchase approximately $19.4 billion annually, which represents approximately one-third of the U.S. acute care market. In 2000, we entered into a ten-year relationship with Novation, VHA and UHC, in which these organizations named us as the exclusive e-commerce solution they will offer to their members.

CHM is sponsored by Medbuy, which represents more than 20% of the Canadian healthcare market, measured in active beds for acute, pediatric and long-term care. In 2000, we entered into a ten-year strategic relationship with Medbuy to jointly develop a comprehensive Internet solution for the Canadian healthcare market. The agreement names us as Medbuy’s exclusive provider of an Internet e-commerce solution for the procurement of products and services. In an effort to accelerate our penetration in the Canadian health market, and the adoption of CHM which is still early in its development, we are currently in discussions with Medbuy to potentially restructure the relationship and our strategy in the Canadian health market.

We have entered into a series of agreements with i2 Technologies, Inc., or i2 Technologies, a leading provider of marketplace solutions, to develop, deploy and market Internet supply chain solutions for healthcare. Using i2 Technologies’ solutions, we expect our Internet marketplaces to deliver greater value-added services and supply chain applications to the healthcare community, including healthcare manufacturers, distributors and providers, to improve trading relationships and reduce costs. We are collaborating on product development, marketing, sales and service activities and will share revenue. Initially, we have leveraged i2 Technologies’ technology to accelerate the delivery of our Sourcing Catalog and Contract Viewing applications, and expect further deployments as the unique requirements of the healthcare market are prioritized and delivered in the core i2 Technologies products.

We have entered into agreements with Lawson Software, or Lawson, and PeopleSoft, Inc., or PeopleSoft, to integrate their materials and enterprise management applications with our marketplaces. We expect to continue to enter into new relationships with software providers that offer enterprise systems to hospitals and suppliers, with the intent of leveraging deeper integration with these systems to enhance the value of our inter-enterprise focused marketplaces.

We currently rely on software that we have licensed from a number of vendors. 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 Corporation, or Oracle, to support the underlying database needs of our marketplaces and we use Gentran software that we license from Sterling Commerce, Inc., or Sterling Commerce, to process EDI documents that we receive from our customers. We use several other commercial software products and will continue to do so to minimize development costs and accelerate time to market.

We focus on integrating and augmenting existing industry leading solutions to enhance our speed to market and speed to value delivery to our trading partners. We work closely with a number of healthcare technology, services and supply industry leaders to more rapidly deliver complete, cutting-edge healthcare supply chain solutions that bring increasing value to our trading partners.

In August 2001, we entered into an agreement with GHX to create a comprehensive, integrated supply chain solution for the healthcare industry and to deliver a more comprehensive supply chain solution to help our supplier and hospital customers more quickly realize the benefits of e-commerce and minimize the costs of connectivity and information exchange. GHX was formed by five leading manufacturers to the healthcare industry: Abbott Laboratories, Baxter International, Inc., GE Medical Systems, Johnson & Johnson and Medtronic, Inc. In addition, GHX licensed portions of our NeoConnect solution suite, which supports the rapid integration of trading partners for supply chain collaboration.

We sell our solutions through a direct field sales force in our sales and services organization. This direct field sales force primarily targets the acute care healthcare provider market and focuses on signing healthcare providers to participate in our marketplaces, driving increased marketplace utilization levels and selling our Trading Partner Services. This sales force works closely with our implementation specialists to speed our response to our trading partners’ needs and to ensure that each trading partner has a single point of contact within our organization. Marketplace management teams support specific marketplace customers and integrate those customers into the ongoing selling effort required to enroll new buyers and suppliers into those marketplaces. Our field sales force has significant experience in the sale of medical products, medical equipment, healthcare supply chain and information technology systems. We believe that we can strengthen our relationships with our trading partners by providing outstanding account management and services.

Our relationships with a number of our strategic allies include joint and cross selling and marketing of our marketplaces, solutions and services. For example, under our strategic relationship with Novation, VHA and UHC, the sales forces of these organizations are exclusively promoting our e-commerce solutions to providers and suppliers, which significantly aids in our sales and marketing efforts. In addition, under our agreements with i2 Technologies, the i2 Technologies sales force is promoting the use of our products and services to existing and potential customers.

Our marketing organization supports the marketing needs of our marketplace management teams, our co-marketing activities with our strategic allies and our overall corporate marketing initiatives. Our marketing programs include traditional and Internet-based marketing initiatives, such as seminars via the Internet, to increase awareness of our brand, to attract new buyers and suppliers to our solutions and to educate our trading partners on how to optimize their use of our solutions. These programs include a variety of public relations initiatives, such as participation in industry conferences and trade shows and ongoing relationships with healthcare, Internet and technology media and industry analysts. We believe these relationships significantly extend our internal sales resources and will accelerate adoption of our marketplaces.

We have invested, and will continue to invest, in both systems and software to provide the technology platform for building and operating Internet marketplaces that optimize supply chain performance. We have developed our technology infrastructure to address the three primary elements of a hosted supply chain marketplace: connectivity, content and Web services. These services are deployed on a marketplace platform that we plan to continue to enhance on a periodic release basis.

The first step in delivering value to our trading partners is connecting their people and business information systems to our marketplaces. Our connectivity infrastructure, NeoConnect, includes both dial-up and Internet-based access for healthcare providers, manufacturers and distributors, deployed to operate as a high-availability, redundant system. We leverage commercial technologies from leading vendors to support transaction routing and reporting, and have developed custom software to connect these various solutions. Our connectivity infrastructure is designed to support increasing marketplace volumes from healthcare providers, manufacturers and distributors. NeoConnect supports extensive bi-directional transaction sets, including ordering, confirmation, shipping notices, invoicing and catalog updates, and is adaptable to trading partners who use existing EDI systems, XML-based communications and/or Web-based interfaces to our marketplaces.

We have invested in extensive catalog and transaction content indexing and normalization efforts. We plan to continue to provide content rationalization services, both directly and through our strategic relationships, to enable healthcare providers, manufacturers and distributors to make buying and selling decisions, evaluate performance against committed contracts and understand standardization opportunities. Our content solutions leverage internally developed applications for moving, indexing and cross-referencing data that can be leveraged across multiple marketplaces. Additionally, we use commercial applications to store, search and display this data for use by both provider and supplier customers. We intend to continue to develop and extend our content business to include additional products, cross-references between suppliers and contracts and other value-added services that facilitate supplier and provider communication.

Our marketplaces consist of a number of Web-based services, including user administration, connectivity, order management, reporting and analysis, catalog and contract management and optimization and collaboration solutions. We have developed these and other services in close consultation with healthcare provider, manufacturer, distributor and GPO user groups. Our currently deployed marketplaces reflect the prioritized services we believe are necessary to enhance the performance of our trading partners’ supply chains. We believe that additional application development, both in-house and through other relationships, will further extend the breadth of solutions available to support high-value collaborations between current and potential trading partners. As a part of our relationship with i2 Technologies, we plan to deploy some of the applications from i2 Technologies’ portfolio as hosted solutions for use within our marketplaces. Our prioritization of Web Services development is driven heavily by customer user groups and task forces and is centered around extending the utility of existing legacy systems installed at our provider and supplier customer sites. We have developed Web-based training and customer support services to speed the adoption of these solutions.

Our open architecture supports integration with our trading partners’ existing legacy systems. The ability to integrate with these diverse systems is important for us to aggregate a wide range of providers and suppliers in our marketplace with minimal disruption to their existing processes. We believe our architecture is based on industry standards and enables us to rapidly introduce new features and functionality.

combined with our distributed architecture, enable us to provide our services on an uninterrupted basis, even in the event of partial system failure. By locating our data centers at two facilities with two different vendors, we are able to easily and rapidly expand our network bandwidth and maintain the physical security of our systems. We have invested in, and plan to continue to support, a co-located backup system in the event of geographic catastrophe.

Our platform for building and operating Internet marketplaces contains a variety of features to ensure the secure transmission of business information among multiple trading partners and to protect against communication failures. We use secure sockets layer, or SSL, an Internet security protocol, at appropriate points in the transaction flow to protect user information during transactions. User information is encrypted to provide a high degree of security. Our employees do not have access to user information, except as necessary to perform customer service functions. The system authenticates users through standard secure login and password technologies.

We intend to continue to expand and enhance the functionality of our solutions. We have invested our product development resources in enhancing our infrastructure to support increasing marketplace volumes, delivering supply chain solutions that support ordering and pricing visibility for our trading partners, extending our catalog services and improving our extensive reporting and analytics functionality. We intend to continue to enhance our existing solutions within our marketplaces and continue our practice of quarterly releases to continue driving increased utility and value for healthcare manufacturers, distributors and providers.

Our current product development efforts are focused on extending the enterprise and supply chain analytics capabilities made possible by the marketplace volume and data flow through our marketplaces, providing demand, contract and procurement collaboration services for our trading partners and developing contracting and performance solutions to support committed purchasing and supply relationships.

For both our current and future product development activities, we plan to continue to leverage our technology partners to accelerate delivery and minimize development risk. Our strategic relationship with i2 Technologies includes provisions for conducting joint development projects aimed at extending the i2 Technologies solution suite to specifically address the needs of the healthcare supply chain. These joint development projects include the definition of a specific statement of work, commitment of resources by both us and i2 Technologies and the assignment of intellectual property on a project-by-project basis.

Our customer service organization provides support to our customers twenty-four hours a day, seven days a week on topics such as communications, marketplace functionality and access, training in marketplace use and management and document tracking. Additionally, we expect that our customer service group will provide premium services for a fee to customers who require more personal attention, greater staff support and/or extended training services.

Our product development and operations group, which includes our customer service group, is responsible for translating customer needs into detailed functional and technical specifications, configuring and developing software applications and Web services to meet these specifications, testing and verifying performance and operating and supporting these solutions in a high-availability production environment. As of December 31, 2001, we had 97 full-time employees in this group. Depending on the number and complexity of current development projects underway, our staff is augmented using both independent contractors and consulting firms.

Our success and ability to compete depend on our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of copyright, trademark and trade secret laws and contractual restrictions to establish and protect the proprietary aspects of our technology. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. Finally, we seek to avoid disclosure of our intellectual property by restricting access to our source code and by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us.

We rely on technology that we license from third parties, including software that is integrated with internally developed software and used in our software products to perform key functions. For example, we license TradeMatrix software from i2 Technologies to offer procurement and order management functions. We also license Gentran software from Sterling Commerce for the processing of order transactions from our customers. Such product licenses may expose us to increased risks, including risks associated with the assimilation of new products, the diversion of resources from the development of our products, the inability to generate revenue from new products sufficient to offset associated acquisition costs and the maintenance of uniform, effective products. If we are unable to continue to license any of this software on commercially reasonable terms, we will face delays in releases of our services until equivalent technology can be identified, licensed or developed and integrated into our current technology. These delays, if they occur, could seriously harm our business.

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

Our 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 allies. 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.

As of December 31, 2001, we had 196 full-time employees, including 66 in sales, marketing and services, 40 in product development, 57 in operations and 33 in general and administrative functions. Our future success will depend, in part, on our ability to attract, train, retain, integrate and motivate highly qualified sales, technical and management personnel. Our employees are not represented by any collective bargaining unit and we have never experienced a work stoppage. We believe our relations with our employees are good. We also use independent contractors and consultants to support our services, primarily in product development and operations.

As of December 31, 2001, our executive, administrative and operating offices were located in approximately 116,000 square feet of office space located in San Jose, California under a sublease scheduled to expire in March 2007. We occupy approximately 84,300 square feet of this facility and subleased approximately 31,700 square feet to a corporation under a sublease that was initially set to expire in October 2003. In September 2001, we received notification that this corporation intended to vacate the subleased premises and in January 2002, we reached a settlement with the sublessee allowing them to vacate the space. In February 2002, we subleased approximately 20,000 square feet to a new corporation for a term of one year, after which this corporation will sublease a total of approximately 31,700 square feet for the following two years. We have occupied this facility since April 2000, when we moved from our previous headquarters located in Santa Clara, California. At the time of our move, we entered into agreements to terminate our leases in Santa Clara.

We also lease offices in San Francisco, California and Atlanta, Georgia. Our San Francisco office is located in the previous headquarters of Pharos Technologies, Inc., or Pharos, our subsidiary that we acquired in January 2000. The facility is approximately 2,400 square feet and the lease expires in December 2004. Our Atlanta office is approximately 3,900 square feet and the lease expires in October 2002. During the year, we also leased an office in Carlisle, Pennsylvania, which was located in the previous headquarters of U.S. Lifeline, or USL. As part of the sale of USL to Medical Distributions Solutions, Inc., or MDSI, in April 2001, MDSI assumed the operating lease on this facility as of the closing date.

We also maintained two facilities in the metropolitan area of Chicago, Illinois for our recently divested Auction operations. We entered into a lease that expires in February 2004 for our facility located in Arlington Heights, Illinois that is 19,765 square feet and served as the headquarters for our Auction operations. Additionally, we entered into a lease which expires in November 2002 for a second location in Elk Grove Village, Illinois. The facility is approximately 124,000 square feet and served as storage for consigned or purchased items until they were sold in an auction. We also maintained a lease that expired in July 2001 on a facility in Santa Fe Springs, California, which was approximately 21,000 square feet of warehouse space for consigned items and which was the primary location of our auction activities on the West Coast.

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 (No. 01 CV 6689 and No. 01 CV 6712) related to our initial public offering, or IPO, on behalf of those who purchased stock from January 24, 2000 to December 6, 2000. The 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 our Chairman and Chief Executive Officer, Robert Zollars, and our 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 our stock. Neoforma and our 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 our stock, interest, attorney and expert fees and other litigation costs. We plan to vigorously defend these actions.

On January 11, 2002, we filed suit against Med XS Solutions, Inc. and Med-XS Asset Services, Inc., or 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 our subsidiary, Neoforma GAR, Inc., which had provided

Auction services. Prior to filing of the suit, we 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. We have filed a motion to dismiss the counterclaims. We believe that our suit ultimately will be successful, although litigation is inherently uncertain and we cannot assure you that we will prevail in this matter.

3061 Zanker Rd., San Jose, CA		95134
(Address of principal executive offices)		(Zip code)

		Page

	PART I

ITEM 1.	BUSINESS	3

ITEM 2.	PROPERTIES	17

ITEM 3.	LEGAL PROCEEDINGS	17

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	18

	PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	19

ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA	21

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	55

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	56

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	56

	PART III

ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	57

ITEM 11.	EXECUTIVE COMPENSATION	57

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	57

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	57

	PART IV

ITEM 14.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K	58

SIGNATURES		63

	High		Low
FISCAL YEAR ENDED DECEMBER 31, 2000
First quarter (from January 24, 2000)	$	735.30	$	163.80
Second quarter	$