UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

xþ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, ~~2004~~ 2005

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

For The Transition Period From To

Commission File No. 000-28715

NEOFORMA, INC.

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

Delaware		77-0424252
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
3061 Zanker Rd., San Jose, CA		95134
(Address of principal executive offices)		(Zip code)

(408) 468-4000 (The Registrant’s telephone number, including area code)

(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 þ No ¨ o

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

The number of shares of the Registrant’s common stock outstanding on August 2 3, ~~2004~~2005 was 20,~~073~~709,~~295~~344.

TABLE OF CONTENTS

	Page		~~Page~~
PART I. FINANCIAL INFORMATION			3
ITEM 1.	Unaudited Condensed Consolidated Financial Statements:
ITEM 1. Unaudited Condensed Consolidated Financial Statements		3
	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003		3
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004		3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003		4
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004		4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003		5
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004		5
Notes to Unaudited Condensed Consolidated Financial Statements	~~Notes to Unaudited Condensed Consolidated Financial Statements~~	6	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		30
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		38
ITEM 4.	Controls and Procedures		30
ITEM 4. Controls and Procedures		38
PART II. OTHER INFORMATION		39	31
ITEM 1.	Legal Proceedings		31
ITEM 1. Legal Proceedings		39
ITEM 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		31
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		39
ITEM 3.	Defaults Upon Senior Securities		31
ITEM 3. Defaults Upon Senior Securities		39
ITEM 4.	Submission of Matters to a Vote of Security Holders		31
ITEM 4. Submission of Matters to a Vote of Security Holders		39
ITEM 5.	Other Information		32
ITEM 5. Other Information		39
ITEM 6.	Exhibits and Reports on Form 8-K		32
ITEM 6. Exhibits		39
SIGNATURE		40	33
EXHIBITS
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

NEOFORMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited)

(in thousands, except per share amounts)


	December 31, 2004			June 30, 2005
Assets
Current assets:
Cash and cash equivalents	$	13,277		$	21,211
Short-term investments		12,593			13,757
Accounts receivable, net of allowances of $208 and $162 as of December 31, 2004 and June 30, 2005, respectively		2,898			2,994
Related party accounts receivable		5,250			—
Prepaid expenses and other current assets		2,983			2,942

Total current assets		37,001			40,904
Property and equipment, net		11,501			10,106
Intangibles, net of amortization		1,434			1,140
Goodwill		1,652			1,652
Capitalized partnership costs, net of amortization		40,996			8,557
Restricted cash		1,020			1,020
Other assets		845			717

Total assets	$	94,449		$	64,096

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,994		$	1,525
Accrued payroll		3,974			3,936
Other accrued liabilities		2,839			3,581
Deferred revenue		1,564			1,835

Total current liabilities		12,371			10,877
Deferred rent		387			245
Deferred revenue, less current portion		326			235

Total liabilities		13,084			11,357

Stockholders’ equity:
Preferred stock, $0.001 par value per share:
Authorized: 5,000 shares, no shares issued and outstanding at December 31, 2004 and June 30, 2005, respectively		—			—
Common stock, $0.001 par value per share:
Authorized: 300,000 shares at December 31, 2004 and June 30, 2005 Issued and outstanding: 20,244 shares and 20,646 shares at December 31, 2004 and June 30, 2005, respectively		20			21
Additional paid-in capital		839,307			842,352
Notes receivable from stockholders		(225	)		(208	)
Deferred compensation		(3,775	)		(3,798	)
Unrealized loss on available for sale securities		(25	)		(56	)
Accumulated deficit		(753,937	)		(785,572	)

Total stockholders’ equity		81,365			52,739

Total liabilities and stockholders’ equity	$	94,449		$	64,096

(unaudited)

	December 31, 2003*			June 30, 2004
Assets
Current assets:
Cash and cash equivalents	$	13,481		$	20,375
Short-term investments		3,138			2,138
Accounts receivable, net of reserves of $235 and $322 as of December 31, 2003 and June 30, 2004, respectively		3,776			3,533
Related party accounts receivable		456			—
Prepaid expenses and other current assets		2,775			2,583
Total current assets		23,626			28,629
Property and equipment, net		7,432			9,890
Intangibles, net		2,022			1,728
Goodwill		1,652			1,652
Capitalized partnership costs, net		106,003			75,070
Non-marketable investments		83			83
Restricted cash		1,020			1,020
Other assets		1,376			885
Total assets	$	143,214		$	118,957
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,727		$	1,533
Accrued payroll		4,199			3,848
Other accrued liabilities		3,183			2,734
Deferred revenue		2,651			1,922
Total current liabilities		12,760			10,037
Deferred rent		657			621
Deferred revenue, less current portion		554			468
Total liabilities		13,971			11,126
Stockholders’ equity:
Preferred stock, $0.001 par value per share:
Authorized—5,000 shares, no shares issued and outstanding at December 31, 2003 and June 30, 2004, respectively		—			—
Common stock, $0.001 par value per share:
Authorized—300,000 shares at December 31, 2003 and June 30, 2004, respectively
Issued and outstanding: 18,943 and 19,915 shares at December 31, 2003 and June 30, 2004, respectively		19			20
Additional paid-in capital		827,570			837,288
Notes receivable from stockholders		(5,422	)		(203	)
Deferred compensation		(218	)		(4,940	)
Unrealized gain on available for sale securities		1			1
Accumulated deficit		(692,707	)		(724,335	)
Total stockholders’ equity		129,243			107,831
Total liabilities and stockholders’ equity	$	143,214		$	118,957

* Derived from audited financial statements.

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

NEOFORMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)

(in thousands, except per share amounts)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2005			2004			2005
Revenue:
Related party revenue, net (see Note 3)	$	—		$	—		$	—		$	—
Non-related party revenue		3,340			2,816			6,268			5,436

Total revenue		3,340			2,816			6,268			5,436

Operating expenses:
Cost of services		2,682			2,857			4,743			5,825
Operations		2,811			3,095			5,809			6,263
Product development		4,403			5,097			8,041			10,159
Selling and marketing		3,513			3,115			7,169			6,659
General and administrative		2,468			2,840			4,706			5,886
Amortization of intangible assets		147			147			294			294
Amortization of partnership costs (see Note 3)		1,669			588			3,141			1,630
Write-off of stockholder notes receivable		4,115			—			4,115			—
Restructuring		—			—			—			767

Total operating expenses		21,808			17,739			38,018			37,483

Loss from operations		(18,468	)		(14,923	)		(31,750	)		(32,047	)
Other income/(expense):
Interest income		55			247			124			433
Interest expense		(2	)		(2	)		(3	)		(4	)
Other income/(expense)		1			—			1			(17	)

Net loss	$	(18,414	)	$	(14,678	)	$	(31,628	)	$	(31,635	)

Net loss per share:
Basic and diluted	$	(0.95	)	$	(0.74	)	$	(1.65	)	$	(1.61	)

Weighted average shares—basic and diluted		19,357			19,810			19,213			19,698

(unaudited)

	Three Months EndedJune 30,						Six Months Ended June 30,
	2003			2004			2003			2004
Revenue:
Related party revenue, net (see Note 3)	$	—		$	—		$	539		$	—
Non-related party revenue		2,519			3,340			4,582			6,268
Total revenue		2,519			3,340			5,121			6,268
Operating expenses:
Cost of services		1,481			2,682			2,859			4,743
Operations		4,799			2,811			9,941			5,809
Product development		4,183			4,403			8,926			8,041
Selling and marketing		4,633			3,513			9,610			7,169
General and administrative		3,130			2,468			6,097			4,706
Amortization of intangibles		147			147			294			294
Amortization of partnership costs (see Note 3)		833			1,669			833			3,141
Write-off of stockholder notes receivable		—			4,115			—			4,115
Total operating expenses		19,206			21,808			38,560			38,018
Loss from operations		(16,687	)		(18,468	)		(33,439	)		(31,750	)
Other income/(expense):
Interest income		80			55			131			124
Interest expense		(300	)		(2	)		(574	)		(3	)
Other income/(expense)		(41	)		1			(117	)		1
Net loss	$	(16,948	)	$	(18,414	)	$	(33,999	)	$	(31,628	)
Net loss per share:
Basic and diluted	$	(0.94	)	$	(0.95	)	$	(1.91	)	$	(1.65	)
Weighted average shares—basic and diluted		17,985			19,357			17,763			19,213

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

NEOFORMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

(in thousands)


	Six Months Ended
	June 30,
	2004			2005
Cash flows from operating activities:
Net loss	$	(31,628	)	$	(31,635	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts		110			—
Accrued interest receivable on notes receivable from stockholders		(11	)		(2	)
Depreciation and amortization of property and equipment		2,483			3,729
Amortization of intangibles		294			294
Amortization of partnership costs classified as an operating expense (see Note 3)		3,141			1,630
Amortization of deferred compensation, net of reversals		1,666			2,195
Write-off of stockholder notes receivable		4,115			—
Restructuring		—			767
Change in assets and liabilities:
Accounts receivable		589			(96	)
Related party accounts receivable		—			5,250
Prepaid expenses and other current assets		192			41
Other assets		491			128
Accounts payable		(1,194	)		(1,850	)
Accrued payroll and other accrued liabilities		(797	)		(114	)
Deferred revenue		(815	)		180
Deferred rent		(36	)		(91	)

Net cash used in operating activities		(21,400	)		(19,574	)

Cash flows from investing activities:
Purchases of short-term investments		(9,589	)		(6,507	)
Proceeds from the sales or maturities of short-term investments		4,414			5,312
Purchases of property and equipment		(1,652	)		(1,397	)
Capitalization of software development costs		(3,236	)		(1,446	)

Net cash used in investing activities		(10,063	)		(4,038	)

Cash flows from financing activities:
Amortization of partnership costs offset against related party revenue (see Note 3)		30,937			30,808
Cash received related to options exercised		622			245
Proceeds from the issuance of common stock under the employee stock purchase plan		526			474
Common stock repurchased, net of notes receivable issued to common stockholders		(177	)		—
Collections of notes receivable from stockholders		274			19

Net cash provided by financing activities		32,182			31,546

Net increase in cash and cash equivalents		719			7,934
Cash and cash equivalents, beginning of period		9,981			13,277

Cash and cash equivalents, end of period	$	10,700		$	21,211


Supplemental schedule of non-cash investing and financing activities:
Issuance of restricted stock to related parties	$	3,145		$	—

Reduction of deferred compensation resulting from employee terminations	$	187		$	285

Issuance of restricted stock to employees and officers	$	6,649		$	2,885

Reduction of amortization of deferred compensation due to capitalization of software development costs	$	53		$	110

~~(unaudited)~~The accompanying notes are an integral part of these condensed consolidated financial statements.

	Six Months Ended June 30,
	2003			2004
Cash flows from operating activities:
Net loss	$	(33,999	)	$	(31,628	)
Adjustments to reconcile net loss to net cash used in operating activities:
Restricted common stock issued to employees		10			—
Provision for doubtful accounts		141			110
Accrued interest receivable on notes receivable from stockholders		(32	)		(11	)
Depreciation and amortization of property and equipment		7,061			2,483
Amortization of intangibles		294			294
Amortization of partnership costs classified as an operating expense (see Note 3)		833			3,141
Amortization of deferred compensation		1,717			1,666
Write-off of stockholder notes receivable		—			4,115
Change in assets and liabilities:
Accounts receivable		(1,698	)		589
Prepaid expenses and other current assets		378			192
Other assets		357			491
Accounts payable		(1,734	)		(1,194	)
Other accrued liabilities and accrued payroll		(4,159	)		(797	)
Deferred revenue		1,039			(815	)
Deferred rent		21			(36	)
Accrued interest on related party notes payable		(2,271	)		—
Net cash used in operating activities		(32,042	)		(21,400	)
Cash flows from investing activities:
Purchases of marketable investments		(2,082	)		(2,890	)
Proceeds from the sale or maturity of marketable investments		2,005			3,890
Capitalization of software development costs		—			(3,236	)
Purchases of property and equipment		(3,679	)		(1,652	)
Net cash used in investing activities		(3,756	)		(3,888	)
Cash flows from financing activities:
Amortization of partnership costs offset against related party revenue (see Note 3)		34,531			30,937
Repayments of notes payable		(3,399	)		—
Cash received related to options exercised		380			622
Proceeds from the issuance of common stock under the employee stock purchase plan		506			526
Common stock repurchased, net of notes receivable issued to common stockholders		(2	)		(177	)
Collections of notes receivable from stockholders		1,042			274
Net cash provided by financing activities		33,058			32,182
Net increase (decrease) in cash and cash equivalents		(2,740	)		6,894
Cash and cash equivalents, beginning of period		23,277			13,481
Cash and cash equivalents, end of period	$	20,537		$	20,375
Supplemental schedule of non-cash investing and financing activities:
Issuance of restricted stock to related parties	$	5,314		$	3,145
Reduction of deferred compensation resulting from employee terminations	$	226		$	187
Issuance of restricted stock to employees and officers	$	320		$	6,649
Issuance of common stock in connection with the acquisition of Revelocity Corporation	$	1,071		$	—
Reduction of amortization of deferred compensation due to capitalization of software development costs	$	—		$	53

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

NEOFORMA, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS:

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

~~Since~~The ~~inception, the~~ Company ~~has incurred~~serves ~~significant~~more ~~losses~~than ~~and~~1,600 ~~as of June 30~~customers, ~~2004,~~including ~~had~~many anof ~~accumulated~~the ~~deficit~~nation’s ofleading ~~$724.3~~hospitals ~~million~~and suppliers. The Company’s ~~future~~has ~~long-term~~a ~~capital~~contractual ~~needs~~relationship ~~will~~with ~~depend~~Novation, ~~significantly~~LLC, onVHA ~~the~~Inc., ~~rate~~University HealthSystem ofConsortium ~~growth~~(UHC) and ofHealthcare ~~its~~Purchasing ~~business~~Partners International, ~~the~~LLC ~~timing~~(HPPI), ~~of its expanded service~~under ~~offerings,~~which ~~the success of~~ these ~~service~~organizations ~~offerings~~have ~~once~~agreed ~~they~~to ~~are~~use ~~launched and~~ the Company’s ~~ability~~as totheir ~~adjust~~exclusive ~~its~~e-commerce ~~operating~~provider ~~expenses~~for supply tochain anmanagement. ~~appropriate~~Novation ~~level~~is if the ~~growth~~supply ~~rate~~chain ofmanagement ~~its~~company ~~business~~for isVHA, ~~slower~~an ~~than~~alliance ~~it expects. Any projections~~ of ~~future~~ ~~long~~not-~~term~~for ~~cash~~profit ~~needs~~hospitals, ~~and~~health ~~cash~~systems ~~flows~~and ~~are~~their ~~subject~~affiliates, ~~to substantial uncertainty. If available funds~~ and ~~cash~~UHC, ~~generated~~an ~~from~~alliance ~~operations~~of ~~are~~academic medical ~~insufficient~~centers toand ~~satisfy~~associate ~~its~~members. ~~long-term~~The ~~liquidity requirements, the~~ Company ~~may~~currently ~~seek~~generates toa ~~sell~~significant ~~additional~~majority ~~equity or debt securities, obtain additional lines~~ of ~~credit, curtail expansion of~~ its ~~services,~~business ~~including~~through ~~reductions in~~ its ~~staffing~~relationships ~~levels~~with ~~and related expenses~~Novation, orVHA ~~potentially~~and ~~liquidate selected assets~~UHC. ~~The~~As ~~Company~~of ~~cannot~~June 30, be2005, ~~certain~~VHA ~~that~~and ~~additional~~UHC ~~financing~~beneficially ~~will~~owned be41.7% ~~available~~and on10.3%, ~~favorable~~respectively, ~~terms~~of ifthe ~~and~~Company’s ~~when~~outstanding ~~required,~~common ~~or at all~~stock.

~~The~~In ~~condensed~~late ~~consolidated~~2004, ~~financial statements included herein have been prepared by~~ the Company,’s ~~without~~board ~~audit, pursuant to the rules and regulations~~ of ~~the~~directors ~~Securities~~decided ~~and~~it ~~Exchange~~believed ~~Commission~~that ~~(SEC).~~it ~~Certain~~would ~~information~~be ~~and footnote disclosures normally included~~ in ~~financial statements prepared in accordance with accounting principles generally accepted in~~ the ~~United~~best interests ~~States~~ of ~~America~~the ~~have~~Company’s ~~been~~stockholders ~~condensed or omitted pursuant~~ to ~~such~~pursue ~~rules~~an ~~and~~evaluation ~~regulations.~~of ~~These~~strategic ~~unaudited~~alternatives, ~~condensed~~including ~~consolidated~~a ~~financial~~possible ~~statements~~sale ~~and~~or ~~notes~~merger ~~should~~of ~~be read in conjunction with~~ the ~~audited financial statements and notes thereto included in the~~ Company~~’s Annual Report on Form 10-K for the year ended December 31~~, ~~2003~~to ~~filed~~achieve ~~with~~greater ~~the SEC~~stockholder value. In connection ~~the~~with ~~opinion~~this ~~of management~~decision, the ~~unaudited~~board ~~condensed consolidated financial statements reflect all adjustments, consisting only~~ of ~~recurring~~directors ~~adjustments,~~appointed ~~necessary for~~ a ~~fair~~special ~~presentation~~committee of ~~the Company’s financial position, results of~~independent ~~operations~~directors ~~and~~to ~~cash~~supervise ~~flows for~~ the ~~periods~~evaluation ~~indicated. The results~~ of ~~operations~~strategic ~~for interim periods are not necessarily indicative of the results that may be expected for future quarters or the year ending December 31, 2004~~alternatives.

There can be no assurances that any particular strategic alternative will be pursued or that any transaction will occur, or if any transaction does occur, on what terms such transaction might be consummated. In addition, there can be no assurances that a buyer acceptable to VHA and UHC will be willing to enter into a transaction on terms acceptable to the Company and VHA and UHC.

Since inception, the Company has incurred significant losses and, as of June 30, 2005, it had an accumulated deficit of $785.6 million. The Company’s future long-term capital needs will depend significantly on the rate of growth of its business, the timing of its expanded service offerings, the success of these service offerings once they are launched and the Company’s ability to adjust its operating expenses to an appropriate level based on its revenue. Any projections of future long-term cash needs and cash flows are subject to substantial uncertainty. The Company believes that its available funds, consisting of cash, cash equivalents and short-term investments, combined with those funds it expects to generate from operations in the next 12 months, will be sufficient to meet the Company’s anticipated needs for working capital and capital expenditures through at least the next 12 months. However, if available funds and cash generated from operations are insufficient to satisfy its long-term liquidity requirements, the Company may seek to sell additional equity or debt securities, obtain a line of credit, curtail expansion of its services, including reductions in its staffing levels and related expenses, or potentially liquidate selected assets. The Company cannot be certain that additional financing will be available on favorable terms if and when required, or at all.

2. RECLASSIFICATIONS

~~Certain~~The ~~reclassifications~~Company ~~have~~has ~~been~~reclassified ~~made~~certain toauction rate securities, for which interest rates reset in less than 90 days, but for which the ~~historical~~underlying ~~unaudited~~maturity ~~condensed~~date ~~consolidated~~is ~~financial~~longer ~~statements~~than to90 days, ~~conform~~from cash and cash equivalents to ~~the~~short-term, ~~2004~~available for sale investments. This resulted in an increase of ~~presentation~~$6.2 million ~~These~~to ~~reclassifications~~cash ~~had~~used noin ~~impact~~investing onactivities in the ~~Company’s~~accompanying ~~previously~~Condensed ~~reported~~Consolidated Statements ~~financial~~of ~~position~~Cash Flows for the six months ended June 30, ~~net~~2004 ~~loss~~to orconform ~~cash~~to ~~flows.~~the 2005 presentation.

3. REVENUE

Application of EITF No. 01-9

In November 2001, the Emerging Issues Task Force (EITF) reached a consensus on EITF Abstract No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” EITF No. 01-9 addresses whether consideration from a vendor to a reseller is (i) an adjustment of the selling prices of the vendor’s products and, therefore, should be classified as an offset against revenue when recognized in the vendor’s statement of operations or (ii) a cost incurred by the vendor for assets or services received from the reseller and, therefore, should be classified as a cost or expense when recognized in the vendor’s statement of operations.

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

~~summarizes the impact that the application of EITF No~~3. ~~01-9 had on the Company’s condensed consolidated statements~~REVENUE ~~of operations (in thousands):~~

	Three Months EndedJune 30,						Six Months Ended June 30,
	2003			2004			2003			2004
Revenue:
Gross related party revenue	$	17,528		$	15,459		$	35,070		$	30,937
Offset of amortization of partnership costs		(17,528	)		(15,459	)		(34,531	)		(30,937	)
Total related party revenue, net	$	—		$	—		$	539		$	—
Amortization of Partnership Costs:
Amortization of partnership costs	$	18,361		$	17,128		$	35,364		$	34,078
Offset to gross related party revenue		(17,528	)		(15,459	)		(34,531	)		(30,937	)
Total amortization of partnership costs reported as an operating expense	$	833		$	1,669		$	833		$	3,141

Application of the Emerging Issues Task Force (EITF) Abstract No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”

~~The~~In ~~amortization~~November 2001, ofthe ~~partnership~~EITF ~~costs reported~~reached asa anconsensus ~~operating~~on ~~expense~~EITF isNo. 01-9. ~~reflected~~EITF asNo. 01-9 anaddresses ~~adjustment~~whether consideration tofrom ~~reconcile~~a ~~net~~vendor ~~loss~~ to ~~cash~~a ~~from~~reseller ~~operating~~is ~~activities~~(i) an inadjustment ~~the condensed consolidated statements~~ of ~~cash flows. Under EITF No. 01-9,~~ the ~~Company~~selling ~~accounts~~prices ~~for~~of the ~~fees paid by Novation~~ ~~under~~vendor’s ~~the~~products ~~terms~~and, oftherefore, ~~the~~should ~~Outsourcing~~be ~~Agreement~~classified as ifan ~~they~~offset ~~were~~against ~~payments~~revenue ~~made~~when ~~for~~recognized in the ~~equity~~vendor’s ~~consideration~~statement ~~provided~~of tooperations ~~VHA~~or ~~and~~(ii) a ~~UHC~~cost asincurred ~~opposed~~by tothe ~~payments~~vendor for assets or services. Asreceived afrom ~~result,~~ the ~~amortization~~reseller ofand, ~~partnership~~therefore, ~~costs~~should ~~that~~be isclassified ~~offset against gross related party revenue is reported~~ as a ~~cash~~cost ~~flow~~or ~~from~~expense ~~financing~~when recognized ~~activities~~ in the ~~Company~~vendor’s ~~condensed~~statement ~~consolidated statements~~ of ~~cash flows~~operations.

~~Revenue~~In byJuly 2000, ~~Customer~~the ~~Category~~Company issued equity consideration to VHA and UHC in connection with the Outsourcing Agreement originally entered into on May 24, 2000, and as amended from time to time (see Note 10). The Company capitalized this consideration when measurement dates occurred. The final measurement date occurred during the quarter ended March 31, 2004. The portion of the consideration that was capitalized at the time of issuance is being amortized over the five-year estimated life of the arrangement. The remaining consideration, which was capitalized as earned, is being amortized over the initial term of the agreements that resulted in the consideration being earned, typically two to three years. As a result of the application of EITF No. 01-9, the Company has classified amortization associated with this equity consideration as an offset against gross related party revenue from those parties. This treatment results in non-cash amortization of partnership costs being offset against gross related party revenue up to the lesser of gross related party revenue or amortization of partnership costs in any period. Any amortization of partnership costs in excess of gross related party revenue in any period is classified as an operating expense.

The ~~Company’s~~following ~~principal~~table ~~sources~~summarizes ofthe ~~revenue,~~impact bythat ~~customer~~the ~~category,~~application ~~are (i) healthcare providers and GPOs, (ii) suppliers and (iii) other. Healthcare provider and GPO revenue primarily consists~~ of ~~revenue~~EITF ~~from hospitals and from GPOs, including from Novation under the Outsourcing Agreement~~No. 01-9 ~~Supplier~~had ~~revenue~~on ~~includes revenue from both manufacturers and distributors. Other revenue consists of all revenue from entities other than healthcare providers, GPOs and suppliers, including~~ the ~~software license revenue generated by the~~ Company’s ~~August~~condensed ~~2001~~consolidated ~~agreement~~statements ~~with~~of ~~Global~~operations ~~Healthcare Exchange, LLC~~ (~~GHX),~~in ~~as well as revenue generated under various agreements whereby the Company is entitled to a share of revenue generated by those entities. Revenue by customer category was as follows~~thousands):

	Three Months Ended June 30,						Six Months EndedJune 30,
	Three Months Ended								Six Months Ended
	2003			2004			2003			2004
	June 30,								June 30,
	(in thousands)						(in thousands)
	2004				2005				2004			2005
Provider and GPO revenue	$	187		$	732		$	1,178		$	1,161
Revenue:
Supplier revenue		2,026			2,324			3,338			4,524
Gross related party revenue	$	15,459			$	15,387			$	30,937		$	30,808
Other revenue		306			284			605			583
Offset of amortization of partnership costs		(15,459	)			(15,387	)			(30,937	)		(30,808	)
Total	$	2,519		$	3,340		$	5,121		$	6,268
Total related party revenue, net	$	—			$	—			$	—		$	—
Amortization of Partnership Costs:
Amortization of partnership costs	$	17,128			$	15,975			$	34,078		$	32,438
Offset to gross related party revenue		(15,459	)			(15,387	)			(30,937	)		(30,808	)
Total amortization of partnership costs reported as an operating expense	$	1,669			$	588			$	3,141		$	1,630

~~Percentage~~The amortization of ~~Total~~partnership ~~Revenue~~costs reported as an operating expense is reflected as an adjustment to reconcile net loss to cash from operating activities in the condensed consolidated statements of cash flows. Under EITF No. 01-9, the Company accounts for the fees paid by Novation under the terms of the Outsourcing Agreement, as amended, as if they were payments made for the equity consideration provided to VHA and UHC, as opposed to payments for services. As a result, the amortization of partnership costs that is offset against gross related party revenue is reported as a cash flow from financing activities in the Company’s condensed consolidated statements of cash flows.

	Three Months EndedJune 30,				Six Months EndedJune 30,
	2003		2004		2003		2004
Provider and GPO revenue	7.4	%	21.9	%	23.0	%	18.5	%
Supplier revenue	80.4		69.6		65.2		72.2
Other revenue	12.2		8.5		11.8		9.3
Total	100.0	%	100.0	%	100.0	%	100.0	%

4. BASIC AND DILUTED NET LOSS PER SHARE

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

Revenue by Customer Category

The Company’s principal sources of revenue, by customer category, are (i) healthcare providers and GPOs, (ii) suppliers and (iii) other. Healthcare provider and GPO revenue primarily consists of revenue from hospitals and from GPOs, including from Novation under the Outsourcing Agreement, as amended. Supplier revenue includes revenue from both manufacturers and distributors. Other revenue consists of all revenue from entities other than healthcare providers, GPOs and suppliers, including the software license revenue that was generated by the Company’s August 2001 agreement with Global Healthcare Exchange, LLC (GHX), which was fully recognized as of the third quarter of 2004, as well as revenue generated under agreements whereby the Company is entitled to a share of revenue generated by those entities. Revenue by customer category was as follows (in thousands, except percentage amounts):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2005		2004		2005
Provider and GPO revenue	$	732	$	669	$	1,161	$	1,172
Supplier revenue		2,324		2,135		4,524		4,247
Other revenue		284		12		583		17

Total	$	3,340	$	2,816	$	6,268	$	5,436


Percentage of Total Revenue


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2005			2004			2005
Provider and GPO revenue		21.9	%		23.8	%		18.5	%		21.6	%
Supplier revenue		69.6			75.8			72.2			78.1
Other revenue		8.5			0.4			9.3			0.3

Total		100.0	%		100.0	%		100.0	%		100.0	%

Major Customers

No customer accounted for 10% or more of total non-related party revenue for either the three or six months ended June 30, 2004 or 2005.

4. BASIC AND DILUTED NET LOSS PER SHARE

Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding. Diluted net loss per share is the same as basic net loss per share for all periods presented because the effect of any potentially dilutive securities is excluded, as the securities are anti-dilutive due to the Company’s net losses in each of these periods. The total number of weighted average common stock equivalents, consisting of options, warrants and unvested restricted stock, that was excluded from the diluted loss per share calculation was 1.0 million, 859,000, 916,000 and 996,000 shares for the three months ended June 30, 2004 and 2005, and the six months ended June 30, 2004 and 2005, respectively.

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

	Three Months EndedJune 30,						Six Months Ended June 30,
	Three Months Ended						Six Months Ended
	2003			2004			2003			2004
	June 30,						June 30,
Net loss	$	(16,948	)	$	(18,414	)	$	(33,999	)	$	(31,628	)
	2004			2005			2004			2005
Net loss	$	(18,414	)	$	(14,678	)	$	(31,628	)	$	(31,635	)
Basic and diluted:
Weighted average shares of common stock outstanding		1819,~~195~~974			1920,~~974~~459			1719,~~941~~668			1920,~~668~~420
Less: Weighted average shares of unvested restricted common stock grants		(~~187~~617	)		(~~617~~649	)		(~~141~~455	)		(~~455~~722	)
Less: Weighted average shares of common stock subject to repurchase		(23	)		—			(37	)		—
Weighted average shares used in computing basic and diluted net loss per share		19,357			19,810			19,213			19,698
Weighted average shares used in computing basic and diluted net loss per share		17,985			19,357			17,763			19,213
Basic and diluted net loss per share	$	(0.95	)	$	(0.74	)	$	(1.65	)	$	(1.61	)
Basic and diluted net loss per share	$	(0.94	)	$	(0.95	)	$	(1.91	)	$	(1.65	)

5. STOCK-BASED COMPENSATION

AtAs ~~June~~of June 30, ~~2004~~2005, the Company had three stock-based employee compensation plans. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board ~~Opinion~~ (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company calculated the fair value of each option grant and stock purchase right on the dates of grant using the Black-Scholes option-pricing model as prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” using the following assumptions:

	Three Months EndedJune 30,			Six Months EndedJune 30,
	Three Months Ended						Six Months Ended
	2003		2004	2003		2004
	June 30,						June 30,
Risk-free interest rate range	1.0%-4.5%		1.6%-3.8%	1.0%-4.7%		1.0%-3.8%
	2004			2005			2004			2005
Expected lives (in years)—options	5.0		5.0	5.0		5.0
Risk-free interest rate range		1.2%-6.6	%		1.2%-5.0	%		1.2%-6.7	%		1.2%-5.2	%
Expected lives (in years)—ESPP	0.5		0.5	0.5		0.5
Expected lives (in years)—options		5.0			5.0			5.0			5.0
Dividend yield	0%		0%	0%		0%
Expected lives (in years)—employee stock purchase plan		0.5			0.5			0.5			0.5
Volatility	90%		90%	90%		90%
Dividend yield		0%			0%			0%			0%
Volatility range		70%-90%			80%-90%			70%-90%			80%-90%

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

	Three Months EndedJune 30,						Six Months Ended June 30,
	Three Months Ended						Six Months Ended
	2003			2004			2003			2004
	June 30,						June 30,
Net loss as reported	$	(16,948	)	$	(18,414	)	$	(33,999	)	$	(31,628	)
	2004			2005			2004			2005
Add: Stock-based compensation expense included in reported net loss		1,003			1,199			1,717			1,666
Net loss as reported	$	(18,414	)	$	(14,678	)	$	(31,628	)	$	(31,635	)
Less: Total stock-based employee compensation expense determined under fair value based method for all awards		(3,358	)		(3,442	)		(6,320	)		(6,229	)
Add: Stock-based compensation expense included in reported net loss		1,199			1,023			1,666			2,195
Net loss, pro forma	$	(19,303	)	$	(20,657	)	$	(38,602	)	$	(36,191	)
Less: Total stock-based employee compensation expense determined under fair value based method for all awards		(3,416	)		(1,823	)		(6,192	)		(4,232	)
Net loss per share, as reported	$	(0.94	)	$	(0.95	)	$	(1.91	)	$	(1.65	)
Net loss, pro forma	$	(20,631	)	$	(15,478	)	$	(36,154	)	$	(33,672	)
Net loss per share, pro forma	$	(1.07	)	$	(1.07	)	$	(2.17	)	$	(1.88	)
Net loss per share, as reported	$	(0.95	)	$	(0.74	)	$	(1.65	)	$	(1.61	)
Net loss per share, pro forma	$	(1.07	)	$	(0.78	)	$	(1.88	)	$	(1.71	)

Restricted Stock

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

8During the three months ended June 30, 2004 and 2005, and the six months ended June 30, 2004 and 2005, the Company recorded deferred compensation of $61,000, $610,000, $6.6 million and $2.9 million, respectively, representing the fair value of the underlying common stock at the dates of grant. The restrictions on the stock underlying these grants lapse on various dates through June 2007. During the three months ended June 30, 2004 and 2005, and the six months ended June 30, 2004 and 2005, the Company recorded $140,000, $119,000, $187,000 and $285,000, respectively, in reductions of the deferred compensation as a result of employee terminations or attrition and the resulting forfeiture of restricted stock and $1.3 million, $1.2 million, $1.7 million and $2.6 million, respectively, in gross amortization of deferred compensation related to these shares.

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

6. PROPERTY AND EQUIPMENT

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

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

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

	December 31, 2003			June 30, 2004
Computer and equipment	$	14,791		$	14,412
Software		21,361			21,723
Capitalized software development costs		—			3,289
Furniture and fixtures		1,673			1,673
Leasehold improvements		2,393			2,396
		40,218			43,493
Accumulated depreciation and amortization		(32,786	)		(33,603	)
Property and equipment, net	$	7,432		$	9,890

7. WRITE-OFF OF STOCKHOLDER NOTES RECEIVABLE

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

Carrying value of notes receivable, including accrued interest	$	4,955
Less: Fair market value of reclaimed common stock of the Company		(840	)
Write-off of stockholder notes receivable	$	4,115

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

8. RECENT ACCOUNTING PRONOUNCEMENTS

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

96. ~~RELATED~~PROPERTY ~~PARTY~~AND ~~TRANSACTIONS~~EQUIPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS

InProperty ~~2000,~~and ~~the~~equipment ~~Company~~are ~~entered~~stated ~~into~~at cost and are depreciated on a 10straight-~~year~~line ~~strategic~~basis ~~Outsourcing~~over ~~Agreement~~the estimated ~~with~~useful ~~VHA,~~lives ~~UHC~~of the assets, ~~Novation~~ranging ~~and~~from ~~HPPI~~two to four years. ~~Under~~Leasehold ~~the~~improvements ~~Outsourcing~~are ~~Agreement~~amortized, using the ~~Company~~straight-line ~~agreed~~method, toover ~~provide~~the ~~specific~~shorter ~~functionality~~of tothe ~~Marketplace@Novation®,~~lease ~~Novation’s~~terms ~~e-commerce~~or ~~marketplace~~the useful lives of the improvements. ~~Novation~~Purchased ~~agreed~~software tois ~~act~~capitalized asat cost when purchased and amortized over the ~~Company’s~~license ~~exclusive~~period ~~agent~~commencing once the software is placed in service. Direct costs to ~~negotiate~~place purchased ~~agreements~~software into service are capitalized as part of the asset. In accordance with ~~suppliers~~Statement of Position (SOP) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” costs incurred to ~~offer~~develop ~~their~~software ~~equipment~~for use in operations are capitalized. Such costs, ~~products~~incurred during the application development stage, ~~supplies~~include external direct costs of materials and services ~~through~~and ~~marketplaces~~internal ~~sponsored~~direct bypayroll ~~Novation~~and payroll-related orcosts. ~~HPPI,~~During ~~including~~2004 ~~Marketplace@Novation.~~and ~~VHA~~the six months ended June 30, ~~UHC~~2005, ~~HPPI~~capitalized ~~and~~software development ~~Novation~~costs ~~each~~related ~~agreed~~to ~~not~~new functionality for the Company’s solutions offered to ~~develop~~its customers. orRepairs ~~promote~~and ~~any~~maintenance ~~other~~costs ~~Internet-based~~are ~~exchange~~expensed ~~for~~as ~~the~~incurred. ~~acquisition~~When property and equipment is retired or ~~disposal~~otherwise ofdisposed ~~products~~of, the cost and accumulated depreciation are relieved from the ~~supplies,~~accounts ~~equipment~~and the net gain or ~~services~~loss byis ~~healthcare~~included ~~provider~~in ~~organizations.~~the determination of income.

InAs ~~July 2000, in connection with the Outsourcing Agreement, the Company issued 4.6 million and 1.1 million shares~~ of ~~its common stock to VHA and UHC~~December 31, ~~respectively.~~2004 ~~The Company also issued warrants to VHA~~ and ~~UHC~~June 30, ~~allowing VHA and UHC the opportunity to earn up to 3.1 million and 752~~2005,~~000~~ ~~additional~~property shares of the Company’s common stock, respectively, over a four-year period by meeting specified performance targets. These performance targets were based upon the historical purchasing volume of VHA and ~~UHC~~ ~~member~~equipment ~~healthcare~~consisted ~~organizations that signed up to use Marketplace@Novation. In October 2000, the Company exchanged VHA’s warrant for 3.1 million restricted shares~~ of the ~~Company’s~~following ~~common stock and,~~ (in ~~January 2001, the Company~~ exchanged the unexercised portion of UHC’s performance warrant to purchase 564,000 shares of the Company’s common stock for 564,000 restricted shares of the Company’s common stock. VHA and UHC have earned all of the restricted shares.thousands): ~~If the performance targets had not been met, VHA’s and UHC’s restricted shares would have been subject to forfeiture.~~

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


	December 31, 2004			June 30, 2005
Computer and equipment	$	15,761		$	14,708
Software		22,144			21,756
Capitalized software development costs		5,754			7,310
Furniture and fixtures		1,729			1,792
Leasehold improvements		2,393			2,405

		47,781			47,971
Accumulated depreciation and amortization		(36,280	)		(37,865	)

Property and equipment, net	$	11,501		$	10,106

• the Company and Novation have agreed to a fee level that is based on the percentage of marketplace volume, including supply chain data captured for Marketplace@Novation user purchases but not facilitated by the Company’s connectivity solution7. ~~This~~STOCKHOLDER ~~fee~~NOTES ~~level is determined based on a tiered fee structure under which the incremental fee per dollar of marketplace volume decreases as the marketplace volume increases;~~RECEIVABLE

•During 2004, the ~~payments~~Company ~~Novation~~wrote isoff ~~required~~two tonotes ~~make~~receivable ~~under~~from ~~the~~stockholders, ~~fee~~with ~~level~~an ~~provision~~aggregate carrying ~~are~~value ~~subject~~of ~~to quarterly maximums~~$5.0 million, ~~During~~consisting ~~2003,~~of ~~the~~one ~~Company~~note ~~generated~~from ~~sufficient~~a ~~marketplace~~former ~~volume~~executive toofficer ~~earn~~of the Company ~~quarterly~~and ~~maximum~~another ~~payments,~~from ~~which~~a ~~totaled~~former ~~$69~~employee.2 ~~million~~These ~~for~~notes were issued in connection with the ~~year~~early exercise ~~ended~~of ~~December~~employee ~~31,~~stock ~~2003.~~option ~~Beginning~~grants in ~~the~~fiscal ~~first~~1999 ~~quarter~~and ofwere ~~fiscal~~collateralized ~~2004~~by, among other things, the ~~quarterly~~shares ~~maximum~~issued ~~payment~~upon ~~became~~exercise ~~$15~~of the options.25 ~~million~~Once inthe ~~each~~notes ~~quarter~~became ~~through~~due, the ~~expiration~~Company actively ofpursued ~~the~~collection ~~initial~~using ~~term~~all ofreasonable efforts to collect the ~~Fourth~~outstanding ~~Amended~~balances. ~~Agreement~~Upon exhausting all such efforts in ~~March~~2004, ~~2010.~~the ~~Under~~Company ~~previous~~determined ~~versions~~that ofthese ~~the~~two ~~Outsourcing~~notes ~~Agreement~~were no longer collectible and, as such, the ~~quarterly~~Company ~~maximums~~reclaimed ~~were~~all ~~dependent~~shares onof ~~revenue~~common ~~generated~~stock bycollateralizing ~~Novation;~~the notes, totaling 71,250 shares, and wrote off the remaining balance of $4.1 million.

•As of June 30, 2005, the Company ~~agreed~~had to$208,000 ~~share~~of ~~revenue~~outstanding ~~with~~remaining ~~Novation~~notes inreceivable ~~certain~~from current ~~instances,~~and ~~including~~former ~~revenue~~employees ~~related~~of to the ~~distribution~~Company, orincluding ~~licensing~~accrued ofinterest. ~~software~~The ~~and~~Company ~~other~~intends ~~technology~~to pursue ~~solutions.~~collection Toon ~~date,~~stockholder nonotes ~~such~~receivable ~~revenue~~that ~~sharing~~have ~~has~~become ~~been triggered;~~due.

•8. ~~Novation’s rights to view data from any customer are restricted to data from Novation and HPPI sponsored marketplaces only;~~RESTRUCTURING

•The Company’s executive, administrative and operating offices are located in 116,000 square feet of office space located in San Jose, California under a sublease scheduled to expire in March 2007. The Company currently occupies 84,300 square feet of this facility. In February 2002, the Company entered ~~has~~into ~~primary~~a ~~responsibility~~sublease with a corporation, under which they subleased 20,000 square feet of this facility for ~~recruiting~~the first year, ~~contracting~~increasing ~~and~~to ~~managing~~31,700 ~~relationships~~square feet for the remaining term of the sublease, which ran through February 2005. This corporation did not elect to extend its sublease beyond February 2005. In the first quarter of 2005, the Company entered into a letter of intent with ~~suppliers~~another ~~regarding~~corporation ~~their~~under ~~use~~which that corporation intended to sublease approximately 25,000 square feet of ~~supply~~the ~~chain~~Company’s ~~solutions~~facility through ~~Marketplace@Novation;~~February 2007. ~~and~~The Company decided that it would not occupy the remaining available space at any time through the expiration of its lease in March 2007. The sublease agreement was executed in the second quarter of 2005. As a result, the Company recorded the $767,000 restructuring charge during the three months ended March 31, 2005 related to anticipated costs for idle facilities, net of expected sublease income. Anticipated costs included the net present value of future minimum lease commitments related to the idle facilities.

• the Company must continue to meet detailed service level and functionality requirements, including new and enhanced functionality, for Marketplace@Novation.

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

109. ~~CONTINGENCIES~~RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, “Share-Based Payment,” which revises SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, including the issuance of stock options and other stock-based compensation to employees. Companies are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, which is usually the vesting period. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. As a result of the SEC’s April 2005 deferral of the effective date of this rule for public companies, the statement will be effective for the Company beginning January 1, 2006 and applies to all awards granted after the effective date and to awards modified, repurchased or canceled after that date. As of the effective date, application of this statement will be through a modified version of prospective application, and compensation cost will be recognized for the portion of outstanding awards for which the requisite service has not yet been rendered. For periods before the effective date, the Company can elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by SFAS No. 123. The Company is currently evaluating the impact this statement will have on its financial position and results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets, an Amendment of APB Opinion No. 29.” SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and to replace it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will have a material effect on its financial position, results of operations or cash flows.

In September 2004, the EITF reached a consensus on EITF No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” EITF No. 04-8 concluded that all issued securities that have embedded conversion features that are contingently exercisable upon occurrence of a market-price condition should be included in the calculation of diluted earnings per share, regardless of whether the market price trigger has been met. This consensus also applies to instruments with embedded conversion features that are contingently exercisable upon the occurrence of a market price condition or upon the occurrence of another contingency. The FASB is presently in the process of amending certain aspects of SFAS No. 128, “Earnings per Share,” and it is expected to require that share settlement be assumed in the diluted earnings per share calculation for contracts that can be settled in stock or cash. The consensus in EITF No. 04-8 will become effective in the period when the proposed amendment to SFAS No. 128 becomes effective. The Company does not believe that EITF No. 04-8 will have a material effect on its diluted per share calculation. The Company will evaluate the impact of the amendments to SFAS No. 128 once issued.

In March 2004, the FASB issued EITF No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF No. 03-1 includes new guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF No. 03-1 relating to evaluation and measurement criteria; however, the disclosure requirements were effective for the Company’s fiscal year ended December 31, 2004. The Company continues to monitor the developments of the FASB and does not currently expect the adoption of the evaluation and measurement criteria, once issued, to have a material impact on the Company’s results of operations or financial position.

10. RELATED PARTY TRANSACTIONS

In May 2000, the Company entered into a 10-year strategic Outsourcing Agreement with VHA, UHC, Novation and HPPI. Under the Outsourcing Agreement, the Company agreed to build and provide specific functionality to Marketplace@Novation^®, Novation’s e-commerce marketplace. Novation agreed to act as the Company’s exclusive agent to negotiate agreements with suppliers to offer their equipment, products, supplies and services through marketplaces sponsored by Novation or HPPI, including Marketplace@Novation. VHA, UHC, HPPI and Novation each agreed not to develop or promote any other Internet-based exchange for the acquisition or disposal of products, supplies, equipment or services by healthcare provider organizations.

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

The parties have amended and restated the Outsourcing Agreement from time to time. Under the current version of the Outsourcing Agreement (the Fourth Amended Agreement), effective August 2003:

	•		The Company and Novation agreed to a fee level that is based on the percentage of marketplace volume, including supply chain data captured for Marketplace@Novation user purchases but not facilitated by the Company’s connectivity solution, as well as gross transaction volume. This fee level is determined based on a tiered fee structure under which the incremental fee per dollar of marketplace volume decreases as the marketplace volume increases;

	•		The payments Novation is required to make under the fee level provision are subject to quarterly maximums. In each of the last 12 quarters, the Company generated sufficient marketplace volume to earn the quarterly maximum payments. Beginning in the first quarter of fiscal 2004, the quarterly maximum payment became $15.3 million in each quarter through the expiration of the initial term of the Fourth Amended Agreement in March 2010. Under previous versions of the Outsourcing Agreement, the quarterly maximums were dependent on several factors, including revenue generated by Novation;

	•		The Company agreed to share revenue with Novation in certain instances, including revenue related to the distribution or licensing of software and other technology solutions. To date, no such revenue sharing has been triggered;

	•		Novation’s rights to view data from any customer are restricted to data from Novation and HPPI-sponsored marketplaces only;

	•		The Company has primary responsibility for recruiting, contracting and managing relationships with suppliers regarding their use of supply chain solutions through Marketplace@Novation; and

	•		The Company must continue to meet detailed service level and functionality requirements, including new and enhanced functionality, for Marketplace@Novation.

Based on the levels of marketplace volume the Company is currently achieving, the Company expects that the fees it earns from Novation will continue to be limited by the quarterly maximums, above which additional volume will not result in increased fees.

In March 2004, the Company entered into a three-year agreement with UHC designating the Company as the preferred provider of supply chain data cleansing and maintenance services to the UHC hospital membership base. In connection with this agreement, the Company offers Neoforma Data Management Solution^™ (Neoforma DMS) to UHC hospital members, and has developed joint sales and marketing plans with UHC to support this relationship. In June 2004, the Company entered into a similar, three-year agreement with VHA, designating the Company as a provider of supply chain data cleansing and maintenance services to the VHA hospital membership base. In connection with this agreement, the Company offers Neoforma DMS to VHA member hospitals and collaborates with VHA to educate their member hospitals about the benefits of Neoforma DMS.

In late January 2005, the Company announced that, in connection with its decision to evaluate strategic alternatives, Novation and the Company each had engaged independent consultants to assess the technology, information, services and pricing provided by the Company to Novation, VHA, UHC and their member hospitals under the Fourth Amended Agreement.

At that time, Novation advised the Company that its assessment could result in a formal request to reduce the quarterly maximum payment under the Fourth Amended Agreement.

In April 2005, VHA and UHC indicated, in amendments to their respective Statements on Schedule 13D filed with the SEC, their intent to support the Company’s evaluation of strategic alternatives, including a possible sale or merger of the Company, and sell their ownership interests in the Company in a transaction on terms, and with a third party, acceptable to them. They indicated that such support would be conditioned upon Novation renegotiating the Fourth Amended Agreement in the context of a sale or merger transaction.

VHA and UHC also indicated that, based upon the advice of their consultant, they believe a market competitive price of the services provided by the Company under the Fourth Amended Agreement should be significantly less than the current fee paid by Novation to the Company. The Company, however, believes its current fee from Novation is reasonable and market competitive based upon the terms and conditions of the Outsourcing Agreement and the services it has provided and is currently providing. No party has currently invoked the benchmarking provision under Section 8.5 of the Fourth Amended Agreement or requested an amendment of the Fourth Amended Agreement fees.

11. CONTINGENCIES

Litigation

In July 2001, the Company, along with Merrill Lynch, Pierce, Fenner & Smith, Bear Stearns and FleetBoston Robertson Stephens (certain of the underwriters of the Company’s initial public offering (IPO)), as well as the Company’s ~~Chairman~~chairman and ~~Chief~~chief ~~Executive~~executive ~~Officer~~officer, Robert Zollars, and its former ~~Chief~~chief ~~Financial~~financial ~~Officer~~officer, Frederick Ruegsegger, were named as defendants in two securities class action lawsuits filed in federal court in the Southern District of New York (No. 01 CV 6689 and No. 01 CV 6712) on behalf of those who purchased shares of the Company’s common stock from January 24, 2000 to December 6, 2000. These actions have since been consolidated, and a consolidated amended complaint was filed in the Southern District of New York on April 24, 2002. The amended complaint alleges that the underwriters solicited and received “undisclosed compensation” from investors in exchange for allocations of stock in the Company’s IPO, and that some investors in the IPO allegedly agreed with the underwriters to buy additional shares in the aftermarket to artificially inflate the price of the Company’s stock. The Company and Messrs. Zollars and Ruegsegger are named in the suits pursuant to Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, for allegedly failing to disclose in the Company’s IPO registration statement and prospectus that the underwriters had entered into the arrangements described above. The complaints seek unspecified damages. Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which are included in a single coordinated proceeding in the Southern District of New York. On July 1, 2002, the underwriter defendants moved to dismiss all of the IPO allocation litigation complaints against them, including the action involving the Company. On July 15, 2002, the Company, along with the other non-underwriter defendants in the coordinated cases, also moved to dismiss the litigation. Those motions were fully briefed on September 13 and September 27, 2002, respectively, and in ~~February~~ February 2003, the Court denied the Company’s motion to dismiss. On October 9, 2002, all of the individual defendants, including MrMessrs. Zollars and ~~Mr.~~ Ruegsegger, were dismissed from the action without prejudice. On June 30, 2003, the Company’s board of directors approved a proposed settlement for this matter, which is part of a larger global settlement between the issuers and plaintiffs. The acceptance of the settlement by the plaintiffs is contingent on a number of factors, including the percentage of issuers who approve the proposed settlement. The Company has agreed to undertake other responsibilities under the proposed settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by the Company’s insurers. InOn ~~June~~February 15, ~~2004~~2005, the Court issued an ~~agreement~~order ofpreliminarily approving the proposed settlement ~~was~~and ~~submitted~~scheduling toa ~~the~~“fairness” ~~court~~hearing ~~for~~to ~~preliminary~~determine ~~approval~~whether to finally approve the settlement. The Company is unable to determine whether or when the settlement will be approved or finalized. Due to the inherent uncertainties of litigation ~~however~~, the Company cannot accurately predict the ultimate outcome of the lawsuits.

~~FIN 45~~ 13

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

Financial Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”

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

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

11 14

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

Forward-Looking Statements

This ~~Management’s~~report ~~Discussion~~contains ~~and~~statements ~~Analysis~~that ofinvolve ~~Financial~~expectations, ~~Condition~~plans ~~and~~or ~~Results~~intentions of(such ~~Operations~~as ~~section~~those relating ~~should~~to befuture ~~read~~business inor ~~conjunction with the accompanying unaudited condensed consolidated~~ financial ~~statements~~results, ~~and~~new ~~related~~features ~~notes~~or ~~appearing~~services, ~~elsewhere~~or ~~in this report~~management strategies). ~~This~~These ~~Quarterly~~statements ~~Report~~are ~~on Form 10-Q contains~~ forward-looking ~~statements~~and ~~within~~are ~~the~~subject ~~meaning~~to ofrisks ~~Section 27A of the Securities Act of 1933~~ and ~~Section~~uncertainties, ~~21E~~so ofactual ~~the~~results ~~Securities~~may ~~Exchange~~vary ~~Act of 1934~~materially. InYou ~~many cases, you~~ can identify these forward-looking statements by ~~terms~~words such as “may,” “will,” “should,” “expect,” “~~plan~~anticipate,” “~~anticipate,” “~~believe,” “estimate,” “~~potential~~intend,” “~~intend~~plan” orand other ~~“continue,”~~similar orexpressions. ~~comparable~~You ~~terminology.~~should ~~These~~consider our forward-looking statements ~~include~~in ~~our~~light ~~expectations~~of ~~about~~the ~~our operating results and strategic~~risks ~~relationships.~~discussed ~~Our~~under ~~actual~~the ~~results~~heading ~~may~~“Factors ~~differ~~That ~~materially~~May ~~from~~Affect ~~those~~Future ~~anticipated~~Operating inResults” ~~these~~below, ~~forward-looking~~as ~~statements~~well as our acondensed ~~result~~consolidated offinancial ~~many factors~~statements, ~~including,~~related ~~but~~notes ~~not~~and ~~limited~~the ~~to,~~other ~~those~~financial ~~presented~~information appearing ~~below~~elsewhere ~~under~~in ~~the~~this ~~caption~~report ~~“Factors~~and ~~That~~our ~~May~~other ~~Affect Future~~filings ~~Operating~~with ~~Results”~~the Securities and ~~elsewhere~~Exchange Commission, inor ~~this report~~SEC. We ~~undertake~~assume no obligation to update any forward-looking statements ~~for any reason, except as required by law, even if new information becomes available or other events occur in the future~~.

Company Background

We are a leading provider of supply chain management solutions for the healthcare industry. ~~Through~~ Through a combination of technology, information and services, our ~~Web-based~~ supply chain management solutions are designed to enable efficient collaboration among hospitals and their suppliers, helping them to reduce operational inefficiencies, ~~and~~ 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 ~~suppliers~~hospitals and ~~hospitals~~ 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 ~~Web-based~~comprehensive solutions make it easier for the participants in the healthcare supply chain, principally hospitals, ~~suppliers and~~ 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, ~~increase~~reduce ~~revenue~~costs, ~~reduce~~increase ~~costs~~revenue and improve capital allocation.

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:

	•		Order management: Neoforma Order Management Solution^™, or Neoforma OMS;

	•		Contract management: Neoforma Contract Management Solution^™, or Neoforma CMS;

	•		Data management: Neoforma Data Management Solution^™, or Neoforma DMS; and

	•		Materials management: Neoforma Materials Management Solution^™, or Neoforma MMS.

We offer our GPO customers solutions to address:

	•		Order management: Neoforma OMS;

	•		Contract management: Neoforma CMS; and

	•		Data management: Neoforma DMS.

We offer our supplier customers solutions to address:

	•		Market intelligence: HPIS Market Intelligence and Neoforma Pharmaceutical Market Intelligence;

	•		Order management: Neoforma OMS;

	•		Contract management: Neoforma CMS and Neoforma CMS for Contract and Rebate Management Services and Reporting; and

	•		Materials management: Neoforma MMS.

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 healthcare supply chain by providing a valuable combination of technology, information and services. We believe that our ability to

achieve 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.

Strategic Relationships

In May 2000, we entered into aan exclusive 10-year ~~strategic~~ outsourcing and operating agreement, or the Outsourcing Agreement, with Novation, LLC, VHA Inc., University HealthSystem Consortium, or UHC, ~~Novation, LLC~~ and Healthcare Purchasing Partners International, LLC, or HPPI. Under the Outsourcing Agreement, we agreed to build and provide specific functionality to Marketplace@Novation®, Novation’s e-commerce marketplace. Novation agreed to act as our exclusive agent to negotiate agreements with suppliers to offer their equipment, products, supplies and services through marketplaces sponsored by Novation or HPPI, including Marketplace@Novation. VHA, UHC, HPPI and Novation each agreed not to develop or promote any other Internet-based exchange for the acquisition or disposal of products, supplies, equipment or services by healthcare provider organizations.

In July 2000, in connection with the Outsourcing Agreement, we issued ~~4.6~~to ~~million~~VHA and ~~1.1~~UHC ~~million~~ shares of our common stock toand ~~VHA~~performance ~~and~~based ~~UHC~~warrants, ~~respectively.~~ Wewhich ~~also issued~~ warrants, to ~~VHA~~the ~~and~~extent ~~UHC~~not exercised, ~~allowing~~were subsequently ~~VHA~~exchanged ~~and~~for ~~UHC~~restricted ~~the opportunity to earn up to 3~~stock.1 ~~million~~VHA and ~~752,000~~UHC ~~additional~~earned ~~shares~~all of ~~our~~the ~~common~~restricted stock, ~~respectively,~~ over a four-year period by meeting specified performance targets~~. These~~ ~~performance targets were~~ based upon the historical purchasing volume of VHA and UHC member healthcare organizations that signed up to use Marketplace@Novation. If Inthe ~~October~~performance ~~2000,~~targets wehad ~~exchanged~~not been met, VHA’s ~~warrant for 3.1 million restricted shares of our common stock~~ and, ~~in January 2001, we exchanged the unexercised portion of~~ UHC’s ~~performance~~restricted ~~warrant to purchase 564,000~~ shares ofwould ~~our~~have ~~common~~been subject ~~stock~~to ~~for~~forfeiture. ~~564,000~~As ~~restricted shares~~ of ~~our~~June 30, ~~common~~2005, ~~stock.~~ VHA and UHC ~~have~~beneficially ~~earned~~owned ~~all of the restricted shares~~41.7% Ifand ~~the performance targets had not been met~~10.3%, respectively, ~~VHA’s~~of ~~and~~our ~~UHC’s~~outstanding ~~restricted~~common ~~shares would have been subject to forfeiture~~stock.

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

• weWe and Novation ~~have~~ agreed to a fee level that is based on the percentage of marketplace volume, including supply chain data captured for Marketplace@Novation user purchases but not facilitated by our connectivity solution, as well as gross transaction volume. This fee level is determined based on a tiered fee structure under which the incremental fee per dollar of marketplace volume decreases as the marketplace volume increases; • The payments Novation is required to make under the fee level provision are subject to quarterly maximums. In each of the last 12 quarters, we generated sufficient marketplace volume to earn the quarterly maximum payments. Beginning in the first quarter of fiscal 2004, the quarterly maximum payment became $15.3 million in each quarter through the expiration of the initial term of the Fourth Amended Agreement in March 2010. Under previous versions of the Outsourcing Agreement, the quarterly maximums were dependent on several factors, including revenue generated by Novation; • We agreed to share revenue with Novation in certain instances, including revenue related to the distribution or licensing of software and other technology solutions. To date, no such revenue sharing has been triggered and we do not expect to share any revenue in the foreseeable future; • Novation’s rights to view data from any customer are restricted to data from Novation- and HPPI-sponsored marketplaces only; • We have primary responsibility for recruiting, contracting and managing relationships with suppliers regarding their use of supply chain solutions through Marketplace@Novation and sole responsibility for generating revenue from those suppliers; and • We must continue to meet detailed service level and functionality requirements, including new and enhanced functionality, for Marketplace@Novation.

• the payments Novation is required to make under the fee level provision are subject to quarterly maximums. During 2003, we generated sufficient marketplace volume to earn the quarterly maximum payments, which totaled $69.2 million for the16

~~year~~Based ~~ended~~on ~~December 31, 2003. Beginning in~~ the ~~first~~levels ~~quarter~~ of ~~fiscal~~marketplace ~~2004,~~volume ~~the~~we ~~quarterly~~are ~~maximum payment~~currently ~~became~~achieving, ~~$15.25~~we ~~million~~expect inthat ~~each quarter through~~ the ~~expiration~~fees ofwe earn ~~the~~from ~~initial~~Novation ~~term~~will ofcontinue ~~the~~to ~~Fourth~~be ~~Amended~~limited ~~Agreement~~by ~~in March 2010. Under previous versions of~~ the ~~Outsourcing~~quarterly ~~Agreement~~maximums, ~~the~~above ~~quarterly~~which ~~maximums~~additional volume ~~were~~will ~~dependent~~not onresult ~~revenue~~in ~~generated by~~increased ~~Novation;~~ fees.

•In March 2004, we ~~agreed~~entered tointo ~~share~~a ~~revenue~~three-year agreement with ~~Novation~~UHC indesignating ~~certain~~us ~~instances,~~as ~~including~~the ~~revenue~~preferred provider ~~related~~of supply chain data cleansing and maintenance services to the ~~distribution~~UHC orhospital ~~licensing~~membership base. ofIn ~~software~~connection with this agreement, we offer Neoforma DMS to UHC hospital members, and ~~other~~have developed ~~technology~~joint ~~solutions~~sales and marketing plans with UHC to support this relationship. ToIn ~~date~~June 2004, nowe entered ~~such~~into ~~revenue~~a ~~sharing~~similar, ~~has~~three-year ~~been~~agreement ~~triggered~~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 dooffer ~~not~~Neoforma ~~expect~~DMS to ~~share~~VHA ~~any~~member ~~revenue~~hospitals inand collaborate with VHA to educate their member hospitals about the ~~foreseeable~~benefits ~~future;~~of Neoforma DMS.

•In ~~Novation’s~~December 2004, ~~rights~~we entered into a three-year agreement with Consorta, Inc. to ~~view~~provide supply chain data ~~from~~management ~~any~~and ~~customer~~order ~~are~~management ~~restricted~~services to ~~data~~the ~~from~~Consorta ~~Novation~~membership base. Consorta named us as the preferred provider of these solutions to their members, and ~~HPPI~~Neoforma ~~sponsored~~DMS ~~marketplaces~~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.

•Evaluation ~~we have primary responsibility for recruiting, contracting and managing relationships with suppliers regarding their use~~ of ~~supply~~Strategic ~~chain solutions through Marketplace@Novation and sole responsibility for generating revenue from those suppliers; and~~Alternatives

•In welate ~~must~~2004, ~~continue~~our toboard ~~meet~~of ~~detailed~~directors ~~service~~decided ~~level~~it ~~and~~believed ~~functionality~~that ~~requirements~~it would be in the best interests of our stockholders to pursue an evaluation of strategic alternatives, including ~~new~~a ~~and~~possible ~~enhanced~~sale ~~functionality~~or merger of the company, ~~for~~to ~~Marketplace@Novation~~achieve greater stockholder value. In connection with this decision, our board of directors appointed a special committee of independent directors to supervise the evaluation of strategic alternatives.

~~During~~In ~~the~~late ~~three~~January 2005, ~~months~~we ~~ended~~announced ~~June 30~~that, ~~2003~~in ~~and~~connection ~~2004~~with ~~and~~our ~~the~~decision ~~six~~to ~~months~~evaluate ~~ended June 30, 2003~~strategic ~~and 2004~~alternatives, ~~the~~we ~~fees~~and ~~paid~~Novation toeach ushad byengaged ~~Novation~~independent ~~totaled~~consultants ~~$18.0~~to ~~million,~~assess ~~$15.3~~the ~~million~~technology, information, ~~$36.0~~services ~~million~~ and ~~$30.5~~pricing ~~million,~~provided ~~respectively.~~by ~~The~~us ~~fees paid~~ to ~~us by~~ Novation, ~~in each of the last eight quarters~~VHA, ~~including~~UHC ~~the~~and ~~quarter~~their ~~ended~~member ~~June 30, 2004, were~~hospitals ~~limited~~under by the ~~quarterly~~Fourth ~~maximums~~Amended ~~in those periods~~Agreement. ~~Based~~At onthat ~~the levels of marketplace volume we are currently achieving~~time, ~~we expect that the fees we earn from~~ Novation ~~will~~advised ~~continue~~us tothat beits ~~limited~~assessment ~~by the quarterly maximums, above which additional~~could ~~volume will not~~ result in ~~increased fees. As~~ a ~~result,~~formal werequest ~~expect~~ to ~~receive~~reduce ~~$61.0~~the ~~million~~quarterly inmaximum ~~fees~~payment ~~from~~under ~~Novation~~the inFourth ~~2004~~Amended Agreement.

In April 2005, VHA and UHC indicated, in amendments to their respective Statements on Schedule 13D filed with the SEC, their intent to support our evaluation of strategic alternatives, including a possible sale or merger of the company, and sell their ownership interests in the company in a transaction on terms, and with a third party, acceptable to them. They indicated that such support would be conditioned upon Novation renegotiating the Fourth Amended Agreement in the context of a sale or merger transaction.

VHA and UHC also indicated that, based upon the advice of their consultant, they believe a market competitive price of the services provided by us under the Fourth Amended Agreement should be significantly less than the current fee paid by Novation to us. We, however, believe our current fee from Novation is reasonable and market competitive based upon the terms and conditions of the Outsourcing Agreement and the services we have provided and are currently providing. No party has currently invoked the benchmarking provision under Section 8.5 of the Fourth Amended Agreement or requested an amendment of the Fourth Amended Agreement fees.

We cannot assure you that any particular strategic alternative will be pursued or that any transaction will occur, or if any transaction does occur, on what terms such transaction might be consummated. In addition, we cannot assure you that a buyer acceptable to VHA and UHC will be willing to enter into a transaction on terms acceptable to VHA, UHC and us.

Other Matters

Since inception, we have incurred significant losses, and, as of June 30, ~~2004~~2005, we had an accumulated deficit of $~~724~~785.3 6 million. We have a limited operating history on which to base an evaluation of our business and prospects. You must consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of development, particularly companies in new and rapidly evolving markets such as the market ~~for~~ Web-based supply chain management solutions for the healthcare industry. To address these risks, we must, among other things, expand our customer base, enter into new strategic alliances, increase the functionality of our solutions, implement and successfully execute our business and marketing strategy, respond to competitive developments and attract, retain and motivate qualified personnel. We may not be successful in addressing these risks, and our failure to do so could seriously harm our business.

for supply chain management solutions for the healthcare industry. To address these risks, we must, among other things, expand our customer base, diversify our sources of revenue, enter into new strategic alliances, increase the functionality of our solutions, implement and successfully execute our business and marketing strategy, respond to competitive developments and attract, retain and motivate qualified personnel. We may not be successful in addressing these risks, and our failure to do so could seriously harm our business.

Results of Operations

Overview

InWe generate the ~~six~~substantial ~~months~~majority ~~ended~~of ~~June~~our 30fees in connection with our relationship with Novation, VHA, ~~2004~~UHC and their member hospitals. However, as ~~compared~~a toresult of the ~~six~~application ~~months~~of ~~ended~~Emerging ~~June~~Issues Task 30Force Abstract, ~~2003~~or EITF, No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” our total revenue ~~increased~~does ~~22%~~not reflect the importance of, ~~from~~and ~~$5.1~~the ~~million to~~fees ~~$6.3~~generated ~~million~~from, this relationship. ~~Over~~In the ~~same~~three ~~period~~and six months ended June 30, ~~our~~2004 ~~net~~and ~~loss~~2005, ~~decreased~~we 7offset 100%, of the fees we generated from ~~$34.0~~Novation ~~million~~and its hospitals and the resultant gross related party revenue (see Note 3 to ~~$31.6~~the ~~million~~Notes to Condensed Consolidated Financial Statements for further discussion of the impact of the application of EITF No. 01-9). It is important to consider both our total revenue and gross related party revenue when evaluating our business.

~~Under~~Total ~~the~~revenue ~~terms~~for of the ~~Fourth~~three ~~Amended~~months ~~Agreement~~ended June 30, ~~the~~2004 ~~quarterly~~and ~~maximum~~2005, ~~limits~~and on the ~~payments~~six wemonths ~~receive~~ended ~~from~~June 30, 2004 ~~Novation~~and ~~decreased~~2005 ~~from~~was an$3.3 million, ~~annual~~$2.8 million, ~~total~~$6.3 million ofand $695.2 4 million, inrespectively, ~~2003~~and, because toof ~~$61.0~~the ~~million~~impact inof ~~2004~~EITF No. 01-9 Ason aour ~~result~~related ~~of this~~party ~~decrease~~revenue, ~~and~~our ~~because~~total werevenue ~~achieved~~in ~~the~~these periods ~~quarterly~~consisted ~~maximum~~entirely ~~payments~~of ~~from~~non-related ~~Novation~~party inrevenue. ~~both~~For the ~~first~~three and ~~second~~six ~~quarters~~months ofended ~~2003~~June 30, 2005 as compared to the three and six months ended June 30, 2004, ~~our~~the ~~gross~~decline ~~related~~in non-related party revenue, ~~prior~~was primarily due to ~~the~~an ~~offset~~anticipated bydecrease ~~amortization~~in ofrevenue ~~partnership~~related ~~costs~~to ~~under~~a ~~the~~$3.5 million ~~application~~technology oflicense ~~EITF~~sale ~~No.~~to ~~01-9~~Global Healthcare Exchange, ~~decreased~~LLC, ~~from~~or ~~$35~~GHX, in 2001.1 ~~million~~We inhad ~~the~~been recognizing ~~six~~this ~~months~~revenue ~~ended~~ratably ~~June~~over ~~30,~~the ~~2003~~three-year toterm ~~$30.9~~of ~~million~~the inrelated operating agreement. Since the ~~six~~inception ~~months~~of ~~ended~~our ~~June~~agreement 30with GHX, ~~2004.~~ratable ~~However,~~recognition asof athis ~~result~~technology oflicense ~~the~~revenue ~~application~~had accounted for $282,000 of ~~EITF~~revenue ~~No.~~on ~~01-9,~~a ~~under~~quarterly ~~which~~basis. weIn ~~offset~~August 2004, ~~gross~~this ~~related party~~license revenue bywas fully ~~amortization~~recognized. ofAs ~~partnership~~a ~~costs~~result, we ~~eliminated~~recognized ~~98%~~$282,000 and ~~100%~~$564,000 ofin ~~gross~~revenue ~~related~~in ~~party~~the three and six months ended June 30, 2004, respectively, and no revenue in the three and six months ended June 30, 2005 ~~2003~~related to this license sale. For the three months and ~~2004,~~six ~~respectively~~months ~~(see~~ended ~~Note~~June 30, 32005 as compared to the ~~Notes~~same toperiod ~~Condensed~~in ~~Consolidated~~the ~~Financial~~prior ~~Statements~~year, ~~for~~we also experienced a decrease in revenue from ~~further~~Neoforma ~~discussion~~Pharmaceutical ofMarket ~~the~~Intelligence ~~impact~~and, offor the ~~application~~three ofmonths ~~EITF~~ended ~~No.~~June 30, ~~01-9).~~2005 ~~Based~~as compared onto the ~~levels~~same ofperiod ~~marketplace~~in ~~volume~~the weprior ~~are currently achieving~~year, we ~~expect~~experienced ~~the~~a ~~fees~~decrease wein ~~earn~~revenue from ~~Novation~~Neoforma OMS ~~will~~for ~~continue~~suppliers. toThe bedecrease ~~limited~~in Neoforma Pharmaceutical Market Intelligence was primarily attributable to the ~~quarterly~~cancellation ~~maximums.~~by As a ~~result, and~~pharmaceutical ~~based~~manufacturer onof ~~the~~a ~~decline~~large pharmaceutical market intelligence contract in the ~~quarterly~~second ~~maximums,~~half weof ~~expect~~2004 due to ~~generate~~their ~~lower~~cancellation ~~gross~~of ~~related~~their ~~party~~underlying ~~revenue~~GPO contract with Novation. The decrease in ~~2004~~Neoforma asOMS ~~compared~~for suppliers was due to ~~2003.~~a ~~There~~conversion ~~are~~of noa large ~~further~~connectivity ~~decreases~~customer to a new contract and pricing structure in the ~~Novation~~second ~~payments~~half ~~scheduled,~~of as2004. This ~~beginning~~cancellation and conversion of contracts resulted in ~~fiscal~~less ~~2004,~~revenue in the ~~maximum payment~~six ~~became~~months ~~$15.3~~ended ~~million~~June 30, ~~per~~2005 ~~quarter~~as ~~through~~compared to the ~~expiration~~six ofmonths ~~the~~ended ~~initial~~June 30, ~~term~~2004. ofThese ~~the~~decreases ~~Fourth~~were ~~Amended~~partially ~~Agreement~~offset by increases in ~~March~~revenue ~~2010.~~from HPIS Market Intelligence.

~~Because~~Our ofquarterly ~~the~~non-related ~~impact~~party ofrevenue ~~EITF~~has ~~No.~~fluctuated ~~01-9~~as ona ~~our~~result ~~gross~~of ~~related~~the ~~party~~size ~~revenue,~~and ~~our~~timing ~~revenue~~of ~~growth~~the completion ~~has~~of ~~been~~Neoforma ~~primarily~~DMS aprojects ~~result~~and ofthe ~~increases~~relative inimmaturity ~~non-related~~of ~~party~~certain ~~revenue~~of our offerings. ~~For~~We ~~the~~expect ~~six~~this ~~months~~trend ~~ended~~to ~~June~~continue ~~30,~~for ~~2003~~certain asof ~~compared~~our tonon-related ~~the~~party ~~six~~revenue ~~months~~streams ~~ended~~and, potentially, ~~June~~for ~~30,~~total ~~2004,~~non-related party revenue as a whole.

13In the second half of 2005, we expect that the fees we generate in connection with our related party relationship that generate our gross related party revenue will not be fully offset by amortization of partnership costs. This expectation is based on the fact that the significant majority of the capitalized partnership costs resulting from the initial shares provided to VHA and UHC will be fully amortized in July 2005. As a result, amortization of partnership costs in the second half of 2005 is expected to be significantly lower than in prior periods. In the first half of 2005, gross amortization of partnership costs was $32.4 million, of which $30.8 million was offset against related party revenue. In the second half of 2005, gross amortization of partnership costs is expected to be $6.6 million. Based on the current quarterly maximum payment from Novation of $15.3 million, this reduced offset will result in significant growth in related party revenue and total revenue in the second half of 2005 as compared to prior periods.

~~this~~Our ~~growth~~total inoperating ~~non-related~~expenses ~~party~~decreased ~~revenue~~for ~~was~~the ~~primarily~~six ~~due~~months toended ~~increases in revenue from solutions we sell to suppliers and from sales of Neoforma Data Management Solution™~~June 30, or2005 ~~Neoforma~~as ~~DMS,~~compared to ~~hospitals. In~~ the six months ended June 30, ~~2003 and~~ 2004, ~~Global~~due ~~Healthcare~~primarily ~~Exchange,~~to ~~LLC,~~a or$4.1 million ~~GHX,~~write-off ~~represented 11% and 9%, respectively,~~ of ~~our~~stockholder ~~total~~notes receivable ~~revenue.~~in ~~The~~the ~~revenue~~first ~~from~~half ~~GHX~~of ~~relates~~2004 toand a $31.5 million ~~technology~~decrease ~~license~~in ~~sold~~the toamortization ~~GHX~~of inpartnership costs ~~2001,~~reported ~~which~~as wean ~~have~~operating ~~been~~expense ~~recognizing~~in ~~ratably over~~ the ~~three-year~~six ~~term~~months ofended ~~the~~June 30, ~~related~~2005 ~~operating~~as ~~agreement.~~compared ~~Since~~to the ~~inception~~six months ofended ~~our~~June 30, ~~agreement~~2004. ~~with GHX~~However, ~~ratable~~most ~~recognition~~ of ~~this~~our ~~technology~~other ~~license revenue~~operating ~~has~~expenses ~~accounted~~increased ~~for~~in ~~$282~~the six months ended June 30,~~000~~ of2005 ~~revenue~~as oncompared ato ~~quarterly~~the ~~basis.~~six Inmonths ~~August~~ended ~~2004~~June 30, ~~this~~2004 ~~license~~as ~~revenue~~we ~~will~~continued beto invest ~~fully~~in ~~recognized~~our ~~and,~~operations asto ~~such,~~grow our non-related party revenue ~~related~~and to ~~this~~enhance ~~agreement~~the ~~will~~functionality related beto ~~lower~~Marketplace@Novation. inIn ~~the~~addition ~~second~~to ~~half~~the ofincrease ~~fiscal~~in ~~2004~~total asoperating ~~compared~~expenses ~~to the~~resulting ~~first~~from ~~half~~these investments, ~~and~~operating weexpenses ~~will~~also ~~recognize~~increased nodue ~~revenue related~~ to ~~this~~a ~~agreement~~$1.8 million ~~after~~decrease ~~August~~in software ~~2004.~~development Wecosts ~~expect~~capitalized ~~this~~and ~~resulting~~a ~~reduction~~$1.2 million increase in ~~revenue~~depreciation toand beamortization of ~~offset~~property byand ~~growth~~equipment in ~~our~~the ~~other~~six ~~revenue~~months ~~streams~~ended inJune 30, 2005 as compared to the ~~second~~same ~~half~~period ofin the ~~2004.~~prior year.

InOur ~~2004~~total asoperating ~~compared~~expenses will continue to ~~2003,~~be weimpacted ~~expect~~by ~~our~~the ~~total~~amount ~~revenue~~of tocapitalized ~~continue~~software developments tocosts ~~grow~~in aseach aquarter. ~~result~~In ~~of increases~~addition, inwe ~~non-related~~expect ~~party~~that ~~revenue~~our ~~from~~general ~~sales~~and ofadministrative expenses ~~our~~will ~~solutions~~be toimpacted ~~hospital,~~by ~~GPO~~costs ~~and~~associated ~~supplier~~with ~~customers~~our ongoing evaluation of strategic alternatives. InAs ~~addition~~discussed above, we also expect ~~that~~a significant decrease in the ~~fees~~gross weamortization of ~~generate~~partnership incosts, ~~connection~~which, ~~with~~based on the ~~Fourth~~current ~~Amended~~quarterly ~~Agreement~~maximum inpayment ~~2004~~from Novation, will result bein ~~fully~~the ~~offset~~elimination byof amortization of partnership costs, ~~resulting~~classified inas ~~zero~~an ~~net~~operating ~~related~~expense and ~~party~~will have a positive impact on our revenue, ~~during~~operating ~~the~~expenses ~~year.~~and results of operations.

In the six months ended June 30, 2004 as compared to the six months ended June 30, 2003, our total operating expenses decreased 1.4%, from $38.6 million to $38.0 million. The decrease in total operating expenses over this period was19 primarily a result of a $4.6 million decrease in depreciation and amortization of property and equipment and the capitalization of $3.3 million of internal use software development costs, which were partially offset by a $4.1 million write-off of stockholder notes receivable and a $2.3 million increase in amortization of partnership costs. In addition to the impact of these changes, we experienced an increase in cost of services and decreases in our other operating expenses including operations, product development, selling and marketing and general and administrative expenses.

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

	Three Months Ended June 30,
	Three Months Ended
	2003			2004			Percentage Change 2003 to 2004
	June 30,						Percent Change
	(in thousands, except per share data)
	2004			2005			2004 to 2005
Revenue:
	(in thousands, except per share data)
Related party revenue, net	$	—		$	—		—
Revenue:
Non-related party revenue		2,519			3,340		32.6	%
Related party revenue, net	$	—		$	—			—
Total revenue		2,519			3,340		32.6	%
Non-related party revenue		3,340			2,816			(16	)%
Operating expenses:
Total revenue		3,340			2,816			(16	)%
Cost of services		1,481			2,682		81.1	%
Operating Expenses:
Operations		4,799			2,811		(41.4	)%
Cost of services		2,682			2,857			7	%
Product development		4,183			4,403		5.3	%
Operations		2,811			3,095			10	%
Selling and marketing		4,633			3,513		(24.2	)%
Product development		4,403			5,097			16	%
General and administrative		3,130			2,468		(21.2	)%
Selling and marketing		3,513			3,115			(11	)%
Amortization of intangibles		147			147		—
General and administrative		2,468			2,840			15	%
Amortization of partnership costs		833			1,669		100.4	%
Amortization of intangibles		147			147			—
Write-off of stockholder notes receivable		—			4,115		*
Amortization of partnership costs		1,669			588			(65	)%
Total operating expenses		19,206			21,808		13.5	%
Write-off of stockholder notes receivable		4,115			—			*
Loss from operations		(16,687	)		(18,468	)	10.7	%
Total operating expenses		21,808			17,739			(19	)%
Other income/(expense):
Loss from operations		(18,468	)		(14,923	)		(19	)%
Interest income		80			55		(31.3	)%
Other income (expense):
Interest expense		(300	)		(2	)	(99.3	)%
Interest income		55			247			349	%
Other income/(expense)		(41	)		1		*
Interest expense		(2	)		(2	)		—
Net loss	$	(16,948	)	$	(18,414	)	8.6	%
Other income		1			—			*
Net loss per share:
Net loss	$	(18,414	)	$	(14,678	)		(20	)%
Basic and diluted	$	(0.94	)	$	(0.95	)	1.1	%
Net loss per share:
Weighted average shares—basic and diluted		17,985			19,357		7.6	%
Basic and diluted	$	(0.95	)	$	(0.74	)		(22	)%
Weighted average shares—basic and diluted		19,357			19,810			2	%

	Six Months Ended June 30,
	Six Months Ended
	2003			2004			Percentage Change 2003 to 2004
	June 30,						Percent Change
	(in thousands, except per share data)
	2004			2005			2004 to 2005
Revenue:
	(in thousands, except per share data)
Related party revenue, net	$	539		$	—		(100.0	)%
Revenue:
Non-related party revenue		4,582			6,268		36.8	%
Related party revenue, net	$	—		$	—			—
Total revenue		5,121			6,268		22.4	%
Non-related party revenue		6,268			5,436			(13	)%
Operating expenses:
Total revenue		6,268			5,436			(13	)%
Cost of services		2,859			4,743		65.9	%
Operating Expenses:
Operations		9,941			5,809		(41.6	)%
Cost of services		4,743			5,825			23	%
Product development		8,926			8,041		(9.9	)%
Operations		5,809			6,263			8	%
Selling and marketing		9,610			7,169		(25.4	)%
Product development		8,041			10,159			26	%
General and administrative		6,097			4,706		(22.8	)%
Selling and marketing		7,169			6,659			(7	)%
Amortization of intangibles		294			294		—
General and administrative		4,706			5,886			25	%
Amortization of partnership costs		833			3,141		277.1	%
Amortization of intangibles		294			294			—
Write-off of stockholder notes receivable		—			4,115		*
Amortization of partnership costs		3,141			1,630			(48	)%
Total operating expenses		38,560			38,018		(1.4	)%
Write-off of stockholder notes receivable		4,115			—			*
Loss from operations		(33,439	)		(31,750	)	(5.1	)%
Restructuring		—			767			*
Other income/(expense):
Total operating expenses		38,018			37,483			(1	)%
Interest income		131			124		5.3	%
Loss from operations		(31,750	)		(32,047	)		1	%
Interest expense		(574	)		(3	)	(99.5	)%
Other income (expense):
Other income/(expense)		(117	)		1		*
Interest income		124			433			249	%
Net loss	$	(33,999	)	$	(31,628	)	(7.0	)%
Interest expense		(3	)		(4	)		33	%
Net loss per share:
Other income (expense)		1			(17	)		*
Basic and diluted	$	(1.91	)	$	(1.65	)	(13.6	)%
Net loss	$	(31,628	)	$	(31,635	)		—
Weighted average shares—basic and diluted		17,763			19,213		8.2	%
Net loss per share:
Basic and diluted	$	(1.65	)	$	(1.61	)		(2	)%
Weighted average shares—basic and diluted		19,213			19,698			3	%

* ~~Not~~Cannot ~~meaningful~~be expressed as a percentage

15 20

Three and Six Months Ended June 30, ~~2003~~2004 as Compared to the Three and Six Months Ended June 30, ~~2004~~ 2005

Revenue

	Three Months Ended June 30,					Percentage Change 2003 to 2004			Six Months Ended June 30,				Percentage Change 2003 to 2004
	Three Months Ended										Six Months Ended
	2003		2004						2003		2004
	June 30,							Percent Change			June 30,					Percent Change
	(in thousands)								(in thousands)
	2004			2005				2004 to 2005			2004			2005		2004 to 2005
Related party revenue, net	$	—	$	—		—			$	539	$	—	(100.0	)%
	(in thousands)										(in thousands)
Non-related party revenue		2,519		3,340		32.6	%			4,582		6,268	36.8	%
Related party revenue, net	$	—		$	—				—		$	—		$	—		—
Total	$	2,519	$	3,340		32.6	%		$	5,121	$	6,268	22.4	%
Non-related party revenue		3,340			2,816				(16	)%		6,268			5,436		(13	)%
Total	$	3,340		$	2,816				(16	)%	$	6,268		$	5,436		(13	)%

~~Effective~~Related Party Revenue. Gross related party revenue consists of fees paid by Novation under the fee level provisions of the Outsourcing Agreement, as amended, and hospital implementation fees earned by us when VHA and UHC member hospitals that have contracted with ~~our~~us ~~fourth~~are ~~quarter~~first connected to Marketplace@Novation. As a result of the adoption of EITF No. 01-9, amortization of partnership costs resulting from the equity consideration issued to VHA and UHC is classified as an offset ~~full~~against ~~year~~gross ~~2003~~related ~~financial~~party revenue, as opposed to being classified as an operating expense, up to the lesser of such gross related party revenue or gross amortization of partnership costs in any given period. This offset of gross amortization of partnership costs against gross related party revenue results in net related party revenue, weif ~~reclassified~~any. ~~our~~In the three months ended June 30, 2004 and 2005, and six months ended June 30, 2004 and 2005, gross related party revenue ~~presentation~~was on$15.5 million, $15.4 million, ~~our~~$30.9 million and $30.8 million, respectively, and was less than the gross amortization of partnership costs in each period. As a result, there was no net related party revenue reported in either of these periods. See Note 3 to the Notes to Condensed Consolidated Financial Statements for further discussion of ~~Operations~~the toimpact ~~reflect~~of the application of EITF No. 01-9. During the remaining term of the Fourth Amended Agreement, the quarterly maximums on the fees we may earn from Novation currently total $15.3 million per quarter and $61.0 million per year. In the second half of 2005, we expect that the fees we generate in connection with our related party relationship that generate our gross related party revenue will not be fully offset by amortization of partnership costs. This expectation is based on the fact that the significant majority of the capitalized partnership costs resulting from the initial shares provided to VHA and UHC will be fully amortized in ~~two~~July 2005. ~~categories:~~As a result, gross amortization of partnership costs in the second half of 2005 is expected to be significantly lower than in prior periods. In the first half of 2005, gross amortization of partnership costs was $32.4 million, of which $30.8 million was offset against related party revenue. In the second half of 2005, ~~net~~gross amortization of partnership costs is expected to be $6.6 million. Based on the current quarterly maximum payment from Novation of $15.3 million, this reduced offset would result in significant growth in related party revenue and total ~~non-~~revenue in the second half of 2005 as compared to prior periods and, as a result, we expect net related party revenue. to increase in the second half of 2005 as compared to the second half of 2004.

~~Related~~Non-related Party Revenue. ~~Gross~~ Non-related party revenue ~~consists~~includes ofrevenue ~~fees~~earned ~~paid~~from bynon-related ~~Novation~~party ~~under~~healthcare ~~the fee level provisions of the Outsourcing Agreement~~providers, asGPOs ~~amended,~~ and ~~hospital implementation fees earned by us when VHA and UHC member hospitals that have contracted with us are connected to Marketplace@Novation. As a result of the adoption of EITF No. 01-9~~suppliers, ~~amortization~~including ofrevenue ~~partnership costs resulting~~ from ~~the~~solutions ~~equity~~sold ~~consideration issued~~ to VHA and UHC~~, the owners of Novation, is classified as an offset against gross related party revenue, as opposed to being classified as an operating~~ ~~expense,~~member uphospitals tooutside the ~~lesser~~scope of ~~gross~~the ~~related~~Fourth ~~party~~Amended ~~revenue~~Agreement or ~~gross~~previous ~~amortization~~versions of ~~partnership costs in any given period. This offset of gross amortization of partnership costs against gross related party revenue results in net related party revenue. For~~ the three months ended June 30, 2003, gross related party revenue of $17.5 million was less than the gross amortization of partnership costs of $18.4 million. For the three months ended March 31, 2003, gross related party revenue of $17.5 ~~million exceeded the gross amortization of partnership costs of $17~~agreement.0 ~~million,~~The ~~resulting~~decrease in ~~$539,000 of net~~ non-related party revenue. Asin ~~a result, net related party revenue for~~ the ~~six months ended June 30, 2003 was $539,000. For the~~ three and six months ended June 30, 2004, gross related party revenue was $15.5 million and $30.9 million, respectively, which were both less than the gross amortization of partnership costs during the same periods of $17.1 million and $34.1 million, ~~respectively.~~2005 Asas acompared ~~result,~~to ~~there was no net related party revenue for~~ the three and six months ended June 30, 2004. ~~See~~was ~~Note~~primarily 3due to ~~the~~a ~~Notes~~decrease ~~to Condensed Consolidated Financial Statements for further discussion of the impact of the application of~~in ~~EITF~~our ~~No.~~other ~~01-9~~revenue. During the remaining term of the Fourth Amended Agreement, the quarterly maximums on the fees we may earn from Novation total $61.0 million per year. As we expect gross amortization of partnership costs to be in excess of $61.0 million in 2004, we expect net Non-related party revenue toby becustomer $0category inwas ~~the~~as ~~remainder of 2004.~~ follows:

Non-Related Party Revenue. Non-related party revenue includes revenue earned from non-related party healthcare providers, GPOs and suppliers, including revenue from solutions sold to VHA and UHC member hospitals outside the scope of the Fourth Amended Agreement or previous versions of the agreement. The increase in non-related party revenue for the three and six months ended June 30, 2004 as compared to the three and six months ended June 30, 2003 was primarily due to increases in revenue generated from providers and GPOs and suppliers. Non-related party revenue by customer category was as follows:


	Three Months Ended							Six Months Ended
	June 30,				Percent Change			June 30,				Percent Change
	2004		2005		2004 to 2005			2004		2005		2004 to 2005
	(in thousands)							(in thousands)
Non-related party revenue:
Provider and GPO revenue	$	732	$	669		(9	)%	$	1,161	$	1,172		1	%
Supplier revenue		2,324		2,135		(8	)%		4,524		4,247		(6	)%
Other revenue		284		12		(96	)%		583		17		(97	)%

Total	$	3,340	$	2,816		(16	)%	$	6,268	$	5,436		(13	)%

	Three Months Ended June 30,				Percentage Change 2003 to 2004		Six Months Ended June 30,				Percentage Change 2003 to 2004
	2003		2004				2003		2004
	(in thousands)						(in thousands)
Non-related party revenue:
Provider and GPO revenue	$	187	$	732	291.4	%	$	639	$	1,161	82.0	%
Supplier revenue		2,026		2,324	14.7	%		3,338		4,524	35.5	%
Other revenue		306		284	(7.2	)%		605		583	(3.6	)%
Total	$	2,519	$	3,340	32.6	%	$	4,582	$	6,268	36.8	%

The decrease in non-related party revenue from providers and GPOs during the three months ended June 30, 2005, as compared to the three months ended June 30, 2004 was primarily due to a decrease in revenue related to Neoforma MMS, for providers. Neoforma MMS revenue from providers was larger in 2004 as a result of a single large implementation completed during the three months ended June 30, 2004. The increase in non-related party revenue from providers and GPOs during the six months ended June 30, 2005 as compared to the six months ended June 30, 2004 was primarily due to an increase in revenue related to our data cleansing services and was partially offset by a decrease in Neoforma MMS revenue.

~~The increase in non-related party~~21 revenue from providers and GPOs during the three and six months ended June 30, 2004 as compared to the same periods in 2003 was primarily due to an increase in revenue related to our data cleansing services, which are part of Neoforma DMS for providers and GPOs. We expect our non-related party revenue from providers and GPOs to generally continue to increase in future periods.

The ~~increase~~decrease in non-related party revenue from suppliers during the three ~~and six~~ months ended June 30, 2005 ~~2004~~ as compared to the ~~same~~three ~~periods~~months inended ~~2003~~June 30, 2004 was aprimarily ~~result~~due ofto ~~increases~~decreases in revenue related to ~~suppliers’ participation in Marketplace@Novation, including our connectivity services provided as part of~~ Neoforma ~~Order Management Solution™, or Neoforma~~ OMS, and ~~our~~Neoforma ~~market~~Pharmaceutical ~~intelligence offerings for medical-surgical~~Market ~~and pharmaceutical suppliers~~Intelligence, ~~part~~as ofdiscussed ~~Neoforma~~above ~~DMS.~~in ~~These~~the ~~increases~~“Results ~~were a result~~ of ~~suppliers’ greater acceptance of Neoforma OMS and Neoforma DMS~~ Operations-Overview”, ~~and~~ which were partially offset by aan ~~decrease~~increase in revenue related to ~~Neoforma~~HPIS ~~Materials~~Market ~~Management Solution™,~~Intelligence. orThe ~~Neoforma MMS, for suppliers.~~decrease ~~Neoforma~~in ~~MMS~~non-related party revenue from suppliers ~~declined~~during ~~as a result of a large license sale to a single supplier that occurred in~~ the six months ended June 30, ~~2003.~~2005 ~~During~~as compared to the ~~three~~six months ended June 30, 2004, awas ~~single~~primarily ~~Neoforma~~due ~~OMS~~to ~~customer~~a ~~accounted for 10.8% of our non-related party supplier revenue. We expect that revenue generated from this customer will~~ decrease in ~~future~~revenue ~~periods~~related ~~because~~to Neoforma ~~the~~Pharmaceutical ~~agreement~~Market ~~previously~~Intelligence, inwhich ~~place~~was ~~with~~partially ~~this~~offset ~~customer~~by ~~terminated~~increases in ~~May 2004 and a new agreement is being~~revenue ~~negotiated at a lower fee. Despite the expected decrease from this single customer relationship, we expect that our non-~~related ~~party~~to ~~revenue~~HPIS ~~from~~Market ~~suppliers~~Intelligence ~~generally~~and ~~will~~Neoforma ~~continue to increase~~OMS.

The decrease in other non-related party revenue ~~primarily~~during ~~related to~~ the ~~expiration~~three ofand ~~one~~six ~~of our~~months ~~revenue~~ended ~~sharing~~June 30, ~~agreements~~2005 as ~~that~~compared weto ~~had entered into in connection with~~ the ~~divestiture~~three ofand ~~one~~six ofmonths ~~our~~ended ~~former~~June 30, ~~lines~~2004 ofwas ~~business.~~primarily Wedue ~~expect other non-related party revenue~~ to ~~continue to decrease in~~ the ~~second half of 2004 largely as a result of~~anticipated ~~the~~$282,000 ~~reduction~~and in$564,000 ~~revenue from GHX. We have been recognizing this revenue ratably over the three-year term of the related operating agreement and~~decreases, ~~as such~~respectively, ~~this~~in revenue ~~will~~related beto ~~fully~~the ~~recognized by August 2004~~$3.5 million ~~Since the inception of our agreement~~technology ~~with~~sale to GHX, ~~ratable~~that ~~recognition~~occurred ofin ~~this technology license revenue has accounted for $282~~2001,~~000~~ ofwhich ~~other~~was ~~non-related~~recognized ~~party~~ratably ~~revenue~~through ~~on a quarterly basis~~August 2004.

Operating Expenses

Cost of Services

	Three Months Ended June 30,					Percentage Change 2003 to 2004			Six Months Ended June 30,				Percentage Change2003 to 2004
	Three Months Ended										Six Months Ended
	2003		2004						2003		2004
	June 30,							Percent Change			June 30,					Percent Change
	(in thousands)								(in thousands)
	2004			2005				2004 to 2005			2004			2005		2004 to 2005
Cost of Services	$	1,481	$	2,682		81.1	%		$	2,859	$	4,743	65.9	%
	(in thousands)										(in thousands)
Cost of Services	$	2,682		$	2,857				7	%	$	4,743		$	5,825	23%

Cost of services consists primarily of ~~expenses~~ ~~related~~the costs to perform hospital and supplier implementation activities and Neoforma DMS services for hospitals and GPOs, as well as direct costs to obtain data for our solutions. These expenditures consist primarily of technology costs, software licenses, salaries and other personnel expenses for our services personnel and fees for independent contractors, consultants and companies to which we outsource services. The increase in cost of services from the three months ended June 30, ~~2003~~2004 to the three months ended June 30, ~~2004~~2005 was primarily due to aan ~~$519,000~~ increase in payroll and related expenses of $192,000 ~~driven~~due byto an increase in headcount in the cost of services group from 2748 as of June 30, ~~2003~~2004 to 4856 as of June 30, ~~2004,~~2005. There was also a $~~310~~77,000 increase in ~~costs~~expenses related to ~~outsourced~~the ~~services~~use ~~for~~of ~~certain~~independent ~~Neoforma~~contractors ~~DMS~~and consultants ~~projects~~during ~~that~~the ~~were~~three ~~completed~~months ~~during~~ended ~~the~~June 30, ~~periods~~2005. ~~and~~These aincreases were partially offset by a $~~300~~180,000 ~~increase~~decrease in depreciation costs allocated to cost of services~~, including depreciation expense and deferred compensation expense~~. The increase in cost of services ~~from~~for the six months ended June 30, ~~2003~~2004 to the six months ended June 30, ~~2004~~2005 was primarily due to aan ~~$1.0 million~~ increase in payroll and related expenses, aof $~~525~~601,000, an increase in ~~costs~~contractor ~~allocated to cost of~~and ~~services,~~consultant ~~including depreciation~~ expense ~~and~~of ~~deferred compensation expense~~$154,000 and aan increase of $~~179~~310,000 ~~increase~~ in allocable costs, ~~related~~including depreciation, todeferred ~~outsourced~~compensation ~~services~~and ~~for~~other ~~certain~~costs ~~Neoforma~~allocated ~~DMS~~to ~~projects~~cost ~~that~~of ~~were completed during the periods~~services.

Operations

	Three Months Ended June 30,					Percentage Change 2003 to 2004			Six Months EndedJune 30,				Percentage Change2003 to 2004
	Three Months Ended										Six Months Ended
	2003		2004						2003		2004
	June 30,							Percent Change			June 30,					Percent Change
	(in thousands)								(in thousands)
	2004			2005				2004 to 2005			2004			2005		2004 to 2005
Operations	$	4,799	$	2,811		(41.4	)%		$	9,941	$	5,809	(41.6	)%
	(in thousands)										(in thousands)
Operations	$	2,811		$	3,095				10	%	$	5,809		$	6,263		8	%

Operations expenses consist primarily of expenditures for the operation and maintenance of our technology infrastructure, including customer service. These expenditures consist primarily of technology costs, software licenses, salaries and other personnel expenses for our operations personnel and fees paid to independent contractors and consultants. The ~~decrease~~increase in operations expenses from the three ~~and six~~ months ended June 30, ~~2003~~2004 ~~as compared~~ to the three ~~and six~~ months ended June 30, ~~2004~~2005 was primarily due to a $~~2.0~~105,000 ~~million and~~increase in Web hosting costs allocated to operations, a $~~4.4~~100,000 increase ~~million~~in ~~decrease,~~software ~~respectively~~maintenance expenses and an $84,000 increase in allocable costs, including depreciation, ~~expense~~deferred compensation and other costs allocated to operations. asThe aincrease ~~result~~in operations ofexpenses ~~certain~~for ~~large~~the ~~software~~six ~~licenses~~months ~~acquired~~ended June 30, 2004 to the six months ended June 30, 2005 was primarily due to an increase in ~~2000~~software ~~that~~maintenance ~~were~~expenses ~~fully~~of ~~depreciated~~$232,000 asand an increase of $119,000 ~~December~~in 31allocable costs, ~~2003.~~including depreciation, deferred compensation and other costs allocated to operations.

17 22

Product Development

	Three Months Ended June 30,					Percentage Change2003 to 2004			Six Months Ended June 30,				Percentage Change 2003 to 2004
	Three Months Ended										Six Months Ended
	2003		2004						2003		2004
	June 30,							Percent Change			June 30,					Percent Change
	(in thousands)								(in thousands)
	2004			2005				2004 to 2005			2004			2005		2004 to 2005
Product Development	$	4,183	$	4,403		5.3	%		$	8,926	$	8,041	(9.9	)%
	(in thousands)										(in thousands)
Product Development	$	4,403		$	5,097				16	%	$	8,041		$	10,159		26	%

Product development expenses consist primarily of personnel expenses, fees to consultants and contractors and technology costs associated with the ~~maintenance~~development, ~~development~~maintenance and enhancement of our solutions. ~~The~~Product ~~increase in product~~ development expenses ~~from~~increased for the three months ended June 30, ~~2003~~2005 as compared to the three months ended June 30, 2004 primarily ~~related~~due to a $~~1.0 million increase in consultant and contractor expenses and a $364~~412,000 increase in payroll and related expenses ~~driven~~as bya result of an increase in headcount in the product development group from 79 61 as of June 30, ~~2003~~2004 to 7597 as of June 30, ~~2004~~2005. ~~Additionally~~In addition, there was a $~~258~~410,000 increase in expenses ~~software and hardware maintenance and hosting costs and costs~~ allocated to product development, ~~including~~consisting ~~depreciation~~of ~~expense~~$332,000 in depreciation and ~~deferred~~$78,000 in ~~compensation~~amortization ~~expense~~of deferred compensation. These increases were partially offset by ~~the~~a ~~capitalization of~~ $~~1.5~~172,000 reduction ~~million~~in ofWeb ~~product~~hosting ~~development~~ costs ~~related~~allocated to ~~development~~product ~~efforts on internal use software in the second quarter of 2004~~development. ~~The~~Product ~~decrease in product~~ development expenses ~~from~~increased for the six months ended June 30, ~~2003~~2004 as compared to the six months ended June 30, ~~2004~~ 2005 primarily ~~related~~due to ~~the~~an ~~capitalization~~increase ofin ~~certain~~payroll ~~internal~~and ~~use~~related ~~software~~expenses ~~development costs~~ of $31.3 1 million inand ~~the~~an ~~first~~increase ~~half~~ of ~~2004~~ $849,000 ~~which~~in ~~was~~expenses ~~partially~~allocated ~~offset~~to byproduct adevelopment, including $~~1.6 million~~623,000 ~~increase~~ in ~~consultant~~depreciation and ~~contractor expenses, a~~ $~~556~~226,000 ~~increase~~ in ~~payroll~~amortization ~~and~~of ~~related~~deferred ~~expenses~~compensation. ~~and~~The aincreases ~~$282,000~~in ~~increase~~payroll inrelated ~~software~~expenses and fees ~~hardware~~paid ~~maintenance~~to contractors and ~~hosting~~consultants ~~costs.~~were ~~Prior~~also topartially ~~2004, neither~~ the ~~qualifying~~result ~~internal~~of ~~costs~~reduced ~~incurred~~levels of tocapitalized ~~develop~~ software ~~for~~development ~~use~~costs induring ~~operations, nor~~ the ~~useful~~three ~~lives~~and ofsix ~~the~~months ~~software~~ended ~~developed~~June 30, ~~were~~2005 ~~material~~as compared ~~and,~~to ~~accordingly,~~the ~~such~~three ~~costs~~and ~~were~~six ~~expensed~~months asended ~~incurred.~~June 30, 2004.

During the three months ended June 30, 2004 and 2005, and the six months ended June 30, 2004 and 2005, we capitalized internal costs incurred related to certain software development projects of $1.5 million, $842,000, $3.3 million and $1.6 million, respectively. Excluding the impact of the capitalized software development costs, payroll and related expenses increased by $646,000 and fees paid to contractors and consultants decreased by $906,000 for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004. Excluding the impact of the capitalized software development costs, payroll and related expense increased by $1.2 million and fees paid to contractors and consultants decreased by $1.5 million for the six months ended June 30, 2005 as compared to the six months ended June 30, 2004.

Selling and Marketing

	Three Months Ended June 30,					Percentage Change 2003 to 2004			Six Months Ended June 30,				Percentage Change 2003 to 2004
	Three Months Ended										Six Months Ended
	2003		2004						2003		2004
	June 30,							Percent Change			June 30,					Percent Change
	(in thousands)								(in thousands)
	2004			2005				2004 to 2005			2004			2005		2004 to 2005
Selling and Marketing	$	4,633	$	3,513		(24.2	)%		$	9,610	$	7,169	(25.4	)%
	(in thousands)										(in thousands)
Selling and Marketing	$	3,513		$	3,115				(11)	%	$	7,169		$	6,659		(7)	%

Selling and marketing expenses consist primarily of salaries and commissions for sales and marketing personnel, as well as advertising, promotions and other related marketing costs. The decrease in selling and marketing expenses for the three ~~and six~~ months ended June 30, ~~2004~~2005 as compared to the three ~~and six~~ months ended June 30, ~~2003~~2004 ~~related~~ primarily related to a decrease of $293,000 in payroll and related expenses ~~of $705,000~~ and ~~$1.3 million, respectively, largely driven by~~ a decrease inof ~~headcount~~$224,000 in ~~the~~deferred ~~selling~~compensation and ~~marketing~~other ~~groups~~costs ~~from~~allocated to 67selling asand ofmarketing. ~~June~~These ~~30,~~decreases ~~2003~~were topartially 48offset asby ofa ~~June 30~~$141,000 ~~2004.~~increase ~~Additionally, significant marketing efforts~~ in ~~the~~depreciation allocated ~~first~~to ~~half~~selling ofand ~~2003,~~marketing. ~~which~~The ~~included~~decrease ~~updating our corporate image, resulted~~ in ~~increased~~selling ~~costs of $138,000~~ and ~~$490,000,~~marketing ~~respectively,~~expenses for the ~~three and~~ six months ended June 30, ~~2003~~2004 as compared to the ~~three and~~ six months ended June 30, ~~2004.~~2005 ~~There~~ was ~~also~~primarily adue to a decrease in payroll and related expenses of $~~325~~526,000 and a $~~602~~201,000, ~~respectively,~~decrease ~~for~~in ~~the~~other ~~three~~allocable costs ~~and~~to ~~six~~selling ~~months~~and ~~ended~~marketing. ~~June~~These ~~30,~~decreases ~~2004~~were aspartially ~~compared~~offset toby ~~the~~a ~~three and six months ended June 30~~$271,000 ~~2003~~increase in depreciation ~~costs~~expenses allocated to selling and marketing~~, including depreciation expense and deferred compensation expense~~.

General and Administrative

	Three Months EndedJune 30,					Percentage Change2003 to 2004			Six Months EndedJune 30,				Percentage Change2003 to 2004
	Three Months Ended										Six Months Ended
	2003		2004						2003		2004
	June 30,							Percent Change			June 30,					Percent Change
	(in thousands)								(in thousands)
	2004			2005				2004 to 2005			2004			2005		2004 to 2005
General and Administrative	$	3,130	$	2,468		(21.2	)%		$	6,097	$	4,706	(22.8	)%
	(in thousands)										(in thousands)
General and Administrative	$	2,468		$	2,840				15	%	$	4,706		$	5,886		25	%

General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services and other general corporate activities. General and administrative expenses ~~decreased~~increased for the three months ended June 30, ~~2004~~2005 as compared to the three months ended June 30, ~~2003~~2004 due primarily to a $~~301~~181,000 increase ~~reduction~~ in payroll and related expenses, ~~and~~ a $~~235~~139,000 ~~reduction~~increase in ~~amortization~~fees ofpaid ~~deferred~~to ~~compensation~~independent consultants ~~related~~and professional services firms and a $139,000 increase in depreciation costs allocated to general and administrative ~~personnel~~expenses. These increases were partially offset by a $149,000 decrease in deferred compensation and other allocated costs. General and administrative expenses ~~decreased~~increased for the six months ended June 30, 2004 ~~as compared~~ to the six months ended June 30, ~~2003~~2005 primarily due ~~primarily~~ to aan ~~$714,000~~increase ~~reduction~~ in payroll and related expenses of $486,000, a $~~439~~294,000 ~~reduction~~increase in ~~amortization~~fees ofpaid ~~deferred compensation related~~ to ~~general~~independent consultants and ~~administrative~~professional ~~personnel~~services firms and aan increase of $~~179~~283,000 ~~decrease~~ in depreciation costs ~~expense~~ allocated to general and administrative expenses. The increase in fees paid to independent consultants and professional services firms was partly related to our evaluation of strategic alternatives.

18 23

Amortization of Partnership Costs

	Three Months EndedJune 30,						Percentage Change2003 to 2004			Six Months Ended June 30,								Percentage Change2003 to 2004
	Three Months Ended										Six Months Ended
	2003			2004						2003				2004
	June 30,						Percent Change				June 30,								Percent Change
	(in thousands)									(in thousands)
	2004			2005			2004 to 2005				2004				2005				2004 to 2005
Gross Amortization of Partnership Costs	$	1817,~~361~~128		$	1715,~~128~~975		~~(6.7~~	)%(7	)%	$	~~35,364~~$	34,078		$	~~34,078~~$	32,438		~~(3.6~~	)%	(5	)%
Amortization of Partnership Costs Offset Against Gross Related Party Revenue		(1715,~~528~~459	)		(15,~~459~~387	)	~~(11.8~~	)%—			~~(34,531~~	)(30,937	)		~~(30,937~~	)(30,808	)	~~(10.4~~	)%	—
Amortization of Partnership Costs Classified as an Operating Expense	$	833		$	1,669		100.4	%		$	833			$	3,141			277.1	%
Amortization of PartnershipCosts Classified as an Operating Expense	$	1,669		$	588			(65	)%		$	3,141			$	1,630				(48	)%

Amortization of partnership costs represents the amortization of the shares of our common stock issued to VHA and UHC. As of June 30, ~~2004~~2005, capitalized partnership costs represented the capitalized valuation of common stock and earned restricted common stock issued to VHA and UHC in connection with our entering into the Outsourcing Agreement, as amended, with those entities and with Novation and HPPI. The value of the initial common stock issued is being amortized over a five-year estimated useful life. The restricted common stock was being valued, and the related valuation was being capitalized, as the shares were earned. ~~VHA~~As ~~and~~of ~~UHC~~March 31, ~~have~~2004, ~~earned~~ all of the shares of restricted stock had been earned by VHA and UHC. The capitalized partnership costs relating to the restricted common stock are being amortized over the term of the agreement with the healthcare organizations that resulted in the shares being earned, generally two to three years.

The ~~increase in~~ amortization of partnership costs ~~classified~~reported as an operating expense ~~from~~is ~~the~~reflected ~~three~~as ~~and~~an adjustment ~~six~~to ~~months~~reconcile ~~ended~~net ~~June~~loss ~~30,~~to ~~2003~~cash tofrom ~~the~~operating ~~three~~activities ~~and~~in ~~six~~our ~~months~~Condensed ~~ended~~Consolidated ~~June~~Statements 30of Cash Flows. Under EITF No. 01-9, ~~2004~~we ~~was~~account ~~largely~~for the ~~result~~fees ofbeing ~~the~~paid ~~scheduled~~by ~~decrease~~Novation inunder the ~~fees~~terms ~~received~~of ~~from~~the ~~Novation,~~Outsourcing asAgreement ~~under~~and ~~EITF~~subsequent ~~No.~~amendments ~~01-9,~~as ~~amortization~~if ofthey ~~partnership~~were ~~costs~~payments ismade ~~classified~~for the asequity anconsideration ~~offset~~we ~~against~~provided ~~gross~~to ~~related~~VHA ~~party~~and ~~revenue~~UHC, as opposed to ~~being~~payments ~~classified as~~for anservices. ~~operating~~As ~~expense~~a result, ~~up to~~ the ~~lesser~~amortization of partnership costs that is offset against gross related party revenue oris reported ~~amortization~~as ofa ~~partnership~~cash ~~costs~~flow from financing activities in ~~any~~our ~~given~~Condensed ~~period.~~Consolidated Statements of Cash Flows.

~~The~~Although ~~amortization~~there ofwere incremental partnership costs ~~reported~~capitalized asrelated anto ~~operating~~the ~~expense~~earning isof ~~reflected~~the restricted ascommon anstock ~~adjustment~~by toVHA ~~reconcile~~and ~~net~~UHC ~~loss~~from tothe ~~cash~~date ~~from~~we ~~operating~~entered ~~activities~~into inthe ~~our~~Outsourcing Agreement ~~Condensed~~through ~~Consolidated~~March 31, ~~Statements~~2004, certain of ~~Cash~~the ~~Flows.~~capitalized ~~Under~~partnership ~~EITF~~costs ~~No.~~relating ~~01-9,~~to wethe ~~account~~restricted stock ~~for~~earned by VHA and UHC when the ~~fees~~first ~~being~~hospitals ~~paid~~signed byup to participate in Marketplace@Novation ~~under~~in ~~the~~2000 ~~terms~~had ofbeen ~~the~~fully ~~Outsourcing~~amortized ~~Agreement~~in asprior ifperiods. ~~they~~Those partnership costs that had been fully amortized in prior periods were ~~payments~~generally ~~made~~capitalized ~~for~~at ~~the~~higher ~~equity~~levels ~~consideration~~than those wethat ~~provided~~have tobeen capitalized in more recent periods because (i) there was a relatively lower number of restricted shares earned by VHA and UHC during more recent periods and (ii) the capitalized value of each restricted share earned was higher in historical periods than in more recent periods given our generally higher stock price in historical periods as ~~opposed~~compared to ~~payments~~more recent ~~for services~~periods. As a result, the overall gross amortization of partnership costs ~~that~~associated iswith the ~~offset~~restricted ~~against~~common ~~gross~~stock ~~related~~decreased ~~party~~for ~~revenue~~the isthree ~~reported~~and six months ended June 30, 2005 as acompared to ~~cash~~the ~~flow~~three ~~from~~and ~~financing~~six ~~activities~~months inended ~~our~~June 30, ~~Condensed~~2004. ~~Consolidated~~We ~~Statements~~expect total gross amortization of ~~Cash~~partnership costs, ~~Flows~~excluding the impact of EITF No. 01-9, and amortization of partnership costs classified as an operating expense to decrease significantly in the second half of 2005 as compared to the second half of 2004. This decrease is expected because the significant

~~We expect the total gross amortization of partnership costs, prior to the~~24 offset under EITF No. 01-9, to decrease slightly in 2004 as compared to 2003. However, net of the offset of gross related party revenue required under EITF No. 01-9, we expect that amortization of partnership costs classified as an operating expense will increase in 2004 as compared to 2003. We expect this increase will be due to decreases in the level of gross related party revenue we will receive in 2004 as a result of the scheduled decrease in the maximum fees payable from Novation under the terms of the Fourth Amended Agreement from $69.2 million in 2003 to $61.0 million in 2004. See Note 3 to the Notes to Condensed Consolidated Financial Statements for further discussion of the impact of the application of EITF No. 01-9. See “Liquidity and Capital Resources” for a further discussion of the Outsourcing Agreement and the related cash and accounting implications.

majority of the capitalized partnership costs resulting from the initial shares provided to VHA and UHC will be fully amortized in July 2005. We recorded $32.4 million in gross amortization of partnership costs in the first half of 2005, and we expect to record $6.6 million in gross amortization of partnership costs in the second half of 2005. As a result, the offset against gross related party revenue will be significantly lower in the second half of 2005 as compared to prior periods. See “Liquidity and Capital Resources” for a further discussion of the Outsourcing Agreement, as amended, and the related cash and accounting implications.

Restructuring

During the six months ended June 30, 2005, we recorded a restructuring charge of $767,000 related to anticipated costs for idle facilities, net of expected sublease income. Anticipated costs included the net present value of future minimum lease commitments related to the idle facilities. We did not have any restructuring charges in the six months ended June 30, 2004.

Amortization of Deferred Compensation

	Three Months EndedJune 30,						Percentage Change2003 to 2004			Six Months EndedJune 30,								Percentage Change2003 to 2004
	Three Months Ended										Six Months Ended
	2003			2004						2003				2004
	June 30,						Percent Change				June 30,								Percent Change
	(in thousands)									(in thousands)
	2004			2005			2004 to 2005				2004				2005				2004 to 2005
Gross Amortization of Deferred Compensation	$	1,~~026~~251		$	1,~~251~~195		~~21.9~~	%(4	)%	$	~~2,069~~$	1,741		$	~~1,741~~$	2,576		~~(15.9~~	)%	48	%
Reversal of Amortization of Deferred Compensation as a Result of Employee Terminations		(23	)		(22	)	4.3	%			(352	)			(22	)		(93.8	)%
Less: Reversals as a Result of Employee Terminations		(22	)		(115	)		423	%			(22	)			(272	)			1,136	%
Reduction of Amortization of Deferred Compensation due to Capitalization of Software Development Costs		—			(30	)	*				—				(53	)		*
Less: Amounts Capitalized as Software Development Costs		(30	)		(58	)		93	%			(53	)			(109	)			106	%
Amortization of Deferred Compensation Recognized as Expense	$	1,003		$	1,199		19.5	%		$	1,717			$	1,666			(3.0	)%
Amortization of Deferred Compensation	$	1,199		$	1,022			(15	)%		$	1,666			$	2,195				32	%

*In ~~Not~~connection ~~meaningful~~with the award of restricted stock to employees and officers, we record deferred compensation representing the fair value of the underlying common stock at the dates of grant. The restrictions on the stock typically lapse over a two-year period from the date of grant, with the restrictions on one-half of the shares lapsing one year from the date of grant and the restrictions on the remaining one-half of the shares lapsing two years from the date of grant, provided that the grant recipients are employed continuously with us through the vesting dates. The deferred compensation amounts are presented as a reduction of stockholders’ equity and are being amortized over the periods from the date of grant through the vesting date on an accelerated basis. Amortization of deferred compensation is reversed for any amounts recognized on shares of restricted stock that do not vest due to employee terminations or employee attrition.

~~Deferred~~During ~~compensation~~the ~~represents~~three ~~the~~months ~~aggregate~~ended ~~difference~~June 30, at2004 and 2005, and the ~~date~~six months ended June 30, 2004 and 2005, we recorded deferred compensation of ~~grant~~$61,000, ~~between~~$610,000, ~~the~~$6.6 million ~~cost~~and to$2.9 million, respectively. During the ~~employee~~three ofmonths ~~equity-based~~ended ~~compensation~~June 30, 2004 and 2005, and the ~~estimated~~six ~~fair~~months ~~value~~ended June 30, 2004 and 2005, we recorded $140,000, $119,000, $187,000 and $285,000, respectively, in reductions of the ~~underlying~~deferred ~~equity~~compensation ~~instrument.~~as Ina result of employee terminations or attrition and the ~~case~~resulting forfeiture of restricted stock. ~~options,~~We recorded amortization of deferred compensation resulting isfrom ~~calculated~~this asrestricted ~~the~~stock, ~~difference~~net ~~between~~of ~~the~~reversals ~~exercise~~relating ~~price~~to forfeitures and amounts capitalized as software development costs, of ~~the~~$1.2 million, ~~option~~$1.0 million, $1.7 million and $2.2 million during the ~~deemed~~three ~~fair~~months ~~value~~ended ofJune 30, ~~the~~2004 ~~underlying~~and ~~stock~~2005, onand the ~~date~~six ~~the~~months ended June 30, 2004 and 2005, respectively.

19The remaining total deferred compensation of $3.8 million at June 30, 2005 is expected to be amortized as follows: $2.1 million during the remainder of 2005, $1.5 million during 2006 and $166,000 during 2007. The amortization expense relates to restricted stock awarded to officers and other employees in all operating expense categories. The amount of amortization of deferred compensation has been separately allocated to these operating expense categories in the Condensed Consolidated Statements of Operations. We expect that we will continue to use restricted stock grants as a means to compensate employees in future periods, although not as widely as we have in prior years. As a result, we expect to capitalize and to amortize additional deferred compensation in future periods related to those grants.

option was granted. We amortize deferred compensation from stock option grants on an accelerated basis over the vesting period of the underlying options, generally four years. Amortization of deferred compensation is reversed for any amounts recognized on options that do not vest due to employee terminations or employee attrition. In connection with the grant of stock options to employees during fiscal 1998, 1999 and 2000, prior to our initial public offering, or IPO, we recorded deferred compensation of $65.2 million. During the three months ended June 30, 2003 and 2004 and the six months ended June 30, 2003 and 2004, we recorded $3,000, $0, $24,000 and $0, respectively, in reductions of this deferred compensation. We recorded amortization of this deferred compensation, net of reversals relating to forfeitures, of $500,000, $0, $1.0 million and $0 during the three months ended June 30, 2003 and 2004 and the six months ended June 30, 2003 and 2004, respectively. As of December 31, 2003, amortization of this deferred compensation was complete.

During 2001, 2002, 2003 and the six months ended June 30, 2004, in connection with the award of restricted stock to officers and other employees, we recorded deferred compensation of $3.6 million, $249,000, $320,000 and $6.6 million, respectively, representing the fair value of the underlying common stock at the dates of grant. The restrictions on the stock lapse on various dates through May 2006 and are subject to the continuous employment of the employees and officers with us through those dates. These amounts are presented as a reduction of stockholders’ equity and are being amortized over the periods from the date of grant through the vesting date on an accelerated basis. Amortization of deferred compensation is reversed for any amounts recognized on shares of restricted stock that do not vest due to employee terminations or employee attrition. During the three months ended June 30, 2003 and 2004 and the six months ended June 30, 2003 and 2004, we recorded $0, $140,000, $144,000 and $187,000, respectively, in reductions of the deferred compensation as a result of employee terminations and the resulting forfeiture of restricted stock. We recorded gross amortization of deferred compensation related to these shares of $503,000, $1.3 million, $1.0 million and $1.7 million during the three months ended June 30, 2003 and 2004 and the six months ended June 30, 2003 and 2004, respectively.

The remaining total deferred compensation of $4.9 million at June 30, 2004 is expected to be amortized as follows: $2.4 million during the remainder of fiscal 2004, $2.2 million during fiscal 2005 and $272,000 during fiscal 2006. The amortization expense relates to restricted stock awarded to officers and other employees in all operating expense categories. The amount of amortization of deferred compensation has been separately allocated to these operating expense categories in the Condensed Consolidated Statements of Operations. We expect we will continue to use restricted stock grants as a means of compensation for employees in 2004 as we have in prior years. As a result, we expect to capitalize and to amortize additional deferred compensation in 2004 related to those grants.

Write-off of Stockholder Notes Receivable

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

Carrying value of notes receivable, including accrued interest	$	4,955
Less: Fair market value of reclaimed common stock		(840	)
Write-off of stockholder notes receivable	$	4,115

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

Income Taxes

As of December 31, ~~2003~~2004, we had federal and state net operating loss carryforwards of $~~371~~406.0 9 million and $~~247~~275.0 4 million, respectively, which may be available to reduce future taxable income. These net operating loss carryforwards expire on various dates through ~~2023~~2024. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset due to our lack of earnings history. Federal and state tax laws impose significant restrictions on the amount of the net operating loss carryforwards that we may utilize in a given year. Under the Tax Reform Act of 1986, the amount of benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating ~~losses~~ losses that we may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three-year period.

Liquidity and Capital Resources

As of June 30, ~~2004~~2005, we had ~~no outstanding bank, other borrowings or notes payable, and we had~~ $2235.5 0 million of cash, cash equivalents and short-term investments, ~~as well as~~ $1.0 million of restricted cash. and no outstanding bank, other borrowings or notes payable.

~~As discussed~~In inconnection ~~Note~~with ~~3 to~~ the ~~Notes~~operating tolease ~~Condensed~~of ~~Consolidated~~our ~~Financial~~corporate ~~Statements,~~headquarters wein ~~adopted~~San ~~EITF~~Jose, ~~No. 01-9 effective January 1~~California, ~~2002.~~we established As a ~~result~~letter of credit initially in the ~~application~~amount of ~~EITF No~~$2.0 million ~~01-9,~~payable weto ~~have~~our ~~classified~~landlord ~~certain amortization costs associated with~~to ~~capitalized~~collateralize ~~equity~~our ~~consideration~~obligations ~~provided~~under tothe ~~VHA~~lease. ~~and~~Under ~~UHC~~the interms ~~connection~~of ~~with~~ the ~~Outsourcing Agreement as an offset against gross related party revenue from VHA~~lease, ~~UHC~~which ~~and~~allowed ~~Novation.~~for reductions ~~This treatment results~~ in the ~~offset~~amount of ~~non-cash~~the ~~amortization~~letter of ~~partnership~~ ~~costs~~credit ~~against~~over ~~gross~~time ~~related~~as ~~party~~we ~~revenue~~fulfilled upour toobligations under the ~~lesser~~lease, ofwe ~~gross~~reduced ~~related~~the ~~party~~letter ~~revenue or amortization~~ of ~~partnership~~credit ~~costs~~to ~~in any period~~$1.0 million ~~Any~~as ~~amortization~~ of ~~partnership~~December 31, ~~costs~~2003, inat ~~excess~~which ~~of gross related party revenue in any period is~~amount ~~classified~~it asremained ~~an operating expense and is reflected~~ as ~~an adjustment to reconcile net loss to cash from operating activities on the Condensed Consolidated Statements~~ of ~~Cash~~June 30, ~~Flows~~2005. ~~Under~~The ~~EITF~~letter ~~No.~~of ~~01-9,~~credit weis ~~account~~collateralized ~~for~~by ~~the~~balances ~~fees~~in ~~being paid by Novation~~our ~~under~~investment ~~the~~accounts ~~terms~~and ofis ~~the~~classified ~~Outsourcing Agreement,~~ as ~~amended,~~restricted ascash ifin ~~they~~our ~~were~~Condensed ~~payments~~Consolidated ~~made for the equity consideration we provided to VHA and UHC as opposed to payments for services~~Balance Sheets. AsThe arestriction ~~result,~~on the ~~amortization~~letter of ~~partnership~~credit ~~costs that~~ is ~~offset against~~expected ~~gross~~to ~~related~~lapse ~~party revenue is reported as a cash flow from financing activities~~ in ~~our Condensed Consolidated Statements of Cash Flows~~March 2007.

~~Net~~In ~~cash~~the ~~used~~normal incourse ~~operating~~of ~~activities~~business ~~was~~to ~~$32.0~~facilitate ~~million~~sales of our products, we indemnify other parties, including customers and ~~$21~~parties to other transactions with us, with respect to certain matters.4 ~~million~~We have ~~for~~agreed to hold the ~~six~~other ~~months~~parties ~~ended~~harmless ~~June~~against ~~30,~~losses ~~2003~~arising ~~and~~from ~~2004,~~a ~~respectively~~breach of representations or covenants, ~~and~~or ~~primarily~~out ~~related~~of tointellectual ~~cash~~property infringement or other claims made ~~utilized~~against tothem. ~~fund~~These ~~net~~agreements ~~losses~~may limit the time within which an indemnification claim can be made and ~~changes~~the inamount of the claim. We have entered into indemnification agreements with our ~~working~~officers ~~capital~~and directors, ~~including~~and ~~the~~our ~~payment~~bylaws ofcontain ~~annual~~similar ~~cash~~indemnification ~~bonuses~~obligations to ~~employees,~~our ~~which~~agents. ~~resulted~~It inis ~~decreases~~not possible to ~~other~~determine ~~accrued~~our ~~liabilities~~maximum potential liability under these indemnification agreements due to the limited history of prior indemnification claims and ~~accrued~~the ~~payroll~~unique facts and circumstances involved in each ~~period~~particular agreement. Historically, we have not made any payments under these agreements.

~~Net~~As ~~cash~~discussed ~~used~~ in ~~investing~~Note ~~activities~~3 ~~was~~to ~~$3.8~~the ~~million~~Notes ~~and~~to $3Condensed Consolidated Financial Statements, we adopted EITF No. 01-9 ~~million~~effective ~~for~~January 1, 2002. As a result of the ~~six~~application ~~months ended~~of ~~June~~EITF 30No. 01-9, ~~2003~~we have classified certain amortization costs associated with capitalized equity consideration provided to VHA and ~~2004~~UHC in connection with the Outsourcing Agreement, ~~respectively.~~as ~~Net~~amended, ~~cash~~as ~~used~~an inoffset ~~investing~~against ~~activities~~gross related ~~for~~party revenue from VHA, UHC and Novation. This treatment results in the ~~six~~offset ~~months~~of ~~ended~~non-cash amortization ~~June~~of ~~30,~~partnership ~~2003~~costs ~~primarily~~against gross related party revenue up to the ~~purchase~~lesser of ~~capital~~such gross ~~equipment~~related toparty ~~operate~~revenue ~~our~~or ~~solutions~~gross amortization of partnership costs in any period. ~~Net~~Any amortization ~~cash~~of ~~used~~partnership costs in ~~investing~~excess ~~activities~~of ~~for~~gross ~~the~~related party revenue in any period is ~~six~~classified ~~months~~as ~~ended~~an ~~June~~operating ~~30,~~expense ~~2004~~and ~~primarily~~is ~~related~~reflected as an adjustment to ~~capitalized~~reconcile ~~internal~~net ~~use~~loss ~~software~~to ~~development~~cash from ~~costs~~operating ~~and~~activities on the ~~purchase~~Condensed Consolidated Statements of ~~capital~~Cash ~~equipment~~Flows. toUnder ~~operate~~EITF ~~our~~No. 01-9, ~~solutions~~we account for the fees being paid by Novation under the terms of the Outsourcing Agreement, as ~~which~~amended, as if they were ~~partially~~payments made for the equity consideration we provided to VHA and UHC as opposed to payments for services. As a result, the amortization of partnership costs that is offset byagainst ~~net~~gross ~~sales~~related party revenue is reported as a cash flow from financing activities in our Condensed Consolidated Statements of ~~marketable~~Cash ~~investments~~Flows.

Net cash ~~provided~~used byin ~~financing~~operating activities was $3321.1 4 million and $3219.2 6 million for the six months ended June 30, ~~2003~~2004 and ~~2004~~2005, respectively~~. Net cash provided by financing activities for the six months ended June 30~~, ~~2003~~ and ~~2004~~ primarily related to ~~fees~~cash ~~received~~utilized ~~from~~to ~~Novation~~fund ~~under~~our ~~the~~net ~~fee level provisions of the Outsourcing~~losses ~~Agreement,~~and aschanges ~~amended, which,~~ in ~~the~~our ~~six~~working ~~months ended June 30, 2003, was partially offset by repayments of notes payable~~capital.

InNet ~~April~~cash ~~2001,~~used wein ~~entered~~investing ~~into~~activities awas ~~revolving credit agreement with VHA~~$10.1 million ~~Under this credit agreement, as amended in February 2002, December 2002~~ and ~~December 2003, we are able to borrow funds until December 31, 2004 up to an amount based on a specified formula dependent on the gross volume of transactions through Marketplace@Novation~~$4.0 million ~~Funds~~for ~~that we borrow under this credit agreement bear interest at~~ the ~~prime~~six ~~rate plus~~months ~~2.75% per year and are secured by substantially all of our assets. All amounts outstanding under this line of credit~~ended June 30, ~~both~~2004 ~~principal~~ and ~~interest~~2005, ~~are~~respectively. ~~due~~Net ~~and~~cash ~~payable~~used onin ~~December~~investing ~~31,~~activities ~~2004,~~for ~~if not repaid sooner. In~~ the ~~event~~six ~~that we (i) sell any~~months ofended ~~our stock as part of an equity financing~~June 30, ~~(ii)~~2004 ~~obtain~~primarily ~~funding~~related ~~in connection with a debt financing or other lending transaction that is either unsecured or subordinate~~ to ~~the~~net ~~lien~~purchases of ~~VHA~~short-term ~~under~~investments, ~~the credit agreement or (iii) enter into a debt~~capitalized ~~financing~~internal oruse ~~other~~software ~~lending~~development ~~transaction~~costs ~~secured~~and bypurchases ~~assets we owned as~~ of ~~the~~capital ~~date~~equipment ~~we entered into the credit agreement, then the maximum we could potentially borrow under the credit agreement will be reduced by an amount equal~~ to ~~the~~operate ~~cash proceeds we~~our ~~receive from any of these transactions~~solutions. ~~During~~Net ~~2003,~~cash weused ~~repaid~~in ~~all~~investing ~~amounts~~activities ~~outstanding~~for ~~under~~ the ~~line~~six ofmonths ~~credit,~~ended ~~including accrued interest~~June 30, ~~and~~2005 ~~amended~~related ~~the line of credit~~ to ~~reduce its capacity from the original $25.0 million to $15.0 million. As~~ ofcapitalized ~~June~~software ~~30,~~development ~~2004~~costs, ~~there~~purchases ~~was~~of nocapital ~~balance~~equipment ~~outstanding~~ and ~~there~~net ~~was~~purchases ~~$15.0 million~~ of short-term ~~remaining capacity available to us under the line of credit~~investments.

~~We currently anticipate that our available funds, consisting of cash and cash equivalents, combined with those funds we expect to generate in 2004 and funds available to~~26 us through our line of credit, will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least the next 12 months. Our future long-term capital needs will depend significantly on the rate of growth of our business, the timing of expanded service offerings, the success of these services once they are launched and our ability to adjust our operating expenses to an appropriate level if the growth rate of our business is slower than expected. Hospitals and suppliers might not accept our business model of providing Web-based supply chain management solutions for the healthcare industry and, as a result, we may not succeed in increasing our revenue and controlling our expenses to the extent necessary to be cash flow positive during the second half of 2004 and beyond. Any projections of future long-term cash needs and cash flows are subject to substantial uncertainty. If our available funds and cash generated from operations are insufficient to satisfy our long-term liquidity requirements, we might need to seek additional sources of funding, such as selling additional equity or debt securities or obtaining additional lines of credit. We also might need to curtail expansion of our services, including reductions in our staffing levels and related expenses, or potentially liquidate selected assets. If our management decides that it is in our best interest to raise cash to strengthen our balance sheet, broaden our investor base, increase the liquidity of our stock or for any other reason, we may decide to issue equity or debt, even if all of our current funding sources remain available to us. If we issue additional securities to raise funds, those securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders may experience dilution. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all.

Net cash provided by financing activities was $32.2 million and $31.5 million for the six months ended June 30, 2004 and 2005, respectively. Net cash provided by financing activities for both the six months ended June 30, 2004 and 2005 primarily related to funds received for sales of stock related to option exercises and stock purchases under the employee stock purchase plan as well as fees received from Novation under the fee level provisions of the Fourth Amended Agreement.

Our future long-term capital needs will depend significantly on the rate of growth of our business, the timing of our expanded service offerings, the success of these service offerings once they are launched and our ability to adjust our operating expenses to an appropriate level based on its revenue. Any projections of future long-term cash needs and cash flows are subject to substantial uncertainty. We currently anticipate that our available funds, consisting of cash, cash equivalents and short-term investments, combined with those funds we expect to generate from operations in the remainder of 2005, will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least the next 12 months. However, if available funds and cash generated from operations are insufficient to satisfy our long-term liquidity requirements, we may seek to sell additional equity or debt securities, obtain a line of credit, curtail expansion of our services, including reductions in our staffing levels and related expenses, or potentially liquidate selected assets. We cannot be certain that additional financing will be available on favorable terms if and when required, or at all.

The following table summarizes the various contractual obligations we have under service contracts, operating leases and any other purchase agreements as of June 30, 2005:


	Payments due by period (in thousands)
			Less than		1–3		3–5		More than
	Total		1 year		years		years		5 years
Net minimum operating lease obligations	$	5,730	$	3,272	$	2,458	$	—	$	—
Purchase obligations		220		220		—		—		—

Total	$	5,950	$	3,492	$	2,458	$	—	$	—

Factors That May Affect Future Operating Results

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

If participants in the healthcare supply chain do not accept our business model of ~~providing~~ providing solutions designed to improve efficiencies in the healthcare supply chain, or are unwilling to do so due to our relationship with VHA, UHC and Novation, demand for our solutions may not develop as we expect and the price of our common stock may decline

We have focused our efforts on developing solutions that address the inefficiencies in the healthcare supply chain. This business model is new and unproven and depends upon participants in this market adopting a new way of doing business and exchanging information. ~~Participants~~We believe that some participants, including hospitals and GPOs not affiliated with VHA, UHC or Novation, as well as suppliers, have not been willing to use our solutions because of the significant stock ownership in us by VHA and UHC and the corresponding ownership by VHA and UHC of Novation, and because the main source of our business is with Novation. This reluctance on the part of market participants has made it increasingly difficult to grow our revenue and has inhibited our future prospects. Additionally, some participants, other than VHA and UHC member hospitals, have been reluctant to to accept our relatively new and unproven approach, which may not be consistent with their existing internal organization and procurement and sale processes. Some participants may prefer to use traditional methods of doing business, such as using paper catalogs and exchanging information in person or by phone. If participants in the healthcare supply chain do not accept our business model, demand for our solutions may not develop as we expect and the price of our common stock could decline.

~~Our~~VHA ~~main~~and ~~source~~UHC ofhave ~~business~~informed isus ~~derived~~that ~~from~~they ~~the~~believe ~~solutions~~a wemarket ~~provide~~competitive price of the services provided ~~through~~by ~~Marketplace@Novation,~~us ~~and~~should webe ~~rely~~significantly onless ~~our~~than ~~relationship~~the ~~with~~current fee paid by Novation, ~~VHA~~to us, and ~~UHC~~that they expect to ~~drive~~renegotiate ~~participation~~the Fourth Amended Agreement in ~~Marketplace@Novation~~the context of any sale or merger transaction. AsOur amain ~~result~~source of business is derived from the Fourth Amended Agreement we have with VHA, UHC and Novation, and our business and prospects may be seriously harmed if ~~these~~this ~~relationships~~agreement ~~are~~ is materially altered or terminated

Our main source of business is derived from the solutions we provide through Marketplace@Novation~~. We have relied, and expect~~ to ~~continue to rely, significantly on our relationship with Novation,~~ VHA and UHC tomember ~~bring~~ hospitals ~~and suppliers to Marketplace@Novation~~. WeFor ~~rely~~example, onfor ~~Novation~~the tothree ~~assist~~months usended inJune 30, ~~attracting suppliers~~2004 ~~to Marketplace@Novation~~ and, ~~if Novation is unable to attract a sufficient number of suppliers~~2005, and the ~~value~~six ofmonths ~~Marketplace@Novation~~ended toJune 30, ~~hospitals~~2004 ~~will be substantially decreased~~ and ~~our~~2005, ~~business~~we ~~will~~generated ~~suffer~~$15.5 million, We$15.4 million, ~~rely~~$30.9 million ~~significantly on VHA~~ and ~~UHC~~ to$30.8 million, ~~assist~~respectively, us in ~~recruiting~~gross ~~and~~related ~~retaining~~party ~~hospitals~~revenue, torepresenting ~~Marketplace@Novation~~82.2%, ~~These~~84.5%, 83.2% ~~partners use a variety of marketing initiatives~~ and ~~financial~~85.0%, ~~incentives~~respectively, ~~to drive adoption and use~~ of ~~Marketplace@Novation and~~ our ~~solutions~~total bygross ~~hospitals.~~revenue Iffor these ~~partners~~ ~~cease using such marketing initiatives and financial incentives, our ability to recruit hospitals to Marketplace@Novation also may be seriously harmed~~periods.

Novation and we each engaged independent consultants to assess the technology, information, services and pricing we provide under the Fourth Amended Agreement. Based upon the advice of their consultant, VHA and UHC informed us that they believe a market competitive price of the services provided by us should be significantly less than the current fee paid by Novation to us, although we have informed Novation that we believe our current fee is reasonable and market competitive based upon the terms and conditions of the Outsourcing Agreement and the services we have provided and are currently providing.

VHA and UHC have indicated that, in the context of a sale or merger transaction in connection with our evaluation of strategic alternatives, their support to such a transaction would be conditioned upon Novation renegotiating the Fourth Amended Agreement. If Novation were to seek to negotiate lower fees through its effective assignment right under the terms of the Fourth Amended Agreement in the context of a sale or merger transaction, this potential reduction in fees could subsequently limit our ability to attract what we would consider a fair price for our stockholders for such a transaction.

In addition, in the absence of, or prior to, a sale or merger of our company, VHA, UHC and Novation might seek to lower their payments to us by renegotiating or invoking the benchmarking provision of the Fourth Amended Agreement. If VHA and UHC were to be ultimately successful in reducing these payments, either through negotiation or benchmarking, our revenue and operating results could be seriously harmed and we might not continue to operate as we have expected.

If we do not meet the expectations of Novation, VHA and UHC for the functionality Marketplace@Novation, the main source of our business could either be reduced or terminated, and our business would be seriously harmed

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

Our ~~solutions~~review ~~and~~of ~~fee~~strategic ~~model~~alternatives ~~are~~may ~~untested~~not be successful and ~~their~~the ~~acceptance~~outcome isof ~~not~~this ~~assured~~process is uncertain

~~Our~~We ~~solutions~~have ~~are~~retained ~~either~~Merrill ofLynch ~~recent~~& ~~introduction~~Co. orto ~~are~~explore ~~currently~~strategic ~~under development,~~alternatives ~~and~~for ~~their acceptance by~~ our ~~existing~~business ~~and~~in ~~potential~~order ~~customers~~to achieve isgreater ~~therefore~~stockholder ~~untested~~value. ~~and~~We are uncertain. ~~Our~~as ~~current~~to ~~business~~what ~~plan~~impact ~~includes~~any ~~seeking~~particular astrategic alternative ~~large~~may ~~portion~~have ofon our ~~revenue~~operating ~~from~~results ~~suppliers.~~or ~~Obtaining~~our ~~the~~stock ~~acceptance~~price. ~~from~~We ~~suppliers~~are uncertain as to ~~pay~~whether ~~our~~any ~~fees~~transaction ~~has~~will ~~proven~~occur ~~difficult.~~as Ifa ~~suppliers~~result doof ~~not~~this ~~accept~~evaluation ~~our~~of ~~solutions~~strategic oralternatives. ~~our~~Other uncertainties ~~fee~~and ~~model,~~risks itrelating ~~would~~to ~~have a serious negative impact on~~ our ~~ability~~evaluation toof ~~grow~~strategic ~~our~~alternatives ~~business.~~ include:

We• The evaluation of strategic alternatives may disrupt our operations and divert management’s attention, which could have a ~~history~~material adverse effect on our business, financial condition or results of ~~losses~~operations; • The perceived uncertainties as to our future direction may result in the loss of, or failure to attract, customers, employees or business partners; • The process of evaluating strategic alternatives may be more time-consuming and expensive than we currently anticipate; ~~incurring~~• ~~losses~~We inmay not be able to identify strategic alternatives that are worth pursuing, and even if we do identify strategic alternatives that we believe are worth pursuing, we may not ultimately consummate the ~~foreseeable~~strategic ~~future~~transaction or, if consummated, such transaction may not enhance stockholder value; • Together, VHA and UHC hold a majority of our common stock outstanding and, additionally, they have an effective consent assignment right over the Fourth Amended Agreement; consequently, any strategic transaction would be subject to their approval; and • Certain of our stockholders may ~~never~~not ~~achieve~~approve ~~profitability~~of any proposed transaction, and may either vote against it or seek redress through the courts.

WeBecause ~~have~~VHA ~~experienced~~and ~~losses~~UHC ~~from~~collectively ~~operations~~beneficially inown ~~each period since our inception, including~~ a ~~net~~ ~~loss~~majority of ~~$31.6~~our ~~million for the six months ended June 30~~stock, ~~2004.~~they ~~In addition, as of June 30, 2004, we had an accumulated deficit of $724.3 million. We~~ have ~~not achieved profitability and we expect to continue to incur operating losses in future~~substantial ~~quarters,~~control ~~primarily~~over asall amatters ~~result~~requiring ofstockholder ~~costs~~approval ~~relating~~and tosignificant ~~the~~sales ~~amortization~~ of ~~the~~ stock weheld ~~issued~~by tothem could ~~VHA~~have ~~and~~a ~~UHC~~negative ~~and~~effect ~~the~~on ~~costs and expenses relating to executing~~ our ~~strategy~~stock ~~of developing solutions and services to address healthcare supply chain~~price ~~inefficiencies. We cannot assure you that we will ever be profitable.~~

If As of June 30, 2005, VHA and UHC beneficially owned 41.7% and 10.3%, respectively, of our outstanding ~~customers~~common stock, or ~~third~~52.0% ~~party~~collectively. ~~vendors~~As ~~refuse~~a toresult ~~provide~~of ustheir ~~with~~ownership ~~consent~~positions, toVHA ~~use~~and UHC ~~their~~individually ~~transaction~~are ~~data~~able to significantly influence, and ~~product~~collectively ~~data~~are able to control, ~~severely~~all matters ~~restrict~~requiring ~~our~~stockholder ~~use~~approval, including the election of ~~their~~directors ~~data~~and approval of significant corporate transactions, orincluding ~~decline~~a tostrategic ~~use~~transaction ~~our~~as ~~solutions~~discussed ~~because~~above. In addition, open market sales of ~~concerns~~significant ~~about~~amounts ~~the~~of ~~potential~~shares ~~release~~held by either of ~~such data~~VHA toand ~~other~~UHC, ~~customers~~or collectively, or ~~partners~~the prospect of these sales, ~~our~~could ~~business~~adversely ~~strategy~~affect ~~may~~the ~~not~~market ~~succeed~~price of our common stock.

We ~~expect~~rely ~~to derive a portion of our future revenue from information services that require the use of data from our hospital, GPO and supplier customers and other third party vendors. To execute~~ on our ~~data~~relationship ~~services~~with ~~strategy~~Novation, weVHA ~~must be able to secure the consent of our customers~~ and ~~these~~UHC ~~third party vendors~~ to ~~various~~drive ~~uses~~participation ~~of their data~~in Marketplace@Novation. ToAs ~~secure~~a ~~such consent~~result, weour ~~must~~business may be ~~able~~seriously toharmed ~~assure~~if these ~~customers~~relationships ~~and third party vendors that we will at all times protect the confidentiality~~are ofmaterially ~~their~~altered ~~data and use the data in the manner to which we agreed. If we are unable to provide such assurance,~~ or ~~if we fail or are perceived by our customers and third party vendors to have failed to meet the levels of assurance that we provided, our~~terminated ~~ability to execute on our data services strategy may be seriously~~

22The level of marketplace volume related to Marketplace@Novation is the basis for the fees we are paid by Novation, although these fees are limited by quarterly maximums. We have relied, and expect to continue to rely, significantly on our relationship with Novation, VHA and UHC to bring hospitals and suppliers to Marketplace@Novation, which in turn generates marketplace volume in connection with Marketplace@Novation. We rely on Novation to assist us in attracting suppliers to Marketplace@Novation and, if Novation is unable to

~~impaired.~~attract Ina ~~addition,~~sufficient wenumber ~~must~~of besuppliers, ~~able~~or tosuppliers ~~abide~~do bynot ~~various~~value ~~contractual~~participation ~~provisions~~with toNovation, our ~~which~~business wewill ~~have~~suffer. ~~agreed~~We ~~concerning~~rely ~~our ability~~significantly toon ~~aggregate~~VHA and ~~blind~~UHC ~~data in such a way that the data cannot be used~~ to ~~identify~~assist ~~any participants to transactions underlying the data. Our inability to do so would potentially subject~~ us toin ~~liability~~recruiting ~~for contractual damages~~ and ~~might~~ ~~seriously~~retaining ~~impair~~hospitals ~~our data services strategy. If potential customers are concerned about other customers viewing their transaction data, they may decide~~ to ~~forgo~~Marketplace@Novation ~~use of our solutions,~~ and ~~this~~also ~~could~~to ~~seriously~~serve ~~impair~~as ~~our~~a ~~ability~~channel tofor ~~generate~~the ~~revenue~~other inproducts ~~the~~and ~~future.~~services we offer.

~~The~~VHA ~~connectivity~~and ~~agreement~~UHC have announced that wethey ~~have~~believe ~~with~~that ~~GHX~~a ~~expires~~market ~~in late~~competitive ~~August~~price ~~2004,~~of ~~and~~the ~~unless~~services provided ~~this~~by ~~agreement~~us isunder ~~extended,~~the orFourth weAmended ~~enter~~Agreement ~~into~~should abe ~~new~~significantly ~~agreement~~less ~~with~~than ~~GHX,~~what weNovation is ~~may~~currently ~~have~~paying ~~difficulty~~us. ~~ensuring~~If ~~proper~~Novation, ~~connectivity~~VHA ~~with~~or ~~certain~~UHC ofwere ~~our~~to ~~supplier~~seek ~~customers~~to orreduce wethe ~~may~~fees ~~have~~Novation tocurrently pays ~~expend~~us, ~~resources~~our ~~re-connecting~~relationship ~~certain suppliers~~with tothose ~~Marketplace@Novation~~parties could be seriously harmed.

~~We signed a three-year connectivity agreement~~Additionally, asthese ~~well~~partners asuse a ~~three-year~~variety ~~license~~of ~~agreement,~~marketing ~~with~~initiatives ~~GHX in 2001. This agreement will expire in late August 2004 unless both we~~ and ~~GHX~~financial ~~elect~~incentives to drive ~~extend~~adoption itand oruse weof ~~both~~Marketplace@Novation ~~decide~~and toour ~~enter~~solutions ~~into~~by ~~a new agreement~~hospitals. ~~Some~~If ofthese ~~our supplier customers use GHX~~partners tocease ~~connect~~using tosuch ~~our~~marketing ~~hospital~~initiatives ~~customers,~~ and ~~without~~financial ~~an agreement with GHX~~incentives, ~~we may have to re-establish connectivity with those suppliers, which would cause us to expend resources which might reduce~~ our ability to ~~provide~~recruit ~~timely service~~ hospitals to ~~other customers~~Marketplace@Novation ~~and~~also ~~temporarily~~may ~~reduce~~be ~~our~~seriously ~~ability to collect transaction data~~harmed.

IfWe wehave ~~are~~a ~~unable~~history ~~to enhance the functionality~~ of ~~our~~losses ~~solutions~~and ~~or develop new solutions, potential customers~~ may ~~choose~~never ~~not~~achieve ~~to enter into business relationships with us, which would harm our business~~ profitability

We ~~must~~have ~~continue~~experienced tolosses ~~develop~~from ~~the~~operations ~~capability~~in toeach ~~integrate~~period ~~our~~since ~~solutions with~~ our ~~hospital and supplier customers’ business processes and information systems~~inception, ~~and~~including ~~develop~~a ~~new~~net ~~solutions~~loss of ~~for our customers~~$31.6 million Wefor ~~may~~the ~~incur~~six ~~significant~~months ~~expenses~~ended inJune 30, ~~developing these capabilities and may not succeed in developing them in a timely manner~~2005. In addition, ~~developing~~as ~~the capability to integrate some~~ of ~~our~~June 30, ~~solutions~~2005, ~~with~~we ~~suppliers’ and hospitals’ enterprise software systems will require the continued cooperation of and collaboration with the companies that develop and market these~~had ~~systems.~~an ~~Suppliers~~accumulated ~~and~~deficit ~~hospitals use a variety~~ of ~~different enterprise software systems provided by third-party vendors or developed internally~~$785.6 million. ~~This~~We ~~lack~~have ofnot ~~uniformity~~achieved ~~increases~~profitability ~~the difficulty~~ and ~~cost~~we ofcannot ~~developing the capability to integrate with~~assure ~~the~~you ~~systems of a large number of hospitals and suppliers. Failure to provide this capability would limit the efficiencies~~ that ~~our~~we ~~solutions~~will ~~provide~~ever ~~and~~be ~~may deter our hospital and supplier customers from using our solutions~~profitable.

If ~~the~~our ~~future~~customers ~~costs~~or ~~required~~third-party vendors refuse to ~~integrate~~provide ~~the~~us ~~systems~~with ofconsent ~~hospitals~~to ~~purchasing~~use ~~through~~their transaction ~~Novation~~data ~~are~~and ~~substantially~~product ~~higher~~data, ~~than~~severely werestrict ~~anticipate~~our use of their data, weor ~~may~~decline ~~not~~to ~~realize~~use our solutions because of concerns about the ~~full~~potential ~~benefits~~release of such data to other customers or partners, our business ~~agreement~~strategy ~~with~~may ~~Novation.~~not succeed

IfWe weexpect ~~were~~to ~~delayed~~derive ora ~~unable~~portion toof ~~integrate~~our ~~the~~future ~~systems~~revenue from information services that require the use of ~~these~~data ~~hospitals,~~from our ~~financial~~hospital, ~~situation~~GPO ~~would~~and besupplier ~~adversely~~customers ~~affected~~and other third-party vendors. InTo ~~addition~~execute on our data services strategy, ~~under~~we must be able to secure the consent of our ~~agreement~~customers ~~with~~and these ~~Novation~~third-party vendors for various uses of their data. To secure such consent, we must ~~meet~~be ~~detailed~~able ~~functionality~~to assure these customers and ~~service~~third-party ~~level~~vendors ~~requirements.~~that Towe will at all times protect the confidentiality ~~extent~~of their data and use the data in the manner that we agreed. If we are unable to provide such assurance, or if we fail, or are ~~delayed~~perceived inby ~~providing~~our ~~this~~customers ~~functionality~~and third-party vendors to have failed, to meet the levels of assurance that we provided to them, our ability to execute on our data services strategy may be ~~unable~~seriously impaired. In addition, we must be able to ~~attract~~abide ~~hospitals~~by various ~~and~~contractual ~~suppliers~~provisions to ~~use~~which ~~our~~we ~~solutions~~have ~~and~~agreed concerning our ~~financial~~ability to aggregate and ~~situation~~blind ~~may~~data in such a way that the data cannot be ~~adversely~~used ~~affected~~to identify any participants to transactions underlying the data. WeOur ~~incur~~inability ~~significant~~to ~~costs~~do inso ~~developing~~would potentially subject us to liability for contractual damages and ~~supporting~~might seriously impair our ~~solutions~~data ~~and~~services instrategy. ~~integrating~~If ~~with~~potential ~~hospitals’~~customers are ~~and~~concerned ~~suppliers’~~about ~~information~~other ~~systems~~customers viewing their transaction data, they may decide to forgo use of our solutions, and wethis ~~may~~could ~~never~~seriously ~~generate~~impair ~~sufficient~~our ~~fees~~ability to ~~offset~~generate ~~these costs.~~revenue in the future.

~~Because our supply chain partners are also our stockholders or are~~30 ~~affiliated with our stockholders, we may find it difficult to attract competing companies to use our solutions~~

Our supply chain partners are also our stockholders or are affiliated with our stockholders or have strategic relationships with us. For example, VHA and UHC, the owners of Novation, owned 8.6 million and 2.1 million shares of our common stock, respectively, as of June 30, 2004. As of June 30, 2004, VHA and UHC owned 43.1% and 10.7%, respectively, of our outstanding shares of common stock. These relationships may deter other potential customers, particularly those that compete directly with Novation, VHA or UHC, from using our solutions due to perceptions of bias in favor of one party over another. This could limit the array of solutions we offer, damage our reputation and limit our ability to maintain or increase the number of our customers.

Our ability to earn fees in future periods from Marketplace@Novation is limited by quarterly maximums, and, as a result, we must generate increased non-related party revenue in order to grow our revenue

We generate the substantial majority of our business from Marketplace@Novation. Our ability to earn fees from Novation for the solutions we provide in connection with Marketplace@Novation depends on several factors, and the fees are subject to limitation by quarterly maximums. During the last eight quarters, including the first and second quarters of 2004, our fees were limited by these quarterly maximums. We expect that our fees will continue to be limited by these maximums in 2004 and in future periods. Consequently, we must generate increased non-related party revenue in order to grow our revenue. In mid-2005, we expect that the significant majority of the capitalized partnership costs will be fully amortized and, as a result, our total revenue will increase substantially beginning in the quarter that our gross related party revenue is initially no longer offset by amortization of capitalized partnership costs. However, we still believe that we must generate non-related party revenue growth in order to show improved operational results.

If we are unable to enhance the functionality of our solutions or develop new solutions, potential customers may choose not to enter into business relationships with us, which would harm our business

We must continue to develop the capability to integrate our solutions with our hospital, GPO and supplier customers’ business processes and information systems, and develop new solutions for our customers. We may incur significant expenses in developing these capabilities and may not succeed in developing them in a timely manner. In addition, developing the capability to integrate some of our solutions with hospitals’ and suppliers’ enterprise software systems will require the continued cooperation of and collaboration with the companies that develop and market these systems. Hospitals and suppliers use a variety of different enterprise software systems provided by third-party vendors or developed internally. This lack of uniformity increases the difficulty and cost of developing the capability to integrate with the systems of a large number of hospitals and suppliers. Failure to provide this capability would limit the efficiencies that our solutions provide and may deter our hospital and supplier customers from using our solutions.

If the future costs required to integrate the systems of hospitals purchasing through Novation are substantially higher than we anticipate, we may not realize the full benefits of our agreement with Novation

We incur significant costs in developing and supporting our solutions and in integrating with hospitals’ and suppliers’ information systems, and we may never generate sufficient fees to offset these costs. The fees that we are able to generate through the Fourth Amended Agreement are limited by quarterly maximums, and so any material increase in the costs to connect hospitals and suppliers will not be offset by a corresponding increase in fees, which would adversely impact our financials.

Our ability to earn fees in future periods from Marketplace@Novation is limited by quarterly maximums, and, as a result, we must generate increased non-related party revenue to grow our revenue

We generate the substantial majority of our business from Marketplace@Novation. Our ability to earn fees from Novation for the solutions we provide in connection with Marketplace@Novation depends on several factors, and the fees are subject to limitation by quarterly maximums. During the last 12 quarters, our fees were limited by these quarterly maximums. Based on the levels of total marketplace transaction volume that we are achieving and expect to continue to achieve, we expect that our fees will continue to be limited by these maximums in future periods. Consequently, we must generate increased non-related party revenue in order to grow our revenue. In July 2005, we expect that the significant majority of the gross capitalized partnership costs will be fully amortized. As a result, our total revenue will increase substantially beginning in the quarter that our gross related party revenue is initially no longer fully offset by amortization of capitalized partnership costs. However, we still believe that we must generate non-related party revenue growth to show improved operational results. To date, we have encountered more difficulty than we had anticipated in growing non-related party revenue.

If our systems are unable to provide acceptable performance as the use of our solutions increases, we could lose customers, which could harm our business and results of operations

We have supported only a limited number and variety of transactions through our solutions compared to the number and variety we expect to process in the future. Our systems may not accommodate increased use while providing acceptable overall performance. We must continue to expand and adapt our network infrastructure to accommodate increased use of our solutions by our customers, which will be expensive. If our systems do not continue to provide acceptable performance as use by our customers’ increases, our reputation may be damaged and we may lose customers. We have had temporary system outages in the past and we may have such temporary outages in the future. If system outages occur frequently or are severe, our customers may decide that our performance levels are unacceptable and may choose not to continue to use our services or may claim liability against us.

We expect that a significant portion of the products ~~and services~~ used by hospitals that are sold through Marketplace@Novation will come from a limited number of key manufacturers and distributors, and the loss of business from a key manufacturer or distributor could result in a significant negative impact on the value of Marketplace@Novation and, consequently, our business

We expect that a significant portion of the products to be sold through and data ~~and fees~~ to be generated from Marketplace@Novation will come as a result of the participation of a limited number of key manufacturers and distributors. If any of these key manufacturers or distributors cease doing business with us, the ~~fees we generate through Marketplace@Novation could be significantly reduced, the~~ value of Marketplace@Novation to our hospital customers would be reduced and our ability to generate ~~revenue-producing~~ data for our customers would also be reduced.

We face significant competition, and if we are unable to compete effectively, we may be unable to maintain or expand the number of our customers and our financial position may be adversely affected

The market for supply chain management solutions in the healthcare industry is rapidly evolving and highly competitive. Because of the breadth of our solutions, which include order management, contract management, data management, market intelligence and materials management, and the breadth of our customer base, which includes hospitals, GPOs and suppliers, we have a diverse set of competitors that compete with portions of our overall offering. To best serve our customers, we sometimes ~~collaborate~~partner ~~with our competitors~~ in one segment of the market with our competitors while competing with them in others. We believe that, as our capabilities grow, we will continue to find areas of opportunity for ~~both~~ collaboration ~~and~~with, as well as encounter competition ~~with~~from, other companies in the market that target a segment of the overall healthcare supply chain. Our ability to manage these relationships to benefit our hospital, ~~supplier~~GPO and ~~GPO~~supplier customers is important to our success.

Some of our current and potential competitors include:

• ~~online~~Online marketplaces or exchanges targeted at the healthcare supply chain, such as the supplier-sponsored GHX, with ~~whom~~which we also have a strategic relationship; • Suppliers that have created their own offerings to provide supply chain management services to their customers; • Software vendors that offer enterprise resource planning applications, including procurement, to the healthcare market, such as Lawson Software, Inc., McKesson Corporation, Oracle Corporation and SAP AG; • GPOs that are offering supply chain management services beyond traditional GPO services, such as Broadlane, Inc. and MedAssets, Inc.; and • Companies that provide information solutions or services or data management solutions or services to participants in the healthcare supply chain.

• suppliers that have created their own offerings to provide supply chain management services to their customers;

• software vendors that offer enterprise resource planning applications, including procurement, to the healthcare market, such as Lawson Software, McKesson Corporation, Oracle Corporation, PeopleSoft, Inc. and SAP AG;

• consultants and consulting firms that provide supply chain management advice and services, including assistance with the selection of software, services and vendors to support hospitals in driving efficiency and cost reductions;

• GPOs that are offering supply chain management services beyond traditional GPO services, such as Broadlane, Inc. and MedAssets, Inc.; and

• companies that provide information solutions or information services to participants in the healthcare supply chain.

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

Our current and potential competitors’ services may achieve greater market acceptance than ours. Our current and potential competitors may have longer operating histories in the healthcare supply chain market, greater name recognition, larger customer bases or greater financial, technical and/or marketing resources than we do. As a result of these factors, our competitors and potential competitors may be able to respond more quickly to market forces, undertake more extensive marketing campaigns for their brands and services and make more attractive offers to hospitals ~~and~~, GPOs, suppliers, potential employees and strategic ~~allies~~partners. In addition, new technologies may increase competitive pressures. We cannot be certain that we will be able to expand our hospital, GPO and supplier base or retain our current hospital, GPO and supplier customers. We may not be able to compete successfully against our competitors, and competition could seriously harm our revenue, operating margins and market share.

technologies may increase competitive pressures. We cannot be certain that we will be able to expand our hospital and supplier base or retain our current hospitals and supplier customers. We may not be able to compete successfully against our competitors, and competition could seriously harm our revenue, operating margins and market share.

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

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

We believe that our ability to successfully execute our business strategy will depend on the continued services of executive officers and other key employees. Our employees, including our executive officers, serve at-will and may elect to pursue other opportunities at any time. The loss of any of our executive officers or other key employees could harm our business.

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

As of June 30, 2004, we had $22.5 million of cash, cash equivalents and short-term investments, $1.0 million of restricted cash and no outstanding borrowings or notes payable.

We may need to raise additional funds within the next 12 months, notwithstanding the fact that our VHA line of credit currently remains in place, if for example, we experience larger than anticipated operating losses or if we pursue acquisitions that contain a cash component. We may try to obtain additional financing by issuing shares of our common stock or convertible debt, either of which could dilute our existing stockholders and may cause our stock price to decline. In addition, if an event of default were to occur under the VHA credit agreement, VHA could terminate the credit agreement. If this were to occur, we may need to obtain an alternate source of funding, such as another credit line or an equity or debt financing.

We believe that it could be difficult to obtain additional financing on favorable terms, if at all. If we were unable to obtain alternate funding under these circumstances, our business would be seriously harmed.

We may make acquisitions that could harm our operating results, put a strain on our resources or cause dilution to our stockholders

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

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

Our operating results may fluctuate from quarter to quarter and are difficult to predict because of a number of factors. These factors include:

• ~~the~~The ~~fees~~amount of related party revenue we ~~collect~~offset ~~from~~by ~~suppliers~~amortization of partnership costs;

~~• changes in the fees we charge users of our solutions;~~32

• the number and timing of new suppliers that sign up to use our solutions and our ability to implement and train them;

• the timing of and expenses incurred in enhancing our solutions;

• the timing and size of any future acquisitions;

• the timing and size of Neoforma DMS deals;

• the amount of related party revenue we offset by amortization of partnership costs; and

• the extent of software development efforts qualifying for capitalization.

	•		The timing of any expenses incurred in enhancing our solutions;

	•		The extent of software development efforts qualifying for capitalization;

	•		The timing and size of Neoforma DMS deals;

	•		Changes in the fees we charge users of our solutions;

	•		The number and timing of new suppliers that sign up to use our solutions and our ability to implement and train them, as well as the number and timing of suppliers that re-sign to use our solutions; and

	•		The timing and size of any future acquisitions.

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

We have announced that we are exploring strategic alternatives, and the resulting uncertainty could make it difficult to attract qualified personnel or retain our executive officers and other key personnel, which may leave us unable to operate successfully

Our success depends on our ability to attract and retain qualified, experienced employees. In particular, we believe that our ability to successfully execute our business strategy will depend on the continued services of executive officers and other key employees. Our employees, including our executive officers, serve at-will and may elect to pursue other opportunities at any time. We may not be able to compete effectively to retain and attract employees. The announcement of our process to evaluate strategic alternatives has resulted in some uncertainty within our employee population. As a result, our executive officers or other key employees may seek employment with larger, more established companies or companies they perceive to have better prospects. Additionally, certain individuals may decide that they do not wish to seek employment with us. Should we fail to retain or attract qualified personnel, we may not be able to compete successfully in our industry, and our business could be harmed.

As of June 30, 2005, we had $35.0 million in cash, cash equivalents and short-term investments, $1.0 million in restricted cash and no outstanding borrowings or notes payable.

We may need to raise additional funds within the next 12 months if, for example, we experience larger than anticipated operating losses or if we pursue acquisitions that contain a cash component. We may try to obtain additional financing by issuing shares of our common stock or convertible debt, either of which could dilute our existing stockholders and may cause our stock price to decline. We may not be able to raise any further cash, either through debt or equity transactions, on terms that are acceptable to us or at all. If we needed to raise funds but were unable to do so, we may be unable to develop new solutions or enhance the functionality of our existing solutions, expand our operations or respond to competitive pressures.

We may make acquisitions that could harm our operating results, put a strain on our resources or cause dilution to our stockholders

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

If we are unable to safeguard the security and privacy of the confidential information of our customers, these customers may discontinue using our solutions

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

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

We believe that recognition and positive perception of the Neoforma brand name in the healthcare industry are important to our success. We intend to continue to invest in marketing programs and initiatives to build the value of our brand. However, such marketing programs and initiatives may be expensive and may not achieve our desired goal of increasing the positive awareness of the Neoforma brand name. Even if recognition of our name increases, it may not lead to an increase in the number of our customers or revenue or offset the expenditures we incurred in increasing our name recognition.

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

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

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

We have, in the past, grown rapidly and will need to continue to grow our business to execute our strategy. Our total number of employees grew from nine as of December 31, 1997, to 267 as of June 30, 2004, although the number of employees has not grown consistently. These changes, and the growth in the number of our customers and their use of our solutions, have placed significant demands on management as well as on our administrative, operational and financial resources and controls. Any future growth or organizational changes would likely cause similar, and perhaps increased, strain on our systems and controls.

If suppliers that use our solutions do not provide timely and professional delivery of products and services to their hospital customers, hospitals may not continue using our solutions

Through certain of our solutions, suppliers are responsible for delivering their products and services sold to hospitals. Currently, the significant majority of these products and services are sold through Marketplace@Novation. If these suppliers fail to make delivery in a professional, safe and timely manner, then our solutions will not meet the expectations of hospitals, and our reputation and brand will be damaged. In addition, deliveries that are non-conforming, late or are not accompanied by information required by applicable law or regulations could expose us to liability or result in decreased adoption and use of our solutions.

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

We currently rely on software that we have licensed from a number of software vendors. We will continue to rely on commercial software vendors where appropriate to speed the delivery of our solutions, while reducing the costs of custom code development and maintenance. These licenses may not continue to be available to us on commercially reasonable terms, or at all. In addition, the licensors may not continue to support or enhance the licensed software. In the future, we expect to license other third -party technologies to enhance our solutions to meet evolving user needs or to adapt to changing technology standards. Failure to license, or the loss of any licenses of, necessary technologies could impair our ability to offer our solutions until equivalent software is identified, licensed and integrated or developed by us. In addition, we may fail to successfully integrate licensed technology into our solutions or to adapt licensed technology to support our specific needs, which could similarly harm development and market acceptance of our solutions.

The connectivity agreement that we have with GHX expires in late August 2005. Unless this agreement is extended, or we enter into a new agreement with GHX, we may have difficulty ensuring proper connectivity with certain of our supplier customers or we may have to expend resources re-connecting certain suppliers to Marketplace@Novation and supplier members of GHX may decline to do business with us

In 2004, we extended by one year a three-year connectivity agreement that we signed with GHX in 2001. This agreement expires in late August 2005 unless both GHX and we elect to extend it or we both decide to enter into a new agreement. Some of our supplier customers use GHX to connect to our hospital customers and, without an agreement with GHX, we may have to re-establish connectivity with those suppliers, which would cause us to expend resources, which might reduce our ability to provide timely service to certain hospital customers and temporarily reduce our ability to process and collect transaction data. Certain suppliers may not wish to re-establish connectivity with us, which would reduce our ability to service our hospital customers.

Additionally, certain suppliers who are also members of GHX may decide that they no longer wish to transact business with other parts of our business, which would hurt our revenue and growth prospects for those businesses.

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

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

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, protect our trade secrets and 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.

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

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

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

The performance of our server and networking hardware and software infrastructure is critical to our business and reputation and our ability to process transactions, provide high quality customer service and attract and retain users of our solutions. Currently, our infrastructure and systems are located at our corporate headquarters in San Jose, California and at one site in ~~Sunnyvale~~Santa Clara, California,. ~~which~~Both islocations anare ~~area~~ susceptible to earthquakes. We also have a limited fail-over system located in Denver, Colorado.

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

If suppliers that use our solutions do not provide timely and professional delivery of products to their hospital customers, hospitals may not continue using our solutions

Through certain of our solutions, suppliers are responsible for delivering the products they have sold to hospitals. Currently, the significant majority of these products are sold through Marketplace@Novation. If these suppliers fail to make delivery in a professional, safe and timely manner, then our solutions may not meet the expectations of hospitals, and our reputation and brand may be damaged. In addition, deliveries that are non-conforming, late or are not accompanied by information required by applicable law or regulations could expose us to liability or result in decreased adoption and use of our solutions.

Our failure to comply with applicable federal and state regulation of healthcare information could disrupt our operations, increase our operating costs and subject us to liability

We are subject to federal and state laws regulating the receipt, storage and distribution of healthcare information, which could have a material adverse effect on our ability to operate our business. Laws governing the receipt, storage and distribution of health information exist at both the federal and state level. The Health Insurance ~~Portability and Accountability Act of 1996, or~~ HIPAA, and the implementing regulations from the Department of Health and Human Services, or HHS, mandate the use of standard transactions and identifiers, prescribed security measures and other provisions. Certain regulations of the Food and Drug Administration, or FDA, and the Hospital Conditions of Participation for the Medicare and Medicaid programs require protection of and security for health information and appropriate patient access to such information. Some of the transactions using our solutions may involve surgical case kits or purchases of products for patient home delivery; these products may contain patient names and other protected health information subject to these laws governing the receipt, storage and distribution of protected health information.

27 35

ItPortability ~~may~~and beAccountability ~~expensive~~Act toof ~~implement~~1996, ~~security~~ or ~~other~~HIPAA, ~~measures~~and ~~designed~~the toimplementing ~~comply~~regulations ~~with~~from the Department ~~HIPAA,~~of ~~FDA~~Health and ~~Medicare confidentiality~~Human ~~and~~Services, ~~security requirements~~ or ~~with~~HHS, ~~any~~mandate ~~new~~the ~~legislation~~use orof ~~regulations.~~standard ~~Moreover,~~transactions ~~these~~ and identifiers, ~~future~~prescribed ~~laws~~security ~~may~~measures ~~restrict~~and orother ~~prevent us from delivering health information electronically~~provisions. IfCertain weregulations ~~fail~~of tothe ~~comply~~Food ~~with these regulatory~~and ~~requirements~~Drug Administration, weor ~~could~~FDA, ~~face~~and athe ~~variety~~Hospital Conditions of ~~civil~~Participation ~~fines~~for the Medicare and Medicaid ~~liabilities,~~programs ~~associated~~require ~~costs~~protection of ~~defense,~~and ~~increased~~security ~~costs~~for ofhealth ~~security,~~information and ~~costs~~appropriate ofpatient access ~~compliance~~to ~~with~~such ~~confidentiality requirements~~information. WeSome ~~may~~of ~~also~~the betransactions ~~required~~using toour ~~significantly~~solutions ~~curtail~~may ~~our~~involve ~~use~~surgical ofcase ~~data~~kits ~~received,~~or ~~stored~~purchases orof ~~distributed~~products byfor ~~our~~patient ~~solutions.~~home Indelivery; ~~addition,~~these ~~because~~products wemay ~~represent~~contain patient names and ~~sometimes~~other ~~contractually~~protected ~~warrant~~health ~~that~~information ~~our~~subject ~~solutions~~to ~~meet~~ these ~~regulatory~~laws ~~requirements,~~governing ~~our~~the ~~success~~receipt, ~~will~~storage ~~also depend on other healthcare participants~~and ~~complying~~distribution ~~with~~of ~~these~~protected ~~regulations.~~health information.

It may be expensive to implement security or other measures designed to comply with the HIPAA, FDA and Medicare confidentiality and security requirements or with any new legislation or regulations. Moreover, these and future laws may restrict or prevent us from delivering health information electronically. If we fail to comply with these regulatory requirements, we could face a variety of civil fines and liabilities, associated costs of defense, increased costs of security, and costs of compliance with confidentiality requirements. We may also be required to significantly curtail our use of data received, stored or distributed by our solutions. In addition, because we represent and sometimes contractually warrant that our solutions meet these regulatory requirements, we could face significant contractual liability and damage to our customer relationship if we fail to comply with these regulatory requirements.

Our failure to comply with applicable federal and state healthcare fraud and abuse laws could subject us and our GPO partners and customers to civil and criminal liability and disrupt our operations

A federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state laws, prohibit payments that are intended to induce the acquisition, arrangement for or recommendation of the acquisition of healthcare products or services. The application and interpretation of these laws are complex and difficult to predict and could constrain our financial and marketing relationships, including, but not limited to, our fee arrangements with suppliers or our ability to obtain supplier company sponsorship for our solutions. The GPO industry has been the subject of a series of critical newspaper articles and has been investigated by the United States Senate Judiciary Committee, which has set practice guidelines for the GPO industry. These investigations could lead to the deletion or amendment of the GPO safe harbor to the federal anti-kickback law, which would harm our GPO partners. Because anything detrimental to the core business of our GPO partners could adversely impact our business, negative substantive findings by the Senate Judiciary Committee, the Justice Department or other regulatory and enforcement bodies could potentially adversely affect our business and, consequently, our stock price. In particular, violations of fraud and abuse laws are punishable by civil and criminal fines and penalties, which could result in restrictions on our operations, increased costs of compliance with remedies and restructuring of our financial arrangements with our GPO and supply chain partners.

If there are changes in the political, economic or regulatory healthcare environment that affect the purchasing practice or operation of hospitals, or our supply chain partners, our business and our stock price could be adversely affected

The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Regulation of the healthcare organizations with which we do business could impact the way in which we are able to do business with these organizations. In addition, factors , such as changes in the laws described above regarding the regulation of healthcare information ~~and~~ and the laws and policies governing reimbursement for healthcare expenses, affect the purchasing practices and operation of hospitals and GPOs. Changes in regulations affecting the healthcare industry, such as any increased regulation by HHS, the Justice Department or the FDA of healthcare information or the purchase and sale of products used by hospitals and GPOs, could require us to make unplanned enhancements of our solutions, or result in delays or cancellations of orders or reduce ~~demand~~ demand for our solutions. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants, including GPOs and companies such as usours, operate.

~~The restatement of some of our financial results may subject us to litigation~~ 36

BecauseTable we restated our financial results for the first and second fiscal quarter of 2002, as well as fiscal 2000 and 2001, we could be subjected to litigation. Any claims, with or without merit, could be time-consuming and costly to defend. Contents

We may be subject to litigation for defects in products sold by suppliers using our solutions, and this product liability litigation may be costly and time -consuming to defend

Because certain of our solutions facilitate the sale of products by suppliers, we may become subject to legal proceedings regarding defects in these products, even though we do not take title to these products. Any claims, with or without merit, could be time-consuming and costly to defend.

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

In July 2001, we were named as a defendant in two securities class action lawsuits filed in ~~federal~~ federal court in the Southern District of New York relating to our IPO by stockholders who purchased our common stock during the period from January 24, 2000, to December 6, 2000. Since that time, additional lawsuits have been filed asserting federal securities claims arising from our IPO. The lawsuits also name certain of the underwriters for our IPO, Merrill Lynch, Pierce, Fenner & Smith, Bear Stearns and Fleet Boston Robertson Stephens, as defendants. The lawsuits contain substantially identical allegations, which are that the prospectus and the registration statement for the IPO failed to disclose that the underwriters solicited and received excessive commissions from investors, and that some investors in the IPO agreed to buy more shares of our common stock in the secondary market, at predetermined prices, in a scheme to artificially inflate the price of our common stock. We agreed to a settlement agreement that was submitted to the Court for preliminary approval. The Court has issued an order preliminarily approving the proposed settlement, and a “fairness” hearing will be held. If the Court determines that the settlement is fair to the class members, the settlement will be approved. Although we have agreed to settle the suits, if the settlement is not finalized, the suits could be time-consuming, costly to defend and require us to pay significant damages.

Robertson Stephens, as defendants. The lawsuits contain substantially identical allegations, which are that the prospectus and the registration statement for the IPO failed to disclose that the underwriters solicited and received excessive commissions from investors, and that some investors in the IPO agreed to buy more shares of our common stock in the secondary market, at predetermined prices, in a scheme to artificially inflate the price of our common stock. Although we have agreed to settle the suits, if the settlement is not finalized, the suits could be time-consuming, costly to defend and require us to pay significant damages.

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

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

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

The trading price of our common stock has fluctuated significantly since our IPO in January 2000 and is significantly below the original offering price. Our public float and the daily trading volume of our common stock are relatively small, and an active public market for our common stock may not be sustained in the future. Many factors could cause the market price of our common stock to fluctuate, including:

• ~~variations~~Variations in our quarterly operating results; • Announcements regarding the progress in our evaluation of strategic alternatives; • Any actions by VHA, UHC or Novation that seek to significantly lower the fees Novation pays to us; • Announcements of new accounting pronouncements or legal rules or regulations; • Announcements of technological innovations by our competitors or by us;

~~• announcements of new accounting pronouncements or legal rules or regulations;~~37

• announcements of technological innovations by us or by our competitors;

• introductions of new services by us or by our competitors;

• departure of key personnel;

• the gain or loss of significant strategic relationships or customers;

• changes in the estimates of our operating performance or changes in recommendations by securities analysts; and

• changes in the number of securities analysts that follow our company.

Because our public float and the daily trading volume of our common stock are relatively small, these factors could have a greater impact on our common stock than for companies for which a more active public market exists for their common stock. In addition, stocks of technology companies have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to these companies’ operating performance. Public announcements by companies in our industry concerning, among other things, their performance, accounting practices or legal problems could cause fluctuations in the market for stocks of these companies. These fluctuations could lower the market price of our common stock regardless of our actual operating performance.

Because VHA and UHC collectively beneficially own a majority of our stock, they have substantial control over all matters requiring stockholder approval and significant sales of stock held by them could have a negative effect on our stock price

As of June 30, 2004, VHA and UHC beneficially owned 43.1% and 10.7%, respectively, of our outstanding common stock. As a result of their ownership positions, VHA and UHC individually are able to significantly influence, and collectively are able to control, all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of our company. In addition, sales of significant amounts of shares held by either of VHA and UHC or collectively, or the prospect of these sales, could adversely affect the market price of our common stock.

	•		Introductions of new services by our competitors or by us;

	•		Departure of key personnel;

	•		The gain or loss of significant strategic relationships or customers;

	•		Changes in the estimates of our operating performance or changes in recommendations by securities analysts; and

	•		Changes in the number of securities analysts that follow our company.

Because the public float and the daily trading volume of our common stock are relatively small, these factors could have a greater impact on our common stock than they would for companies for which a more active public market exists for their common stock. In addition, stocks of technology companies have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to these companies’ operating performance. Public announcements by companies in our industry concerning, among other things, their performance, accounting practices or legal problems could cause fluctuations in the market for stocks of these companies. These fluctuations could lower the market price of our common stock regardless of our actual operating performance.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. By policy, we limit the amount of credit exposure to any one issuer. As stated in our investment policy, we seek to ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in safe and high-credit quality securities and by reviewing our portfolio monthly to respond appropriately to a significant reduction in a credit rating of any investment issuer, guarantor or depository. Our ~~portfolio~~ portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. ~~Because~~A ~~our investments mature within one year, a~~ hypothetical change in interest rate of 10% would not have a significant effect on ~~the~~ the value of our investments and would reduce interest income by ~~approximately~~ $665,000. annually.

The table below presents principal amounts and related weighted average interest rates by date of maturity for our investment portfolio (in thousands):

	Fiscal years
	2004			2005		2006	2007		2008
	2005			2006			2007			2008		2009
Cash equivalents and short-term investments:
Fixed rate short-term investments	$	11,637		—		—	—		—
Fixed rate short-term investments*	$	6,150		$	5,575		$	3,088			—		—
Cash equivalents	$	2,808		—		—	—		—
Average interest rate		3.01	%		3.10	%		3.82	%		—		—
Average interest rate		1.38	%	—		—	—		—


*		Fixed rate short-term investments include auction rate securities with contractual maturities of generally 20 to 30 years. As the interest rate on the securities is reset periodically at short-term intervals established at the time of issuance, auction rate securities are priced and traded as short-term investments and are available for use during the normal operating cycle of the business.

ITEM 4. Controls and Procedures

(a) Under ~~Disclosure~~the ~~Controls~~supervision and ~~Procedures~~with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and Form 10-Q as of the end of the period covered by this quarterly report.

We(b) There ~~carried~~were ~~out~~no anchanges ~~evaluation required~~in ~~by the Securities Exchange Act of 1934, under the supervision and with the participation of~~ our ~~principal~~internal ~~executive~~control ~~officer~~over ~~and principal~~ financial ~~officer,~~reporting ofduring the ~~effectiveness of the design and operation of our disclosure controls and procedures as of the end of the~~ period covered by this quarterly report. ~~Based~~ on ~~this~~Form ~~evaluation,~~10-Q ~~our principal executive officer and principal financial officer concluded~~ that ~~our~~have ~~disclosure~~materially ~~controls~~affected, ~~and~~or ~~procedures~~ are ~~effective at the “reasonable~~reasonably ~~assurance”~~likely ~~level in timely alerting them~~ to ~~material~~materially ~~information~~affect, ~~required to be included in~~ our ~~periodic~~internal ~~SEC~~control ~~reports.~~over Itfinancial ~~should be noted that the design of any system of controls is based in part upon certain assumptions, and there can be no assurance that any design will succeed in achieving its stated goals~~reporting.

~~(b)~~38 ~~Changes in Internal Controls Over Financial Reporting~~

During the most recent fiscal quarter, there did not occur any change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In July 2001, Neoforma, along with Merrill Lynch, Pierce, Fenner & Smith, Bear Stearns and FleetBoston Robertson Stephens (certain of the underwriters of our initial public offering (IPO)), as well as our Chairman and Chief Executive Officer, Robert Zollars, and its former Chief Financial Officer, Frederick Ruegsegger, were named as defendants in two securities class action lawsuits filed in federal court in the Southern District of New York (No. 01 CV 6689 and No. 01 CV 6712) on behalf of those who purchased shares of our common stock from January 24, 2000 to December 6, 2000. These actions have since been consolidated, and a consolidated amended complaint was filed in the Southern District of New York on April 24, 2002. The amended complaint alleges that the underwriters solicited and received “undisclosed compensation” from investors in exchange for allocations of stock in our IPO, and that some investors in the IPO allegedly agreed with the underwriters to buy additional shares in the aftermarket to artificially inflate the price of our stock. We and Messrs. Zollars and Ruegsegger are named in the suits pursuant to Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, for allegedly failing to disclose in our IPO registration statement and prospectus that the underwriters had entered into the arrangements described above. The complaints seek unspecified damages. Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which are included in a single coordinated proceeding in the Southern District of New York. On July 1, 2002, the underwriter defendants moved to dismiss all of the IPO allocation litigation complaints against them, including the action involving us. On July 15, 2002, we, along with the other non-underwriter defendants in the coordinated cases, also moved to dismiss the litigation. Those motions were fully briefed on September 13 and September 27, 2002, respectively, and in February 2003, the Court denied our motion to dismiss. On October 9, 2002, all of the individual defendants, including Mr. Zollars and Mr. Ruegsegger, were dismissed from the action without prejudice. On June 30, 2003, our board of directors approved a proposed settlement for this matter, which is part of a larger global settlement between the issuers and plaintiffs. The acceptance of the settlement by the plaintiffs is contingent on a number of factors, including the percentage of issuers who approve the proposed settlement. We have agreed to undertake other responsibilities under the proposed settlement, including agreeing to assign away, not assert, or release certain potential claims we may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by our insurers. In June 2004, an agreement of settlement was submitted to the court for preliminary approval. We are unable to determine whether or when the settlement will be approved or finalized. Due to the inherent uncertainties of litigation however, we cannot accurately predict the ultimate outcome of the lawsuits.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

~~Our 2004 Annual Meeting of Stockholders was held on May 27, 2004 at our corporate offices at 3061 Zanker Road, San Jose, California~~None. ~~At the meeting, our stockholders~~ voted upon (i) the election of two Class II directors, and Jeffrey H. Hillebrand and Wayne B. Lowell, each for a term of three years and until his successor has been elected and qualified or until his earlier resignation, death or removal, and (ii) to ratify the selection of PricewaterhouseCoopers LLP as our independent auditor for the year ending December 31, 2004.

The director nominees received the following votes:

Nominee	For	Withheld	Unvoted
Jeffrey H. Hillebrand	18,918,346	291,342	760,473
Wayne B. Lowell	18,918,346	291,342	760,473

Edward A. Blechschmidt and Michael J. Murray, our Class I directors, and Richard D. Helppie, C. Thomas Smith, and Robert J. Zollars, our Class III directors, continued to serve as our directors after the meeting, as the Class I and Class III directors were not up for reelection at the 2004 Annual Meeting of Stockholders.

The ratification of PricewaterhouseCoopers LLP received the following votes:

		For		Against		Abstain		Unvoted
Ratification of PricewaterhouseCoopers LLP		19,195,929		12,201		1,558		760,473

Item 5. Other Information

None.

Item 6. Exhibits ~~and Reports on Form 8-K~~

(a) Exhibits

(a)		Exhibits

10.1		Form of director option grant.

31.1		Certification of Robert J. Zollars, Chairman and Chief Executive Officer of Neoforma, Inc., Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Andrew L. Guggenhime, Chief Financial Officer of Neoforma, Inc., Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification of Robert J. Zollars, Chairman and Chief Executive Officer of Neoforma, Inc., pursuant to 18 U.S.C. Section 1350.

32.2		Certification of Andrew L. Guggenhime, Chief Financial Officer of Neoforma, Inc., pursuant to 18 U.S.C. Section 1350.

10.1		Services Agreement (“Agreement”) by and between VHA Inc. and Neoforma, Inc. effective on June 1, 2004.*
31.1		Certification of Robert J. Zollars, Chairman and Chief Executive Officer of Neoforma, Inc., Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2		Certification of Andrew L. Guggenhime, Chief Financial Officer of Neoforma, Inc., Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1		Certification of Robert J. Zollars, Chairman and Chief Executive Officer of Neoforma, Inc., Pursuant to 18 U.S.C. Section 1350.
32.2		Certification of Andrew L. Guggenhime, Chief Financial Officer of Neoforma, Inc., Pursuant to 18 U.S.C. Section 1350.

* Confidential treatment has been requested for portions of this exhibit.

(b) Reports on Form 8-K

None.

SIGNATURE ~~SIGNATURES~~

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

Date: August 5, 2004		NEOFORMA, INC.
Date: August 8, 2005	NEOFORMA, INC.
	By:	~~By:~~/s/ ANDREW L. GUGGENHIME	~~/s/ ANDREW L. GUGGENHIME~~
			Andrew L. Guggenhime Chief Financial Officer
		Andrew L. Guggenhime
		Chief Financial Officer

INDEX TO EXHIBITS

(a) Exhibits

10.1		Form of director option grant.

31.1		Certification of Robert J. Zollars, Chairman and Chief Executive Officer of Neoforma, Inc., Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Andrew L. Guggenhime, Chief Financial Officer of Neoforma, Inc., Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification of Robert J. Zollars, Chairman and Chief Executive Officer of Neoforma, Inc., pursuant to 18 U.S.C. Section 1350.

32.2		Certification of Andrew L. Guggenhime, Chief Financial Officer of Neoforma, Inc., pursuant to 18 U.S.C. Section 1350.

10.1		Services Agreement (“Agreement”) by and between VHA Inc. and Neoforma, Inc. effective on June 1, 2004.*
31.1		Certification of Robert J. Zollars, Chairman and Chief Executive Officer of Neoforma, Inc., Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2		Certification of Andrew L. Guggenhime, Chief Financial Officer of Neoforma, Inc., Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1		Certification of Robert J. Zollars, Chairman and Chief Executive Officer of Neoforma, Inc., Pursuant to 18 U.S.C. Section 1350.
32.2		Certification of Andrew L. Guggenhime, Chief Financial Officer of Neoforma, Inc., Pursuant to 18 U.S.C. Section 1350.

* Confidential treatment has been requested for portions of this exhibit.

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BecauseTable we restated our financial results for the first and second fiscal quarter of 2002, as well as fiscal 2000 and 2001, we could be subjected to litigation. Any claims, with or without merit, could be time-consuming and costly to defend. Contents

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