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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

For The Fiscal Year Ended December 31, 2004

For The Transition Period From ____________ To ____________

Commission File No. 000-28715

NEOFORMA, INC.

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

(408) 468-4000

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

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 Par Value Per Share

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes  x    No  ¨

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

As of June 30, 2004, the aggregate market value of the Registrant’s voting stock held by non-affiliates of the Registrant, based on the closing price for the Registrant’s common stock on The Nasdaq National Market on such date, was $100,154,223. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purposes.

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

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TABLE OF CONTENTS

Neoforma, Neoforma.com, Neoforma Order Management Solution, Neoforma OMS, Neoforma Contract Management Solution, Neoforma CMS, Neoforma Data Management Solution, Neoforma DMS, Neoforma Materials Management Solution, Neoforma MMS, NeoConnect, Healthcare Products Information Services, HPIS, Med-ecom, Medcontrax, Neoforma Success Tracker and the Neoforma logo are some of our trademarks or service marks. Other trademarks or trade names appearing in this Annual Report on Form 10-K are the property of their respective owners.

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PART I

FORWARD LOOKING STATEMENTS

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

Our Company

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

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

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

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

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

We were incorporated in California in 1996 and reincorporated in Delaware in 1998. Our headquarters is located at 3061 Zanker Road, San Jose, CA 95134, and our telephone number is (408) 468-4000. Our Web site is www.neoforma.com. We are not including the information contained on our Web site as a part of, nor incorporating it by reference into, this Annual Report on Form 10-K. Through our Web site, we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, as well as other materials, as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission.

Recent Developments

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

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

Industry Background

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

Participants in the healthcare industry are also under significant competitive and cost pressures. For example, hospitals are faced with reduced Medicare and third-party payor reimbursement rates, increasing

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malpractice insurance costs, intense pressure to increase patient safety initiatives and new legislation requiring increased investment in technology. Suppliers are faced with an increasingly competitive environment and growing margin pressures, as well as a need to support the financial and operational health of their hospital customers. These industry participants are seeking ways to improve efficiencies in their supply chain to increase overall margins.

Our Customers and Solutions

We deliver supply chain management solutions, utilizing a combination of technology, information and services, to enable effective collaboration among hospitals and suppliers, helping them to reduce operational inefficiencies and lower costs. Our customers principally consist of hospitals, GPOs and suppliers. We offer our customers solutions to address several main areas in the healthcare supply chain, including order management, contract management, data management, market intelligence and materials management.

We offer our hospital customers solutions to address:

We offer our GPO customers solutions to address:

We offer our supplier customers solutions to address:

Our solutions are designed to enable hospitals, GPOs and suppliers to improve communication, receive comprehensive and accurate information, improve day-to-day operations, accelerate order and contract implementations, enhance strategic planning and gain organization-wide visibility into supply chain activities. Our solutions are designed to complement and augment our customers’ existing supply chain business processes, and we offer these solutions individually or jointly. Our principal focus is on helping our hospital and GPO customers address the inefficiencies in the healthcare supply chain to empower them with the strategic information they need to operate their supply chain more effectively.

Hospitals and Group Purchasing Organizations

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

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

Order Management

Neoforma Order Management Solution, or Neoforma OMS

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

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

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

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

Contract Management

Neoforma Contract Management Solution, or Neoforma CMS

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

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

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

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Data Management

Neoforma Data Management Solution, or Neoforma DMS

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

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

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

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Materials Management

Neoforma Materials Management Solution, or Neoforma MMS

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

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

Marketplace@Novation

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

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

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

Suppliers

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

Market Intelligence

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

HPIS Market Intelligence

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

For manufacturers, HPIS Market Intelligence provides:

For distributors, HPIS Market Intelligence provides:

Neoforma Pharmaceutical Market Intelligence

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

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

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

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

Order Management

Neoforma OMS

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

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

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Contract Management

Neoforma CMS

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

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

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

Neoforma CMS for Contract and Rebate Management Services and Reporting

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

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

Materials Management

Neoforma MMS

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

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

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

Strategic Relationships

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

In August 2001, we entered into a three-year agreement, which we subsequently renewed for one year in August 2004, with Global Healthcare Exchange, LLC, or GHX, to provide connectivity to GHX’s supplier customers to help our hospital customers more quickly realize the benefits of e-commerce and minimize the costs of connectivity and information exchange. GHX is majority owned by a number of manufacturers and distributors to the healthcare industry.

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

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

Marketing, Sales and Service

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

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

We sell our solutions to hospitals and suppliers through a direct field sales force. The sales force consists of hospital specialists, who primarily target the hospital market to sell our solutions, and supplier specialists, who focus on the sale of our solutions to manufacturers and distributors. Our field sales force has significant experience in the sale of medical products, medical equipment and supply chain and information technology systems to healthcare customers. We plan to continue to grow and develop our sales force as we expand the breadth of our solutions portfolio and our hospital and supplier customer base.

Our relationships with a number of our strategic partners provide for joint and cross-selling and marketing of our solutions. For example, under our strategic relationships with Novation, VHA, UHC and Consorta, the sales forces and account managers of these organizations actively promote our supply chain management solutions to hospitals and suppliers, which significantly aids in our selling and marketing efforts. We plan to expand the number and scope of our strategic relationships, including channel relationships, to support the sale of our solutions.

We provide extensive customer service and support for our hospital and supplier customers. Once a customer has signed an agreement with us, our customer care team manages the customer experience from implementation through ongoing support. Our services include technical integration and interfaces, data mapping and cleansing, Web-based training and 24x7 call center support. In addition to our centralized service and support resources, we employ a team of field-based account managers to work closely with our hospital and supplier customers at their facilities, where appropriate. Additionally, we utilize a value documentation team that currently assists our hospital customers in identifying and documenting actual dollar cost savings and other value received through the use of our solutions. We believe a commitment to providing a consistently superior customer experience, coupled with highly dependable, reliable systems, is and will continue to be an important differentiator for us.

Architecture, Product Development and Support

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

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

Currently, we are developing additional enterprise and supply chain analytics capabilities as a part of our solutions infrastructure. These capabilities will provide enhanced business intelligence and supply chain management information to our customers and partners in support of committed purchasing and supplier relationships.

For both our current and future product development activities, we plan to continue to leverage commercially available technology from new and existing partners to accelerate product delivery and minimize development risk.

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

Proprietary Rights and Licensing

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

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

Despite our efforts to protect our proprietary rights, parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary without authorization. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Any resulting litigation could result in substantial costs and/or diversion of resources and could seriously harm our business. In addition, the laws of some foreign c