10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2002

¨    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 (State or other jurisdiction of incorporation or organization) 77-0424252 (I.R.S. Employer Identification Number)

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

(408) 468-4000

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

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

The number of shares of common stock outstanding on December 10, 2002 was 18,655,529.

NEOFORMA, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	3
ITEM 1.	Unaudited Condensed Consolidated Financial Statements:
	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001	3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001 (as restated)	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 (as restated)	5
	Notes to Unaudited Condensed Consolidated Financial Statements	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	42
ITEM 4.	Controls and Procedures	42
PART II.	OTHER INFORMATION	43
ITEM 1.	Legal Proceedings	43
ITEM 2.	Changes in Securities and Use of Proceeds	43
ITEM 3.	Defaults Upon Senior Securities	43
ITEM 4.	Submission of Matters to a Vote of Security Holders	43
ITEM 5.	Other Information	43
ITEM 6.	Exhibits and Reports on Form 8-K	44
SIGNATURES		45

PART I.     FINANCIAL INFORMATION

Item 1.    Unaudited Condensed Consolidated Financial Statements

NEOFORMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

	December 31, 2001*			September 30, 2002
Current assets:
Cash and cash equivalents	$	14,096		$	22,580
Restricted cash, current portion		500			—
Accounts receivable, net of allowance for doubtful accounts of $206 and $259 as of December 31, 2001 and September 30, 2002, respectively		1,377			1,459
Prepaid expenses and other current assets		3,739			4,934
Deferred debt costs, current portion		175			—
Total current assets		19,887			28,973
Property and equipment, net		26,955			20,754
Intangibles, net of amortization		311			1,017
Capitalized partnership costs, net of amortization		234,352			184,786
Non-marketable investments		745			745
Restricted cash, less current portion		1,000			1,000
Other assets		3,051			1,903
Total assets	$	286,301		$	239,178
Current liabilities:
Notes payable, current portion:
Due to related party	$	—		$	19,000
Other		5,164			4,140
Total notes payable, current portion		5,164			23,140
Accounts payable		4,661			4,013
Accrued payroll		4,708			6,210
Other accrued liabilities		4,152			3,667
Deferred revenue, current portion		1,897			2,549
Total current liabilities		20,582			39,579
Deferred rent		499			594
Deferred revenue, less current portion		2,111			1,662
Notes payable, less current portion:
Due to related party		19,000			—
Other		1,635			455
Total notes payable, less current portion		20,635			455
Stockholders’ equity:
Common stock, $0.001 par value:
Authorized — 300,000 shares at September 30, 2002
Issued and outstanding: 16,589 and 17,455 shares at December 31, 2001 and September 30, 2002, respectively		17			17
Warrants		80			80
Additional paid-in capital		803,239			811,805
Notes receivable from stockholders		(6,407	)		(6,445	)
Deferred compensation		(10,344	)		(3,781	)
Accumulated other comprehensive loss		(1	)		—
Accumulated deficit		(544,110	)		(604,788	)
Total stockholders’ equity		242,474			196,888
Total liabilities and stockholders’ equity	$	286,301		$	239,178

* Derived from audited financial statements

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

3

NEOFORMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2001			2002			2001			2002
	(As Restated, see Note 10)						(As Restated, see Note 10)
Revenue:
Marketplace revenue:
Related party, net of amortization of partnership costs of $7,433, $18,452, $13,196 and $49,355 for the three months ended September 30, 2001 and 2002 and the nine months ended September 30, 2001 and 2002, respectively (see Note 2)	$	—		$	—		$	—		$	—
Other		307			248			833			737
Total Marketplace revenue		307			248			833			737
Trading Partner Services revenue:
Trading partner services (see Note 2)		196			1,065			1,260			1,769
Sales of used equipment		13			—			250			—
Total Trading Partner Services revenue		209			1,065			1,510			1,769
Total revenue		516			1,313			2,343			2,506
Operating expenses:
Cost of equipment sold		—			—			216			—
Cost of services		3,370			2,197			10,988			6,360
Operations		3,599			6,459			11,993			13,305
Product development		3,888			4,381			13,450			12,120
Selling and marketing		5,704			3,095			23,232			9,391
General and administrative		3,614			3,583			12,584			11,283
Amortization of intangibles		7,397			32			22,777			32
Amortization of partnership costs (see Note 2)		11,489			1,290			43,237			8,936
Write-off of purchased software		1,019			6			1,334			250
Write-off of in-process research and development		—			110			—			110
Restructuring		—			—			600			(165	)
Write-down of non-marketable investments		3,000			—			3,000			—
Write-down of note receivable		—			1,053			—			1,053
Net (gain)/loss on divested businesses		(872	)		—			(55	)		156
Total operating expenses		42,208			22,206			143,356			62,831
Loss from operations		(41,692	)		(20,893	)		(141,013	)		(60,325	)
Other income (expense):
Interest income		113			327			654			717
Interest expense		(276	)		(548	)		(413	)		(1,199	)
Other income (expense)		634			(4	)		444			129
Net loss	$	(41,221	)	$	(21,118	)	$	(140,328	)	$	(60,678	)
Net loss per share:
Basic and diluted	$	(2.58	)	$	(1.24	)	$	(9.00	)	$	(3.65	)
Weighted average shares—basic and diluted		15,960			16,985			15,600			16,623

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

4

NEOFORMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2001			2002
	(As Restated, see Note 10)
Cash flows from operating activities:
Net loss	$	(140,328	)	$	(60,678	)
Adjustments to reconcile net loss to net cash used in operating activities:
Employee stock compensation		559			268
Forgiveness of note payable in connection with acquisition		(500	)		—
Provision for doubtful accounts		607			83
Depreciation and amortization of property and equipment		6,537			8,048
Write-off of purchased software		1,334			250
Amortization of intangibles		22,777			32
Amortization of partnership costs classified as an operating expense (see Note 2)		43,237			8,936
Amortization of deferred compensation		12,604			4,662
Amortization of deferred debt costs		315			175
Write-off of in-process research and development		—			110
Write-down of non-marketable investments		3,000			—
Write-down of note receivable		—			1,053
Net (gain)/loss on divested businesses		(55	)		156
Accrued interest on stockholder note receivable		(75	)		(54	)
Change in assets and liabilities, net of divestitures:
Restricted cash		500			500
Accounts receivable		734			723
Prepaid expenses and other current assets		2,152			(2,248	)
Other assets		(392	)		1,156
Accounts payable		(12,775	)		(648	)
Accrued liabilities and accrued payroll		3,794			1,014
Deferred revenue		2,313			(198	)
Deferred rent		167			95
Net cash used in operating activities		(53,495	)		(36,565	)
Cash flows from investing activities:
Purchases of marketable investments		(2,681	)		—
Proceeds from the sale or maturity of marketable investments		7,825			—
Cash surrendered with divested businesses, net of cash proceeds received		(166	)		—
Proceeds from repayments of notes receivable relating to divestitures		150			—
Cash paid in connection with the acquisition of MedContrax, Inc. and Med-ecorp, Inc.		—			(1,494	)
Purchases of property and equipment		(7,593	)		(2,097	)
Net cash used in investing activities		(2,465	)		(3,591	)
Cash flows from financing activities:
Amortization of partnership costs offset against related party revenue (see Note 2)		13,347			49,814
Repayments of notes payable		(7,629	)		(2,204	)
Proceeds from draw under line of credit		14,000			—
Cash received related to options exercised		15			201
Proceeds from the issuance of common stock under the employee stock purchase plan		524			813
Common stock repurchased, net of notes receivable issued to common stockholders		(89	)		—
Collections of notes receivable from stockholders		1			16
Proceeds from the issuance of common stock, net of issuance costs and notes receivable issued to common stockholders		29,438			—
Net cash provided by financing activities		49,607			48,640
Net increase (decrease) in cash and cash equivalents		(6,353	)		8,484
Cash and cash equivalents, beginning of period		22,530			14,096
Cash and cash equivalents, end of period	$	16,177		$	22,580
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	509		$	194

5

NEOFORMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2001		2002
	(As Restated, see Note 10)
Supplemental schedule of non-cash financing activities:
Reduction of deferred compensation resulting from employee terminations	$	2,260	$	792
Increase in deferred compensation resulting from issuance of restricted stock to employees	$	—	$	516
Issuance of restricted common stock to related parties	$	3,571	$	9,184
Notes receivable from common stockholders cancelled in repurchase of common shares	$	91	$	—

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

6

NEOFORMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS:

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

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

Since inception, the Company has incurred significant losses, and, as of September 30, 2002, had an accumulated deficit of $604.8 million. The Company anticipates that currently available funds, consisting of cash and cash equivalents, combined with cash generated through its operations and funds available through its line of credit with VHA Inc. (VHA), will be sufficient to meet anticipated needs for working capital, capital expenditures and the payment of the current portion of notes payable through at least the next 12 months. The Company’s future long-term capital needs will depend significantly on the rate of growth of its business, the timing of expanded service offerings, the success of these services once they are launched and the Company’s ability to adjust its operating expenses to an appropriate level if the growth rate of its business is slower than it expects. The Company’s projections of future long-term cash needs and cash flows are subject to substantial uncertainty. If available funds and cash generated from operations are insufficient to satisfy its long-term liquidity requirements, the Company may seek to sell additional equity or debt securities, obtain additional lines of credit, renew its existing 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 when and if required, or at all.

The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These Unaudited Condensed Consolidated Financial Statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report for the year ended December 31, 2001 filed on Form 10-K, as amended, with the SEC. In the opinion of management, the Unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods indicated. The results of operations for interim periods are not necessarily indicative of the results that may be expected for future quarters or the year ending December 31, 2002.

Certain reclassifications have been made to the historical Unaudited Condensed Consolidated Financial Statements to conform to the 2002 presentation.

2. 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 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. EITF No. 01-9 was required to be adopted no later than the first quarter of 2002 and upon adoption, companies were required to retroactively reclassify such amounts in previously issued financial statements to comply with the income statement classification requirements of EITF No. 01-9.

On July 26, 2000, the Company issued equity consideration to VHA and University HealthSystem Consortium (UHC) in connection with the Company’s outsourcing and operating agreement (Outsourcing Agreement) entered into with Novation, LLC (Novation), VHA, UHC and Healthcare Purchasing Partners International, LLC (HPPI) on May 24, 2000. The Company is capitalizing this consideration when a measurement date has occurred as defined under EITF No. 96-18. The portion of the

7

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 is being capitalized as earned, is being amortized over the term of the arrangements that result in the consideration being earned, typically two to three years. As a result of the application of EITF No. 01-9, the Company has reclassified certain costs associated with this equity consideration, historically classified as operating expenses, to an offset against related party revenue from those parties. This treatment results in non-cash amortization of partnership costs being offset against related party revenue up to the lesser of such related party revenue or amortization of partnership costs in any period. Any amortization of partnership costs in excess of related party revenue in any period will continue to be classified as an operating expense.

The following table summarizes the impact the application of EITF No. 01-9 had on the Company’s Unaudited Condensed Consolidated Statements of Operations:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2001			2002			2001			2002
Revenue:
Related party marketplace revenue	$	7,433		$	18,452		$	13,196		$	49,355
Related party implementation revenue		86			173			151			459
Offset of amortization of partnership costs		(7,519	)		(18,625	)		(13,347	)		(49,814	)
Total related party revenue, as reported	$	—		$	—		$	—		$	—
Amortization of Partnership Costs:
Amortization of partnership costs	$	19,008		$	19,915		$	56,584		$	58,750
Offset to related party revenue		(7,519	)		(18,625	)		(13,347	)		(49,814	)
Total amortization of partnership costs reported as operating expenses	$	11,489		$	1,290		$	43,237		$	8,936

The amortization of partnership costs reported as operating expenses is reflected as an adjustment to reconcile net loss to cash from operating activities in the Unaudited 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, these fees that are offset by amortization of partnership costs are reported as a cash flow from financing activities in the Company’s Unaudited Condensed Consolidated Statements of Cash Flows.

As reclassifications, these changes had no impact on the Company’s loss from operations, net loss, net loss per share or total cash flow.

3.    INVESTMENTS IN DEBT AND EQUITY SECURITIES

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

Investments in debt and equity securities with original maturities less than 90 days are classified as cash equivalents; those with maturities greater than 90 days and less than one year are classified as short-term investments; and those with maturities greater than one year are classified as long-term investments.

Realized gains and losses are included in interest income and expense in the accompanying Unaudited Condensed Consolidated Statements of Operations. As of September 30, 2002, all of the Company’s investments in debt and equity securities had original maturities of less than 90 days and, as such, were classified as available-for-sale.

The Company’s investments in debt and equity securities were as follows, organized by major security type:

	September 30, 2002
	Amortized Cost		Aggregate Fair Value		Unrealized Holding Gain
	(in thousands)
Debt securities issued by states of the United States and political subdivisions of the states	$	5,793	$	5,793	$	—
Corporate debt securities		6,547		6,547		—
Total	$	12,340	$	12,340	$	—

8

	December 31, 2001
	Amortized		Aggregate	Unrealized
	Cost		Fair Value	Holding Loss
	(in thousands)
Debt securities issued by states of the United States and political subdivisions of the states	$	4,295	4,294	$	(1	)
Corporate debt securities		3,276	3,276		—
Total	$	7,571	7,570	$	(1	)

4.    RESTRUCTURING ACCRUALS

In December 2000, the Company recorded a restructuring charge of $691,000 in connection with the Company’s decision to divest its Auction and USL operations. Of the $691,000, $160,000 related to anticipated severance of 24 employees and the remainder related to idle facilities and related costs. For the year ended December 31, 2001, $221,000 was paid out in termination benefits relating to employees terminated as part of the divestiture and $268,000 was paid out for idle facilities and related costs. Of the employees terminated, 16 were from sales and marketing and 8 were from operations. In June 2001, the Company recorded an additional restructuring charge of $600,000, of which $539,000 related to a revision of the Company’s estimate of the time required to sublease idle facilities of the Auction operations and $61,000 related to severance costs for employees of the Auction operations. During the nine months ended September 30, 2002, $527,000 was paid out for idle facilities and related costs. The remaining accrual balance is expected to be utilized by the end of 2003.

In December 2001, the Company recorded a restructuring charge of $350,000 in connection with its decision to divest its EquipMD subsidiary. Of the $350,000, $311,000 related to anticipated severance of 7 employees and $39,000 related to idle facilities and related costs. During the nine months ended September 30, 2002, $146,000 was paid out in termination benefits relating to employees terminated as part of the divestiture and $17,000 was paid out for idle facilities and related costs. Of the employees terminated, all 7 were from sales and marketing. The Company also reversed $165,000 of severance related accruals during the nine months ended September 30, 2002 as the Company had determined that severance costs would be less than originally anticipated. The remaining accrual balance is expected to be utilized by the end of 2002.

Components of the restructuring accrual as of September 30, 2002 were as follows (in thousands):

	Employee Severance			Cost of Idle Facilities			Other			Total
Balance at December 31, 2001	$	311		$	696		$	45		$	1,052
Payments		(146	)		(544	)		(61	)		(751	)
Reversals		(165	)		—			—			(165	)
Reclassifications		—			(16	)		16			—
Balance at September 30, 2002	$	—		$	136		$	—		$	136

5.    BASIC AND DILUTED NET LOSS PER SHARE

Basic net loss per share on a historical basis is computed using the weighted-average number of shares of common stock outstanding. Diluted net loss per common share was the same as basic net loss per share for all periods presented since the effect of any potentially dilutive securities is excluded, as the securities are anti-dilutive as a result of the Company’s net losses. The total number of weighted average shares that are excluded from the diluted loss per share calculation relating to these securities was approximately 2.3 million, 1.6 million, 2.6 million and 2.3 million shares for the three months ended September 30, 2001 and 2002, and the nine months ended September 30, 2001 and 2002, respectively.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2001			2002			2001			2002
Net loss	$	(41,221	)	$	(21,118	)	$	(140,328	)	$	(60,678	)
Basic and diluted:
Weighted average shares of common stock outstanding		16,230			17,096			15,926			16,767
Less: Weighted average shares of common stock subject to repurchase		(270	)		(111	)		(326	)		(144	)
Weighted average shares used in computing basic and diluted net loss per share		15,960			16,985			15,600			16,623
Basic and diluted net loss per common share	$	(2.58	)	$	(1.24	)	$	(9.00	)	$	(3.65	)

6.    RECENT ACCOUNTING PRONOUNCEMENTS

9

In November 2001, the EITF reached a consensus on EITF Abstract No. 01-9, “Accounting for Consideration Given by 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. EITF No. 01-9 was required to be adopted no later than the first quarter of 2002 and upon adoption, companies were required to retroactively reclassify such amounts in previously issued financial statements to comply with the income statement classification requirements of EITF No. 01-9. On July 26, 2000, the Company issued equity consideration to VHA and UHC in connection with its Outsourcing Agreement with Novation, VHA, UHC and HPPI. As a result of the application of EITF No. 01-9, the Company has reclassified certain costs associated with this equity consideration, historically classified as operating expenses, to an offset against related party revenue from those parties. This treatment results in the classification of non-cash amortization of partnership costs as an offset against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any period. The adoption of EITF No. 01-9 resulted in a reduction of reported amortization of partnership costs and related party revenue by approximately $7.5 million and $18.6 million for the three months ended September 30, 2001 and 2002, respectively, and $13.3 million and $49.8 million for the nine months ended September 30, 2001 and 2002, respectively. As reclassifications, these changes had no impact on the Company’s loss from operations, net loss, net loss per share or total cash flow. See Note 2 for further discussion of the application of EITF No. 01-9.

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

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses significant issues relating to the implementation of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (i) can be distinguished from the rest of the entity and (ii) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 became effective for fiscal years beginning after December 15, 2001 and its provisions are to be applied prospectively. The adoption of this pronouncement in 2002 did not have a significant impact on the Company’s financial position, results of operations or cash flows.

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

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

7. 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”)) (the “Underwriter Defendants”), as well as its Chairman and Chief Executive Officer, Robert J. Zollars, and its former Chief Financial Officer, Frederick Ruegsegger (the “Individual Defendants”), 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 the common stock of the Company 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 was filed in the Southern District of New York on April 24, 2002. The amended complaint alleges that the Underwriter Defendants solicited and received “undisclosed compensation” from investors in exchange for allocations of stock in the IPO, and that some investors in the IPO allegedly agreed with the Underwriter Defendants to buy additional shares in the aftermarket to artificially inflate the price of the Company’s stock. The Company and the Individual Defendants 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 its IPO registration statement and prospectus that the Underwriter Defendants 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 (the “IPO Allocation Litigation”). 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 and the Individual Defendants, 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 have not yet been decided. On October 9, 2002, the Individual Defendants were dismissed from the action without prejudice. The Company is defending against this action vigorously. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, the Company cannot accurately predict the ultimate outcome of the motions.

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On January 11, 2002, the Company filed suit against Med XS Solutions, Inc. and Med-XS Asset Services, Inc., or Med-XS, in the United States District Court, Northern District of Illinois, Eastern Division (No. 02C 0295) for the failure of Med-XS to make payments under a $2.4 million promissory note. Med-XS executed the promissory note as partial payment for the purchase of assets of the Company’s subsidiary, Neoforma GAR, Inc., which had provided Auction services. Prior to filing of the suit, the Company had accelerated all principal payments under the promissory note after Med-XS failed to make scheduled payments under the promissory note and demanded Med-XS pay the entire $2.4 million immediately. On September 26, 2002, the Company entered into a confidential settlement agreement with Med-XS to settle the suit the Company had filed against Med-XS. The Company recorded a $1.1 million write-down of the promissory note during the three months ended September 30, 2002 to reflect the collectible value of the note based on the terms of the settlement agreement.

8. RELATED PARTY TRANSACTIONS

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

In consideration for the services agreed to be rendered, the Company issued warrants to VHA and UHC to purchase up to 3,084,502 shares and 751,943 shares, respectively, of the Company’s common stock, at an exercise price of $0.10 per share. Vesting on the warrants was performance based and was driven by historical gross purchasing levels by VHA and UHC member healthcare organizations that enter into commerce agreements with the Company to use Marketplace@Novation. Additionally, the Company issued to VHA and UHC 4,626,753 shares and 1,127,915 shares, respectively, of the Company’s common stock, which are subject to certain voting restrictions. This common stock was issued in consideration for services to be rendered by VHA, UHC and Novation over the term of the Outsourcing Agreement. The total valuation of the common stock issued, $291.3 million, was capitalized and recorded in capitalized partnership costs in the accompanying Unaudited Condensed Consolidated Balance Sheets and is being amortized over the estimated beneficial life of five years. Due to the performance criteria on the warrants, the valuation of the warrants is not calculated until earned. The valuation of warrants earned is calculated using the Black-Scholes pricing model using a risk free interest rate of 5.8%, expected dividend yield of zero, an average life equal to the remaining term of the Outsourcing Agreement and volatility of 70%. The valuation is recorded as earned in the capitalized partnership costs account in the accompanying Unaudited Condensed Consolidated Balance Sheets. The value of the warrant shares earned for each healthcare organization is amortized over the life of the agreement signed between the Company and that healthcare organization (generally between 2-3 years). As of September 30, 2002, VHA and UHC had earned a total of 2.6 million of the shares resulting in a total valuation of $57.4 million being capitalized in capitalized partnership costs.

As of September 30, 2002, the Company had recorded total reductions in capitalized partnership costs of $163.9 million. As a result of the adoption of EITF No. 01-9 in 2002, the Company has classified the amortization of these capitalized partnership costs as an offset against related party revenue received from Novation, VHA and UHC, up to the lesser of such related party revenue or amortization of partnership costs in any period, until the capitalized partnership costs are fully amortized. Additionally, as required under the transition guidance of EITF No. 01-9, the Company has reclassified prior period financial statements presented for comparative purposes to be consistent with this presentation. Any amortization of partnership costs in excess of related party revenue in any period will continue to be classified as an operating expense, and will be reflected as an adjustment to reconcile net loss to cash from operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows. Under EITF No. 01-9, the Company accounts for the fees being paid by Novation under the terms of the Outsourcing Agreement and subsequent amendments as if they were payments made for the equity consideration provided to VHA and UHC

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as opposed to payments for services. As a result, these fees that are offset by amortization of partnership costs are reported as a cash flow from financing activities in the Company’s Unaudited Condensed Consolidated Statements of Cash Flows. See Note 2 for a further discussion of the application of EITF No. 01-9.

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

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

Concurrent with the $30.5 million financing, the Company amended the Outsourcing Agreement (the Amended Outsourcing Agreement), effective on January 1, 2001. Under the terms of the Amended Outsourcing Agreement, Novation agreed to increase the minimum fee level it guaranteed to the Company under the Outsourcing Agreement, which guaranteed minimum fee level is based on a percentage of marketplace volume processed through Marketplace@Novation. The fee level is determined based on a tiered fee structure under which the incremental fee per dollar of transaction volume decreases as the marketplace volume through Marketplace@Novation increases. This structure results in a higher blended fee percentage at lower volume levels and a lower blended fee percentage at higher volume levels. Under the terms of the Amended Outsourcing Agreement, the payments Novation is required to make are subject to quarterly maximums. These maximums are based on a predetermined schedule with increasing dollar amounts through 2002. Beginning in 2003 through the remaining term of the Amended Outsourcing Agreement, these maximums are calculated based on Novation’s financial performance, as defined. In certain historical periods, the fees from Novation have been limited by these maximums. The Amended Outsourcing Agreement also included modifications to certain revenue sharing, supplier recruitment and supplier implementation provisions.

In April 2001, the Company entered into a $25 million revolving credit agreement with VHA. Under the credit agreement, which was amended in February 2002, the Company is able to borrow funds until May 31, 2003, up to an amount based on a specified formula dependent on the gross volume of transactions through Marketplace@Novation. Funds that the Company borrows under this credit agreement bear interest at a rate of 10% per year and are secured by substantially all of the Company’s assets. All amounts outstanding under this line of credit, both principal and interest, are due and payable on May 31, 2003. In the event that the Company (i) sells any stock as part of an equity financing, (ii) obtains funding in connection with a debt financing or other lending transaction that is either unsecured or subordinate to the lien of VHA under the credit agreement or (iii) enters into a debt financing or other lending transaction secured by the Company’s assets as of the date entered into the credit agreement, then the maximum of $25 million the Company could potentially borrow under the credit agreement will be reduced by an amount equal to the cash proceeds it receives from any of these transactions. As of September 30, 2002, the Company had outstanding principal borrowings of $19.0 million under the line of credit and remaining available funds of $6.0 million.

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

Effective September 2002, the Company, Novation, VHA, UHC and HPPI further amended and restated the Amended Outsourcing Agreement (the Revised Amended Outsourcing Agreement). As stated above, the payments that Novation is required to make are subject to quarterly maximums. These quarterly maximums are based on a predetermined fee schedule through 2002. Among other changes, the amendment reduced the quarterly maximums for the third and fourth quarters of 2002. In the third quarter of 2002, the fees received from Novation were reduced by these revised maximums. Effective in 2003, the quarterly maximums for a given year will be based on Novation’s estimated financial performance, as defined, for the subsequent year. Any difference in the calculated quarterly maximums that results from differences between Novation’s estimated and actual financial performance will increase or decrease subsequent period quarterly maximums. Additionally, under the Revised Amended Outsourcing Agreement, the scope of Novation’s rights to view marketplace level data was limited to data from

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Novation and HPPI sponsored marketplaces only. Also, Novation now only has the exclusive right to recruit suppliers for Novation and HPPI sponsored marketplaces and not for any other marketplaces that we operate.

As a result of the terms of the Outsourcing Agreement and the subsequent amendments between the Company, VHA, UHC and Novation, certain executive officers of VHA, UHC and Novation sat on the board of the Company as of September 30, 2002. Such individuals were: Robert J. Baker, President and CEO of UHC; Mark McKenna, President of Novation; Curt Nonomaque, Executive Vice President of VHA; and C. Thomas Smith, President and CEO of VHA.

9. ACQUISITION

In July 2002, the Company acquired substantially all of the assets of data management companies MedContrax, Inc. (MedContrax) and Med-ecorp, Inc. (Med-ecorp). The total purchase price was approximately $1.5 million in cash. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. In the allocation of the purchase price, $336,000, $360,000, $340,000, $348,000 and $110,000 were allocated to tangible assets, a proprietary database, developed technology, goodwill and acquired in-process research and development, respectively. The proprietary database and developed technology are being amortized over their estimated useful lives of three year and five years, respectively. Goodwill is not being amortized. The $110,000 allocated to acquired in-process research and development represented the estimated fair value, based on risk-adjusted cash flows related to incomplete research and development projects. At the date of the acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future use. Accordingly, the $110,000 was expensed as of the acquisition date.

10. RESTATEMENT

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

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

During the years ended December 31, 2000 and 2001, as well as the nine months ended September 30, 2002, the Company ceased using certain software. However, the Company did not give accounting recognition to this event. In addition, depreciation of the software equipment should have ceased as of the date the Company ceased using the software equipment in its operations.

During 2000, the Company capitalized certain deal costs, primarily investment banking fees, incurred in connection with the negotiation of its outsourcing and operating agreement (see Note 8). These costs, which were being amortized over 5 years, should have been expensed when incurred.

Also, the Company incorrectly calculated the value of restricted stock earned by related parties and the related amortization of partnership costs associated with this restricted stock (see Note 8).

Finally, the Company also determined that (i) it had over accrued for certain expenses, (ii) it had incorrectly accounted for certain stockholder notes receivable, (iii) it had not recorded stock compensation related to termination of employment in the period of termination, (iv) it should have capitalized interest expense related to the development of its marketplace platform, (v) it had not amortized an intangible asset acquired in 2000 and (vi) the allocation of the purchase price to the assets acquired and liabilities assumed in certain acquisitions required revision to correctly reflect the fair value of certain intangible assets including the amount allocated to acquired in-process research and development expensed upon acquisition. The Company also made other corrections to its consolidated financial statements for the years ended December 31, 2000 and 2001, as well as the three and nine months ended September 30, 2001.

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

The consolidated financial statements for the three and nine months ended September 30, 2001 contained herein have been restated to incorporate all of these adjustments and reclassifications.

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

Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 2001

(unaudited)

	As Previously Reported*			Adjustments			As Restated
Revenue:
Marketplace revenue:
Related party, net of amortization of partnership costs of $7,433 (see Note 2)	$	—		$	—		$	—
Other		307			—			307
Total marketplace revenue		307			—			307
Trading Partner Services revenue:
Trading partner services (see Note 2)		196			—			196
Sales of used equipment		13			—			13
Total Trading Partner Services revenue		209			—			209
Total revenue		516			—			516
Operating expenses:
Cost of services		3,767			(397	)		3,370
Operations		3,820			(221	)		3,599
Product development		4,124			(236	)		3,888
Selling and marketing		6,062			(358	)		5,704
General and administrative		4,047			(433	)		3,614
Amortization of intangibles		7,168			229			7,397
Amortization of partnership costs (see Note 2)		11,748			(259	)		11,489
Write-off of purchased software		—			1,019			1,019
Write-down of non-marketable investments		3,000			—			3,000
Net gain on divested business		(879	)		7			(872	)
Total operating expenses		42,857			(649	)		42,208
Loss from operations		(42,341	)		649			(41,692	)
Other income (expense):
Interest income		60			53			113
Interest expense		(337	)		61			(276	)
Other income (expense)		652			(18	)		634
Net loss	$	(41,966	)	$	745		$	(41,221	)
Net loss per share:
Basic and diluted	$	(2.64	)				$	(2.58	)
Weighted average shares — basic and diluted		15,907						15,960

* Reflects the application of EITF No. 01-9. See Note 2 for further discussion of the impact of EITF No. 01-9.

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Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2001

(unaudited)

	As Previously Reported*			Adjustments			As Restated
Revenue:
Marketplace revenue:
Related party, net of amortization of partnership costs of $13,196 (see Note 2)	$	—		$	—		$	—
Other		833			—			833
Total Marketplace revenue		833			—			833
Trading Partner Services revenue:
Trading partner services (see Note 2)		1,260			—			1,260
Sales of used equipment		250			—			250
Total Trading Partner Services revenue		1,510			—			1,510
Total revenue		2,343			—			2,343
Operating expenses:
Cost of equipment sold		216			—			216
Cost of services		11,856			(868	)		10,988
Operations		11,955			38			11,993
Product development		14,114			(664	)		13,450
Selling and marketing		23,900			(668	)		23,232
General and administrative		13,900			(1,316	)		12,584
Amortization of intangibles		22,181			596			22,777
Amortization of partnership costs (see Note 2)		44,352			(1,115	)		43,237
Write-off of purchased software		—			1,334			1,334
Restructuring		—			600			600
Write-down of non-marketable investments		3,000			—			3,000
Net gain on divested businesses		(258	)		203			(55	)
Total operating expenses		145,216			(1,860	)		143,356
Loss from operations		(142,873	)		1,860			(141,013	)
Other income (expense):
Interest income		539			115			654
Interest expense		(955	)		542			(413	)
Other income (expense)		441			3			444
Net loss	$	(142,848	)	$	2,520		$	(140,328	)
Net loss per share:
Basic and diluted	$	(9.19	)				$	(9.00	)
Weighted average shares — basic and diluted		15,546						15,600

* Reflects the application of EITF No. 01-9. See Note 2 for further discussion of the impact of EITF No. 01-9.

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

Subsequent to the issuance of the Company’s 2001 consolidated financial statements, the Company’s management determined that the accounting treatment initially afforded to certain transactions was not correct. The following discussion and analysis for the three and nine months ended September 30, 2001 gives effect to the restatement for those periods. See Note 10 to the Notes to Condensed Consolidated Financial Statements for further discussion of the restatement.

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

Overview

Neoforma is a leading healthcare supply chain and information solutions company. We build and operate Internet marketplaces that empower healthcare trading partners to optimize supply chain performance and we provide complementary solutions to our trading partners that enable them to increase the value they derive from our marketplaces. Our objective is to develop the industry standard supply chain operating system for healthcare. Our solutions enable the participants in the healthcare supply chain, principally healthcare providers, manufacturers, distributors and group purchasing organizations, or GPOs, to significantly improve business processes within their organizations and among their trading partners. These solutions consist of Web-based applications and services for our customers, or trading partners, that are designed to accelerate and optimize their use of the marketplaces that we build for them. Our trading partners include GPOs, healthcare providers such as hospitals and integrated delivery networks, and the manufacturers and distributors that sell products and services to them. As of September 30, 2002, the Company’s only Internet marketplace that was generating revenue was Marketplace@Novation.

Our revenue streams currently consist of two types of revenue: marketplace revenue and trading partner services revenue. Marketplace revenue is comprised of transaction and subscription based fees paid by the buyers and the suppliers of products on our marketplaces, as well as fees paid by marketplace sponsors such as GPOs. Trading partner services revenue consists of revenue generated from the sale or license of applications and services that are complementary to our marketplace services. Trading partner services revenue currently consists of revenue relating to contract management and market intelligence services provided to manufacturers and distributors, revenue relating to the sale of our Rapid Connectivity Solution, or RCS, to Global Healthcare Exchange, LLC, or GHX, revenue relating to data cleansing and implementation services provided to healthcare providers and fees from other value added services to our trading partners.

We recognize transaction fees as revenue in the period the transaction is confirmed by both the buyer and the seller. The transaction fee is based on the total purchase price as confirmed by the seller and the buyer. We receive transaction fees when (i) the initial order is placed and processed through the marketplace, or (ii) the initial order is placed outside the marketplace, but the transaction information is subsequently captured and processed through the marketplace. Marketplace subscription fees are recognized ratably over the period of the related agreement with the applicable buyer or supplier. Setup and implementation fees are recognized upon completion of the related services. With respect to software licenses, license fees are recognized when the software has been delivered and there are no other contingencies related to our performance. If license fees are contingent upon our performance subsequent to delivery, we defer recognition of such fees or the fair market value of the undelivered element requiring performance until we have completed performance. Subscription and maintenance fee revenue is recognized ratably over the period of the service agreement. Services revenue from contract management and market intelligence services is recognized ratably over the term of the related services agreement, unless the agreement calls for specific deliverables, in which case revenue is recognized upon delivery of the applicable deliverables. Services revenue for implementation projects is generally the result of fixed fee arrangements, and due to the nature and term of the projects, we recognize such fees on a completed contract basis. Revenue for other services, including training and consulting, is recognized as services are performed for time and material arrangements.

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

        Our operations have grown significantly since inception. We have significantly increased the number of trading partners, both hospitals and suppliers, that are participants in Marketplace@Novation, and we have introduced new and enhanced

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technology to offer to these trading partners within our marketplace services. In addition, we have increased the scope of our trading partner services that we offer to our marketplace participants. Because of the growth in our marketplace services, and increased adoption of our marketplace, we have generated increasing levels of marketplace volume. However, as a result of our adoption of Emerging Issues Task Force Abstract No. 01-9, or EITF No. 01-9, our reported marketplace revenue is not reflective of the increased level of fees being received from related parties for these marketplace services. As a result of the application of EITF No. 01-9, we offset the amortization of capitalized partnership costs resulting from the equity consideration provided to related parties against the fees received from those related parties, thereby resulting in an offset of the related party revenue reported (see Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion of the application of EITF No. 01-9). Since inception, our operating expenses have also increased, primarily due to increased impairment of assets held for divestiture resulting from the write-down of the assets of several of our ancillary operations in conjunction with our plans to divest the businesses, increased costs incurred to write down certain non-marketable investments and intangible assets and increased amortization of partnership costs relating to our outsourcing and operating agreement, or the Outsourcing Agreement, effective May 24, 2000, with Novation, LLC, or Novation, VHA Inc., or VHA, University HealthSystem Consortium, or UHC, and Healthcare Purchasing Partners International, LLC, or HPPI.

Strategic Partnerships

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

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

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

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

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

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

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

As a result of the terms of the Outsourcing Agreement and the subsequent amendments and revisions, certain executive officers of VHA, UHC and Novation sat on our board as of September 30, 2002. Such individuals were: Robert J. Baker, President and CEO of UHC; Mark McKenna, President of Novation; Curt Nonomaque, Executive Vice President of VHA; and C. Thomas Smith, President and CEO of VHA.

Acquisition

In July 2002, we acquired substantially all of the assets of data management companies MedContrax, Inc., or MedContrax, and Med-ecorp, Inc., or Med-ecorp. The total purchase price was approximately $1.5 million in cash. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. In the allocation of the purchase price, $336,000, $360,000, $340,000, $348,000 and $110,000 were allocated to tangible assets, a proprietary database, developed technology, goodwill and acquired in-process research and development, respectively. The proprietary database and developed technology are being amortized over their estimated useful lives of three years and five years, respectively. Goodwill is not being amortized. The $110,000 allocated to acquired in-process research and development represented the estimated fair value, based on risk-adjusted cash flows related to incomplete research and development projects. At the date of the acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future use. Accordingly, the $110,000 was expensed as of the acquisition date.

Other Matters

Since inception, we have incurred significant losses and, as of September 30, 2002, had an accumulated deficit of $604.8 million. In 2002, our losses will decrease as compared to fiscal 2001, and we expect our losses in 2003 will continue to decrease as a result of several factors. These factors primarily relate to anticipated reductions in non-cash charges, such as amortization of intangibles, impairment of intangibles, impairment of assets held for divestiture and write-down of non-marketable investments, as well as anticipated increases in fees received from related parties. Historically, these fees have been reported as related party revenue. However, as a result of the application of EITF No. 01-9, non-cash amortization of partnership costs will be offset against these fees received from related parties up to the lesser of related party revenue or amortization of partnership costs in any period, resulting in a reduction in the amortization classified as an operating expense (see Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion of the application of EITF No. 01-9).

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We have a limited operating history on which to base an evaluation of our business and prospects. You must consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as the online market for the purchase and sale of new products and services used by healthcare providers, including medical supplies and equipment. To address these risks, we must, among other things, increase the number of marketplaces we build and operate, expand the number of trading partners that use our marketplaces, enter into new strategic alliances, increase the functionality of our services, implement and successfully execute our business and marketing strategy, respond to competitive developments and attract, retain and motivate qualified personnel. We may not be successful in addressing these risks, and our failure to do so could seriously harm our business.

Critical Accounting Policies and Estimates

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

• revenue recognition;

• estimating the allowance for doubtful accounts receivable and notes receivable;

• estimating litigation reserves and other accrued liabilities; and

• valuation of intangible assets.

Revenue Recognition

We derive our revenue from marketplace applications and services and from related trading partner applications and services we provide to our trading partners. Marketplace revenue consists primarily of transaction based fees and subscription based fees. Trading partner services revenue currently consists of software license fees, contract management and market intelligence services fees, subscription fees, implementation fees and fees from other value added services. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences might result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.

Marketplace Revenue

Transaction Fees. Transaction fee revenue represents the negotiated percentage of the purchase price, or marketplace volume, of products in transactions between signed marketplace participants that are either (i) purchased by trading partners through Marketplace@Novation, or (ii) purchased through means other than our marketplace, but for which the transaction data is captured and processed through the marketplace for the benefit of our trading partner customers. The gross marketplace value of a transaction is the price of a product as agreed to by the buyer and the supplier, regardless of whether the transaction occurs through the marketplace, or whether we capture the transaction data, process it and make it available to the trading partners on the marketplace. We recognize transaction fees on a net basis, as we do not believe that we act as a principal in connection with orders to be shipped or delivered by a supplier to a purchaser because, among other things, we do not:

• establish the prices of products paid by buyers;

• take title to products to be shipped from the supplier to the buyer, nor do we take title to or assume the risk of loss of products prior to or during shipment;

• bear the credit and collections risk of the purchaser to the supplier; and

• bear the risk that the product will be returned.

Subscription Fees. Subscription fee revenue is generated from buyers and suppliers on our marketplaces that prefer to pay a single annual subscription fee to participate in any given marketplace instead of transaction fees. In all cases, we recognize subscription fees ratably over the period of the subscription agreement, as that is generally the period over which the services are performed.

EITF No. 01-9. As a result of the application of EITF No. 01-9, we offset the amortization of capitalized partnership costs resulting from the equity consideration provided to related parties against the fees received from those related parties, thereby resulting in a reduction of the related party revenue reported. As a result, as discussed in Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements, our reported related party marketplace revenue does not reflect the increased level of fees received from related parties for those marketplace services.

Trading Partner Services Revenue

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Software License Fees. Although we have had relatively immaterial amounts of software license revenue to date, we anticipate that we will generate increased software license revenue in future periods. We apply the provisions of Statement of Position No. 97-2, “Software Revenue Recognition,” as amended, to all transactions involving the sale of software products. We recognize revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured.

Contract Management and Market Intelligence Services Fees. As our contract management and market intelligence services fees agreements are generally for the delivery of specified reports or other deliverables, we recognize these fees upon delivery of the specified deliverables. In the event that a contract management or market intelligence services agreement does not contain specific deliverables, but rather provides access to services or reports over a specified term, the fees are recognized ratably over that term.

Implementation and Other Services Fees. We generally recognize implementation fees and other services fees where they relate to the implementation or use of our e-commerce solution, ratably over the term of the underlying e-commerce agreement. Revenue generated by implementation and other services we perform in connection with the implementation of other software products, applications or deliverables not directly related to our e-commerce services, is recognized on a completed contract basis.

Estimating the Allowance for Doubtful Accounts Receivable and Notes Receivable

Our management must make estimates of the collectability of both our accounts receivable and our notes receivable. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Management also performs additional periodic analysis of the financial condition of debtors for which we hold notes receivable. If the financial condition of our customers or debtors were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As of September 30, 2002, our accounts receivable balance was $1.5 million, net of allowance for doubtful accounts of $259,000. As of September 30, 2002, we had a notes receivable balance of $2.0 million, against which no allowance has been provided.

Estimating Litigation Reserves and Other Accrued Liabilities

Management’s current estimated range of liability related to our pending litigation is based on claims for which our management is able to estimate the amount and range of loss. As additional information becomes available, we will assess the potential liability related to our pending litigation and revise our estimates. Such revisions in our estimates of the potential liability could materially impact our results of operation and financial position in the period such revisions are made. As of September 30, 2002, we had accrued $410,000 for potential liabilities related to our pending litigation.

Valuation of Intangible Assets

We assess the impairment of identifiable intangible assets, which currently consist of capitalized partnership costs, goodwill and other intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

• loss of a major supplier or marketplace sponsor;

• significant underperformance relative to expected historical or projected future operating results;

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

• significant negative industry or economic trends;

• significant decline in our stock price for a sustained period; and

• our market capitalization relative to net book value.

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If we determine that the carrying value of any intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we would measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Capitalized partnership costs, net of amortization, and acquisition related intangible assets, net of amortization, amounted to $184.8 million and $1.0 million, respectively, as of September 30, 2002.

Results of Operations

Three Months Ended September 30, 2001 as Compared to Three Months Ended September 30, 2002

Revenue

Marketplace Revenue

Related Party.    Related party marketplace revenue consists of payments for marketplace services from VHA, UHC and Novation. For the three months ended September 30, 2001 and 2002, related party marketplace revenue consisted solely of payments from Novation to us under the minimum fee level guarantee provisions of the Outsourcing Agreement as amended, during those periods. 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 against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any given period. Due to the offset of approximately $7.4 million and $18.5 million of amortization of partnership costs against related party marketplace revenue for the three months ended September 30, 2001 and 2002, respectively, there was no net related party marketplace revenue for either period. See Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion of the application of EITF No. 01-9.

Other.    Other marketplace revenue consists of marketplace revenue received from trading partners, marketplace sponsors and other sources that are not related parties and generally consists of transaction-based fees and subscription fees. Other marketplace revenue was $248,000 for the three months ended September 30, 2002, a decrease from $307,000 for the three months ended September 30, 2001. The decrease was primarily due to the elimination of the revenue from our NeoMD operations in the second quarter of 2002 as a result of our divestiture of those operations in March 2002, partially offset by an increase in other marketplace revenue generated by suppliers as a result of increased marketplace participation.

Trading Partner Services Revenue

Trading Partner Services.    Trading partner services revenue consists of revenue generated from the sale of applications and services that are complementary or additive to our marketplace services. Currently, trading partner services revenue consists of revenue relating to contract management and market intelligence services provided to manufacturers and distributors, revenue relating to the sale of internally-generated software and technology solutions, revenue relating to data cleansing services provided to healthcare providers and fees from other value added services to our trading partners. Historically, trading partner services revenue has consisted of the following: setup fees to digitize product information; subscription and transaction-based fees for management and disposition of used medical equipment through our asset recovery service, which were generated by our Neoforma GAR division, or GAR, which we refer to as Auction, which we divested in September 2001; sponsorship fees paid by sellers to feature their brands and products on our Plan service, which was terminated in late 2001; license fees from the sale of software tools and related technical information; and services revenue for implementation and consulting services paid by users of our marketplaces. The increase in trading partner services revenue from $196,000 for the three months ended September 30, 2001 to $1.1 million for the three months ended September 30, 2002 was primarily due to revenue generated from our new contract management and market intelligence services. These services were introduced in connection with our acquisition of substantially all of the assets of MedContrax and Med-ecorp in July 2002.

Sales of Used Equipment.    Sales of used equipment consisted of the gross revenue generated from the sales of used and refurbished medical equipment that we owned as part of our now divested Auction operations. We had total sales of used equipment of $13,000 for the three months ended September 30, 2001, and none for the three months ended September 30, 2002. The decrease is a direct result of the sale of the Auction operations in September 2001. Because we have sold our Auction operations, we do not anticipate that we will recognize any future revenue from sales of used equipment.

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Operating Expenses

Cost of Services. Cost of services consists primarily of the costs to perform e-commerce readiness services and buyer and supplier implementation activities for our marketplaces. These expenditures consist primarily of technology costs, software licenses, salaries and other personnel expenses for our services personnel and fees for independent contractors. Cost of services decreased from $3.4 million for the three months ended September 30, 2001 to $2.2 million for the three months ended September 30, 2002. The decrease was due to the fact that the services group has historically utilized contractors and consultants as a significant portion of their resources. During the latter half of 2001 and the first quarter of 2002, however, as part of our cost management efforts and the development of the required skills by our full-time employees, we reduced the number of contractors and consultants utilized and instead increased our use of full-time employees, which resulted in significantly reduced costs. We expect our cost of services to increase slightly in future periods as we continue to perform e-commerce readiness services, connect both buyers and sellers to our marketplaces and support and service an increasing number of trading partners.

Operations. Operations expenses consist primarily of expenditures for the operation and maintenance of our marketplaces and our marketplace technology infrastructure, including customer service. These expenditures consist primarily of fees for independent contractors and consultants, technology costs, software licenses, salaries and other personnel expenses for our operations personnel. Operations expenses increased from $3.6 million for the three months ended September 30, 2001 to $6.5 million for the three months ended September 30, 2002. The increase was primarily due to depreciation of certain assets utilized in the operation of our marketplaces, which were first placed into service during the three months ended September 30, 2002. We expect our operations expenses to increase as we expand our operating infrastructure and add content and functionality to our marketplaces.

Product Development. Product development expenses consist primarily of personnel expenses, fees to consultants and contractors and technology costs associated with the development and enhancement of our marketplace solutions and functionality. Product development expenses increased from $3.9 million for the three months ended September 30, 2001 to $4.4 million for the three months ended September 30, 2002. The increase was primarily due to an increase in product development personnel between September 2001 and September 2002. We believe that continued investment in product development is critical to attaining our strategic objectives and, as such, we intend to continue to invest in this area. As a result, we expect product development expenses to increase slightly in future periods. Internally generated software development costs subject to capitalization were not material and were expensed as incurred.

Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, advertising, promotions and related marketing costs. Selling and marketing expenses decreased from $5.7 million for the three months ended September 30, 2001 to $3.1 million for the three months ended September 30, 2002. The decrease was primarily due to reduced selling and marketing personnel costs as well as a reduction in general sales and marketing expenses, including travel and other related costs. As part of our realignment of resources to focus on our core business model, we have been focusing the majority of our resources on product development and marketplace implementation and integration efforts. As a result, selling and marketing costs were at significantly lower levels for the three months ended September 30, 2002 as compared with the three months ended September 30, 2001. We do not expect these costs to remain at these reduced levels in future periods. We recognize that sales and marketing efforts are key to establishing ourselves as a leader in our industry and in branding our products, and as a result, we intend to continue to invest in sales and marketing activities and sell our marketplace services into the channels we have established. As a result, we expect sales and marketing costs to increase slightly over the next several quarters.

General and Administrative. General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services and other general corporate activities. General and administrative expenses remained relatively unchanged at $3.6 million for the three months ended September 30, 2001 and 2002. We expect general administrative expenses to increase slightly over the next few quarters as we make investments, primarily in personnel, to support our growth.

Amortization of Intangibles. Intangibles include goodwill and other intangible assets purchased in acquisitions. We have historically amortized intangible assets on a straight-line basis over a period of three to seven years. Amortization of intangibles decreased from $7.4 million for the three months ended September 30, 2001 to $32,000 for the three months ended September 30, 2002. During the fourth quarter of 2001, we wrote down the intangible assets related to our acquisition of Pharos Technologies, Inc. and effectively all of the intangible assets relating to the acquisition of EquipMD, Inc., or EquipMD, operated as NeoMD, as a result of our plans to divest the NeoMD business. As a result, we no longer incur amortization expenses related to these operations. In July 2002, we recorded intangible assets of $1.0 million, of which $348,000 is goodwill, in connection with the acquisition of substantially all of the assets of MedContrax and Med-ecorp. Effective fiscal 2002, goodwill is not being amortized. The amortization of intangibles of $32,000 for the three months ended September 30, 2002 related to these intangible assets.

        Amortization of Partnership Costs. Amortization of partnership costs represents the amortization of the capitalized valuation of consideration given to strategic partners as part of entering into any operating relationships with those partners. As of September 30, 2002, capitalized partnership costs represented common stock, warrants and restricted stock issued to VHA and UHC in connection with entering into the Outsourcing Agreement with those entities and with their purchasing organization, Novation. We initially issued warrants to VHA and UHC, but subsequently canceled these warrants and issued them restricted common

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stock in substitution for the canceled warrants. The value of the common stock issued is being amortized over a five-year estimated useful life. The restricted common stock issued in substitution for the warrants is being valued, and the related valuation is being capitalized, as the shares are earned. The capitalized partnership costs relating to the restricted common stock are being amortized over the term of the Outsourcing Agreement with the healthcare organizations that resulted in the shares being earned, generally two to three years. Amortization of partnership costs classified as an operating expense decreased from $11.5 million for the three months ended September 30, 2001 to $1.3 million for the three months ended September 30, 2002. The decrease in amortization expense is the result of the increase in fees received from related parties as, under EITF No. 01-9, amortization of partnership costs is classified as an offset against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any given period. We offset approximately $7.5 million and $18.6 million of amortization of partnership costs against related party revenue for the three months ended September 30, 2001 and 2002, respectively. The amortization of partnership costs reported as operating expenses will be reflected as an adjustment to reconcile net loss to cash from operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows. Under EITF No. 01-9, we account for the fees being paid by Novation under the terms of the Outsourcing Agreement and subsequent amendments as if they were payments made for the equity consideration we provided to VHA and UHC as opposed to payments for services. As a result, these fees that are offset by amortization of partnership costs are reported as a cash flow from financing activities in our Unaudited Condensed Consolidated Statements of Cash Flows.

Including the amortization offset against related party revenue under EITF No. 01-9, amortization of partnership costs increased from approximately $19.0 million to $19.9 million for the three months ended September 30, 2001 and 2002, respectively. This increase was due to the fact that there were incremental partnership costs capitalized during fiscal 2001, as VHA and UHC earned a portion of the restricted stock. As the period over which VHA and UHC can earn the restricted common stock extends four years from the date of the Outsourcing Agreement, and as we expect VHA and UHC to continue to earn the restricted stock, we expect capitalized partnership costs to continue to increase for the next several quarters. The related amortization of partnership costs will continue to remain at lower than historical levels as we anticipate that our related party revenue, and therefore the amount of amortization which we offset against this revenue, will continue to be significant. See Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion 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.

Amortization of Deferred Compensation. Deferred compensation represents the aggregate difference, at the date of grant, between the cost to the employee of equity-based compensation and the estimated fair value of the underlying equity instrument. In the case of stock options, deferred compensation is calculated as the difference between the exercise price of the option and the fair value of the underlying stock on the date the option was granted. This type of deferred compensation is amortized over the vesting period of the underlying options, generally four years. In connection with the grant of stock options to employees during fiscal 1998, 1999 and 2000, we recorded deferred compensation of $65.2 million. We amortize this amount on an accelerated basis over the vesting periods. Amortization of deferred compensation is reversed for any amounts recognized on options that do not vest due to employee terminations. During the three months ended September 30, 2001 and 2002, we recorded $1.3 million and $15,000, respectively, in reductions of this deferred compensation as a result of employee terminations and employee attrition. We recorded amortization of this deferred compensation, net of reversals relating to forfeitures, of $1.3 million and $628,000 during the three months ended September 30, 2001 and 2002, respectively.

In connection with the assumption of certain stock options granted to employees of EquipMD prior to our acquisition of EquipMD in April 2000, we recorded deferred compensation of $23.1 million, representing the difference between the estimated fair value of the common stock for accounting purposes and the option exercise price of these options at the date of announcement of the acquisition. This amount was presented as a reduction of stockholders’ equity and was being amortized over the vesting period of the applicable options using an accelerated method of amortization. During the three months ended September 30, 2001 and 2002, we recorded no reductions of this deferred compensation as a result of employee terminations and employee attrition in this business, which we divested in March 2002. We recorded amortization of this deferred compensation, net of reversals relating to forfeitures, of $1.6 million and $0 during the three months ended September 30, 2001 and 2002, respectively. Because we no longer employ any of the employees hired in connection with the acquisition of EquipMD as a result of the divestiture of these operations in March 2002, we do not have any remaining deferred compensation related to the employees of these operations. As a result, we will not be incurring amortization expenses relating to this deferred compensation in future periods.

In late 2001 and in the first half of 2002, in connection with the award of restricted stock to certain employees and officers, we recorded deferred compensation of $3.8 million which represents the fair value of the underlying common stock at the date of grant. The restrictions on the stock lapse on various dates through February 16, 2004, subject to the continuous employment of the employees and officers with us through those dates. This amount is presented as a reduction of stockholders’ equity and will be amortized ratably over the period from the date of grant through the vesting date using the straight line method of amortization. We recorded amortization of deferred compensation related to these shares of $589,000 during the three months ended September 30, 2002.

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The total deferred compensation balance of $3.8 million at September 30, 2002 is expected to be amortized as follows: $1.1 million during the remainder of fiscal 2002, $2.6 million during fiscal 2003 and $0.1 million during fiscal 2004. The amortization expense relates to options and restricted stock awarded to employees and officers in all operating expense categories. The amount of deferred compensation has been separately allocated to these categories in our Unaudited Condensed Consolidated Statements of Operations. The amount of deferred compensation expense to be recorded in future periods could continue to decrease if options or restricted stock for which accrued but unvested compensation has been recorded are forfeited, or increase if additional restricted stock grants are made.

Write-Off of Purchased Software. During the three months ended September 30, 2001 and 2002, we expensed $1.0 million and $6,000, respectively, related to the write-off of purchased software licenses that we were no longer utilizing.

Write-Off of Acquired In-Process Research and Development. For the three months ended September 30, 2002, we expensed $110,000 related to the write-off of acquired in-process research and development in connection with the MedContrax and Med-ecorp acquisition in July 2002.

Write-Down of Non-Marketable Investments. In September 2001, we received notice from Pointshare, Inc. that it was in the process of selling its remaining assets and winding down its operations. Pointshare is a privately held business-to-business administration services company in which we invested $3.0 million in March 2000. Based on our subsequent discussions with Pointshare’s management, we felt that it was highly unlikely that we would recover any material portion of our initial investment. As such, we wrote off our $3.0 million investment in Pointshare as of September 30, 2001.

Write-Down of Note Receivable. In September 2002, we entered into a confidential settlement agreement with Med XS Solutions, Inc. and Med-XS Asset Services, Inc., or Med-XS, to settle the suit we had filed against Med-XS, and the subsequent counterclaim filed by Med-XS against us, in connection with their failure to make payments to us under a $2.4 million promissory note executed as partial payment for their purchase of our subsidiary, GAR. We recorded a write-down of $1.1 million during the three months ended September 30, 2002 to reflect the collectible value of the note based on the terms of the settlement agreement.

Net (Gain)/Loss on Divested Businesses. Net (gain)/loss on divested businesses for the three months ended September 30, 2001 consisted of the gain realized as a result of the sale of GAR to Med-XS. The gain on divested businesses is calculated by reducing the consideration paid to us for the divested operations by the net book value of all assets and liabilities transferred with the divested operations. The divestiture of GAR resulted in a gain of $872,000 on the sale of the net assets for the third quarter of 2001.

Other Income (Expense). Other income (expense) consists of interest and other income and expense. Interest income for the quarter ended September 30, 2002 was $327,000 compared to $113,000 for the quarter ended September 30, 2001. The increase in interest income was due to an increase in notes receivable and other interest bearing assets in fiscal 2002 versus 2001. Interest expense increased from $276,000 for the three months ended September 30, 2001 to $548,000 for the three months ended September 30, 2002. The increase in interest expense was primarily due to a reduction in capitalized interest from $308,000 during the three months ended September 30, 2001 to $0 during the three months ended September 30, 2002. Total interest incurred during the three months ended September 30, 2001, before capitalized interest, was $584,000. In addition, we also had higher interest costs due to increased borrowings under our line of credit with VHA. Other income (expense) decreased from income of $634,000 in the third quarter of 2001 to expense of $4,000 in the third quarter of 2002. The other income during the three months ended September 30, 2001 was primarily the result of the forgiveness of $500,000 of debt under our note payable to the original owner of the GAR business. This $500,000 of debt was forgiven by the former owner of the GAR business in connection with the termination of his employment during the quarter ended September 30, 2001.

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

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Nine Months Ended September 30, 2002 as Compared to Nine Months Ended September 30, 2001

Revenue

Marketplace Revenue

Related Party. Related party marketplace revenue consists of payments for marketplace services from VHA, UHC and Novation. For the nine months ended September 30, 2001 and 2002, related party marketplace revenue consisted solely of payments from Novation to us under the minimum fee level guarantee provisions of the Outsourcing Agreement, as amended, during those periods. 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 against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any given period. Due to the offset of approximately $13.2 million and $49.4 million of amortization of partnership costs against related party marketplace revenue for the nine months ended September 30, 2001 and 2002, respectively, there was no net related party marketplace revenue for either period. See Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion of the application of EITF No. 01-9.

Other. Other marketplace revenue consists of marketplace revenue received from trading partners, marketplace sponsors and other sources that are not related parties and generally consists of transaction-based fees and subscription fees. Other marketplace revenue was $737,000 for the nine months ended September 30, 2002, a decrease from $833,000 for the nine months ended September 30, 2001. The decrease was primarily due to the elimination of the revenue from our NeoMD operations in the second half of 2002 as a result of our divestiture of those operations in March 2002, partially offset by an increase in other marketplace revenue generated by suppliers as a result of increased marketplace participation.

Trading Partner Services Revenue

Trading Partner Services. Trading partner services revenue consists of revenue generated from the sale of complementary applications and services to users and potential users of our marketplaces. Currently, trading partner services revenue consists of revenue relating to contract management and market intelligence services provided to manufacturers and distributors, revenue relating to the sale of internally-generated software and technology solutions, revenue relating to data cleansing services provided to healthcare providers and fees from other value added services to our trading partners. Historically, trading partner services revenue has consisted of the following: setup fees to digitize product information; subscription and transaction-based fees for management and disposition of used medical equipment through our asset recovery service, which were generated by our Auction operations, which we divested in September 2001; sponsorship fees paid by sellers to feature their brands and products on our Plan service, which was terminated in late 2001; license fees from the sale of software tools and related technical information; and services revenue for implementation and consulting services paid by users of our marketplaces. The increase in trading partner services revenue from $1.3 million for the nine months ended September 30, 2001 to $1.8 million for the nine months ended September 30, 2002 was primarily due to an increase in revenue related to the sale of RCS to GHX and revenue generated from our new contract management and market intelligence services. These services were introduced in connection with our acquisition of substantially all of the assets of MedContrax and Med-ecorp in July 2002. These increases were partially offset by reduced revenue as a result of the divestiture of the Plan, Auction and USL operations in 2001. Substantially all of the trading partner services revenue for the first nine months of 2001 was related to the FDI, Auction and USL operations, all of which were divested later in 2001, whereas in the first nine months of 2002, trading partner services revenue primarily was made up of revenue from the sale of RCS to GHX and contract management, market intelligence and data cleansing services we provided to our trading partners.

Sales of Used Equipment. Sales of used equipment consisted of the gross revenue generated from the sales of used and refurbished medical equipment that we owned as part of our now divested Auction operations. We had total sales of used equipment of $250,000 for the nine months ended September 30, 2001, and none for the nine months ended September 30, 2002. The decrease is a direct result of the sale of the Auction operations in September 2001. Because we have sold our Auction operations, we do not anticipate that we will recognize any future revenue from sales of used equipment.

Operating Expenses

Cost of Equipment Sold. Cost of equipment sold consisted solely of the costs of owned inventory of used medical equipment held for sale as part of our Auction operations. Cost of equipment sold decreased from $216,000 for the nine months ended September 30, 2001 to none for the nine months ended September 30, 2002. The decrease was due to the sale of our Auction operations in September 2001. Because of the sale of our Auction operations, we do not anticipate that we will incur any future expense relating to cost of equipment sold resulting from the sale of used equipment.

        Cost of Services. Cost of services consists primarily of the costs to perform e-commerce readiness services and buyer and supplier implementation activities for our marketplaces. These expenditures consist primarily of technology costs, software licenses, salaries and other personnel expenses for our services personnel and fees for independent contractors. Cost of services decreased from $11.0 million for the nine months ended September 30, 2001 to $6.4 million for the nine months ended September 30, 2002. The decrease was due to the fact that the services group has historically utilized contractors and consultants as a significant portion of their resources. During 2001 and the first half of 2002, however, as part of our cost management efforts and

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the development of the required skills by our full-time employees, we reduced the number of contractors and consultants utilized and instead increased our use of full-time employees, which resulted in significantly reduced costs. We expect our cost of services to increase slightly in future periods as we continue to perform e-commerce readiness services, connect both buyers and sellers to our marketplaces and support and service an increasing number of trading partners.

Operations. Operations expenses consist primarily of expenditures for the operation and maintenance of our marketplaces and our marketplace technology infrastructure, including customer service. These expenditures consist primarily of fees for independent contractors and consultants, technology costs, software licenses, salaries and other personnel expenses for our operations personnel. Operations expenses increased from $12.0 million for the nine months ended September 30, 2001 to $13.3 million for the nine months ended September 30, 2002. The increase was primarily due to depreciation of certain assets utilized in the operation of our marketplaces, which were first placed into service during the nine months ended September 30, 2002. We expect our operations expenses to increase as we expand our operating infrastructure and add content and functionality to our marketplaces.

Product Development. Product development expenses consist primarily of personnel expenses, fees to consultants and contractors and technology costs associated with the development and enhancement of our marketplace solutions and functionality. Product development expenses decreased from $13.5 million for the nine months ended September 30, 2001 to $12.1 million for the nine months ended September 30, 2002. The decrease was primarily due to reduced costs relating to product development personnel, specifically with respect to contractors and consultants. We believe that continued investment in product development is critical to attaining our strategic objectives and, as such, we intend to continue to invest in this area. As a result, we expect product development expenses to increase slightly in future periods. Internally generated software development costs subject to capitalization were not material and were expensed as incurred.

Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, advertising, promotions and related marketing costs. Selling and marketing expenses decreased from $23.2 million for the nine months ended September 30, 2001 to $9.4 million for the nine months ended September 30, 2002. The decrease was primarily due to reduced selling and marketing personnel costs as well as a reduction in general sales and marketing expenses, including travel and other related costs. As part of our realignment of resources to focus on our core business model, we have been focusing the majority of our resources on product development and marketplace implementation and integration efforts. As a result, selling and marketing costs were at significantly lower levels for the nine months ended September 30, 2002 as compared with the nine months ended September 30, 2001. We do not expect these costs to remain at these reduced levels in future periods. We recognize that sales and marketing efforts are key to establishing ourselves as a leader in our industry and in branding our products, and as a result, we intend to continue to invest in sales and marketing activities and sell our marketplace services into the channels we have established. As a result, we expect sales and marketing costs to increase slightly over the next several quarters.

General and Administrative. General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services and other general corporate activities. General and administrative expenses decreased from $12.6 million for the nine months ended September 30, 2001 to $11.3 million for the nine months ended September 30, 2002. The decrease was primarily due to reduced administrative personnel costs, including finance, accounting and administrative personnel, as well as a decrease in recruiting, legal and accounting expenses. These reductions were primarily the result of the fact that in fiscal 2001, we divested several of the operations we had acquired, including our Auction operations and certain components of our Plan services, and we incurred certain administrative costs of those entities during the first nine months of 2001. We expect general administrative expenses to increase slightly over the next few quarters as we make investments, primarily in personnel, to support our growth.

Amortization of Intangibles. Intangible assets include goodwill and the value of other intangible assets purchased in acquisitions. We have historically amortized intangible assets on a straight-line basis over a period of three to seven years. Amortization of intangibles decreased from $22.8 million for the nine months ended September 30, 2001 to $32,000 for the nine months ended September 30, 2002. During the fourth quarter of 2001, we wrote down the intangible assets related to our acquisition of Pharos Technologies, Inc. and effectively all of the intangible assets relating to the acquisition of EquipMD, operated as NeoMD, as a result of our plans to divest the NeoMD business. As a result, we no longer incur amortization expenses related to these operations. In July 2002, we recorded intangible assets of $1.0 million, of which $348,000 is goodwill, in connection with the acquisition of substantially all of the assets of MedContrax and Med-ecorp. Effective fiscal 2002, goodwill is not being amortized. The amortization of intangibles of $32,000 for the three months ended September 30, 2002 related to these intangible assets.

Amortization of Partnership Costs. Amortization of partnership costs represents the amortization of the capitalized valuation of consideration given to strategic partners as part of entering into any operating relationships with those partners. As of September 30, 2002, capitalized partnership costs represented common stock, warrants and restricted stock issued to VHA and UHC in connection with entering into the Outsourcing Agreement with those entities and with their purchasing organization, Novation. We initially issued warrants to VHA and UHC, but subsequently canceled these warrants and issued them restricted common stock in substitution for the canceled warrants. The value of the common stock issued is being amortized over a five-year

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estimated useful life. The restricted common stock issued in substitution for the warrants is being valued, and the related valuation is being capitalized, as the shares are earned. The capitalized partnership costs relating to the restricted common stock are being amortized over the term of the Outsourcing Agreement with the healthcare organizations that resulted in the shares being earned, generally two to three years. Amortization of partnership costs classified as an operating expense decreased from $43.2 million for the nine months ended September 30, 2001 to $8.9 million for the nine months ended September 30, 2002. The decrease in amortization expense is the result of the increase in fees received from related parties as, under EITF No. 01-9, amortization of partnership costs is classified as an offset against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any given period. We offset approximately $13.3 million and $49.8 million of amortization of partnership costs against related party revenue for the nine months ended September 30, 2001 and 2002, respectively. The amortization of partnership costs reported as operating expenses will be reflected as an adjustment to reconcile net loss to cash from operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows. Under EITF No. 01-9, we account for the fees being paid by Novation under the terms of the Outsourcing Agreement and subsequent amendments as if they were payments made for the equity consideration we provided to VHA and UHC as opposed to payments for services. As a result, these fees that are offset by amortization of partnership costs, are reported as a cash flow from financing activities in our Unaudited Condensed Consolidated Statements of Cash Flows.

Including the amortization offset against related party revenue under EITF No. 01-9, amortization of partnership costs increased from approximately $56.6 million to $58.8 million for the nine months ended September 30, 2001 and 2002, respectively. This increase was due to the fact that there were incremental partnership costs capitalized during fiscal 2001, as VHA and UHC earned a portion of the restricted stock. As the period over which VHA and UHC can earn the restricted common stock extends four years from the date of the Outsourcing Agreement, and as we expect VHA and UHC to continue to earn the restricted stock, we expect capitalized partnership costs to continue to increase for the next several quarters. The related amortization of partnership costs will continue to remain at lower than historical levels as we anticipate that our related party revenue, and therefore the amount of amortization which we offset against this revenue, will continue to be significant. See Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion 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.

Amortization of Deferred Compensation. Deferred compensation represents the aggregate difference, at the date of grant, between the cost to the employee of equity-based compensation and the estimated fair value of the underlying equity instrument. In the case of stock options, deferred compensation is calculated as the difference between the exercise price of the option and the fair value of the underlying stock on the date the option was granted. This type of deferred compensation is amortized over the vesting period of the underlying options, generally four years. In connection with the grant of stock options to employees during fiscal 1998, 1999 and 2000, we recorded deferred compensation of $65.2 million. We amortize this amount on an accelerated basis over the vesting periods. Amortization of deferred compensation is reversed for any amounts recognized on options that do not vest due to employee terminations. During the nine months ended September 30, 2001 and 2002, we recorded $2.3 million and $225,000, respectively, in reductions of this deferred compensation as a result of employee terminations and employee attrition. We recorded amortization of this deferred compensation, net of reversals relating to forfeitures, of $6.6 million and $2.8 million during the nine months ended September 30, 2001 and 2002, respectively.

In connection with the assumption of certain stock options granted to employees of EquipMD prior to our acquisition of EquipMD in April 2000, we recorded deferred compensation of $23.1 million, representing the difference between the estimated fair value of the common stock for accounting purposes and the option exercise price of these options at the date of announcement of the acquisition. This amount was presented as a reduction of stockholders’ equity and was being amortized over the vesting period of the applicable options using an accelerated method of amortization. During the nine months ended September 30, 2001 and 2002, we recorded $0 and $1.2 million, respectively, in reductions of this deferred compensation as a result of employee terminations and employee attrition in this business, which we divested in March 2002. We recorded amortization of this deferred compensation, net of reversals relating to forfeitures, related to these options of $6.1 million and $51,000 during the nine months ended September 30, 2001 and 2002, respectively. Because we no longer employ any of the employees hired in connection with the acquisition of EquipMD as a result of the divestiture of these operations in March 2002, we do not have any remaining deferred compensation related to the employees of these operations. As a result, we will no longer be incurring amortization expenses relating to this deferred compensation in future periods.

In late 2001 and in the first half of 2002, in connection with the award of restricted stock to certain employees and officers, we recorded deferred compensation of $3.8 million, which represents the fair value of the underlying common stock at the date of grant. The restrictions on the stock lapse on various dates through February 16, 2004, subject to the continuous employment of the employees and officers with Neoforma through those dates. This amount is presented as a reduction of stockholders’ equity and will be amortized ratably over the period from the date of grant through the vesting date using the straight line method of amortization. We recorded amortization of deferred compensation related to these shares of $1.8 million during the nine months ended September 30, 2002.

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Write-Off of Purchased Software. During the nine months ended September 30, 2001 and 2002, we expensed $1.3 million and $250,000, respectively, related to the write-off of purchased software licenses that we were no longer utilizing.

Write-Off of Acquired In-Process Research and Development. For the nine months ended September 30, 2002, we expensed $110,000 related to the write off of acquired in-process research and development in connection with the MedContrax and Med-ecorp acquisition in July 2002.

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

In December 2000, we recorded a restructuring charge of $691,000 in connection with our decision to divest the Auction and USL operations. Of the $691,000, $160,000 related to anticipated severance of 24 employees and the remainder related to idle facilities and related costs. The operations were sold in 2001. Of the employees terminated, 16 were from sales and marketing and 8 were from operations. During the nine months ended September 30, 2001, we recorded an additional restructuring charge of $600,000, of which $539,000 related to a revision of our estimate of the time required to sublease idle facilities of the Auction operations and $61,000 related to severance costs for employees of the Auction operations. No restructuring charges related to these operations were recorded during the nine months ended September 30, 2002.

In December 2001, we recorded a restructuring charge of $350,000 in connection with our decision to divest the EquipMD subsidiary. Of the $350,000, $311,000 related to anticipated severance of 7 employees and $39,000 related to idle facilities and related costs. During the nine months ended September 30, 2002, we reversed $165,000 of severance related accruals, as we determined that severance costs related to the divestiture of our NeoMD operations would be less than originally anticipated. EquipMD was sold in the first quarter of 2002. Of the employees terminated, all 7 were from sales and marketing. No restructuring charges related to these operations were recorded during the nine months ended September 30, 2001.

Write-Down of Non-Marketable Investments. In September 2001, we received notice from Pointshare, Inc. that it was in the process of selling its remaining assets and winding down its operations. Pointshare is a privately held business-to-business administration services company in which we invested $3.0 million in March 2000. Based on our subsequent discussions with Pointshare’s management, we felt that it was highly unlikely that we would recover any material portion of our initial investment. As such, we wrote off our $3.0 million investment in Pointshare as of September 30, 2001.

Write-Down of Note Receivable. In September 2002, we entered into a confidential settlement agreement with Med-XS, to settle the suit we had filed against Med-XS, and the subsequent counterclaim filed by Med-XS against us, in connection with their failure to make payments to us under a $2.4 million promissory note executed as partial payment for their purchase of our subsidiary, GAR. We recorded a write-down of $1.1 million during the three months ended September 30, 2002 to reflect the collectible value of the note based on the terms of the settlement agreement.

Net (Gain)/Loss on Divested Businesses. Net (gain)/loss on divested businesses during the nine months ended September 30, 2001 consisted of the net gain realized as a result of the divestiture of the USL, FDI and GAR operations during that period. The gain on divested businesses is calculated by reducing the consideration paid to us for the divested operations by the net book value of all assets and liabilities transferred with the divested operations. The divestiture of USL resulted in a gain of $307,000 on the sale of the net assets, the divestiture of FDI resulted in a loss of $1.1 million on the sale of the net assets and the divestiture of the GAR operations resulted in a gain of $872,000 on the sale of the net assets. The resulting net gain on divested businesses during the nine months ended September 30, 2001 was $55,000. During the nine months ended September 30, 2002, (gain)/loss on divested businesses consisted of the loss incurred as a result of the sale of the NeoMD operations. The divestiture of the NeoMD operations resulted in a loss of $156,000 on the sale of the net assets in March 2002.

Other Income (Expense). Other income (expense) consists of interest and other income and expense. Interest income for the nine months ended September 30, 2002 was $717,000 compared to $654,000 for the nine months ended September 30, 2001. Interest expense increased from $413,000 for the nine months ended September 30, 2001 to $1.2 million for the nine months ended September 30, 2002. The increase in interest expense was primarily due to a reduction in capitalized interest from $799,000 during the nine months ended September 30, 2001 to $674,000 during the nine months ended September 30, 2002. Total interest incurred during the nine months ended September 30, 2001 and 2002, before capitalized interest was $1.2 million and $1.9 million, respectively. The increase in our total interest costs was due to increased borrowings under our line of credit with VHA. Other income was $444,000 and $129,000 for the nine months ended September 30, 2001 and 2002, respectively. The other income during the nine months ended September 30, 2001 was primarily the result of the forgiveness of $500,000 of debt under our note payable to the original owner of the GAR business. This $500,000 of debt was forgiven by the former owner of the GAR business in connection with the termination of his employment during the quarter ended September 30, 2001.

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

Liquidity and Capital Resources

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In January 2000, we completed our IPO and issued 805,000 shares of our common stock at an initial public offering price of $130.00 per share. Net cash proceeds to us from the IPO were approximately $95.3 million. From our inception until our IPO, we financed our operations primarily through private sales of preferred stock through which we raised net proceeds of $88.5 million. We have also financed our operations through an equipment loan and lease financing facility and bank and other borrowings. As of September 30, 2002, we had outstanding bank, other borrowings and notes payable of $23.6 million, and we had $22.6 million of cash and cash equivalents and $1.0 million of restricted cash.

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

In April 2001, we entered into a $25 million revolving credit agreement with VHA. Under the credit agreement, as amended in February 2002, we are able to borrow funds until May 31, 2003, up to an amount based on a specified formula dependent on the gross volume of transactions through Marketplace@Novation. Funds that we borrow under this credit agreement bear interest at a rate of 10% per year and are secured by substantially all of our assets. All amounts outstanding under this line of credit, both principal and interest, are due and payable on May 31, 2003, if not repaid sooner. In the event that we (i) sell any of our stock as part of an equity financing, (ii) obtain funding in connection with a debt financing or other lending transaction that is either unsecured or subordinate to the lien of VHA under the credit agreement or (iii) enter into a debt financing or other lending transaction secured by assets we owned as of the date we entered into the credit agreement, then the maximum of $25 million we could potentially borrow under the credit agreement will be reduced by an amount equal to the cash proceeds we receive from any of these transactions. As of September 30, 2002, we had outstanding borrowings of $19.0 million under the line of credit and remaining available funds of $6.0 million.

In May 2001, we entered into a leasing facility with CapitalWerks, LLC, or CapitalWerks, to provide us with a $10.2 million lease line facility to finance the purchase of capital equipment, software and other assets. After several unsuccessful attempts by us to access the line of credit, on April 14, 2002, we sent to CapitalWerks notification of our termination of the line of credit agreement and a demand for repayment of the initial “access fee” we had paid to open the line of credit. We believe that CapitalWerks did not ever have any intention of fulfilling its obligations required under the line of credit agreement with us and therefore breached the agreement. We are actively engaged in efforts to obtain repayment of this “access fee” and accrued interest from CapitalWerks, which ultimately may involve the initiation of legal proceedings.

In July 1999, Comdisco provided us with a $2.5 million loan and lease facility to finance computer hardware and software equipment. Amounts borrowed to purchase hardware bear interest at 9% per annum and are payable in 48 monthly installments consisting of interest only payments for the first nine months and principal and interest payments for the remaining 36 months, with a balloon payment of the remaining principal payable at maturity. Amounts borrowed to purchase software bear interest at 8% per annum and are payable in 30 monthly installments consisting of interest only payments for the first four months and principal and interest payments for the remaining 26 months, with a balloon payment of the remaining principal payable at maturity. The computer equipment purchased with the proceeds of the loans secures this facility. In connection with this facility, we issued Comdisco a warrant to purchase 13,771 shares of our Series D preferred stock, which converted into 13,771 shares of our common stock upon the closing of our IPO, at an exercise price of $11.80 per share. As of September 30, 2002, we had outstanding borrowings of $509,000 under this facility.

In August 1999, in connection with the GAR acquisition, we issued a promissory note in the principal amount of $7.8 million payable monthly over five years bearing interest at a rate of 7% per year. In July 2001, we modified the terms of this promissory note in exchange for the release of the security interest the note holder had in the assets of the GAR operations. In accordance with the revised terms of the note, we repaid $750,000 of the balance of the note in August 2001, and an additional $500,000 was forgiven by the note holder. The remaining balance due on the promissory note is to be paid in equal monthly installments, with interest accruing at 7% per year, over the subsequent 30 months. As of September 30, 2002, the outstanding balance on the note was $1.5 million.

In connection with our operating lease on our corporate headquarters in San Jose, California, we established a letter of credit in the amount of $2.0 million payable to our landlord to secure our obligations under the lease. Under the terms of the lease, which allow for reductions in the amount of the letter of credit over time as we fulfill our obligations under the lease, we have reduced the letter of credit to $1.5 million during 2001 and to $1.0 million in 2002. The letter of credit is secured by balances in the Company’s investment accounts and is classified as restricted cash in our consolidated balance sheets.

In March 2000, we entered into an agreement with Ariba, Inc., or Ariba, under which we have the right to offer Ariba’s ORMX procurement solution to users of our marketplace. We paid Ariba a substantial upfront fee for use of the ORMX procurement solution and, under the terms of the agreement, we agreed to pay specified fees for transactions occurring through Ariba’s network. We are currently in dispute with Ariba with regards to the terms of the agreement and our obligations to make payments to Ariba.

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In May 2000, as part of the termination of the proposed mergers with Eclipsys and Healthvision, we entered into a strategic commercial relationship with Eclipsys and Healthvision that includes a co-marketing and distribution arrangement between us and Healthvision. Under the terms of the arrangement, we purchased a license to utilize Eclipsys’ eWebIT enterprise application technology to enhance the integration of legacy applications with our e-commerce platform technology. Additionally, we committed to utilize their professional services organizations to assist in this work at a minimum of $4.3 million over a four-year period. We are currently in dispute with Healthvision and Eclipsys over this arrangement regarding our obligation to utilize their services. As of September 30, 2002, we had utilized $1.6 million of these professional services.

In July 2000, in recognition for the advisory services rendered in connection with the terminated Healthvision and Eclipsys mergers, our Outsourcing Agreement and our acquisition of EquipMD, we entered into a promissory note with our investment banker for these transactions in the amount of $6.0 million. The note was payable in quarterly payments of $1.5 million, commencing on January 1, 2001. In April 2001, we amended the terms of the note such that the remaining balance was payable in two installments: the first $2.0 million payable in May 2001 and the remaining $2.5 million payable in April 2002. At September 30, 2002, the remaining balance on the note was $2.5 million.

In July 2000, as part of the acquisition of certain assets of NCL, we issued a promissory note to each of the four principals of NCL in the amount of $62,500 each. These notes are payable in twenty-four equal monthly installments, with the first payment due on August 15, 2000. As of September 30, 2002, the total balance of the four notes was $10,000. In addition, as part of the acquisition, we also agreed to pay $250,000 on July 14, 2002, two years from the closing date of the acquisition. This payment was to be distributed in equal amounts of $62,500 to each of the four principals of NCL. In July 2002, all remaining balances were paid.

As discussed in Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements, we adopted EITF No. 01-9 effective January 1, 2002. As a result of the application of EITF No. 01-9, we have classified certain costs associated with equity consideration provided to VHA and UHC in connection with the Outsourcing Agreement as an offset against related party revenue from VHA, UHC and Novation. This treatment will result in the offset of non-cash amortization of partnership costs against related party revenue up to the lesser of such related party revenue or amortization of partnership costs in any period. Any amortization of partnership costs in excess of related party revenue in any period will continue to be classified as an operating expense, and will be reflected as an adjustment to reconcile net loss to cash from operating activities on the Unaudited Condensed Consolidated Statements of Cash Flows. Under EITF No. 01-9, we account for the fees being paid by Novation under the terms of the Outsourcing Agreement as if they were payments made for the equity consideration we provided to VHA and UHC as opposed to payments for services. As a result, these fees that are offset by amortization of partnership costs are reported as a cash flow from financing activities in our Unaudited Condensed Consolidated Statements of Cash Flows.

Net cash used in operating activities for the nine months ended September 30, 2002 was $36.6 million as compared to $53.5 million for the nine months ended September 30, 2001. Net cash used by operating activities for the nine months ended September 30, 2002 related primarily to cash utilized to fund net losses as well as decreases in accounts payable and deferred revenue and an increase in prepaid expenses and other current assets, which were partially offset by an increase in accrued liabilities and accrued payroll and decreases in restricted cash, other assets and accounts receivable. Net cash used by operating activities for the nine months ended September 30, 2001 related primarily to cash utilized to fund net losses as well as a decrease in accounts payable and an increase in other assets, which were partially offset by increases in accrued liabilities and accrued payroll, deferred revenue and deferred rent and decreases in restricted cash, accounts receivable and prepaid expenses and other current assets.

Net cash used in investing activities was $3.6 million for the nine months ended September 30, 2002 as compared to $2.5 million for the nine months ended September 30, 2001. Net cash used in investing activities for the nine months ended September 30, 2002 related to the purchase of equipment to operate our marketplaces and cash paid for the acquisition of MedContrax and Med-ecorp. Net cash used in investing activities for the nine months ended September 30, 2001 related primarily to the purchase of equipment to operate our marketplaces, which was partially offset by the net proceeds from the sale of marketable investments.

Net cash provided by financing activities was $48.6 million for the nine months ended September 30, 2002 as compared to $49.6 million for the nine months ended September 30, 2001. Net cash provided by financing activities for the nine months ended September 30, 2002 related to fees received from VHA and UHC under the guaranteed minimum fee level provisions of the Outsourcing Agreement, cash received related to options exercised, and proceeds from the issuance of common stock under our employee stock purchase plan, partially offset by repayments of notes payable. Net cash provided by financing activities for the nine months ended September 30, 2001 related to fees received from VHA and UHC under the guaranteed minimum fee level provisions of the Outsourcing Agreement, proceeds from draws under our line of credit with VHA, proceeds from the issuance of common stock under our employee stock purchase plan and proceeds from the issuance of common stock, net of issuance costs and notes receivable, which were partially offset by repayments of notes payable.

We currently anticipate that our available funds, consisting of $22.6 million in cash and cash equivalents and $1.0 million of restricted cash, combined with cash generated through our operations and funds available to us through our line of credit with VHA, will be sufficient to meet our anticipated needs for working capital, capital expenditures and the payment of the current

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

Recent Accounting Pronouncements

In November 2001, the Emerging Issues Task Force reached a consensus on EITF Abstract No. 01-9, “Accounting for Consideration Given by 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. EITF No. 01-9 was required to be adopted no later than the first quarter of 2002 and upon adoption, companies were required to retroactively reclassify such amounts in previously issued financial statements to comply with the income statement classification requirements of EITF No. 01-9. On July 26, 2000, we issued equity consideration to VHA and UHC in connection with the Outsourcing Agreement. As a result of the application of EITF No. 01-9, we have reclassified certain costs associated with this equity consideration, historically classified as operating expenses, to an offset against related party revenue from those parties. This treatment results in the classification of non-cash amortization of partnership costs as an offset against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any period. The adoption of EITF No. 01-9 resulted in a reduction of reported amortization of partnership costs and related party revenue by approximately $7.5 million and $18.6 million for the three months ended September 30, 2001 and 2002, respectively, and $13.3 million and $49.8 million for the nine months ended September 30, 2001 and 2002, respectively. As reclassifications, these changes had no impact on our loss from operations, net loss, net loss per share or total cash flow. See Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion of the application of EITF No. 01-9.

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

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses significant issues relating to the implementation of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 became effective for fiscal years beginning after December 15, 2001 and its provisions are to be applied prospectively. The adoption of this pronouncement in 2002 did not have a significant impact on our financial position, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30 will now be used to classify those gains and losses. SFAS No.

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145 also amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 becomes effective for fiscal years beginning after May 15, 2002. We do not expect the adoption of SFAS No. 145 to have a significant impact on our financial position, results of operations and cash flows.

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

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Factors That May Affect Future Operating Results

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

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

We have focused our efforts on building and operating Internet and electronic marketplaces that aggregate buyers and suppliers of products and services used by healthcare providers, including medical supplies and equipment. This business model is new and unproven and depends upon buyers and sellers in this market adopting a new way to purchase and sell products and services. If buyers and sellers of products and services used by healthcare providers do not accept our business model, demand for our applications and services may not develop as we expect and the price of our common stock could decline. Some buyers and suppliers could be reluctant to accept our relatively new and unproven approach, which may not be consistent with their existing internal organization and procurement processes. Some buyers and suppliers may prefer to use traditional methods of buying and selling products and services, such as using paper catalogs and interacting in person or by phone with representatives of manufacturers or distributors.

Our products and services and revenue model are untested and their acceptance is not assured

Our products and services are either of recent introduction or are currently under development and their acceptance by our marketplace participants is therefore untested and uncertain. Our current business plan includes seeking a large portion of our revenue from participating suppliers. Obtaining the acceptance from such suppliers to pay our fees has proven difficult. If suppliers do not accept our products and services or fee model, it would have a serious negative impact on our business.

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

We have experienced losses from operations in each period since our inception, including a net loss of $60.7 million for the nine months ended September 30, 2002. In addition, as of September 30, 2002, we had an accumulated deficit of $604.8 million. We have not achieved profitability, and we expect to continue to incur substantial operating losses in future quarters, primarily as a result of increases in costs and expenses relating to executing our strategy of building and operating Internet marketplaces for our trading partners. We will not achieve profitability unless we are able to significantly increase our revenue while adequately controlling our operating expenses, and we cannot assure you that we will ever be profitable.

We rely on our relationship with our strategic partners to drive participation in our marketplaces, and our business may be seriously harmed if these relationships are materially altered or terminated

We expect to rely significantly on our relationship with Novation and, to a lesser extent, our relationship with Medbuy Corporation, or Medbuy, along with other strategic allies such as GHX, to bring buyers and suppliers to our marketplaces. Under our Revised Amended Outsourcing Agreement, Novation is our exclusive agent for signing up suppliers to participate in Marketplace@Novation, subject to limited exceptions. Accordingly, we rely on Novation to attract suppliers to Marketplace@Novation and, if Novation is unable to attract a sufficient number of suppliers, the value of Marketplace@Novation to buyers will be substantially decreased and our business will suffer. Novation currently requires suppliers to participate in Marketplace@Novation as a requirement to sell contracted products to hospitals served by Novation. If Novation ceases to require Marketplace@Novation participation as a contract requirement, our ability to recruit suppliers to Marketplace@Novation may be seriously harmed. We rely significantly on VHA and UHC and expect to rely significantly on Medbuy to recruit and retain providers to our marketplaces. These partners use a variety of marketing initiatives and financial incentives to drive adoption and use of our marketplaces by healthcare providers. If these partners cease using such marketing initiatives and financial incentives our ability to recruit healthcare providers to our marketplaces also may be seriously harmed.

Under the Revised Amended Outsourcing 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 Revised Amended Outsourcing Agreement could be terminated, which would seriously harm our business and financial results.

Marketplace@Novation is currently the only marketplace from which we derive fees; our ability to earn fees in future periods may depend on Novation’s performance

Because Marketplace@Novation is currently the only one of our marketplaces from which we derive fees, our financial performance greatly depends on the success of this marketplace. Our ability to earn fees from Marketplace@Novation is

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dependent on several factors and may be limited by quarterly fee maximums, which are in turn partly calculated based on Novation’s financial performance. If Novation’s performance declines, our ability to earn fees from the Marketplace@Novation may also decline.

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

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

• the fees we collect from Novation, which are subject to quarterly maximums;

• the fees we collect from suppliers;

• changes in the fees we charge users of our services;

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

• the amount and timing of payments to our strategic and technology partners;

• our ability to recognize as revenue the payments made to us by our strategic and technology partners;

• the timing and size of any future acquisitions;

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

• budgetary fluctuations of purchasers of medical products, supplies and equipment.

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.

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

As of September 30, 2002, we had $22.6 million of cash and cash equivalents and $1.0 million of restricted cash and $23.6 million in outstanding borrowings and notes payable, including $19.0 million in principal outstanding under our credit agreement with VHA.

We may need to raise additional funds within the next twelve months, notwithstanding the fact that our VHA line of credit remains in place, if for example, we do not generate significantly increased revenue from our marketplaces, experience larger than anticipated operating losses or pursue additional acquisitions. We may try to obtain additional financing by issuing shares of our common stock, which could dilute our existing stockholders and may cause our stock price to decline.

If an event of default were to occur under the VHA credit agreement, VHA could terminate the credit agreement and declare all amounts outstanding thereunder to be immediately due and payable. If this were to occur, we would likely need to obtain an alternate source of funding, such as another credit line or an equity or debt financing, to repay amounts due under the credit agreement.

We believe that it would 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 and we could be forced to cease operations.

Because of our relationship with Novation, other GPOs as well as integrated delivery networks, or IDNs, may be reluctant to engage us to build new marketplaces

We believe that we must establish relationships with GPOs in addition to Novation, as well as IDNs, to assist in our ability to build new marketplaces. GPOs represent groups of buyers in the negotiation of purchasing contracts with sellers and, consequently, have the ability to significantly influence the purchasing decisions of their members. Our relationship with Novation may make it more difficult to attract other GPOs as well as IDNs to engage our services. The inability to enter into and maintain favorable relationships with other

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GPOs and the hospitals they represent could impact the breadth of our customer base and could harm our growth and revenue. One of the largest GPOs, Premier Inc., has a long-term, exclusive agreement for e-commerce services with one of our competitors, medibuy.com, Inc.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• e-commerce providers and GPOs that currently have or have announced plans for online marketplaces targeted at the healthcare supply chain, including e-commerce provider medibuy.com, Inc. and GPOs Broadlane, Inc. and MedAssets, Inc.;

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

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

• enterprise resource application software vendors that offer solutions in the healthcare market, such as Lawson Software, McKesson HBOC, Inc., Oracle Corporation, PeopleSoft, Inc. and SAP AG;

• vendors establishing electronic marketplaces and procurement capabilities, including Ariba and Commerce One, Inc.; and

• supply chain software vendors, including Manugistics Group, Inc. and Logility, Inc.

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

• the amount of the fees charged to suppliers;

• functionality, ease of use and convenience;

• number of buyers using their services and the volume of their purchases;

• level of bias, or perceived bias, towards particular suppliers;

• existing relationships;

• compatibility with suppliers’ existing distribution methods;

• ability to integrate their services with suppliers’ existing systems and software;

• quality and reliability of their services; and

• brand recognition.

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

• existing relationships;

• costs of integration;

• breadth, depth and quality of product offerings;

• ease of use and convenience;

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• number of suppliers available through their marketplace;

• ability to integrate their services with buyers’ existing systems and software;

• quality and reliability of their services;

• customer service; and

• brand recognition.

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

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

• secure services and products from suppliers on more favorable terms;

• devote greater resources to marketing and promotional campaigns;

• secure exclusive arrangements with buyers that impede our sales; and

• devote substantially more resources to Website and systems development.

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

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

Our business strategy includes entering into strategic alliances with leading technology and healthcare-related companies to increase the number of marketplaces we build and operate, increase the number of trading partners that utilize our marketplaces, increase the number and variety of products and services that we offer and provide additional functionality, services and content to our trading partners. We may not succeed in entering into new strategic alliances, and even if we do succeed, we may not achieve our objectives through these alliances. In addition, we have not yet succeeded in establishing new strategic alliances beyond those with Novation and Medbuy to increase the number of marketplaces that we build and operate. Our alliances do not, and future relationships may not, afford us any exclusive marketing or distribution rights.

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

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

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

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

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

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

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

If our contract partners do not supply us with the necessary data to populate our marketplaces and our other services, our products and services will lose value to our customers

We have agreements with suppliers, distributors and other partners to populate our marketplaces and our other services with data, and if those suppliers, distributors or other partners terminated their agreements with us, we may not be able to provide the same level of products and services that we currently do. If we could not provide these levels of products and services, our customers may not value our products or services, and we would lose those customers.

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

Some participants in our marketplaces are our stockholders or are affiliated with our stockholders or have strategic relationships with us. For example, VHA and UHC, the owners of Novation, own approximately 5.8 million and 1.7 million shares of our common stock, respectively. In addition, VHA and UHC own approximately 3.1 million shares and 0.6 million shares, respectively, of restricted common stock which was subject to restrictions upon issuance, and of which a portion is still subject to those restrictions. As of September 30, 2002, VHA and UHC owned 47.7% and 11.8%, respectively, of our outstanding shares of common stock assuming they earned all the remaining shares of restricted stock. These relationships may deter other GPOs, suppliers or users, particularly those that compete directly with these participants, from participating in our marketplaces due to perceptions of bias in favor of one party over another. This could limit the number of marketplaces we operate, the array of products offered on our marketplaces, damage our reputation and limit our ability to maintain or increase the number of our trading partners.

We have not been able to file our financial results for the fiscal quarter ended September 30, 2002 in a timely manner, and have been informed by Nasdaq that it may de-list our stock

Our quarterly report on Form 10-Q for the third quarter ending September 30, 2002 was required to be filed with the Securities and Exchange Commission by November 14, 2002. However, because we have had to restate our financial results for fiscal years 2000 and 2001, and the first two fiscal quarters of 2002, we have not been able to file our quarterly report on Form 10-Q for the third quarter ended September 30, 2002 in a timely manner. Because of this, we have been in violation of Nasdaq marketplace rules requiring all companies with stock listed on the Nasdaq National Market, as ours is, to timely file their financial results, and Nasdaq has scheduled a hearing date to decide whether our stock should be de-listed from the Nasdaq National Market. There is no assurance that by filing this financial statement ahead of the hearing date that Nasdaq will cancel the hearing as unnecessary, or that if we do have a hearing with Nasdaq, that Nasdaq will not de-list our stock from the Nasdaq National Market. If this were to occur, the value of our stock would likely suffer a significant decline in value, and the market for our stock would become much less liquid.

We have had to restate some of our financial results, and this may subject us to litigation

        Because we restated our financial results for the first fiscal quarter of 2002 and this restatement resulted in significantly reduced revenue being presented in our financial statements, and we have had to further restate our financial results for fiscal 2000 and 2001, as well as the first two fiscal quarters of 2002, we could be subjected to litigation. Any claims, with or without merit, could be time-consuming and costly to defend.

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

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

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

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companies or companies they perceive to have better prospects. Should we fail to retain or attract qualified personnel, we may not be able to compete successfully in our industry, and our business would be harmed.

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

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

We have grown rapidly and will need to continue to grow our business to execute our strategy. Our total number of employees grew from nine as of December 31, 1997 to 239 as of September 30, 2002, although the number of employees has not grown consistently. For example, in May 2000, we reduced the number of our employees from approximately 330 to approximately 250. These changes, and the growth in the number of our trading partners and marketplace volume through our marketplaces, have placed significant demands on management as well as on our administrative, operational and financial resources and controls. Any future growth or organizational changes would likely cause similar, and perhaps increased, strain on our systems and controls.

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

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

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

The performance of our server and networking hardware and software infrastructure is critical to our business and reputation and our ability to process transactions, provide high quality customer service and attract and retain users of our services. Currently, our infrastructure and systems are located at one site with Exodus, a division of Cable and Wireless Plc, in Sunnyvale, California, which is an area susceptible to earthquakes. We also have a fail-over system for marketplace transaction processing located in Atlanta, Georgia.

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

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

A significant barrier to the widespread adoption of e-commerce is the secure transmission of personally identifiable information of Internet users as well as other confidential information over public networks. If any compromise or breach of security were to occur, it could harm our reputation and expose us to possible liability. We support encrypted communications protocols and 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 be able to circumvent our security measures and could misappropriate proprietary information or cause interruptions in our operations. We may be required to make significant expenditures to protect against security breaches or to alleviate problems caused by any breaches and under certain contracts with marketplace participants would be liable for contractual damages due to security breaches.

39

We expect to derive a portion of our future revenue from information services that require the aggregation and blinding of transaction and supply chain data from our marketplace participants. To execute on our data services strategy, we must be able to secure the consent of our marketplace participants to various uses of their transaction and supply chain data. To secure such consent, we must be able to assure our marketplace participants that we will at all times protect the confidentiality of their transaction and supply chain data. If we are unable to provide such assurance, or if we fail to meet the levels of assurance provided, our ability to execute on our data services strategy may be seriously impaired.

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

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

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

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

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

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

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, or HIPAA, of 1996 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 by April 2003. 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 at our marketplaces may involve surgical case kits or purchases of products for patient home delivery; these products may contain patient names and other health information subject to these laws governing the receipt, storage and distribution of 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 marketplaces. In addition, because we represent that our marketplaces meet these regulatory requirements, our success will also depend on other healthcare participants complying with these regulations.

40

Our failure to comply with applicable federal and state healthcare fraud and abuse laws could subject us and our GPO and trading partners 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 products. The GPO industry is currently being subjected to a “limited scope” audit by the HHS Office of Inspector General to determine compliance with the Medicare/Medicaid anti-kickback law. Because anything detrimental to the core business of our GPO and trading partners could adversely impact our business, negative substantive findings by any of these or future investigations could potentially adversely affect our business. In particular, violations of these 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 require us to restructure our financial arrangements with our GPO and trading partners.

If there are changes in the political, economic or regulatory healthcare environment that affect the purchasing practice or operation of healthcare organizations, particularly our GPO trading 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 the laws and policies governing reimbursement for healthcare expenses affect the purchasing practices and operation of healthcare organizations. 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 healthcare providers could require us to make unplanned enhancements of our services, or result in delays or cancellations of orders or reduce demand for our services. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry providers, including GPOs and companies such as us, operate. The New York Times has published a series of articles critical of the GPO industry, and a subcommittee of the United States Senate Judiciary Committee held a hearing on April 30, 2002 regarding possible abuses by the GPO industry. The New York Times articles and the Senate hearings focused on whether the contracting strategies and processes used by GPOs unfairly disadvantage smaller suppliers and whether the fees paid by suppliers and the financial interests of the GPOs and their executives in suppliers create conflicts of interest. The Senate Judiciary Committee has formed a panel of industry experts and developed guidelines for GPOs. We do not know what effect these articles and Senate Judiciary Committee actions will have on our business, but 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.

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

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

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

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

• variations in our quarterly operating results;

41

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

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

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

• departure of key personnel;

• the gain or loss of significant strategic relationships or trading partners;

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

• market conditions in our industry and the economy as a whole.

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

Our ability to recruit and hire the requisite number of qualified directors based on the new corporate governance reform initiatives could result in the delisting of our common stock from Nasdaq.

In July 2002, Nasdaq proposed certain rule changes in connection with the recent, widely publicized corporate governance reform initiatives. Those rule changes have not yet been adopted, and it is currently uncertain whether they will be adopted in the form proposed or modified prior to adoption. But, if they were adopted in their currently proposed form today, and no temporary relief from their application or phase-in time period during which to come into compliance were provided, we would be out of compliance with certain requirements of the rules, including, but not limited to, the requirement that (i) a majority of the Board of Directors be independent, and (ii) the audit committee have at least three independent directors. There is a risk that we will not be able to recruit the requisite number of qualified directors to satisfy the new rules, and failure to do so, or to comply more generally with such new rules, could result in our delisting from Nasdaq, which could materially impair stockholders’ ability to engage in transactions involving our stock and impair the liquidity of our stock.

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. We invest in high-credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer. As stated in our investment policy, we ensure the safety and preservation of our invested principal 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 constantly positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer, guarantor or depository. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.

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

	Fiscal Years
	2002			2003	2004	2005	2006
Cash equivalents, restricted cash and short-term investments:
Fixed rate short-term investments	$	12,339		—	—	—	—
Average interest rate		1.83	%	—	—	—	—

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Our senior management team, led by our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) within 90 days of the filing date of this report, has concluded that there were deficiencies in the design and operation of our internal controls which adversely affected our ability to record, process, summarize and report financial data. One such deficiency is considered to be a material weakness under standards as established by the American Institute of Certified Public Accountants. The material weakness was related to our inability to review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or that such an asset may be obsolete.

(b) Changes in Internal Controls. As a result of the conclusions discussed above, under the direction of the Audit Committee and the Board of Directors, we have taken corrective action and made certain changes to strengthen our internal controls and procedures to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and accurately reported, within the time periods specified in the SEC's rules and forms. Specifically, we have expanded the scope of periodic discussions between our finance department and our other operational departments, and expanded our formal reporting procedures, to ensure that all long-lived assets are periodically reviewed for obsolescence.

Additionally, to improve the overall effectiveness of our disclosure controls and procedures, we have (i) established a Disclosure Committee, constituted with finance, investor relations, operational and legal personnel, with a mandate to assist our chief executive officer and chief financial officer in overseeing the accuracy and timeliness of our disclosure controls and procedures; (ii) established a policy of financial and operational certifications for key company contributors, finance team members, human resources team members and sales employees that will assist senior management; and (iii) formalized a corporate compliance policy that is expected to be distributed within a short period, and pursuant to which a series of educational seminars will also be held for all employees, describing the legal and ethical standards we expect all our employees to uphold.

42

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In July 2001, we, along with Merrill Lynch, Pierce, Fenner & Smith, Bear Stearns and FleetBoston Robertson Stephens (certain of the underwriters of our IPO) as well as our Chairman and Chief Executive Officer, Robert Zollars, and our former Chief Financial Officer, Frederick Ruegsegger, were named as defendants in two securities class action lawsuits filed in federal court in the Southern District of New York (No. 01 CV 6689 and No. 01 CV 6712) on behalf of those who purchased 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 in order to artificially inflate the price of our stock. We and our officers 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 describe 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 have not yet been decided. On October 9, 2002, all of the individual defendants, including Mr. Zollars and Mr. Ruegsegger, were dismissed from the action without prejudice. We are defending against this action vigorously. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, we cannot accurately predict the ultimate outcome of the motions.

On January 11, 2002, we filed suit against Med XS Solutions, Inc. and Med-XS Asset Services, Inc., or Med-XS, in the United States District Court, Northern District of Illinois, Eastern Division (No. 02C 0295) for the failure of Med-XS to make payments under a $2.4 million promissory note. Med-XS executed the promissory note as partial payment for the purchase of assets of our subsidiary, Neoforma GAR, Inc., which had provided Auction services. Prior to filing of the suit, we had accelerated all principal payments under the promissory note, due to Med-XS’s failure to make scheduled payments under the promissory note, and made demand to Med-XS for the entire $2.4 million. On September 26, 2002, we entered into a confidential settlement agreement with Med-XS to settle the suit we had filed against Med-XS and the subsequent counter-claim they had filed against us.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

43

Item 6. Exhibits and Reports on Form 8-K

A. Exhibits

EXHIBIT NUMBER	EXHIBIT
10.1*	Third Amended and Restated Outsourcing and Operating Agreement effective September 30, 2002

B. Reports on Form 8-K

1. We filed a Form 8-K on July 25, 2002 to report under Item 5 our preliminary financial results for the fiscal quarter ended June 30, 2002, and to report that we were reviewing two accounting matters.

2. We filed a Form 8-K on August 19, 2002 to report under Item 5 that we had completed a consultation with the Securities and Exchange Commission, and would be restating our financial results for the first fiscal quarter of 2002.

3. We filed a Form 8-K on August 28, 2002, to report under Item 9 that in connection with our filing of our Form 10-Q/A and 10-Q for the first and second fiscal quarters of 2002, respectively, our CEO and CFO had each filed Certifications in compliance with Section 906 of the Sarbanes-Oxley Act of 2002.

* Confidential treatment has been requested for portions of the agreement.

44

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: December 13, 2002	NEOFORMA, INC.
	By:	/s/ ANDREW L. GUGGENHIME
		Andrew L. Guggenhime Chief Financial Officer and Secretary

45

Certifications

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

1. I have reviewed this quarterly report on Form 10-Q of Neoforma, Inc.;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: December 13, 2002

/s/ Robert J. Zollars

Robert J. Zollars

Chief Executive Officer

46

Certifications

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

1. I have reviewed this quarterly report on Form 10-Q of Neoforma, Inc.;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: December 13, 2002

    /s/    Andrew L. Guggenhime

Andrew L. Guggenhime
Chief Financial Officer

47

INDEX TO EXHIBITS

EXHIBIT NUMBER		EXHIBIT
10.1	*	Third Amended and Restated Outsourcing and Operating Agreement effective September 30, 2002

* Confidential treatment has been requested for portions of the agreement.

EX-10.1

                                                                    Exhibit 10.1

================================================================================

        THIRD AMENDED AND RESTATED OUTSOURCING AND OPERATING AGREEMENT *

                         dated as of September 30, 2002

                                      among

                                 NOVATION, LLC,

                                    VHA INC.,

                      UNIVERSITY HEALTH SYSTEM CONSORTIUM,

               HEALTHCARE PURCHASING PARTNERS INTERNATIONAL, LLC,

                                       and

                                 NEOFORMA, INC.

================================================================================



_________________

*    Confidential treatment requested: Certain portions of this agreement have
     been omitted pursuant to a request for confidential treatment and, where
     applicable, have been marked with an asterisk to denote where omissions
     have been made. The confidential material has been filed separately with
     the Securities and Exchange Commission.



                                TABLE OF CONTENTS



                                                                           Page
                                                                           ----
                                                                        
1.    DEFINITIONS ......................................................     2

2.    NOVATION OBLIGATIONS .............................................     9

      2.1      Agency Relationship .....................................     9
      2.2      Novation Duties .........................................     9
      2.3      Certain Contracts .......................................    10

3.    NEOFORMA OBLIGATIONS .............................................    11

      3.1      Service .................................................    11
      3.2      Service Levels ..........................................    11
      3.3      Cooperation with Novation ...............................    11
      3.4      Employee Incentives .....................................    11
      3.5      Quality Assurance Program ...............................    12
      3.6      Notice of Materially Adverse Facts ......................    12
      3.7      Case Studies ............................................    12
      3.8      Supplier Sign-Up and Integration ........................    12

4.    THE MARKETPLACE ..................................................    13

      4.1      Maintenance of Marketplace ..............................    13
      4.2      Consultation ............................................    13
      4.3      Provision of Non-Contract Product Information ...........    13
      4.4      Provision of Contract Product Information ...............    13
      4.5      Independent Users .......................................    13
      4.6      Multiple Memberships ....................................    14
      4.7      User Registration .......................................    14
      4.8      Delivery and Order Fulfillment ..........................    14
      4.9      Removal of Products from the Marketplace ................    14
      4.10     Customized Marketplaces .................................    14
      4.11     Links ...................................................    15
      4.12     Reasonable Assistance ...................................    15

5.    NOVATION MARKETPLACE AND HPPI MARKETPLACE ........................    15

      5.1      Development .............................................    15
      5.2      Hosting .................................................    15
      5.3      Delivery and Order Fulfillment ..........................    15
      5.4      Display of Material .....................................    15
      5.5      Reports and Meetings ....................................    15
      5.6      Retained Contracts ......................................    16
      5.7      Marketing. ..............................................    16
      5.8      Neoforma Auction ........................................    16

6.    EXCLUSIVITY AND RIGHT OF FIRST OFFER .............................    17

      6.1      Novation, VHA, UHC and HPPI Exclusivity .................    17




                                                                       
      6.2      Neoforma Exclusivity ....................................    17
      6.3      Right of First Offer for Novation and Neoforma ..........    18
      6.4      First Offer for Non-Exclusive Services ..................    18

7.    LICENSES AND OWNERSHIP ...........................................    19

      7.1      Ownership of Marks ......................................    19
      7.2      Novation Marks ..........................................    19
      7.3      Neoforma Marks ..........................................    19
      7.4      VHA, UHC and HPPI Marks .................................    20
      7.5      Ownership of Neoforma Materials and Novation Materials ..    20
      7.6      Neoforma Materials ......................................    20
      7.7      Novation Materials ......................................    20
      7.8      Development of Tools ....................................    20
      7.9      Access License ..........................................    21

8.    FEES AND TAXES ...................................................    21

      8.1      Contract Product Transaction Fees .......................    21
      8.2      Revenue Sharing .........................................    22
      8.3.     Establishment of * ......................................    23
      8.4      Reporting and Payment of Novation Marketplace Transaction
               Fees and Revenue Sharing ................................    23
      8.5      * .......................................................    24
      8.6      Taxes ...................................................    25
      8.7      New Markets .............................................    25
      8.8      Product Returns .........................................    25
      8.9      Neoforma Auction and other non-GPO marketplaces .........    25
      8.10     Distribution or Licensing of Software and other
               Technology Solutions ....................................    25
      8.11     Other Expenses ..........................................    26

9.    TERM AND TERMINATION .............................................    26

      9.1      Initial Term ............................................    26
      9.2      Renewal and Extension of Term ...........................    27
      9.3      Termination for Cause ...................................    27
      9.4      Termination for Insolvency Events .......................    27
      9.5      Termination for Rejection in Bankruptcy .................    27
      9.6      Termination Upon Neoforma Change of Control .............    28
      9.7      Return of Materials .....................................    28
      9.8      Survival ................................................    28
      9.9      Termination Assistance Services .........................    28
      9.10     Third Party Products ....................................    30

10.   USER DATA ........................................................    31

      10.1     Registration ............................................    31



_______________

  * Confidential treatment requested.

                                       ii



                                                                       
      10.2     Transaction Database ....................................    31
      10.3     Member Data .............................................    31
      10.4     Aggregated Member Data ..................................    32
      10.5     Transaction Database ....................................    32
      10.6     License Grant of Information to Novation ................    32
      10.7     No Other Licenses or Use ................................    32
      10.8     Other Data ..............................................    33
      10.9     Neoforma Information ....................................    33

11.   SAFEGUARDING OF DATA; CONFIDENTIALITY ............................    33

      11.1     Novation Data ...........................................    33
      11.2     Confidentiality .........................................    34

12.   REPRESENTATIONS AND WARRANTIES ...................................    35

      12.1     Representations by Neoforma .............................    35
      12.2     Representations by Novation, VHA, UHC and HPPI ..........    36
      12.3     Warranty Disclaimer .....................................    38

13.   USE OF SUBCONTRACTORS ............................................    38

      13.1     Generally ...............................................    38
      13.2     Novation's Right to Revoke Approval .....................    38
      13.3     Continuing Responsibility ...............................    38
      13.4     Confidential Information ................................    38

14.   INSURANCE ........................................................    38

      14.1     Insurance ...............................................    38
      14.2     Proof of Insurance ......................................    39

15.   INDEMNITY ........................................................    39

      15.1     Neoforma Indemnity ......................................    39
      15.2     Novation Indemnity ......................................    40
      15.3     Infringement Claims .....................................    40
      15.4     Indemnity Procedures ....................................    41

16.   LIMITATION OF LIABILITY ..........................................    41

      16.1     Limitations .............................................    41
      16.2     Exceptions ..............................................    42
      16.3     Liquidated Damages ......................................    42

17.   AUDIT RIGHTS .....................................................    43

      17.1     General .................................................    43
      17.2     Frequency of Audits .....................................    44
      17.3     Auditors ................................................    44
      17.4     Record Retention ........................................    44
      17.5     Cooperation .............................................    44
      17.6     Overcharges .............................................    44

18.   DISPUTE RESOLUTION ...............................................    44



                                       iii



                                                                       
      18.1     Resolution of Disputes ..................................    44
      18.2     Negotiations and Escalation .............................    45
      18.3     Appointment of Arbitral Body ............................    45
      18.4     Qualifications of Arbitrator ............................    45
      18.5     Initiation of Arbitration and Procedures ................    45
      18.6     Procedures ..............................................    46
      18.7     Governing Law; Jurisdiction .............................    46
      18.8     Arbitration Award .......................................    46
      18.9     Cooperation of the Parties ..............................    47
      18.10    Costs ...................................................    47
      18.11    Judgment on the Award; Enforcement ......................    47
      18.12    Preservation of Equitable Relief; Third-Party
               Litigation ..............................................    47
      18.13    Continued Performance ...................................    48

19.   GUARANTY OF PERFORMANCE ..........................................    48

      19.1     VHA and UHC Guarantees ..................................    48
      19.2     VHA and UHC Waivers .....................................    48
      19.3     Scope of Liability ......................................    49
      19.4     Continued Performance by Neoforma .......................    50

20.   GENERAL PROVISIONS ...............................................    50

      20.1     No Waiver ...............................................    50
      20.2     Entire Agreement ........................................    51
      20.3     Publicity ...............................................    51
      20.4     Covenant of Good Faith ..................................    51
      20.5     Compliance with Laws and Regulations ....................    51
      20.6     Assignment; Successors and Assigns ......................    51
      20.7     Governing Law ...........................................    51
      20.8     Notices .................................................    52
      20.9     No Agency ...............................................    52
      20.10    Force Majeure ...........................................    53
      20.11    Interest ................................................    53
      20.12    Program Management ......................................    54
      20.13    Severability ............................................    54
      20.14    Counterparts ............................................    54
      20.15    Headings.................................................    54
      20.16    Section 365(n) Matters ..................................    54



                                       iv



EXHIBITS:

Exhibit A         Marks +
Exhibit B         Current Marks Usage Guidelines for Novation +
Exhibit C         Current Marks Usage Guidelines for Neoforma +
Exhibit D         Current Marks Usage Guidelines for VHA, UHC and HPPI +
Exhibit E         Reports and Other Information Requirements +
Exhibit F         Program Management +
Exhibit G         Minimum Fees
Exhibit H         *
Exhibit I         Target Fee Levels
Exhibit J         2002 Monthly * Schedule
Exhibit K         Current Functionality Roadmap
Exhibit L         Collaborative Marketing Agreement
Exhibit M         Collaborative Development Process
Exhibit N         Service Level Specifications

_______________

   + Exhibit filed previously and not included here
   * Confidential treatment requested.

                                        v



                           THIRD AMENDED AND RESTATED
                       OUTSOURCING AND OPERATING AGREEMENT

     This Third Amended and Restated Outsourcing and Operating Agreement
("Agreement") effective as of September 30, 2002 (the "Effective Date"), by and
among Neoforma, Inc., (formerly named Neoforma.com, Inc.) a Delaware corporation
with offices at 3061 Zanker Road, San Jose, California 95134 ("Neoforma"),
Novation, LLC, a Delaware limited liability company with offices at 125 East
John Carpenter Freeway, Irving, Texas 75062 ("Novation"), Healthcare Purchasing
Partners International, LLC, a Delaware limited liability company with offices
at 125 East John Carpenter Freeway, Irving, Texas 75062 ("HPPI"), VHA Inc., a
Delaware corporation with offices at 220 East Las Colinas Boulevard, Irving,
Texas 75039-5500 ("VHA"), and University Health System Consortium, an Illinois
corporation with offices at 2001 Spring Road, Suite 700, Oak Brook, Illinois
60523 ("UHC").

                                    RECITALS

     WHEREAS, Neoforma is a provider of Internet (as defined in Section 1)
e-commerce services to the healthcare industry facilitating the sale, rental or
lease of new and used equipment, products, supplies, services information and
other content, and provides information regarding various healthcare facilities
and equipment through its online offerings and programs;

     WHEREAS, VHA and UHC are organizations whose patrons are hospitals and
healthcare providers, who view e-commerce as an essential part of their
cooperative purchasing programs on behalf of their patrons for the future and
who desire to more fully develop the services they render to their patrons
through this Agreement;

     WHEREAS, VHA and UHC together own all the ownership interests in Novation
and HPPI;

     WHEREAS, Novation is a contracting agent that develops and delivers supply
chain management agreements, programs and services on behalf of VHA and UHC and
their patrons;

     WHEREAS, HPPI is a GPO that serves healthcare organizations that are not
members of VHA and UHC and other GPOs and which develops and delivers
supply-chain management programs and services to such healthcare organizations;

     WHEREAS, the parties wish to establish a long-term, global relationship to
enable the parties to achieve increased efficiency and cost savings through
Internet-based technology and pursuant to which (i) Neoforma will develop and
manage the Novation Marketplace and HPPI Marketplace (as defined in Section 1),
e-commerce web sites for the benefit of the members of VHA and UHC, the
associated healthcare organizations of HPPI and for the benefit of other users
unaffiliated with VHA, UHC or HPPI, (ii) Novation will serve as the contracting
agent for Neoforma by recruiting, contracting with and managing relationships
with healthcare equipment manufacturers and service suppliers on Neoforma's
behalf and (iii) VHA and UHC will provide marketing support for the Novation
Marketplace and HPPI Marketplace, guarantee Novation's

                                       1



obligations to the extent provided under this Agreement and enter into the
exclusivity provisions hereunder;

     WHEREAS, the Parties have previously entered into an Outsourcing and
Operating Agreement (the "Original Outsourcing and Operating Agreement"), dated
as of March 30, 2000 (the "Original Effective Date"), and have also previously
entered into an amended and restated Outsourcing and Operating Agreement, dated
as of May 24, 2000 (the "First Amended and Restated Outsourcing and Operating
Agreement"), a second amended and restated Outsourcing and Operating Agreement,
dated as of January 1, 2001 (the "Second Amended and Restated Outsourcing
Agreement"), and a first amendment to the Second Amended and Restated
Outsourcing Agreement, dated as of July 1, 2001 (the "First Amendment"), and
each Party desires to amend and restate the Second Amended and Restated
Outsourcing and Operating Agreement and the First Amendment as set forth herein;
and

     WHEREAS, in consideration for the services initially agreed to be provided
by VHA and UHC pursuant to the Original Outsourcing and Operating Agreement and
the First Amended and Restated Outsourcing and Operating Agreement, Neoforma
issued to VHA and UHC shares of, and warrants to purchase, common stock of
Neoforma.

     NOW, THEREFORE, for good and valuable consideration, the parties agree as
follows:

1.   DEFINITIONS

     As used in this Agreement, the following terms shall have the respective
meanings set forth below. Other capitalized terms shall have the meanings set
forth elsewhere in this Agreement.

     "Adjusted Gross Transaction Value(s)" means, with regard to a confirmed
purchase, rental or lease on the Novation Marketplace or HPPI Marketplace, the *
which are related to the Product purchased, rented or leased.

     "Affiliate(s)" means, with respect to a specified person, any other person
that, directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with such specified person. Neoforma,
on the one hand, and Novation, VHA and/or UHC, on the other hand, shall not be
Affiliates.

     "Aggregated Member Data" means all or any of an aggregate of the
Information relating to any two or more Members.

     "API(s)" means language and messaging formats, in human and computer
readable form, that define how programs interact with an operating system, a
database, with functions in other programs, with communication systems, or with
hardware drivers.

__________________________

   * Confidential treatment requested.

                                       2



     "Blinded Aggregated Data" means aggregated data which does not contain
information sufficient to identify any individual Supplier, Member or User or
any Member Data, that is derived from transactions of Users of a Customized
Marketplace, at least * of which shall come from non-Member Users.

     "Contract Product(s)" means any Product that is part of the Novation
Contract Portfolio and available on the Novation Marketplace or the HPPI
Marketplace.

     "Customized Marketplace(s)" means a Marketplace specifically for and
accessible only to members of a particular GPO or its members, and includes, but
is not limited to, the Novation Marketplace and the HPPI Marketplace.

     "EDI Standards" means, the standard format for Electronic Data Interchange
(EDI) generally accepted and used in North America, as may change from time to
time.

     "Expected Transaction Fees" means all amounts of Novation Marketplace
Transaction Fees expected to be paid by a Supplier during the period commencing
on the applicable * or *, as the case may be, up to and including * of such
Supplier. Such Expected Transaction Fees shall be calculated with respect to
each Supplier by multiplying (i) the * sales, rentals and leases of * (as
evidenced by the most recent *) and * (as evidenced by reasonable supporting
documentation provided to Neoforma by Novation) by * that were * prior to the
applicable * or *, as the case may be, and that processed transactions with the
applicable * through the Novation Marketplace during the preceding *, by (ii)
the applicable * for sales, rentals and leases of * and * as defined in the
agreement between Neoforma and such Supplier. In order to calculate the *
Expected Transaction Fees, the resulting number is then multiplied by a
fraction, the numerator of which is * for the first * days subsequent to the *,
* for the second * days, * for the third * days, and * thereafter, and the
denominator of which is *. By way of example, if (A) as of a certain *,
healthcare organizations (as described above) representing * in annual purchases
of * and * from the applicable Supplier in the preceding * were processing
transactions through the Novation Marketplace, and (B) such Supplier was
obligated to pay a Novation Marketplace Transaction Fee of * with respect to
such transactions through the Novation Marketplace, then in the first * days
following such *, * would be multiplied by *, and the resultant number of *
would be multiplied by the quotient of * and *, or *, to calculate a * Expected
Transaction Fee of *.

     "Functionality Roadmap" means each proposed plan for development and
implementation of new and updated functionality specifications for the Novation
Marketplace or HPPI Marketplace, as may be agreed and amended from time to time
by and between Novation and Neoforma in signed writings in accordance with
Section 5.1.

     "GAAP" means United States generally accepted accounting principles as in
effect at the time of the application thereof.

__________________________

   * Confidential treatment requested.

                                       3



     "GPO(s)" means any entity in the United States that meets the definition of
a "Group Purchasing Organization" as set forth in 42 CFR Section 1001.952(j),
and any entity outside the United States performing a similar function.

     "Gross Revenue" means, with respect to Novation's responsibility to pay
Neoforma any * pursuant to Section 8.1, the aggregate of (i) the
marketing fees and other revenue recognized by VHA and the administrative fees
and other revenue recognized by UHC pursuant to Novation-related agreements with
suppliers and distributors and (ii) revenue recognized by Novation pursuant to
Sections 8.2, 8.9 and 8.10, less any revenues recognized from HPPI and amounts
related to purchases made through VHA's Care Continuum Program and any
substantially similar program operated by UHC.

     "High-Volume Supplier" means a Supplier whose sales of Products from the
Novation Contract Portfolio (whether purchased through the Novation Marketplace
or otherwise) are at least * annually as evidenced by the * during the preceding
12-month period.

     "HPPI Marketplace" means a Customized Marketplace accessible only to HPPI
Members.

     "HPPI Member(s)" means, at any date, those organizations acting as
purchasers, renters or lessees in their respective markets that are associates
of HPPI and to which HPPI provides procurement related services, cost management
programs and other services.

     "Information" means the information and data maintained by Neoforma in the
Transaction Database, which shall include, at minimum, (i) any and all
information and data collected, developed and/or stored by Neoforma relating to
Members and (ii) any and all information and data relating to use of or
transactions on the Novation Marketplace by Members.

     "Intellectual Property Rights" means all copyrights, patents, trade names
and trademarks (in each of the preceding cases, whether registered or not) and
trade secrets and other intellectual property rights of a person.

     "Integration" means the integration of the current system of a Supplier or
Member, as applicable, with the Novation Marketplace or HPPI Marketplace such
that such Supplier or Member, as the case may be, may (i) conduct transactions
through the Marketplace or send or receive Supply Chain Data regarding such
transactions, (ii) solely in the case of a Supplier that conducts transactions
through a distributor integrated with the Marketplace whose data Neoforma is
contractually permitted to share with other Users, access information regarding
transactions, or (iii) solely in the case of a Supplier that conducts
transactions through a distributor which is not integrated with the Novation or
HPPI Marketplace, publish Supplier's product catalog data on the Novation or
HPPI Marketplace.

__________________________

   * Confidential treatment requested.


                                       4



     "Internet" means the public, global network of computer networks and
individual computers constantly connected using standardized communications
protocols, specifically TCP/IP or any successor protocol thereof.

     "Marketplace" means the Novation Marketplace, HPPI Marketplace, all
Customized Marketplaces and all other Neoforma web sites.

     "Material(s)" means information on equipment, products, supplies or
services, including, without limitation, product availability and pricing
information, provided to Neoforma for display to Users of the Novation
Marketplace or HPPI Marketplace.

     "Member(s)" means, at any date, those organizations that are (i) patrons or
members of VHA or UHC, or are associated therewith, or (ii) HPPI Members, and in
each case, that are listed in an electronic file supplied to Neoforma and
updated periodically by Novation.

     "Member Data" means any and all Transaction Database information relating
to a specific Member.

     "Neoforma Auction" means Neoforma's auction services offered on the
Marketplace.

     "Neoforma Change of Control" means the occurrence of any of the following:

     (a)  the direct or indirect sale, transfer, conveyance or other disposition
          (other than by way of merger or consolidation), in one or a series of
          related transactions, of all or substantially all of the properties
          and assets of Neoforma and its subsidiaries taken as a whole to any
          "person" or "group" (as such terms are used in Section 13(d)(3) of the
          Securities and Exchange Act of 1934, as amended (the "Exchange Act")),
          other than Novation or any of its Affiliates;

     (b)  the adoption by the Board of Directors of Neoforma of a plan relating
          to the liquidation or dissolution of Neoforma;

     (c)  the consummation of any transaction or series of related transactions
          (including, without limitation, any merger or consolidation) the
          result of which is that any "person" or "group" (as defined above),
          other than Novation or any of its Affiliates, becomes the "beneficial
          owner" (as such term is used in Rule 13d-3 promulgated under the
          Exchange Act), directly or indirectly, of more than 50% of the capital
          stock of Neoforma, measured by voting power or economic interest
          rather than number of shares;

     (d)  the consummation of any transaction or series of related transactions
          (including, without limitation, any merger or consolidation) the
          result of which is that the beneficial owners (as defined above) of
          the capital stock of Neoforma immediately prior to such transaction or
          transactions cease to be the beneficial owners of at least 50.1% of
          the capital stock, measured by voting power or

                                       5



          economic interest rather than number of shares, of the surviving or
          resulting entity of such transaction or transactions; or

     (e)  during any period of two consecutive years, individuals who at the
          beginning of such period constituted the Board of Directors of
          Neoforma (together with any new directors whose election by the Board
          of Directors or whose nomination for election by the stockholders of
          Neoforma was approved by a vote of a majority of the directors then
          still in office who were either directors at the beginning of such
          period or whose election or nomination for election was previously
          approved) cease to constitute a majority of the directors then in
          office.

     "Neoforma Information" means Information received from non-Members.

     "Neoforma Materials" means Materials provided by Neoforma and displayed on
and available to Users of a Marketplace but shall not include the Novation
Materials.

     "Non-Contract Product" means any Product available through a Customized
Marketplace that is not part of the Novation Contract Portfolio or any other
GPO-specific contract portfolio.

     "Novation Contract Portfolio" means a catalog of all Products and Novation
Materials that will appear on the Novation Marketplace or the HPPI Marketplace,
for which Novation has contracted, for the benefit of the Members.

     "Novation Competitor" means any person that, at the time of determination,
would reasonably be considered to be (i) a competitor of Novation or (ii) a
competitor of any Member.

     "Novation Marketplace" means a Customized Marketplace accessible only to
members of VHA, UHC or HPPI, which may include Contract and Non-Contract
Products.

     "Novation Marketplace Transaction Fee(s)" means fees to be paid by
Suppliers to Neoforma in respect of (i) transactions occurring "on the Novation
Marketplace" or (ii) processing Supply Chain Data; excluding fees associated
with Neoforma Auction. For the purposes of this definition "on the Novation
Marketplace" means the initiation or confirmation of a transaction is captured
through the Novation Marketplace.

     "Novation Materials" means Materials provided by Novation or by Novation
Suppliers to Neoforma for display to Users of a Customized Marketplace,
including to Members on the Novation Marketplace.

     "Novation Suppliers" means suppliers, manufacturers or distributors that
provide equipment, products, supplies, services, information and other content
for sale, rental or lease through the Novation Marketplace and HPPI Marketplace
under the Novation Contract Portfolio.

     "Party" means each of Neoforma, Novation, HPPI, VHA and UHC and any other
person who becomes a signatory to this Agreement, unless the context requires
otherwise.

                                       6



     "Patron(s)" means a person who is entitled to receive a patronage refund
from VHA or UHC.

     "Person" means a natural person, corporation, partnership (limited or
general), limited liability company, business trust or other entity.

     "Product(s)" means equipment, products, supplies, services, information and
other content provided by Suppliers and available for purchase, rental or lease
by Users through a Marketplace.

     "Remote Order Entry" means the ability of Users, including, without
limitation, persons outside of central purchasing/materials management
departments to create requisitions and to have such requisitions turned into
valid orders in accordance with the protocol agreed to by the Novation
Marketplace and the User.

     "Retained Contract(s)" means those product or service contracts of VHA or
UHC that have not been transferred to Novation and which the Members may have
access to because they are Members in VHA or UHC.

     "Service(s)" means the services to be provided hereunder by Neoforma.

     "Service Level(s)" means the objective criteria establishing the level of
Neoforma's required performance of the Services under this Agreement.

     " * " has the meaning specified in Section 8.1.2

     "Sign-up" (also "Signs-up" and "Signed-up") means for a party to enter into
a contractual relationship with a Supplier to enable all or any portion of that
Supplier's equipment, products, supplies, services, information and other
content to be displayed on a Customized Marketplace.

     "Supplier(s)" means suppliers, manufacturers or distributors that provide
Products and Materials for display, sale, rental or lease, including, without
limitation, High-Volume Suppliers pursuant to an agreement allowing
participation on the a Customized Marketplace.

     "Supplier Integration Deadline" means the later of: (i) * days following
the date on which a Supplier is Signed-up; or (ii) the * specified in the
contract between the Supplier and Neoforma, as either may be adjusted pursuant
to Section 3.8.2.

     "Supply Chain Data" means information for use by Members and Suppliers
regarding the purchase, rental or lease of a Product by a Member who has signed
a Member participation
___________________________

   * Confidential treatment requested.

                                        7



agreement with Neoforma to participate in the Novation Marketplace or HPPI
Marketplace, whether the * is conducted * or *. For the purposes of this
definition * means the *, and * means *.

     "Supply Chain Data Transaction Value(s)" means the * , relating to each
purchase, rental or lease of a Product *, but for which Neoforma processes
Supply Chain Data. For the purposes of this definition * means the *.

     "Supply Chain Management Services" means (i) with respect to Novation, VHA
and HPPI, operations and activities related to the evaluation, bidding,
negotiation, contracting, administering, marketing, distribution, sale,
acquisition or disposal of equipment, products, supplies, services, information
and other content by healthcare organizations from third parties and (ii) with
respect to UHC only, operations and activities related to the evaluation,
bidding, negotiation, contracting, administering, marketing, distribution, sale,
acquisition or disposal of equipment, products, supplies and services by
healthcare organizations from third parties, and in the case of each of clause
(i) and (ii), including operations and activities directly related to Neoforma
Auction. Notwithstanding the generality of the foregoing, and with respect to
UHC only, Supply Chain Management Services do not include outsourcing,
consulting, information technology products and services (unless related to
equipment or supplies), financial products and services, insurance products and
services, education and networking and communication products and services.

     "Target Fee Levels" has the meaning specified in Section 8.2.1 of this
Agreement.

     "Tool(s)" means a program, utility or user interface that helps the user of
the program, utility or user interface analyze or search for data.

     "Transaction Data" means the data maintained by Neoforma on the Transaction
Database.

     "Transaction Database" means any and all means used to store Information.

     "Transaction Fee(s)" means fees to be paid by each Supplier pursuant to its
agreement with Neoforma for participation on the Novation Marketplace or the
HPPI Marketplace.

     "User(s)" means all Members and other users of a Customized Marketplace,
including, without limitation, participating healthcare organizations, GPOs or
other registered users that do not act as Suppliers.

_____________

* Confidential treatment requested



                                       8



2.   NOVATION OBLIGATIONS

     2.1   Agency Relationship. Neoforma hereby appoints Novation to act as
           Neoforma's agent to Sign-up Suppliers for the Novation Marketplace
           and HPPI Marketplace, and Novation accepts such appointment, for the
           principal purpose of facilitating e-commerce purchases by the patrons
           of VHA and UHC and by others.

     2.2   Novation Duties. In connection with Novation's appointment as agent
           under Section 2.1, Novation will perform the following obligations:

           2.2.1   Neoforma and Novation shall meet to discuss and mutually
                   agree upon certain commercially reasonable negotiating
                   parameters within which Novation may negotiate with Suppliers
                   without seeking Neoforma's approval. While within such
                   parameters, Novation may negotiate with and Sign-up any
                   Supplier and obtain any terms and conditions that in
                   Novation's reasonable discretion are consistent with its
                   obligations under this Agreement. Novation agrees that if it
                   wishes to conclude any agreement upon terms and conditions
                   outside of the agreed upon negotiating parameters, or at
                   Transaction Fee levels that are lower than the levels agreed
                   upon by Neoforma and Novation under Section 2.5, it will seek
                   Neoforma's prior consent, which consent shall not be
                   unreasonably withheld or delayed. Novation shall use its
                   diligent efforts to obtain favorable terms from each Supplier
                   with whom it negotiates on behalf of Neoforma. Neoforma
                   agrees, however, that Novation shall have no obligation to
                   obtain the best terms and conditions available from any
                   Supplier.

           2.2.2   Neoforma and Novation shall meet no less frequently than on a
                   quarterly basis (or at any time that either Neoforma or
                   Novation reasonably requests such a meeting) to review the
                   then-current negotiating parameters. At such meetings,
                   Neoforma and Novation shall in good faith review whether the
                   negotiating parameters then in effect are market competitive
                   and, if not, shall adjust so that they are market
                   competitive. For the avoidance of doubt, the parties agree
                   that "market competitive" shall mean that (i) Suppliers are
                   reasonably likely to sign such agreement (after negotiation)
                   or (ii) the negotiating parameters are commercially
                   reasonable.

           2.2.3   Novation will provide to Neoforma promptly after the Sign-up
                   of each Supplier agreement that Novation enters into on
                   Neoforma's behalf, all information concerning such agreement
                   that is necessary for Neoforma to fulfill its obligations
                   thereunder.

           2.2.4   Novation will manage the Supplier relationships in respect of
                   each Supplier that Novation Signs-up on Neoforma's behalf,
                   and will use diligent efforts to facilitate favorable
                   commercial relationships between Neoforma and such Suppliers.

                                       9



           2.2.5   Novation shall make available a number of employees as will
                   be necessary to perform Novation's agency obligations
                   hereunder. No such employees will be required to devote their
                   full time to providing such services hereunder.

           2.2.6   Novation and Neoforma shall cooperate to increase the number
                   of Suppliers on the Novation Marketplace and HPPI
                   Marketplace.

           2.2.7   Novation will reasonably cooperate with Neoforma to resolve
                   performance problems with respect to any Supplier that it has
                   Signed-up on Neoforma's behalf and who has become the subject
                   of numerous User complaints. In the resolution of such
                   issues, Novation will act solely as Neoforma's agent with
                   respect to Suppliers, and Novation shall not be required to
                   contact any Users.

           2.2.8   Subject to its obligations under Section 11.2, Novation will
                   bring to Neoforma's attention, reasonably promptly after
                   learning thereof, any fact that would reasonably be likely to
                   materially adversely affect the Novation Marketplace or HPPI
                   Marketplace, Neoforma or Users, including, without
                   limitation, the institution of litigation against Novation or
                   any Supplier.

           2.2.9   In connection with the negotiation of Supplier agreements,
                   Novation will provide Suppliers with technical information
                   and specifications provided by Neoforma to enable such
                   Suppliers to effectively connect to and interface with the
                   Novation Marketplace or HPPI Marketplace. Novation shall not
                   independently negotiate or modify any aspects of Neoforma's
                   technical specifications regarding a Marketplace without
                   Neoforma's prior written consent.

           2.2.10  During or after development by Neoforma of any Customized
                   Marketplace other than the Novation Marketplace or HPPI
                   Marketplace, Neoforma and Novation shall discuss the
                   feasibility and desirability for each party of Neoforma
                   appointing Novation as its agent to Sign-up Suppliers for
                   that Customized Marketplace. Should Novation wish to act as
                   such agent, it shall obtain Neoforma's consent, which consent
                   shall not be unreasonably withheld or delayed. The
                   reasonableness of Neoforma's consent shall take into account,
                   among other factors, the terms for such appointment, and the
                   willingness of the Customized Marketplace to use Novation as
                   its Agent.

           2.2.11  In performing its duties under this Section 2, Novation shall
                   not be required to initiate or carry on litigation.

     2.3   Certain Contracts. For the avoidance of doubt, the parties agree that
           the contracts constituting the Novation Contract Portfolio or the
           Retained Contracts, as now or hereafter constituted, shall remain
           obligations of Novation, UHC or VHA, as the

                                       10



            case may be, and shall not be transferred to, or assumed by,
            Neoforma in connection with this Agreement.

     2.4    Employee Incentives. No later than February 15, 2003 and by February
            15 every year thereafter for the term of this Agreement, Novation
            shall develop and implement Novation employee compensation plans
            that will provide Novation employees with incentives to meet
            Functionality Roadmap delivery dates.

     2.5    Adjustment of Transaction Fees. Novation shall meet with Neoforma no
            less frequently than on a quarterly basis (or at any time that
            either Neoforma or Novation reasonably requests such a meeting) to
            review the Transaction Fees then in effect. At such meetings,
            Neoforma and Novation shall in good faith review whether the
            Transaction Fees then in effect are market competitive and, if not,
            shall adjust such Transaction Fees so that they are market
            competitive. For the avoidance of doubt, the parties agree that
            "market competitive" shall mean that (i) Suppliers are reasonably
            likely to agree to pay such fees at such time or (ii) such fees are
            competitive with similar Transaction Fees paid by suppliers in
            similar e-commerce or related industries. Until Neoforma and
            Novation have agreed upon a change to the Transaction Fees, as the
            case may be, the then-existing fees shall remain in effect.

3.   NEOFORMA OBLIGATIONS

     3.1    Service. Neoforma shall provide Services mutually agreed between
            Neoforma and Novation in the Functionality Roadmap. Neoforma and
            Novation anticipate that the Services will evolve and be modified or
            be enhanced over time to keep pace with technological advancements
            and improvements in e-commerce as specified in each Functionality
            Roadmap as agreed upon in accordance with the Collaborative
            Development Process set forth in Exhibit M. Once agreed upon, all
            modification to each Functionality Roadmap must be in writing and
            agreed to by the parties in writing.

     3.2    Service Levels. Neoforma shall provide such professional and
            technical personnel and other resources (including, without
            limitation, hardware, software, facilities, equipment and other
            assets) as shall be required to perform the Services in accordance
            with service levels set forth in Exhibit N and as shall otherwise be
            mutually agreed upon by the parties hereto and referred to as the
            "Service Level Specifications." Once agreed upon, all modifications
            to the Service Level Specifications must be in writing and agreed to
            by the parties in writing.

     3.3    Cooperation with Novation. Neoforma shall cooperate with Novation in
            the performance of Novation's agency obligations under Section 2.

     3.4    Employee Incentives. No later than February 15, 2003 and by February
            15 every year thereafter for the term of this Agreement, Neoforma
            shall develop and

                                       11



          implement employee compensation plans that will provide Neoforma
          employees with incentives to meet Functionality Roadmap delivery
          dates.

     3.5  Quality Assurance Program. Neoforma will administer a quality
          assurance program that has been mutually agreed to by Neoforma and
          Novation, among other things, to monitor Supplier performance and
          order confirmation for Products ordered by Users.

     3.6  Notice of Materially Adverse Facts. Subject to its obligations under
          Section 11.2, Neoforma will bring to the attention of each of
          Novation, VHA and UHC, reasonably promptly after learning thereof, any
          fact that would reasonably be likely to materially adversely affect
          the Novation Marketplace, the HPPI Marketplace or the Members, VHA,
          UHC or HPPI, including, without limitation, the institution of
          litigation against Neoforma or any Supplier.

     3.7  Case Studies. During each of the * through *, Neoforma shall on *
          basis (but in no event later than *) undertake to prepare * or more
          User case studies documenting the economic value that the Novation
          Marketplace and HPPI Marketplace has for each of Suppliers and
          Members. After calendar year *, such case studies shall be prepared by
          Neoforma from time to time as mutually agreed by Novation and
          Neoforma. In addition, during the Term, Neoforma shall measure *
          provided to Members and Suppliers by the Novation Marketplace and HPPI
          Marketplace. Each case study prepared by Neoforma will be sent to each
          of Novation, VHA, and UHC for the purpose of marketing the Novation
          Marketplace and HPPI Marketplace to other Suppliers and Members.

     3.8  Supplier Sign-Up and Integration.

          3.8.1  Neoforma and Novation shall meet within 30 days after the
                 execution of this Agreement, and at each Cross-Functional
                 Management Team Meeting thereafter, to establish a plan (i) to
                 Sign-up additional Suppliers, (ii) to Integrate and make
                 operational such Suppliers for receiving and confirming orders,
                 and (iii) to eliminate the back-log of Suppliers, if any, that
                 have been previously Signed-up but not yet Integrated.

          3.8.2  Neoforma shall complete the Integration and make operational
                 for receiving and confirming orders, or delivering or receiving
                 Supply Chain Data, for each Supplier that is Signed-up by the
                 Supplier Integration Deadline. In the event that a *, then
                 Neoforma shall *. Notwithstanding the foregoing, if (i)
                 Neoforma does not *, as the case may be, (ii) such * is a
                 result of that *, and (iii) prior to the 30th day before the
                 applicable *, Neoforma (A) notifies Novation in writing of such
                 * and the likelihood

________________

   * Confidential treatment requested.

                                       12



                 that such * by the applicable * and (B) reasonably demonstrates
                 to Novation's reasonable satisfaction *, then *, as the case
                 may be, will be * as the * day following the date of such *.

4.   THE MARKETPLACES

     4.1  Maintenance of Novation Marketplace and HPPI Marketplace. Neoforma
          shall use its best efforts to maintain the Novation Marketplace and
          HPPI Marketplace as a leading provider of e-commerce services to the
          healthcare industry.

     4.2  Consultation. Neoforma, Novation, VHA and UHC will consult regularly
          (but no less frequently than on a quarterly basis) to discuss the
          strategic direction of the Novation Marketplace and HPPI Marketplace,
          including the features and functions that would provide additional
          value to patrons and others.

     4.3  Provision of Non-Contract Product Information. The Suppliers will be
          responsible for providing Neoforma with Materials to be located on the
          Marketplaces in respect of all Non-Contract Products. Novation will
          review such Materials relating to the Non-Contract Products, subject
          to Neoforma providing Novation a methodology for previewing such
          Materials.

     4.4  Provision of Contract Product Information. Novation shall be
          responsible for providing Neoforma with pricing for Contract Products
          and any unique facts and summary sheets relating to such Contract
          Products that are prepared by Novation. The Suppliers will be
          responsible for providing Neoforma with all other information
          regarding such Contract Products. Subject to Neoforma providing to
          Novation a methodology for allowing Novation to preview Materials
          relating to Contract Products,Novation will review such information
          and determine that such information is reasonably accurate, prior to
          being loaded on the Novation Marketplace (e.g., correct pricing,
          product numbers, description, etc.).

     4.5  Independent Users. Prior to the date on which Neoforma concludes an
          agreement with a GPO (other than HPPI) having its own Supplier
          contracts (an "Independent GPO") who, as a condition to using a
          Marketplace, contractually requires Neoforma to act in a neutral
          manner, Neoforma shall refer any User who requests access to a
          Customized Marketplace (other than a Member entitled to use the
          Novation Marketplace) to the HPPI Marketplace. After the date on which
          an Independent GPO is on the Marketplace, if a User (other than a
          Member entitled to use the Novation Marketplace) approaches Neoforma
          requesting access to a Customized Marketplace, Neoforma shall act in a
          neutral manner with regard to such User and shall not be required to
          recommend or otherwise refer such User to any specific part of the
          Marketplace, including the HPPI Marketplace or the Novation
          Marketplace. Notwithstanding the preceding sentence, Neoforma will

__________________

   * Confidential treatment requested.

                                       13



           at all times feature the HPPI Marketplace at least as prominently on
           the Marketplace as any other Customized Marketplace.

     4.6   Multiple Memberships. If a Member is also a member of any other GPO
           that has a Customized Marketplace on the Marketplace, that Member
           will have access to all of the Marketplace, including the Novation
           Marketplace or HPPI Marketplace, as the case may be, and the
           applicable Customized Marketplace. Members who are also Users of
           Customized Marketplaces will have access rights to the Novation
           Marketplace or the HPPI Marketplace equal to those of Members that do
           not belong to Customized Marketplaces. Notwithstanding the foregoing,
           Neoforma shall provide favorable view and framing in respect of the
           Novation Contract Portfolio to any Member accessing the Marketplace.

     4.7   User Registration. Upon implementation of the Novation Marketplace,
           Neoforma, with Novation's assistance, will develop a Tool to register
           Members on the Novation Marketplace and HPPI Marketplace. Neoforma
           will require Members to create and use passwords as a necessary
           condition to accessing the Novation and HPPI Marketplace. Neoforma
           shall be responsible for keeping the Novation Marketplace registry
           and the HPPI Marketplace registry current and for not allowing access
           to such Marketplaces by unauthorized Users.

     4.8   Delivery and Order Fulfillment. Neoforma will notify Suppliers and
           provide Suppliers access to the Transaction Database for sales,
           rentals and leases of Products by such Suppliers, in a form and
           format mutually agreed upon by Neoforma and Suppliers and to the
           extent set forth in the Functionality Roadmap.

     4.9   Removal of Products from the Novation Marketplace and HPPI
           Marketplace. With regard to Non-Contract Products, Neoforma shall
           remove Product listings from the Novation Marketplace and HPPI
           Marketplace promptly after determining that the appearance of such
           Products will, or is reasonably likely to, result in liability to
           Neoforma, Novation, HPPI, VHA, UHC or any Users. Upon such removal,
           Neoforma will promptly notify Novation of such action and the reasons
           therefore. With regard to Contract Products, Neoforma shall notify
           Novation promptly after becoming aware of any problems with a
           Contract Product or that any such Contract Product will, or is
           reasonably likely to, result in liability to Neoforma, Novation,
           HPPI, VHA, UHC or any Users. In addition and at the same time,
           Neoforma shall provide to Novation all information of which it is
           aware regarding the problems with such Contract Product. Neoforma
           will obtain Novation's prior written consent, prior to taking any
           action to remove such Contract Product listing from the Novation
           Marketplace and HPPI Marketplace.

     4.10  Customized Marketplaces. In accordance with the Functionality Roadmap
           to be agreed upon, Neoforma may create Customized Marketplaces and
           other customized sites for the use and benefit of Users on the
           Customized Marketplace. Neoforma will not intentionally create
           Customized Marketplaces for the purpose of evading fees owed to
           Novation under Section 8 of this Agreement.

                                       14



     4.11  Links. The parties will establish and maintain hypertext links from
           the Novation web site, HPPI web site, VHA web site and UHC web site
           to the Novation Marketplace and HPPI Marketplace. Each of Novation,
           HPPI and Neoforma will use reasonable efforts to ensure that the
           respective links that each party maintains linking Novation, HPPI and
           Members to the Novation Marketplace and HPPI Marketplace function
           correctly.

     4.12  Reasonable Assistance. Each party will provide the other parties with
           on-going reasonable assistance with regard to technical,
           administrative and service-oriented issues relating to the
           Marketplaces.


5.   NOVATION MARKETPLACE AND HPPI MARKETPLACE

     5.1   Development. The parties shall meet from time to time to agree to the
           "look and feel" and organization of the Novation Marketplace and the
           HPPI Marketplace, and to jointly develop and agree upon a
           Functionality Roadmap, which shall include an implementation plan and
           schedule for development of the Novation Marketplace and the HPPI
           Marketplace. The current Functionality Roadmap is approved by the
           Parties as of the date hereof and attached hereto as Exhibit K. . The
           Collaborative Development Process is the process by which future
           Functionality Roadmaps will be developed and is attached hereto as
           Exhibit M.

     5.2   Hosting. Neoforma will create, host and implement the Novation
           Marketplace and the HPPI Marketplace according to the agreed plan and
           display the Novation Contract Portfolio in a manner similar to the
           way in which products currently appear on the Marketplace.

     5.3   Delivery and Order Fulfillment. Neoforma will notify the Suppliers of
           purchases, rentals and leases made by Members in a form and format
           according to the terms of Neoforma's agreements with Suppliers.

     5.4   Display of Material. In order to facilitate efficient presentation of
           Product information, Neoforma will categorize, organize and display
           all Products on the Novation Marketplace and the HPPI Marketplace in
           a manner consistent with that in which it organizes similar
           information on other Customized Marketplaces.

     5.5   Reports and Meetings.

           5.5.1 Subject to obtaining the consent of the Members' in accordance
                 with Section 10, Neoforma will provide each of Novation, VHA,
                 UHC and HPPI with real-time, on-line reports of its Members
                 usage statistics and reports on other reasonable matters. Such
                 reports shall be made available in the form of Excel(TM) files
                 transferred via electronic transmission to Novation, VHA, UHC
                 or HPPI, or in such other format as the parties agree. The
                 parties will mutually agree as to the scope, format and

                                       15



                 substance of the standardized reporting system that Neoforma
                 will develop (at no extra charge) and that will be available
                 to Novation, VHA, UHC and HPPI via the Internet.

          5.5.2  Neoforma and Novation shall establish a cross-functional
                 management team in order to review operations of the Novation
                 Marketplace. The cross-functional management team shall meet
                 (each a "Cross-Functional Management Team Meeting") no less
                 frequently than on a quarterly basis. The cross-functional
                 management team shall include the lead executive from each of
                 Neoforma and Novation responsible for overseeing this
                 Agreement, and shall also include management representatives
                 from each of Neoforma and Novation from each functional area,
                 including marketing, Member sales, Supplier relations,
                 implementation and development. Additionally, one or more
                 representatives from each of VHA and UHC shall be invited to
                 participate in each Cross-Functional Management Team Meeting.
                 In addition, Neoforma and Novation shall establish a strategic
                 planning team to discuss the direction and strategy of the
                 Novation Marketplace. The strategic planning team shall meet at
                 least twice in each calendar year.

     5.6  Retained Contracts. Either VHA or UHC may at any time elect to put
          their respective Retained Contracts on the Novation Marketplace. If
          the posting on the Novation Marketplace is merely informational and
          Members are not able to purchase, rent or lease Products covered by
          such Retained Contracts through the Marketplaces, no fees shall be
          paid for such posting. If during the Term, Novation Signs-up the
          Suppliers under such Retained Contracts, such contracts shall then
          become subject to Section 8.

     5.7  Marketing. Novation, VHA, UHC and HPPI will use commercially
          reasonable efforts to drive traffic to the Novation Marketplace and
          the HPPI Marketplace, including, without limitation, making
          appropriate introductions for Neoforma, allowing Neoforma preferred
          space and visibility at Member forums, presenting satellite broadcasts
          or web casting targeted at the Members, and otherwise in accordance
          with the roles and responsibilities specified for each Party in any
          collaborative marketing agreement reached among the Parties. The
          current collaborative marketing agreement is attached hereto as
          Exhibit L. Novation, VHA and UHC will work with Neoforma to develop
          new initiatives targeted toward increasing Members' participation on
          the Marketplaces, including the Novation Marketplace and the HPPI
          Marketplace.

     5.8  Neoforma Auction.

          5.8.1  Novation, VHA, UHC and HPPI will promote the use of Neoforma's
                 asset management and recovery services and related activities
                 of Neoforma Auction to patrons and others.

                                       16



          5.8.2  Any Member wishing to utilize the Neoforma Auction and
                 Neoforma's asset management and recovery services shall enter
                 into an Asset Recovery Services Agreement with Neoforma.

          5.8.3  Neoforma may delegate the performance of the asset management
                 and recovery services to a third party appointed by Neoforma.

6.   EXCLUSIVITY AND RIGHT OF FIRST OFFER

     6.1  Novation, VHA, UHC and HPPI Exclusivity. Except as provided in Section
          6.3, each of Novation, HPPI, VHA and UHC agrees that it will not
          directly or indirectly develop, promote, contract for the development
          of, assist others to develop, or enter into any agreement with any
          other person to provide to any of them, or promote to their Members,
          any Internet-based marketplace related to Supply Chain Management
          Services by acute or non-acute healthcare providers anywhere in the
          world other than the Marketplaces.

     6.2  Neoforma Exclusivity.

          6.2.1  Except as otherwise provided in Section 6.3, neither Neoforma
                 nor its Affiliates will develop, promote, contract for the
                 development of, assist others to develop, or enter into any
                 agreement with any other person to provide, any Internet-based
                 system related to the acquisition or disposal of equipment,
                 products, supplies, services, information and other content by
                 acute or non-acute healthcare providers anywhere in the world
                 other than the Marketplaces.

          6.2.2  Except as provided in Section 6.2.3, Novation will be
                 Neoforma's and Neoforma's Affiliates' exclusive agent to
                 Sign-up Suppliers to the Novation Marketplace. Neoforma will
                 not, and will cause any Affiliate of Neoforma not to: (i)
                 Sign-up any Supplier directly to the Novation Marketplace; or
                 (ii) contract with, or pay any financial incentives to, any
                 person to act as a contracting agent of Neoforma or Neoforma's
                 Affiliates to Sign-up any Supplier to the Novation Marketplace
                 on Neoforma's or Neoforma's Affiliates' behalf; provided,
                 however, that nothing herein shall be construed to impose upon
                 Neoforma any obligation to seek to terminate agreements with
                 Suppliers previously entered into by Neoforma and existing as
                 of the Original Effective Date.

          6.2.3  Notwithstanding the provisions of Subsection 6.2.2, Neoforma
                 may Sign-up any Supplier, if Neoforma refers a Supplier to
                 Novation for contracting, and notwithstanding such referral,
                 the Supplier specifically requests to Sign-up with Neoforma or
                 Novation informs Neoforma that Novation will not Sign-up that
                 Supplier.

                                       17



     6.3  Right of First Offer for Novation and Neoforma.

          6.3.1  If either Novation or Neoforma elects to commence an
                 Internet-venture in any country other than the United States
                 or in any market that is not then served by a Customized
                 Marketplace (whether in the United States or otherwise), such
                 party (the "Offeror") shall offer to the other (the "Offeree")
                 the opportunity to participate in such venture in a manner
                 commensurate with the Offeree's role under this Agreement
                 (including the right of Novation to create other contract
                 portfolios similar to the Novation Contract Portfolio or to
                 recruit suppliers for such venture). The Offeror shall provide
                 full information to the Offeree regarding the venture, and
                 shall make its senior executives available to meet with the
                 Offeree to discuss the venture. The Offeror shall also notify
                 the Offeree of such venture a reasonable time prior to
                 commencement of the venture (but in no event less than 60 days
                 prior to the date on which the Offeree must decide to
                 participate). If after consideration the Offeree declines to
                 participate in such venture, then, notwithstanding Section 6.1
                 or 6.2, as the case may be, the Offeror may proceed with such
                 venture, but solely in that market or country, and on no less
                 favorable terms and conditions in the aggregate as had been
                 offered to the Offeree. In addition, the Offeree shall be
                 released from its obligations under Section 6.1 or 6.2, as the
                 case may be, but solely in respect of the market or country
                 that was the subject of such Offer. If the Offeror
                 subsequently does not consummate the venture, and the Offeror
                 wishes to commence another venture in the same market or
                 country, the Offeror must once again offer such opportunity to
                 the Offeree. The Offeror shall have no obligation to share any
                 fees earned in a venture in which the Offeree has not elected
                 to participate.

          6.3.2  Business development representatives of Neoforma and Novation
                 shall meet on a quarterly basis to review existing
                 opportunities in foreign markets and countries and to review
                 existing opportunities in markets not then served by a
                 Customized Marketplace. Such representatives shall prepare a
                 joint plan to identify and exploit such other opportunities in
                 foreign markets and in other healthcare markets. Any right of
                 an Offeror to proceed with a venture under Subsection 6.3.1
                 without the Offeree shall be conditioned on such Offeror's
                 compliance with this Subsection 6.3.2.

     6.4  First Offer for Non-Exclusive Services.

          6.4.1  The term "Non-Exclusive Service(s)" means Internet-related
                 services available primarily through Neoforma that are outside
                 the scope of Section 6.1, including, without limitation, the
                 products and services excluded from the definition of Supply
                 Chain Management Services as applied to UHC. For purposes of
                 clarification, Non-Exclusive Services will not include
                 Internet-related services the majority of which are provided
                 by an entity other than Neoforma. UHC shall give favorable
                 consideration to

                                       18



                 Neoforma as a third-party provider to UHC of Non-Exclusive
                 Services as follows: if (i) UHC elects to provide for itself
                 or for the benefit of all or substantially all of UHC's
                 Members any new Non-Exclusive Service or (ii) UHC intends to
                 replace any agreement for the provision of a Non-Exclusive
                 Service then being provided to UHC by a third party, then UHC
                 shall first offer to Neoforma the opportunity to provide such
                 Non-Exclusive Service (the "Opportunity"). Promptly upon
                 becoming aware of an Opportunity, UHC shall send notice of the
                 Opportunity in electronic or paper writing to the Chief
                 Executive Officer of Neoforma, or his or her designate.
                 Promptly after receiving such notification, but in no less
                 than 15 days, Neoforma shall meet with UHC to discuss the
                 Opportunity and Neoforma's proposed role therein. Neoforma and
                 UHC shall continue to meet and discuss the Opportunity for the
                 30-day period commencing upon UHC's notification to Neoforma.
                 Neither UHC nor Neoforma will have any obligation to meet and
                 to discuss the Opportunity (i) if Neoforma does not meet with
                 UHC within the time required, or (ii) after the expiration of
                 the 30-day discussion period. The communication by UHC to
                 Neoforma of any Opportunity, including the ideas, concepts or
                 other intellectual property contained therein, will be
                 Confidential Information subject to Section 11.

          6.4.2  For the avoidance of doubt and notwithstanding anything to the
                 contrary in this Agreement, in no event will UHC be required to
                 obtain any Non-Exclusive Service from Neoforma.

7.   LICENSES AND OWNERSHIP

     7.1  Ownership of Marks. Each party will own and retain all right, title
          and interest in and to its intellectual property, including its
          trademarks, trade names, service marks and logos ("Marks") worldwide,
          as specified in Exhibit A.

     7.2  Novation Marks. Subject to the terms of this Agreement, Novation
          grants to Neoforma, VHA, UHC and HPPI a worldwide, nontransferable,
          non-exclusive, royalty-free license to use, transmit and display
          Novation's Marks in connection with the Marketplaces during the Term
          of this Agreement, provided that such use is in accordance with
          Novation's then-current trademark usage guidelines. A copy of
          Novation's current trademark usage guidelines is attached as Exhibit
          B. Upon any change in such guidelines, Novation will promptly provide
          to Neoforma a copy of such revised usage guidelines. Neoforma will not
          modify the Novation Marks or combine any of the Novation Marks with
          any other mark or term. Subject to the provisions of Section 9.9, upon
          termination or expiration of this Agreement, Neoforma will cease all
          use of the Novation Marks.

     7.3  Neoforma Marks. Subject to the terms of this Agreement, Neoforma
          grants to Novation, VHA, UHC and HPPI a worldwide, nontransferable,
          non-exclusive,

                                       19



          royalty-free license to use, transmit and display Neoforma's Marks
          during the Term only in promotional materials used to encourage
          participation on the Marketplaces, provided that such use is in
          accordance with Neoforma's then-current trademark usage guidelines. A
          copy of Neoforma's current trademark usage guidelines is attached as
          Exhibit C. Upon any change in such guidelines, Neoforma will promptly
          provide to Novation, VHA, UHC and HPPI a copy of such revised usage
          guidelines. Except as authorized under this Agreement, Novation, VHA,
          UHC and HPPI will not modify any of the Neoforma Marks or combine the
          Neoforma Marks with any other mark or term. Subject to the provisions
          of Section 9.9, upon the termination or expiration of this Agreement,
          Novation, VHA, UHC and HPPI will cease all use of the Neoforma Marks.

     7.4  VHA, UHC and HPPI Marks. Subject to the terms of this Agreement, each
          of VHA, UHC and HPPI grants to Novation and Neoforma a worldwide,
          nontransferable, non-exclusive, royalty-free license to use, transmit
          and display its Marks solely to promote the Marketplaces to the
          Members during the Term, provided that such use is in accordance with
          the then-current trademark usage guidelines of VHA, UHC and HPPI, as
          the case may be. A copy of each of VHA's, UHC's and HPPI's current
          trademark usage guidelines are attached as Exhibit D. Except as
          authorized under this Agreement, Neoforma and Novation will not modify
          any of the Marks of VHA, UHC and HPPI or combine any of them with any
          other mark or term. Subject to the provisions of Section 9.9, upon the
          termination or expiration of this Agreement, Neoforma and Novation
          will cease all use of VHA's, UHC's and HPPI's Marks.

     7.5  Ownership of Neoforma Materials and Novation Materials. Neoforma and
          Novation will own and retain all worldwide right, title and interest
          in and to the Neoforma Materials and Novation Materials, respectively.
          Neither Neoforma nor Novation will alter or delete any copyright or
          other proprietary notice that may appear in the other party's
          Materials without prior written consent of such party.

     7.6  Neoforma Materials. Neoforma grants to Novation a worldwide,
          nontransferable, non-exclusive, royalty-free license to use the
          Neoforma Materials only in promotional materials used to encourage
          participation on the Marketplaces.

     7.7  Novation Materials. Novation grants to Neoforma a worldwide,
          nontransferable, non-exclusive, royalty-free license to use the
          Novation Materials on the Marketplaces during the Term solely to
          enable Neoforma to provide the Services contemplated under this
          Agreement.

     7.8  Development of Tools. From time to time during the Term, Novation may
          request Neoforma to design Tools for Members or Suppliers in addition
          to the Tools, functions and APIs, which will be mutually agreed upon
          and contained in the Functionality Roadmap. Within a reasonable time
          after such request, appropriate personnel from Novation and Neoforma
          will meet to discuss and draft technical specifications for the
          desired customized Tools, functions and APIs.

                                       20



                  7.8.1    If the Tool, function or API requested by Novation
                           will be used by all Users of the Customized
                           Marketplaces, Neoforma will develop such Tool,
                           function or API promptly and at its own expense.
                           Neoforma will own and retain all right, title and
                           interest to all the intellectual property, including
                           the source code, object code and other Confidential
                           Information, in and to the Neoforma developed Tools,
                           functions and APIs.

                  7.8.2    If Neoforma does not otherwise agree to develop such
                           Tool, function or API for use by all Users of the
                           Customized Marketplaces, Novation may, in its sole
                           discretion, agree to pay for the development of such
                           Tool, function or API. If Novation agrees to pay
                           Neoforma for the development of such Tool, function
                           or API, Neoforma will promptly endeavor to develop
                           such requested Tool, function or API, and Novation
                           will own all right, title and interest to all the
                           intellectual property, including all source code,
                           object code and other Confidential Information, in
                           and to such Tools, functions and APIs. Any fees
                           charged to Novation for development of any Tool,
                           function or API shall be provided by Neoforma at the
                           most favorable fee Neoforma charges to any other
                           person for such development or integration services.

                  7.8.3    Nothing in this Section 7.8 shall limit Neoforma's
                           obligation to provide the Services as shall be set
                           forth in the Functionality Roadmap.

         7.9      Access License. Neoforma grants to Novation a non-exclusive,
                  worldwide, non-assignable license to members of Novation and
                  HPPI in order to access the Novation Marketplace and HPPI
                  Marketplace. Novation and HPPI grant to Neoforma a
                  non-exclusive, worldwide, non-assignable license to access the
                  Novation and HPPI web sites and computer systems solely to
                  enable Neoforma to provide the services contemplated under
                  this Agreement.

8.       FEES AND TAXES

         8.1      Fees.

                  8.1.1    Neoforma and Novation shall each use its reasonable
                           best efforts to collect all Transaction Fees required
                           to be paid by each Supplier.

                  8.1.2    Novation * to Neoforma aggregate minimum Novation
                           Marketplace Transaction Fees, which shall be
                           calculated as a percentage (the "Supplier Target
                           Percentage") of the * on a * basis as set forth in
                           Exhibit G (the "Minimum Fees"). Subject to Section
                           3.8 and Subsection 8.1.3, Novation shall pay to
                           Neoforma the *, if any, in any * the * calculated in
                           accordance with this Section 8.1.2 and the *
                           recognized by Neoforma in accordance with GAAP for
                           such * (each such payment, a " * ").

_______________________

   * Confidential treatment requested.

                                       21




                  8.1.3    Notwithstanding anything in this Agreement to the
                           contrary (except, with respect to clauses (ii)-(v)
                           below, any prior period * amounts or "*" payable
                           pursuant to Section 8.3 below), Novation shall not be
                           responsible for any *: (i) to the extent that any
                           part of the * results from the * by a * of its
                           agreement with Neoforma as a result of Neoforma's *
                           of such *, (ii) during the period commencing on * and
                           ending *, to the extent that the * in any * for that
                           * in Exhibit H; (iii) during the period commencing on
                           * and ending *, to the extent that the aggregate * in
                           that * exceed * of Novation's * for that *, (iv)
                           during the period commencing on * and ending *, to
                           the extent that the aggregate * in that * exceed *
                           of Novation's * for that *, or (v) for * periods
                           beginning on *, to the extent that the aggregate * in
                           any * exceed * of Novation's * for that *; provided,
                           however, that (A) the * in clauses (iii), (iv) and
                           (v) above may be adjusted from time to time pursuant
                           to Section 8.5; (B) any such * adjustment shall not
                           result in a *; and (C) the * of Novation's * amount
                           for such applicable * shall be further reduced by $*
                           in *, $* in *, $* in *, $* in * and $* in *.

                  8.1.4    In the event that Novation notifies Neoforma that its
                           obligations under Section 8.1.2 are limited by
                           Section 8.1.3(iii), Section 8.1.3(iv) or Section
                           8.1.3(v), Neoforma may request in writing Novation's
                           financial statements for the applicable *. Novation
                           shall provide to Neoforma relevant financial
                           statements in sufficient detail to verify Novation's
                           * for such * within a reasonable period of time
                           following such request from Neoforma.

         8.2      Revenue Sharing.

                  8.2.1    The parties have agreed to the Target Fee Levels (the
                           "Target Fee Levels"), set forth in Exhibit I.

                  8.2.2    Neoforma shall pay to Novation * of any Novation
                           Marketplace Transaction Fees recognized by Neoforma
                           in accordance with GAAP in excess of the Target Fee
                           Level for any given *, but only if Novation has
                           fulfilled its obligations under Subsection 8.1.2.

                  8.2.3    Subject to Section 8.2.2, Neoforma shall retain all
                           revenues it earns and collects, and Novation shall
                           pay to Neoforma within thirty (30) days after the end
                           of each *, all revenues earned by Neoforma but

_______________________

   * Confidential treatment requested.

                                       22




                           * (as the case may be) for the provision of the
                           Customized Marketplaces during that *, including all
                           * and *, and revenue that would otherwise be subject
                           to revenue sharing pursuant to Section *.

         8.3      Establishment of * and * Payment Thereof. Neoforma and
                  Novation shall meet and agree on or before * of * on the *
                  for the subsequent * pursuant to Sections 8.1.2 and 8.1.3 (the
                  "*"). On the * of each * month, Novation shall * to Neoforma
                  an amount equal to * of that * payable pursuant to Sections
                  8.1.2 and 8.1.3. The agreed * payment amounts and schedule for
                  such * for the remainder of * are set forth in Exhibit J.
                  Beginning in *, on or before * , Neoforma and Novation shall
                  meet and agree on the * of any "*" required to the * for the
                  preceding * pursuant to Sections 8.1.2 and 8.1.3 based on
                  Novation's * in such *. Neoforma and Novation shall apply any
                  such "*" to subsequent * as mutually agreed to by them.
                  Beginning in *, on or before *, Novation and Neoforma shall
                  meet and agree on the * for the subsequent * pursuant to
                  Sections 8.1.2 and 8.1.3.

         8.4      Reporting and Calculation of Fees and Revenue Sharing. To
                  fulfill the obligations of Novation and Neoforma under Section
                  8.3 to agree on estimated and actual *, before any meeting
                  conducted pursuant to Section 8.3: (a) Novation will provide
                  Neoforma with a written report of: (i) Novation's * or any
                  other adjustment amounts that may be applicable pursuant to
                  Section 8.1.3; and (ii) the revenues received by Novation for
                  the provision of the Customized Marketplace (including * and
                  *); and (b) Neoforma will provide each of Novation, VHA and
                  UHC, with a written report of: (i) aggregate Adjusted Gross
                  Transaction Values and Supply Chain Data Transaction Values
                  for all purchases, rentals and leases of Products through the
                  Novation Marketplace, (ii) the aggregate amount of any
                  Transaction Fees received by Neoforma, (iii) the aggregate
                  amount of any Novation Marketplace Transaction Fees received
                  by Neoforma; (iv) the information set forth in Exhibit E and
                  such other information as Novation may reasonably request; (v)
                  revenue received by Neoforma from distribution or licensing of
                  software and other technology solutions; and (vi) revenue
                  received by Neoforma associated with Section 8.9 below.
                  Neoforma and Novation shall then jointly calculate: (i) the
                  Minimum Fees, (ii) any revenue sharing amounts under Sections
                  8.2, 8.9, and 8.10, (iii) any *

____________________
 * Confidential treatment requested.

                                       23



                  payable pursuant to Subsection 8.1.2, subject to Section
                  8.1.3, and (iv) any other fees to be paid by a party
                  hereunder.

         8.5      *.
                  -


                  8.5.1    Right to *. Beginning on * and from time to time
                           thereafter, either Novation or Neoforma may initiate
                           an * (the "* Process") in order to *.

                  8.5.2    * Process. In the case of a general * Process, (i)
                           either Novation or Neoforma may select and hire a *,
                           which * shall be reasonably acceptable to the other
                           party, and the party selecting such * shall pay all
                           costs associated with the * Process; or (ii) Novation
                           and Neoforma shall mutually agree upon an
                           independent, third party * and Novation and Neoforma
                           shall share all costs associated with such shared *.
                           In addition, in the case of a * Process with respect
                           to Supplier Target Percentages, or if Neoforma and
                           Novation otherwise agree with respect to a general *
                           Process, Neoforma and Novation may rely on publicly
                           available information in carrying out the * Process,
                           and to carry out the * Process without the use of a
                           third-party *. The Parties shall cooperate to
                           facilitate the * Process, including by providing
                           reasonable information as is necessary to conduct the
                           * Process.

                  8.5.3    General *. The * Process for general items shall *
                           (i) with respect to Neoforma, the * provided by
                           Neoforma to Novation, the * offered to Members, the *
                           offered to Suppliers, the * of the Services, and
                           Neoforma's * incurred in performing its obligations
                           under this Agreement and (ii) with respect to
                           Novation, the * by Novation of its agency obligations
                           pursuant to Section * and the * for any * as provided
                           in Subsection * and, in each case, shall be based
                           upon a *, including, without limitation, relative *.
                           If the * Results indicate that the * by Novation or
                           Neoforma, as the case may be, are not "*," Neoforma
                           and Novation shall promptly meet and enter into a
                           good faith negotiation to determine whether there
                           should be an *.

                  8.5.4    *. The * Process with respect to * shall be based
                           upon review of whether such * are "*". If the *
                           Results indicate that the * in place during the
                           period examined are not "*," then Neoforma and
                           Novation shall promptly meet and * such * so that
                           they are *. For the avoidance of doubt, the parties
                           agree that "*" shall mean that (i) * are reasonably
                           likely to agree to pay such fees at such time or (ii)
                           such *.

                  8.5.5    * Results. Within 30 days after the completion of any
                           * Process, the *, if any, shall deliver the results
                           of the * (the "* Results") in a written report,
                           including identification of the *, to Novation and
                           Neoforma. In the event

_______________________

   * Confidential treatment requested.

                                       24



                           that the * Process does not utilize a third-party *,
                           the party initiating the * Process shall be
                           responsible for writing and delivering such report of
                           the * Results to the other party.

                  8.5.6    * Review Period. For a period of 60 days following
                           delivery of the * Results from the * (the "* Review
                           Period"), Novation and Neoforma shall review the *
                           Results, and schedule one or more meetings to address
                           any issues either Party may have with the * Results.

                  8.5.7    * Dispute. In the event Novation and Neoforma in good
                           faith dispute the * Results or if Novation and
                           Neoforma have not reached agreement after the *
                           Review Period, Novation may dispute such outcome in
                           accordance with the provisions of Section 18 hereto.

         8.6      Taxes. Neoforma and Novation shall cooperate to minimize any
                  local, state, national and foreign taxes (including, without
                  limitation, sales, use and VAT taxes which may apply),
                  licenses, export/import fees and any other fees or similar
                  obligations relating to any sale, rental or lease of a
                  Contract Product through the Marketplaces or relating to the
                  Supply Chain Data. If in the future any such taxes or similar
                  obligations are required to be paid by Neoforma or Novation in
                  respect of Contract Products, such fees shall be shared by
                  Neoforma and Novation proportionately based on revenues each
                  derives from the Novation Marketplace and HPPI Marketplace. In
                  no event shall Novation be required to share any taxes under
                  this Section 8.6 for Products other than Products for which
                  Novation receives Novation Marketplace Transaction Fees.

         8.7      New Markets. If Neoforma and Novation agree pursuant to
                  Section 6.3 to enter any other healthcare market (other than
                  the United States acute care market) that is not then served
                  by a Customized Marketplace or that is in countries outside of
                  the United States, Neoforma and Novation shall negotiate in
                  good faith to set the Transaction Fees to be paid in respect
                  of such products to be purchased, rented and leased on such
                  Customized Marketplace.

         8.8      Product Returns. Neoforma and Novation will cooperate in good
                  faith to make any adjustments to the fees to be paid hereunder
                  to reflect Products that have been returned by Users.

         8.9      Neoforma * and * and *. Beginning *, Neoforma shall pay to
                  Novation on a * basis * by Neoforma * from (i) Neoforma *),
                  (ii) other * (excluding *, and *), and (iii) all * of * from
                  *.

         8.10     *. Neoforma will pay to Novation * by Neoforma *, whether to
                  buyers or suppliers, but not including * in any way related to
                  Neoforma *. For the

_______________________

   * Confidential treatment requested.

                                       25



                  avoidance of doubt, the parties agree that this Section 8.10
                  shall not limit the scope of Section 6.2.1.

         8.11     Other Expenses. Neither Neoforma nor Novation shall be
                  required to pay to the other party any amounts for the
                  performance of their respective obligations hereunder other
                  than those expressly set forth in this Agreement.


         8.12     VHA/UHC Allocation. VHA and UHC agree to allocate between
                  themselves (i) any obligation of Novation to pay Shortfall
                  Payments pursuant to Section 8.1.2 and (ii) any fees received
                  by Novation pursuant to Section 8.2.2, 8.9, 8.10, 10.6.3, or
                  16.3 as follows:

                  (i)      with respect to *, * to VHA and * to UHC;

                  (ii)     with respect to each succeeding *, VHA's allocation
                           shall be a fraction (A) the numerator of which is the
                           sum of the aggregate dollar amount of VHA's Members'
                           purchases through Novation, plus * of the aggregate
                           dollar amount of all purchases through HPPI, and (B)
                           the denominator of which is the sum of the aggregate
                           dollar amount of both VHA's and UHC's Members'
                           purchases through Novation, plus * of the aggregate
                           dollar amount of all purchases through HPPI, in each
                           case during the immediately preceding calendar year
                           and excluding purchases through VHA's Care Continuum
                           Program or any similar program operated by UHC; and

                  (iii)    with respect to each succeeding *, UHC's allocation
                           shall be a fraction (A) the numerator of which is the
                           sum of the aggregate dollar amount of UHC's Members'
                           purchases through Novation, plus * of the aggregate
                           dollar amount of all purchases through HPPI, and (B)
                           the denominator of which is the sum of the aggregate
                           dollar amount of both VHA's and UHC's Members'
                           purchases through Novation, plus * of the aggregate
                           dollar amount of all purchases through HPPI, in each
                           case during the immediately preceding calendar year
                           and excluding purchases through VHA's Care Continuum
                           Program or any similar program operated by UHC.

9.       TERM AND TERMINATION

         9.1      Initial Term. This Agreement commences on the Original
                  Effective Date and will remain in effect for an initial term
                  of 10 years (the "Initial Term"), unless terminated earlier in
                  accordance with the terms of this Agreement.

_______________________

   * Confidential treatment requested.

                                       26



         9.2      Renewal and Extension of Term. This Agreement will
                  automatically renew for successive one-year terms after the
                  completion of the Initial Term (each a "Renewal Term") unless
                  Neoforma or Novation provides written notice of its intention
                  to terminate this Agreement to the other at least 90 days
                  prior to the end of the Initial Term or any then-current
                  Renewal Term. The Initial Term and any and all renewals or
                  extensions thereof and any Termination Assistance Period are
                  referred to herein as the "Term".

         9.3      Termination for Cause. Each of Neoforma and Novation, after
                  complying with Section 18.2 hereunder, will have the right to
                  terminate this Agreement if the other party materially
                  breaches (i) its service obligations under this Agreement or
                  (ii) its exclusivity obligations under Section 6 of this
                  Agreement, unless the breaching party (x) cures such breach
                  within 30 days after receiving written notice or (y) if such
                  breach is not curable within 30 days, makes substantial
                  progress in curing such breach within 30 days and cures such
                  breach within 90 days. Any repeated or sustained failure of
                  Neoforma to meet its Service Level obligations hereunder shall
                  constitute a material breach of Neoforma's service obligations
                  under Subsection (i) hereunder.

         9.4      Termination for Insolvency Events. If either Neoforma or
                  Novation is unable to obtain credit from any creditors,
                  becomes insolvent, makes an assignment for the benefit of its
                  creditors, or becomes the subject of a proceeding under Title
                  11 of the United States Code, as amended, or becomes the
                  subject of similar state court proceedings, then in any such
                  case, the other party, or in the case of Neoforma, VHA, UHC or
                  HPPI, may, without prejudice to any other rights, immediately
                  terminate this Agreement or, if such termination is subject to
                  any statutory provision or judicial order staying such action,
                  seek leave to modify such stay so as to terminate this
                  Agreement. Each of Neoforma and Novation acknowledges and
                  agrees that its insolvency, the making of an assignment for
                  the benefit of its creditors, or its becoming the subject of a
                  proceeding under Title 11 of the United States Code, is
                  "cause" for the termination of any statutory or judicial stay
                  of the rights of the other party hereunder to terminate this
                  Agreement. Each of Neoforma and Novation acknowledges and
                  agrees that, in such event, it could not provide "adequate
                  protection" to the other party, or in the case of Neoforma, to
                  VHA, UHC or HPPI, that the continued imposition of a stay
                  would likely cause irreparable harm to the other party, and
                  the continued imposition of a stay would adversely affect the
                  health, safety and welfare of communities served by the
                  parties hereto.

         9.5      Termination for Rejection in Bankruptcy. Each of Neoforma and
                  Novation will have the right to immediately terminate this
                  Agreement if the other party becomes a debtor or an alleged
                  debtor in a case under Title 11 of the United States Code, as
                  amended, and in such proceeding this Agreement is rejected in
                  such case in accordance with Title 11 of the United States
                  Code.

                                       27



         9.6      Termination Upon Neoforma Change of Control. Novation may
                  terminate this Agreement upon any Neoforma Change of Control.


         9.7      Return of Materials. Subject to Section 9.8, upon termination
                  or expiration of this Agreement for any reason, each of
                  Neoforma and Novation shall promptly return to the other
                  party, and shall not take, use or disclose, all Products of
                  any nature that belong to the other party and all records (in
                  any form, format or medium) containing or relating to Neoforma
                  Materials or Novation Materials or the Confidential
                  Information of the other party.

         9.8      Survival. The provisions of Sections 7.1, 7.5, 8.4, 9.7, 9.8,
                  9.9, 9.10, 10, 11, 15, 16, 17, 18, 19 and 20 will survive
                  termination or expiration of this Agreement for any reason.

         9.9      Termination Assistance Services.

                  9.9.1    General. Upon any termination or expiration of this
                           Agreement, Neoforma shall provide termination
                           assistance and shall comply with the reasonable
                           directions of Novation, or, if applicable, VHA or
                           UHC, to allow the Services to continue without
                           interruption or adverse effect and to facilitate the
                           orderly transition and migration of all Services then
                           being performed by Neoforma, including any transition
                           and migration from Neoforma to Novation or, if
                           applicable, VHA and UHC, (or a third-party provider
                           undertaking, on behalf of Novation, VHA or UHC, to
                           provide the Services) (the "Termination Assistance
                           Services"), all in accordance with this Section 9.
                           Additionally, all of Novation's, or, if applicable,
                           VHA's and UHC's, rights under this Agreement
                           (including, without limitation, the right to license
                           software hereunder), as such rights exist immediately
                           prior to any expiration or termination, but excluding
                           any right to share Novation Marketplace Transaction
                           Fees with Neoforma pursuant to Section 8, shall
                           continue during any Termination Assistance Period (as
                           defined in Section 9.9.2). Novation or, if
                           applicable, VHA and UHC, shall cooperate in good
                           faith with Neoforma in connection with Neoforma's
                           obligations under this Section 9.

                  9.9.2    Termination Assistance Period. Neoforma shall
                           commence providing Termination Assistance Services
                           (i) with respect to the scheduled expiration of this
                           Agreement, 90 days prior to such scheduled expiration
                           or such earlier date as Novation may reasonably
                           request, and (ii) with respect to any termination of
                           this Agreement, upon the delivery of the notice of
                           termination. Neoforma shall continue providing
                           Termination Assistance Services through the effective
                           date of the expiration or termination of this
                           Agreement and for a period of not less than * days
                           thereafter (the "Termination Assistance Period").
                           Upon at least 30 days prior written notice to
                           Neoforma, Novation or, if applicable, each of VHA

_______________________

   * Confidential treatment requested.

                                       28



                           and UHC, may extend, from time to time, the
                           Termination Assistance Period for an additional
                           * period. During any Termination Assistance
                           Period, Neoforma shall provide, at Novation's
                           request, or, if applicable, VHA's or UHC's request,
                           as applicable, as part of the Termination Assistance
                           Services, any or all of the Services being provided
                           by Neoforma prior to the date of the expiration or
                           termination of this Agreement.

                  9.9.3    Termination Plan. Neoforma and Novation or, if
                           applicable, VHA and UHC, shall cooperate in good
                           faith to develop a termination plan setting forth the
                           respective tasks to be accomplished by each party in
                           connection with the termination and a schedule
                           pursuant to which such tasks are to be completed in
                           accordance with the Termination Assistance Services
                           (collectively, the "Termination Plan").

                  9.9.4    Certain Licenses. As of the Original Effective Date,
                           Neoforma shall grant the following to Novation:

                           (i)      a * license to all third-party software that
                                    is required to provide the Services, to the
                                    extent Neoforma is entitled to sublicense
                                    such software, and to the extent Neoforma is
                                    not entitled to sublicense such software,
                                    Neoforma shall provide a list of all
                                    third-party software licenses that are
                                    required to provide the Services and shall
                                    assist Novation in licensing a substantially
                                    similar software at a commercially
                                    reasonable price; and

                           (ii)     a * license, solely for Novation's internal
                                    use, to all Neoforma-owned software that is
                                    required to provide the Services. For the
                                    avoidance of doubt, "internal use" as used
                                    in this Section 9.9.4 shall include the
                                    right of other Internet marketplaces or
                                    providers to use the software solely on
                                    behalf of Novation for its Members. In
                                    addition, Neoforma shall provide to Novation
                                    consulting services, at no charge to
                                    Novation, as may be reasonably required in
                                    order to recreate the Marketplace
                                    environment for Novation.

                           (iii)    Additionally, if at any time after the
                                    Original Effective Date Neoforma begins
                                    using any software to provide the Services,
                                    then Neoforma shall be deemed to have
                                    granted, as of the first date on which such
                                    software is used to provide the Services and
                                    for so long as such software is either used
                                    or required to provide the Services, the
                                    following licenses to Novation: (x) with
                                    respect to third-party software, a * license
                                    to such software, to the extent Neoforma is
                                    entitled to sublicense such software, and
                                    (y) with respect to

_______________________

   * Confidential treatment requested.

                                       29



                                    Neoforma-owned software, a * license, solely
                                    for Novation's internal use, to such
                                    software.

                           (iv)     Notwithstanding the other provisions in this
                                    Section 9.9.4, Novation shall not use such
                                    licenses until the effective date of the
                                    termination of this Agreement in accordance
                                    with Section 9.3, 9.4, or 9.5.

                  9.9.5    Equitable Remedies. Neoforma acknowledges that, if it
                           breaches (or attempts or threatens to breach) its
                           obligation to provide Novation or, if applicable, VHA
                           and UHC, Termination Assistance Services in
                           accordance with this Section 9.9, Novation or, if
                           applicable, VHA and UHC, will be irreparably harmed.
                           In such circumstance, and notwithstanding the
                           provisions of Section 18, Novation or, if applicable,
                           each of VHA and UHC, may proceed directly to court.
                           If a court of competent jurisdiction should find that
                           Neoforma has breached (or attempted or threatened to
                           breach) any such obligations, Neoforma agrees that
                           even without any additional findings of irreparable
                           injury or other conditions to injunctive relief, it
                           shall not oppose the entry of an appropriate order
                           compelling performance by Neoforma restraining it
                           from further breaches (or attempted or threatened
                           breaches).

         9.10     Third Party Products. Notwithstanding anything in this
                  Agreement to the contrary, prior to entering any agreement
                  with a third party for the provision of software (other than
                  providers of off the shelf software) (the "Third Party
                  Products"), Neoforma shall use commercially reasonable and
                  good faith efforts to obtain the agreement of each provider of
                  a Third Party Product that such Third Party Product may be
                  assigned and/or sublicensed without additional charge to each
                  and any of Neoforma, VHA or UHC. If Neoforma is not able to
                  obtain such written agreement or, in the event that Neoforma
                  is informed that such provision will be made available on at
                  additional cost to Neoforma, Neoforma shall promptly provide
                  notice of such to each of Novation, VHA and UHC, setting forth
                  with particularity in such notice the nature of the proposed
                  Third Party Product, the nature of the assignment and/or
                  sublicense proposed, the agreement to be signed and, if
                  applicable, the additional cost for the required assignment
                  and/or sublicense provision. Each of Novation, VHA and UHC
                  shall have one business day after the receipt of such notice
                  from Neoforma to advise Neoforma as to whether Novation, VHA
                  or UHC, or any of them or any combination of them, agrees to
                  pay the additional cost involved for the proposed assignment
                  and/or sublicense provision. Failure of Novation, VHA or UHC
                  to advise Neoforma of its decision within one business day
                  after the receipt of notice from Neoforma shall be deemed an
                  affirmative refusal to pay additional amounts required to
                  obtain the proffered assignment and/or sublicense provision
                  and,

_______________________

   * Confidential treatment requested.

                                       30



          provided that the agreement is not materially modified in a manner
          that might cause the sublicense and/or assignment provision to be
          renegotiated in a manner more favorable to Novation, VHA or UHC,
          Neoforma may proceed to enter into the agreement for such Third Party
          Product without further obligation to Novation, VHA or Neoforma under
          this Section 9.10.

10.  USER DATA

     10.1 Registration. Users who are representatives of Members will be
          required to register as a representative of a Member prior to using
          the Novation Marketplace. To effect such registration, Neoforma will
          require that each Member or other User complete a registration form in
          form and substance reasonably acceptable to Novation, which form shall
          request, among other things, submission of contact information
          regarding the User, including, without limitation, the User's name,
          name of the Member organization, mailing address, and email address.
          Neoforma will verify such information against the on-line data base
          information made available by Novation and ensure that such
          registration is authorized in accordance with registration and
          password issuance and protection procedures acceptable to Neoforma and
          in accordance with the Functionality Roadmap to be mutually agreed
          upon. Neoforma will store data collected during registration as part
          of the Information in the Transaction Database.

     10.2 Transaction Database. Neoforma will create and maintain the
          Transaction Database relating to all activity occurring on the
          Novation Marketplace and relating to Supply Chain Data in accordance
          with the Functionality Roadmap to be mutually agreed upon. Novation
          and Neoforma shall only use Information in accordance with the
          provisions of this Section 10. Neoforma shall at all times make all
          Information available to Novation in any manner that it is, or can
          reasonably be, made available.

     10.3 Member Data. Members shall own their respective Member Data. Novation
          will use commercially reasonable efforts to acquire a nonexclusive,
          non-transferable license from Members (or sublicense from VHA, UHC or
          HPPI) to permit:

          (i)  Novation to access and use such Member Data for, among other
               things, (A) legal compliance purposes, (B) to track the
               performance of Suppliers, (C) to be able to track payments to
               VHA, UHC and HPPI and cooperative payments to the Members, (D) to
               consult with each of the Members and (E) to promote utilization
               and standardization among Members; and

          (ii) Neoforma to use such Member Data provided that such use is (A)
               solely related to the performance of Neoforma's obligations
               pursuant to this Agreement and (B) in accordance with the
               confidentiality provisions of Section 11.

                                       31



     10.4 Aggregated Member Data. Subject to the receipt of a license or
          sublicense for use of the Member Data, Novation shall own the
          Aggregated Member Data.

     10.5 Transaction Database. Subject to the ownership rights of the Members
          in Member Data and of Novation in Aggregated Member Data, Neoforma
          shall own the derivative works created by using the Member Data and
          the Aggregated Member Data, provided that no such information may be
          used by Neoforma other than subject to the following conditions:

          (i)  in accordance with the license or sublicense to be obtained from
               Members in accordance with the provisions of Subsection 10.3
               (ii); or

          (ii) is provided as Blinded Aggregated Data.

     10.6 License Grant of Information to Novation.


          10.6.1 Subject to the terms and conditions of this Agreement, Neoforma
                 hereby grants to Novation a nonexclusive, non-transferable
                 license during the Term to access and use the Information and
                 Blinded Aggregated Data; provided, however, that (i) such use
                 is solely for Novation's internal use and for the
                 sublicensing of the use of such data to VHA, UHC and HPPI for
                 their use in serving the needs of their Members (provided that
                 a party may not license, sell or otherwise make available the
                 Information), (ii) such use complies with the privacy policy in
                 existence on the Novation Marketplace at the time of such use
                 and (iii) Novation, VHA, UHC and HPPI each treat such
                 Information as Confidential Information subject to Section 11
                 of this Agreement.

          10.6.2 Subject to the terms and conditions of this Agreement, Neoforma
                 hereby grants to Novation a nonexclusive, non-transferable
                 license, as agent, to sublicense the Information described in
                 Section 10.5 to Suppliers.

          10.6.3 With respect to the Information sublicensed by Novation under
                 Subsection 10.6.2, Novation will keep * of the gross license
                 fees and the remaining * of such license fees shall be paid to
                 Neoforma.

     10.7 No Other Licenses or Use. Except as expressly set forth in this
          Section 10, none of the Members, Novation or Neoforma grants any
          license, express or implied, in the Member Data, Aggregated Member
          Data or Information. The failure to abide by the terms and conditions
          of this Section 10 shall constitute a material default of this
          Agreement.

___________________________

   *   Confidential treatment requested.

                                       32



     10.8 Other Data. Neoforma and Novation acknowledge that all other data that
          a party gathers or develops independent of this Agreement shall not be
          covered by this Agreement, provided that Neoforma shall not solicit
          any information from a Member without fully disclosing to the Member
          all intended uses for which such information is being collected and
          will be used.

     10.9 Neoforma Information. Notwithstanding anything herein to the contrary,
          Neoforma may use the Neoforma Information in any manner that it
          chooses, provided that such information does not include Member Data
          or Aggregated Member Data.

11.  SAFEGUARDING OF DATA; CONFIDENTIALITY

     11.1 Novation Data.

          11.1.1 Generally. As between Neoforma and its Affiliates, on the one
                 hand, and Novation and its Affiliates, on the other hand,
                 information relating to Novation, VHA or UHC or their
                 respective Affiliates, Members or customers, whether or not
                 marked "confidential" and whether disclosed in tangible or in
                 intangible (e.g., oral or visual) form, including, without
                 limitation, (i) information regarding the operations, affairs
                 and business of Novation, VHA or UHC, or their respective
                 Affiliates, Members or customers, (ii) Novation Materials and
                 (iii) all Transaction Data, except as provided in Section 10,
                 (collectively, the "Novation Data") is confidential and will be
                 subject to Section 11.2. Novation Data is the property of
                 Novation, VHA or UHC, or their respective Affiliates, Members
                 or customers. Neoforma shall have access to and may make use of
                 Novation Data to the extent reasonably necessary to perform
                 obligations under this Agreement. Neoforma shall not, its
                 however, use Novation Data for any purpose other than providing
                 Services, except as provided in Section 10. Upon termination or
                 expiration of this Agreement for any reason, or upon Novation's
                 request, Neoforma shall promptly return to Novation all of the
                 Novation Data in Neoforma's possession (including backup or
                 archival copies).

          11.1.2 Safeguarding of Data. Neoforma shall maintain appropriate
                 safeguards, consistent with prevailing industry standards,
                 against the destruction, inappropriate disclosure, wrongful
                 access or use, loss or alteration of the Novation Data in the
                 possession of Neoforma. In any event, Neoforma shall maintain
                 safeguards that are no less rigorous than those maintained by
                 Neoforma for its own information of a similar nature and, in no
                 event, less than a reasonable level of safeguards.

                                       33



    11.2  Confidentiality.


          11.2.1 Confidential Information. "Confidential Information" means (i)
                 business or technical information of any party, including,
                 without limitation, information relating to a party's product
                 plans, designs, costs, product prices, finances, marketing
                 plans, business opportunities, personnel, research,
                 development, know-how or the pricing information available to
                 Members, (ii) any information communicated with respect to an
                 Opportunity, including the ideas, concepts or other
                 intellectual property contained therein, (iii) any
                 information designated "confidential" or "proprietary" or
                 which, under the circumstances, should reasonably have been
                 understood to be confidential, (iv) Novation Data and (v)
                 the terms and conditions of this Agreement.

          11.2.2 Confidentiality Obligations. Each party agrees that (i) it will
                 not use or disclose to any other party or third person
                 including its Affiliates any Confidential Information
                 disclosed to it by any other party except as contemplated by
                 this Agreement and (ii) it will take all reasonable measures to
                 maintain the confidentiality of all Confidential Information of
                 each other party in its possession or control, which will in no
                 event be less than the measures it uses to maintain the
                 confidentiality of its own information of similar importance.

          11.2.3 Exclusions. Subsection 11.2.2 will not prevent a party from
                 disclosing Information that (i) is owned by such party or its
                 Affiliates or is already known by the recipient party or its
                 Affiliates without an obligation of confidentiality other than
                 under this Agreement, (ii) is publicly known or becomes
                 publicly known through no unauthorized act of the recipient
                 party, (iii) is rightfully received from a third party,
                 provided that the source is not known to be bound by a
                 confidentiality agreement or (iv) is independently developed by
                 employees of a party or an Affiliate of a party without use of
                 the other party's Confidential Information. If Confidential
                 Information is required to be disclosed pursuant to a
                 requirement of a governmental authority, such Confidential
                 Information may be disclosed pursuant to such requirement so
                 long as the party required to disclose the Confidential
                 Information, to the extent possible, (i) provides the party
                 that owns the Confidential Information with timely prior notice
                 of such requirement and coordinates with such other party in an
                 effort to limit the nature and scope of such required
                 disclosure and (ii) uses commercially reasonable efforts to
                 ensure that, within applicable law, such Confidential
                 Information will not be further disclosed. If Confidential
                 Information is required to be disclosed in connection with the
                 conduct of any arbitration proceeding conducted pursuant
                 to Section 18, such Confidential Information may be disclosed
                 pursuant to and in accordance with the approval and at the
                 direction of the arbitrator conducting such proceeding. Upon
                 written request at the termination or expiration of this
                 Agreement

                                       34



                  for any reason, all such Confidential Information in tangible
                  form (and all copies thereof) owned by the requesting party or
                  its Affiliates will be returned to the requesting party or
                  at the requesting party's option will be destroyed, with
                  written certification thereof being given to the requesting
                  party, and subject to any rights expressly granted to the
                  other party under this Agreement, the other party shall cease
                  all further use of any Confidential Information, whether
                  tangible or intangible.

          11.2.4  No License. Nothing contained in this Section 11.2 will be
                  construed as obligating a party to disclose its Confidential
                  Information to another party, or as granting to or conferring
                  on a party, expressly or implied, any patent, copyright,
                  trademark, trade name, trade secret or other Intellectual
                  Property Rights or any license to the Confidential
                  Information of the other party.

          11.2.5  Loss of Confidential Information. In the event of any breach
                  by the recipient party of this Section 11.2 that results in a
                  disclosure or loss of, or inability to account for, any
                  Confidential Information of the furnishing party, the
                  receiving party shall promptly, at its own expense, (i) notify
                  the furnishing party in writing, (ii) take such commercially
                  reasonable actions as may be necessary or reasonably
                  requested by the furnishing party to minimize the breach, and
                  (iii) cooperate in all reasonable respects with the furnishing
                  party to minimize the breach and any damage resulting
                  therefrom.

12.  REPRESENTATIONS AND WARRANTIES

     12.1 Representations by Neoforma. Neoforma represents and warrants to
          Novation, VHA, UHC and HPPI that each of the following statements in
          this Section 12.1 are true and correct as of the Effective Date of
          this Agreement.

          12.1.1  Due Organization. Neoforma is a corporation duly organized,
                  validly existing and in good standing under the laws of the
                  State of Delaware.

          12.1.2  Authority; Non-Contravention.

                  (a)    Neoforma has all requisite corporate power and
                         authority to enter into this Agreement and to perform
                         its obligations hereunder. The execution and delivery
                         of this Agreement and the consummation of the
                         transactions contemplated hereby have been duly
                         authorized by all necessary corporate action on the
                         part of Neoforma. This Agreement has been duly executed
                         and delivered by Neoforma, and it constitutes the valid
                         and binding obligation of Neoforma, enforceable against
                         Neoforma in accordance with its terms, except as
                         enforceability may be limited by bankruptcy and other
                         similar

                                       35



                      laws affecting the rights of creditors generally and
                      general principles of equity.

                 (b)  The execution and delivery of this Agreement by Neoforma
                      does not, and the performance of this Agreement by
                      Neoforma will not, (i) conflict with or violate the
                      Certificate of Incorporation or Bylaws of Neoforma, (ii)
                      conflict with or violate any law, rule, regulation,
                      order, judgment or decree applicable to Neoforma or by
                      which Neoforma or any of its properties is bound or
                      affected or (iii) result in any breach of or constitute
                      a default (or an event that with notice or lapse of time
                      or both would become a default) under, or impair
                      Neoforma's rights or alter the rights or obligations of
                      any third party under, or give to others any rights of
                      termination, amendment, acceleration or cancellation of,
                      or result in the creation of an encumbrance on any of
                      the properties or assets of Neoforma pursuant to, any
                      note, bond, mortgage, indenture, agreement, lease,
                      license, permit, franchise or other instrument or
                      obligation to which Neoforma is a party or by which
                      Neoforma or its assets is bound or affected, except, in
                      the case of clauses (ii) and (iii), for such conflicts,
                      violations, breaches, defaults, impairments, or rights
                      which, individually or in the aggregate, would not have
                      a material adverse effect on Neoforma.

                 (c)  No consent, approval, order or authorization of, or
                      registration, declaration or filing with any governmental
                      entity is required to be obtained or made by Neoforma in
                      connection with the execution, delivery and performance of
                      this Agreement.

          12.1.3 Performance. All Services will be performed in a professional
                 and workmanlike manner, consistent with the high professional
                 standards and practices prevailing in the Internet e-commerce
                 services industry.

     12.2 Representations by Novation, VHA, UHC and HPPI. Each of Novation, VHA,
          UHC and HPPI, severally and not jointly, represents and warrants to
          Neoforma that the following statements made by it in this Section 12.2
          are true and correct as of the Effective Date of this Agreement.

          12.2.1 Due Organization. Novation is a limited liability company duly
                 organized, validly existing and in good standing under the laws
                 of the State of Delaware; UHC is a corporation duly organized,
                 validly existing and in good standing under the laws of the
                 State of Illinois; VHA is a corporation duly organized, validly
                 existing and in good standing under the laws of the State of
                 Delaware; HPPI is a limited liability company duly organized,
                 validly existing and in good standing under the laws of the
                 State of Delaware.

                                       36



          12.2.2 Authority; Non-Contravention.

                 (a) Each of Novation and HPPI has all requisite limited
                     liability company power and authority, and each of VHA and
                     UHC has all requisite corporate power and authority, to
                     enter into this Agreement and to perform its obligations
                     hereunder. The execution and delivery of this Agreement and
                     the consummation of the transactions contemplated hereby
                     have been duly authorized by all necessary limited
                     liability company action on the parts of Novation and HPPI
                     and all necessary corporate action on the parts of VHA and
                     UHC. This Agreement has been duly executed and delivered by
                     Novation, VHA, UHC and HPPI, and it constitutes the valid
                     and binding obligation of each of Novation, VHA, UHC and
                     HPPI, enforceable against each of Novation, VHA, UHC and
                     HPPI in accordance with its terms, except as enforceability
                     may be limited by bankruptcy and other similar laws
                     affecting the rights of creditors generally and general
                     principles of equity.

                 (b) The execution and delivery of this Agreement by Novation,
                     VHA, UHC and HPPI does not, and the performance of this
                     Agreement by each of Novation, VHA, UHC and HPPI will not,
                     (i) conflict with or violate the limited liability company
                     and corporate organizational documents, respectively, (ii)
                     conflict with or violate any law, rule, regulation, order,
                     judgment or decree applicable to Novation, VHA, UHC or HPPI
                     or by which Novation, VHA, UHC or HPPI, or any of their
                     respective properties are bound or affected, or (iii)
                     result in any breach of or constitute a default (or an
                     event that with notice or lapse of time or both would
                     become a default) under, or impair Novation's, VHA's, UHC's
                     or HPPI's rights or alter the rights or obligations of any
                     third party under, or give to others any rights of
                     termination, amendment, acceleration or cancellation of, or
                     result in the creation of an encumbrance on any of the
                     properties or assets of Novation, VHA, UHC or HPPI pursuant
                     to, any note, bond, mortgage, indenture, agreement, lease,
                     license, permit, franchise or other instrument or
                     obligation to which Novation, VHA, UHC or HPPI is a party
                     or by which Novation, VHA, UHC or HPPI, or any of their
                     assets, is bound or affected, except, in the case of
                     clauses (ii) and (iii), for such conflicts, violations,
                     breaches, defaults, impairments, or rights which,
                     individually or in the aggregate, would not have a material
                     adverse effect on Novation, VHA, UHC and HPPI,
                     respectively.

                 (c) No consent, approval, order or authorization of, or
                     registration, declaration or filing with any governmental
                     entity is required to be obtained or made by Novation, VHA,
                     UHC or HPPI in connection with the execution, delivery and
                     performance of this Agreement.

                                       37



     12.3 Warranty Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
          EACH PARTY DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING,
          WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF NON-INFRINGEMENT,
          MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.

13.  USE OF SUBCONTRACTORS

     13.1 Generally. Neoforma may subcontract its obligations under this
          Agreement subject to the limitations imposed by this Section 13.1.
          Neoforma shall not subcontract any of the following without the prior
          written consent of Novation, such consent not to be unreasonably
          withheld:

          (i)  any Services involving any contact or interface with Members,
               including, without limitation, sales efforts, implementation and
               integration and call center services; or

          (ii) any Services to a Novation Competitor.

     13.2 Novation's Right to Revoke Approval. Novation shall have the right
          during the Term to revoke its prior approval of a subcontractor and
          direct Neoforma to replace such subcontractor as soon as possible if
          the subcontractor's performance is materially deficient, good faith
          doubts exist concerning the subcontractor's ability to render future
          performance because of changes in the subcontractor's ownership,
          management, financial condition, or otherwise, or there have been
          material misrepresentations by or concerning the subcontractor.

     13.3 Continuing Responsibility. Neoforma shall remain responsible for
          obligations performed by subcontractors to the same extent as if such
          obligations were performed by Neoforma's employees. Neoforma shall be
          Novation's sole point of contact regarding the Services, including
          with respect to payment.

     13.4 Confidential Information. Neoforma shall not disclose Confidential
          Information of any of Novation, VHA, UHC or HPPI to a subcontractor
          unless and until such subcontractor has agreed in writing to protect
          the confidentiality of such Confidential Information as required of
          Neoforma under this Agreement.

14.  INSURANCE

     14.1 Insurance. Each of Neoforma and Novation shall determine the types and
          amounts of insurance coverage it requires in connection with this
          Agreement, including, without limitation, general public liability,
          property damage and workers compensation insurance. Neither Neoforma
          nor Novation is required to obtain insurance for the benefit of the
          other, including, without limitation, business interruption insurance.
          Each of Neoforma and Novation will pay all

                                       38



          costs and receive all benefits under policies arranged by it, and each
          waives rights of subrogation it may otherwise have regarding the
          other's insurance policies.

     14.2 Proof of Insurance. When requested by Neoforma or Novation, an
          insurance certificate indicating the coverage described in Section
          14.1, issued by an insurance company licensed to do business in the
          relevant state or states and signed by an authorized agent, shall be
          furnished by the insured party to the requesting party. Each of
          Neoforma and Novation shall provide the other with at least 30 days
          prior written notice of any cancellation or material modification of
          such insurance.

15.  INDEMNITY

     15.1 Neoforma Indemnity. Subject to Section 15.4, Neoforma shall indemnify,
          defend and hold harmless each of Novation, VHA, UHC and HPPI and each
          of their Affiliates, officers, directors, employees, consultants and
          agents from and against any and all damages, liabilities, claims,
          actions, suits, proceedings, costs, charges and expenses, including
          reasonable attorneys' fees (collectively, "Losses"), incurred or
          sustained by any of such persons as a result of or from any
          third-party claim relating to (i) any claims based on Neoforma's
          confidentiality obligations contained in Section 11 or its warranties
          contained in Section 12; (ii) the failure of Neoforma to perform any
          of its obligations under any agreement between Neoforma and a third
          party (including, without limitation, any agreements between Neoforma
          and a Supplier); (iii) any claims arising out of Neoforma's breach of
          this Agreement; (iv) any claim arising out of the death of or bodily
          injury to any employee of any of Novation, VHA, UHC and HPPI and each
          of their Affiliates (or their respective subcontractors) to the extent
          caused by the negligence or willful misconduct of Neoforma or its
          Affiliates; (v) the loss of or damage to the real or tangible personal
          property (whether owned or leased) of each of Novation, VHA, UHC and
          HPPI and each of their Affiliates, officers, directors, employees,
          consultants and agents to the extent caused by the negligence or
          willful misconduct of Neoforma or its Affiliates; (vi) any third-party
          claim that arises in connection with the use by any of Novation, VHA,
          UHC and HPPI and each of their Affiliates of any deliverables or
          services provided by Neoforma to any of Novation, VHA, UHC and HPPI
          and each of their Affiliates under this Agreement, except to the
          extent covered by Novation's indemnities set forth in Section 15.2;
          (vii) Neoforma's failure to pay and discharge any taxes (including
          interest and penalties) for which Neoforma is responsible pursuant to
          the terms of this Agreement; (viii) any claim asserted against any of
          Novation, VHA, UHC and HPPI and each of their Affiliates by an
          employee of Neoforma to the extent such claim arises from decisions,
          acts, omissions or violations of statute by Neoforma with respect to
          such employee's employee/employer relationship with Neoforma.

                                       39



     15.2 Novation Indemnity. Subject to Section 15.4, Novation shall indemnify,
          defend and hold harmless each of Neoforma and its Affiliates,
          officers, directors, employees, consultants and agents from and
          against any and all Losses awarded against or paid in settlement by
          Neoforma, incurred or sustained by any of such persons as a result of
          or from any third-party claim relating to (i) any claims based on
          Novation's confidentiality obligations contained in Section 11 or its
          warranties contained in Section 12; (ii) the failure of Novation to
          perform any of its obligations under any agreement between Novation
          and a third party; (iii) any claims arising out of Novation's breach
          of this Agreement; (iv) any claim arising out of the death of or
          bodily injury to any employee of Neoforma or its Affiliates (or their
          respective subcontractors) to the extent caused by the negligence or
          willful misconduct of Novation or its Affiliates; (v) the loss of or
          damage to the real or tangible personal property (whether owned or
          leased) of Neoforma and its Affiliates, officers, directors,
          employees, consultants and agents to the extent caused by the
          negligence or willful misconduct of Novation or its Affiliates; (vi)
          any third-party claim that arises in connection with the use by
          Neoforma and its Affiliates or any deliverables or services provided
          by Novation to any of Neoforma or its Affiliates under this Agreement,
          except to the extent covered by Neoforma's indemnities set forth in
          Section 15.1; (vii) Novation's failure to pay and discharge any taxes
          (including interest and penalties) for which Novation is responsible
          pursuant to the terms of this Agreement; or (viii) any claim asserted
          against Neoforma by an employee of Novation to the extent such claim
          arises from decisions, acts, omissions or violations of statute by
          Novation with respect to such employee's employee/employer
          relationship with Novation.

     15.3 Infringement Claims.

          15.3.1 Each of Neoforma and Novation, at their respective expense,
                 shall indemnify, defend and hold harmless the other party and
                 its Affiliates, and their respective officers, directors,
                 employees, consultants, agents, successors and assigns, from
                 and against any and all Losses arising from any Services,
                 software, hardware or the indemnitor's Materials ("Item(s)")
                 provided or delivered by the indemnitor to the indemnitee
                 under this Agreement, when used in conformity with all
                 applicable written instructions and documentation, (i)
                 infringes any patent in any country that is a signatory to the
                 Patent Cooperation Treaty, (ii) infringes any copyright in any
                 country that is a signatory to the Berne Convention for the
                 Protection of Literary and Artistic Works, or (iii) constitutes
                 misappropriation of any trade secret in any country in which a
                 trade secret right exists such that it would be enforceable in
                 the United States (each such third-party claim, action, suit
                 or proceeding, an "Infringement Claim").

          15.3.2 Notwithstanding anything to the contrary herein, the indemnitor
                 shall have no obligation to defend or indemnify the indemnitee
                 for any Infringement Claim to the extent arising out of or
                 relating to modifications to any Item

                                       40



                 made by or on behalf of the indemnitee where but for such
                 modifications there would have been no Infringement Claim.

          15.3.3 If the indemnitee's use of any Item is enjoined or otherwise
                 prohibited, or if the indemnitor reasonably believes that there
                 exists a threat of the same, the indemnitor shall have the
                 right, in its sole discretion and at its expense, in addition
                 to its indemnification obligations above, to (i) obtain for
                 the indemnitee the right to continue to use the affected Item,
                 (ii) replace the affected Item with a non-infringing product
                 or service that will not degrade the performance quality of
                 the affected component of the Services or (iii) modify the
                 affected Item so that it becomes non-infringing. If the
                 alternatives in (i), (ii) and (iii) are not feasible, the
                 indemnitor shall remove the Item from the Services and
                 equitably adjust the charges to reflect such removal.

          15.3.4 THIS SECTION SETS FORTH THE SOLE AND EXCLUSIVE REMEDY OF THE
                 INDEMNITEES, AND THE ENTIRE OBLIGATION AND LIABILITY OF THE
                 INDEMNITOR, AS TO ANY INFRINGEMENT CLAIMS IN CONNECTION WITH
                 ANY ACTIVITY UNDER THIS AGREEMENT.

     15.4 Indemnity Procedures. The party seeking indemnification under Section
          15.1 through 15.3, as the case may be (the "Indemnified Party"), shall
          give prompt written notice to the other party (the "Indemnifying
          Party"). In addition, the Indemnified Party shall allow the
          Indemnifying Party to direct the defense and settlement of any such
          claim, with counsel of the Indemnifying Party's choosing that is
          reasonably acceptable to the Indemnified Party, and will provide the
          Indemnifying Party, at the Indemnifying Party's expense, with
          information and assistance that is reasonably necessary for the
          defense and settlement of the claim. The Indemnified Party reserves
          the right to retain counsel, at the Indemnified Party's sole expense,
          to participate in the defense of any such claim. The Indemnifying
          Party shall not settle any such claim or alleged claim without first
          obtaining the Indemnified Party's prior written consent, which consent
          shall not be unreasonably withheld, if the terms of such settlement
          would not adversely affect the Indemnified Party's rights under this
          Agreement.

16.  LIMITATION OF LIABILITY

     16.1 Limitations. IN NO EVENT WILL ANY PARTY BE LIABLE TO ANY OTHER PARTY
          FOR ANY LOST PROFITS, SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL
          DAMAGES, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING
          NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT THAT PARTY HAS BEEN ADVISED
          OF THE POSSIBILITY OF SUCH DAMAGE.

                                       41



     16.2  Exceptions. The limitation set forth in Section 16.1 above will not
           apply to (i) Neoforma's obligations under Section 11, Section 15.1,
           Section 15.3 or Section 16.3, (ii) Novation's obligations under
           Section 11, Section 15.2 or Section 15.3, (iii) Neoforma's willful
           misconduct or gross negligence in the provision of Services or (iv)
           Neoforma's wrongful termination or abandonment of this Agreement.

     16.3  Liquidated Damages.

           16.3.1  Neoforma acknowledges that proper achievement of each of the
                   functions and responsibilities as shall be agreed upon and
                   set forth in the Functionality Roadmap and the completion of
                   each functional deliverable (as shall be defined in the
                   Functionality Roadmap) within the time frames specified
                   pursuant to the process set forth therein (or as otherwise
                   agreed to by Neoforma and Novation) are critical to the
                   business operations of Novation. In connection therewith,
                   Neoforma agrees that if any of its functions and
                   responsibilities or any of the functions and responsibilities
                   with respect to any functional deliverable (as shall be
                   described in the Functionality Roadmap) are not properly
                   achieved by the applicable target date (a "Failure"), such
                   Failure shall be deemed to constitute a material breach of
                   Neoforma's service obligations under this Agreement. Upon
                   such Failure, Neoforma shall pay liquidated damages to
                   Novation for each day past the applicable target date in
                   which the objective is still not achieved in the amount of
                   (i) *; provided, however, that any Failure by Neoforma to
                   complete any of its functions and responsibilities under the
                   Functionality Roadmap or any functional deliverable within
                   the time frames to be agreed upon as described in the
                   Functionality Roadmap shall be excused if and to the extent
                   (A) such Failure by Neoforma resulted principally from a
                   material failure by Novation to perform its obligations in
                   respect of such Phase (as such obligations are set forth
                   pursuant to the Functionality Roadmap) and (B) Neoforma used
                   commercially reasonable efforts to perform notwithstanding
                   Novation's failure to perform; provided, further, that any
                   Failure by Neoforma pursuant to the preceding proviso shall
                   only be excused for a number of days equal to the number of
                   days Novation failed to perform its obligations in respect of
                   such function, responsibility or functional deliverable (as
                   such obligations are set forth pursuant to the Functionality
                   Roadmap). Notwithstanding the foregoing, Neoforma shall not
                   be required to pay any liquidated damages under this Section
                   16.3.1 until the * occurrence of Failures in any consecutive
                   * period. Upon the occurrence of the * such Failure, Neoforma
                   shall retroactively pay liquidated damages in respect of each
                   Failure in such period (including the * previous Failures) in
                   an amount equal to the amount that would have been paid by
                   Neoforma if each such prior Failure

________________

   * Confidential treatment requested.

                                       42



                   had not been subject to the exception in the penultimate
                   sentence of this Subsection 16.3.1.

           16.3.2  Neoforma acknowledges that proper achievement of the Service
                   Levels as shall be set forth in the Service Level
                   Specifications (including those Service Levels which will be
                   determined after the Effective Date) are critical to the
                   business operations of Novation. Accordingly, in connection
                   with any failure to meet Service Levels, Neoforma and
                   Novation shall agree on a methodology whereby Neoforma shall
                   pay to Novation liquidated damages up to * of the aggregate
                   of all Novation Marketplace Transaction Fees received by
                   Neoforma during the calendar month that such Service Levels
                   were not met by Neoforma. Such methodology shall be defined
                   in the Service Level Specifications.

           16.3.3  The parties agree that the damages provided in this Section
                   16 apply only with respect to the failures to perform
                   described in Subsections 16.3.1 and 16.3.2. Moreover, the
                   parties agree that the damages provided in this Section 16
                   are a reasonable estimate of the damages that would be
                   suffered by Novation as a consequence of the failures
                   described in Subsections 16.3.1 and 16.3.2 and do not
                   constitute a penalty (the parties hereby acknowledging the
                   inconvenience and difficulty of otherwise obtaining an
                   adequate remedy). Notwithstanding anything to the contrary in
                   this Agreement, the aggregate amount of liquidated damages
                   paid by Neoforma to Novation pursuant to this Section 16.3
                   (including all payments to be agreed upon and described in
                   the Functionality Roadmap and the Service Level
                   Specifications) shall not exceed *.

17.  AUDIT RIGHTS

     17.1  General. Upon 10 days prior notice from Novation, Neoforma shall
           provide to such auditors as Novation may designate in writing,
           subject to the limitation imposed by Section 17.3, access during
           normal business hours to Neoforma's applicable facilities and to
           appropriate Neoforma management personnel and subcontractors, and to
           the data and records maintained by Neoforma with respect to the
           Services for the purpose of (i) performing audits and inspections of
           Neoforma and its businesses, (ii) to verify the integrity of Novation
           Materials and Neoforma Materials, (iii) to examine the systems that
           process, store, support and transmit such Novation Materials, (iv) to
           verify user volume reports, (v) to verify the accuracy of Novation
           Marketplace Transaction Fees and (vi) to confirm Neoforma's
           compliance with this Agreement. To the extent applicable to the
           Services performed by Neoforma, the scope of such audits may include,
           without limitation, (i) Neoforma's practices and procedures, (ii) the
           adequacy of general controls and security practices and procedures
           and (iii) the adequacy of disaster

________________

   * Confidential treatment requested.

                                       43



           recovery and back-up procedures. Subject to Section 17.6, such audits
           shall be conducted at Novation's expense.

     17.2  Frequency of Audits. Operational audits, to examine the technological
           aspects of Neoforma's provision of Services, may not be conducted
           more than once in any 12-month period. Financial audits, which
           examine Neoforma's financial records, and other supporting records,
           may not be conducted more than once in any 12-month period. Novation
           may, at its election, conduct operational and financial audits
           concurrently.

     17.3  Auditors. For the purposes of conducting financial audits, Novation
           may designate any internal auditor who customarily audits contract
           compliance issues for Novation or any nationally recognized
           accounting firm. For the purposes of conducting operational audits,
           Novation may designate any party to act as its auditor, subject to
           Neoforma's consent, which shall not be unreasonably delayed or
           withheld.

     17.4  Record Retention. In order to document the Services and the Novation
           Marketplace Transaction Fees paid or payable by Novation under this
           Agreement, Neoforma shall retain its standard records and supporting
           documentation for at least seven years.

     17.5  Cooperation. Neoforma shall use commercially reasonable efforts to
           assist such auditors, inspectors, regulators and representatives in
           connection with such audits and inspections.

     17.6  Overcharges. If, as a result of any such audit, Novation determines
           that Neoforma has overcharged Novation, Novation shall notify
           Neoforma of the amount of such overcharge and Neoforma shall promptly
           pay to Novation the amount of the overcharge, plus interest at a rate
           of 1.5% per month or the maximum rate permitted by law, whichever is
           less, calculated from the date of receipt by Neoforma of the
           overcharged amount until the date of payment to Novation. If any such
           audit reveals an overcharge to Novation during any 12-month period
           exceeding 5% of all Novation Marketplace Transaction Fees in the
           aggregate paid by Novation during such period, Neoforma shall
           reimburse Novation for the out-of-pocket costs and expenses incurred
           for such audit.

18.  DISPUTE RESOLUTION

     18.1  Resolution of Disputes. Except as otherwise provided in this Section
           18, any and all disputes arising out of or in connection with the
           execution, interpretation, performance or nonperformance of this
           Agreement (each such dispute, a "Disputed Matter") will be resolved
           by the procedures established in this Section 18.

                                       44



     18.2  Negotiations and Escalation. Each party shall use commercially
           reasonable efforts expeditiously to resolve any Disputed Matter which
           arises from time to time between it and any of the other parties on a
           mutually acceptable negotiated basis. In connection therewith, any
           party involved in a Disputed Matter may deliver a notice to each of
           the other parties (an "Escalation Notice") demanding an in-person
           meeting of the senior level management representatives of the parties
           involved (and providing, as a courtesy, notice to the parties not
           involved). Any agenda, location or procedures for such discussions or
           negotiations may be established by the parties to the Disputed
           Matter, but such parties shall, in any event, meet within 10 days
           after the delivery of the Escalation Notice. The parties to a
           Disputed Matter may, if they mutually so desire, retain a mutually
           agreed upon mediator to assist in resolution of the Disputed Matter,
           but (i) all statements and opinions of such mediator shall be only
           advisory and shall be inadmissible in any subsequent proceedings
           between the parties concerning the Disputed Matter, (ii) the parties
           thereto shall bear the costs of any such mediation equally (but each
           party to the mediation shall be responsible for its own expenses) and
           (iii) mediation is not a prerequisite to arbitration. If the parties
           to the Disputed Matter are unable to resolve it by the earlier of (i)
           30 days after the delivery of the Escalation Notice or (ii) the
           conclusion of the meeting held pursuant to the applicable Escalation
           Notice, then any party thereto may institute arbitration, as provided
           below, concerning the Disputed Matter.

     18.3  Appointment of Arbitral Body. Except as provided in Section 18.11,
           any Disputed Matters not resolved pursuant to Section 18.2 or
           otherwise settled between the parties will be finally resolved solely
           by arbitration, by a single arbitrator appointed in accordance with
           the rules and procedures (the "Rules") of the American Arbitration
           Association, or if the American Arbitration Association is no longer
           conducting such arbitrations, a successor organization thereto or
           such other private arbitration service as the parties shall mutually
           agree (the actual authority involved, the "Arbitral Body"). Except as
           set forth below in Sections 18.10 and 18.11, the parties renounce all
           recourse to litigation to resolve Disputed Matters and agree that the
           Award of the arbitrator will be final and subject to no judicial
           review.

     18.4  Qualifications of Arbitrator. The arbitrator shall be selected
           pursuant to the rules and procedures of the Arbitral Body, but shall
           be (i) impartial and will not have been employed by or affiliated
           with any of the parties to this Agreement or any of their respective
           Affiliates, (ii) experienced in commercial dispute resolution and
           (iii) familiar with commercial business practices in the medical
           supplies procurement business or the business involved in the
           Disputed Matter. If the Arbitral Body is unable to provide an
           arbitrator with the qualifications set forth in this Section 18.4,
           the Arbitral Body will consult with the parties and consider their
           recommendations for the arbitrator.

     18.5  Initiation of Arbitration and Procedures. After the expiration of the
           30-day period referred to in Section 18.2, arbitration procedures may
           be initiated concerning a

                                       45



               Disputed Matter by any of the parties thereto by giving written
               notice to the other parties thereto and in compliance with any of
               the applicable Rules. If not specified by the Rules, such notice
               shall be given to the parties to the Disputed Matter in the
               manner provided generally for notices in this Agreement. Any
               notice will specify in reasonable detail the dispute being
               submitted to arbitration and comply with all other Rules
               concerning commencement of arbitration.

          18.6 Procedures. The arbitrator will conduct the proceedings,
               including arguments and briefs, in accordance with the Rules;
               provided that the provisions of this Section 18 will prevail in
               the event of any conflict between the Rules and its provisions.
               Within five days after his or her appointment, the arbitrator
               shall contact the parties to the Disputed Matter and arrange an
               initial conference with them, to be conducted within 30 days
               after his or her appointment, at which conference (the "Hearing
               Conference") the arbitrator and the parties will establish
               procedures (based on a brief written plan submitted in letter
               form by each party to the Disputed Matter in advance of such
               Hearing Conference concerning expected measures to prepare for
               hearing on the merits) and a schedule for the resolution of the
               Disputed Matter by hearing on the merits in a timely and
               efficient manner, giving due consideration to the nature and
               extent of the Disputed Matter, the apparent complexity of
               preparations for, and complexity of, hearing on its merits and
               other factors (such as third-party litigation pending against one
               of the parties on the same subject-matter as raised in the
               Disputed Matter). In the event of a dispute concerning such
               procedures at the Hearing Conference, the arbitrator shall have
               the power to impose the schedule upon the parties to the Disputed
               Matter, giving due consideration to resolution of the Disputed
               Matter by a full and fair hearing on the merits. The arbitrator
               shall include in procedures established at the Hearing Conference
               provisions which permit the parties to engage in reasonable,
               limited discovery in preparation for hearing on the merits and
               which protect and preserve privileges and shield confidential
               proprietary information from disclosure. The hearing on the
               merits will be held within 60 days after the Hearing Conference,
               and evidentiary matters at such hearing will be determined in
               accordance with the Federal Rules of Evidence as applied at the
               place of arbitration.

          18.7 Governing Law; Jurisdiction. The arbitrator will decide the
               issues submitted in accordance with the provisions and commercial
               purposes of this Agreement, provided that all substantive
               questions of law will be determined under the laws of the State
               of New York. The parties consent to venue in the State in which
               the principal place of business of the party initiating
               arbitration regarding a Disputed Matter is located.

          18.8 Arbitration Award. All decisions of the arbitrator will be in
               writing and submitted to the parties, and the decision after
               hearing on the merits which announces resolution of the Disputed
               Matter (the "Award") shall, in addition, set forth findings of
               fact and conclusions of law to support the arbitrator's
               resolution of the

                                       46



                    merits of the Disputed Matter. The arbitrator will issue the
                    Award within 30 days after completion of the hearing on the
                    merits.

              18.9  Cooperation of the Parties. The parties to the Disputed
                    Matter will facilitate the arbitration by (i) making
                    availableto one another and to the arbitrator for
                    examination, inspection and extraction all documents, books,
                    records and personnel under their control if determined by
                    the arbitrator to be relevant to the dispute, (ii)
                    conducting arbitration hearings to the greatest extent
                    possible on successive days and (iii) observing strictly the
                    time periods and procedures established by the Rules or by
                    the arbitrator for submission of evidence or briefs, conduct
                    of the hearing on the merits and preparations therefor.

              18.10 Costs. All costs of the arbitration shall initially be
                    borne equally by the parties thereto as incurred, but upon
                    completion of the arbitration, the arbitrator shall award to
                    the prevailing party, as determined by the arbitrator in
                    accordance with principles of New York law for determining
                    prevailing parties in litigation, all reasonable costs, fees
                    and expenses related to the arbitration, including
                    reasonable fees and expenses of attorneys, accountants and
                    other professionals or experts incurred by the prevailing
                    party.

              18.11 Judgment on the Award; Enforcement. Judgment on the Award
                    may be entered in any court having jurisdiction and
                    procedures therefor. Each party agrees that any Award of an
                    arbitrator against it and on which judgment is entered may
                    be executed against the assets of any party which is a
                    judgment debtor or otherwise enforced in any jurisdiction
                    pursuant to the procedures in and protections of such
                    jurisdiction which are generally applicable to enforcement
                    of judgments, including provision in such jurisdiction for
                    the enforcement of equitable remedies provided in the Award.

              18.12 Preservation of Equitable Relief; Third-Party Litigation.
                    Notwithstanding any provision of this Section 18 to the
                    contrary, any party will be entitled (i) to seek a temporary
                    restraining order or injunctive or other equitable relief in
                    any court of competent jurisdiction with respect to a breach
                    (or attempted or threatened breach) of this Agreement by any
                    party (including, without limitation, the matters referred
                    to in Subsection 9.9.5) or (ii) to institute litigation or
                    other formal proceedings to the extent necessary (A) to
                    enforce the award of the arbitrator, (B) to avoid the
                    expiration of any applicable limitations period or (C) to
                    preserve a superior position with respect to other
                    creditors. Nothing in this Section 18 shall prevent parties
                    to this Agreement who become involved in a Disputed Matter
                    and who have become parties to litigation instituted by a
                    third party concerning facts involved in such Disputed
                    Matter from resolving disputes between them arising in
                    connection with such Disputed Matter through such litigation
                    in lieu of arbitration under this Section 18.

                                       47



         18.13    Continued Performance. Each party agrees to continue
                  performing its obligations under this Agreement during the
                  pendency of any dispute resolution process conducted in
                  accordance with this Section 18.

19.      GUARANTY OF PERFORMANCE

         19.1     VHA and UHC Guarantees. Subject to Section 19.4, VHA and UHC
                  agree, severally but not jointly, that they will be
                  responsible for the obligations and liabilities of Novation
                  under this Agreement, as follows:

                  (i)    to the extent that any such obligation or liability
                         relates primarily to any action or omission by UHC or
                         an UHC Member, UHC shall be responsible;

                  (ii)   to the extent that any such obligation or liability
                         relates primarily to any action or omission by VHA or a
                         VHA Member, VHA shall be responsible; and

                  (iii)  to the extent that the allocations set forth in (i)
                         and (ii) are not applicable, VHA and UHC shall be
                         responsible in accordance with the allocation
                         provisions set forth in Section 8.12.

         19.2     VHA and UHC Waivers. Each of VHA and UHC hereby waives the
                  following with regard to its guaranty obligations under
                  this Section 19:

                  (i)    any right to require Neoforma to pursue any other
                         remedy in Neoforma's power whatsoever, other than
                         Neoforma proceeding exclusively against VHA or UHC with
                         respect to a liability described in Section 19.1 (iii)

                  (ii)   any defense resulting from the absence, impairment or
                         loss of any right of reimbursement, subrogation or
                         contribution of VHA or UHC against Neoforma, or against
                         one another;

                  (iii)  any defense of discharge, relief or stay of the
                         principal's obligations hereunder based upon a filing
                         of or against Novation under the U.S. Bankruptcy Code
                         or Novation's request for any relief of its obligations
                         under this Agreement based on laws for the relief of
                         debtors generally;

                  (iv)   any right to be informed by Neoforma of the financial
                         or other condition of Novation or of VHA or UHC or any
                         change therein or any other circumstances bearing upon
                         the risk of nonperformance by Novation; and

                  (v)    any defense of exoneration or release based on
                         amendment of this Agreement.

                                       48




                  Each of VHA and UHC agrees that its guarantee, as set forth in
                  Section 19.1, constitutes a guarantee of payment when due and
                  not of collection.

         19.3     Scope of Liability. Neither VHA's nor UHC's obligations and
                  liabilities under this Agreement shall be subject to any
                  set-off, reduction, limitation, impairment or termination for
                  any reason, including, without limitation, compromise, and
                  shall not be subject to any defense or termination whatsoever
                  by reason of the invalidity, illegality or unenforceability of
                  any of its obligations and liabilities under this Agreement;
                  excluding, however, any defenses based upon Neoforma's failure
                  to perform any of its obligations under this Agreement.

                                       49



     19.4  Continued Performance by Neoforma.

           19.4.1  In the event that the Operating Agreement, dated October 21,
                   1997, as amended from time to time, between VHA and UHC is
                   terminated (and not replaced by any successor document) (the
                   "Novation Dissolution"), Neoforma agrees that it shall
                   continue to perform its obligations under this Agreement for
                   a period of no less than * following the date of such
                   termination (and any additional Termination Assistance Period
                   required by this Agreement). Additionally, during such *
                   period, Neoforma shall offer to enter into separate
                   agreements with each of VHA and UHC upon substantially
                   similar terms and conditions and pursuant to which Neoforma
                   will provide services substantially similar to the Services
                   provided hereunder at the time of such termination and create
                   separate proprietary marketplaces for each of VHA and UHC.
                   The price for the aggregate services to be rendered under the
                   new separate agreements shall be substantially similar to the
                   price paid by Novation hereunder at the time of such
                   termination; provided, however, that with respect to each of
                   the separate agreements, (i) VHA and UHC (in their separate
                   agreements) will provide services substantially similar to
                   those being provided by Novation hereunder (or, if either
                   VHA or UHC elects not to provide such services, Neoforma and
                   the party so electing will negotiate in good faith to adjust
                   the cost of the services to be provided by Neoforma to such
                   party), and (ii) Neoforma may charge VHA or UHC, as
                   applicable, incremental costs associated with the transition
                   of services provided by Neoforma from the Novation
                   Marketplace to the separate marketplaces, including, without
                   limitation, incremental costs relating to establishing a
                   separate "look and feel" to the proprietary marketplaces and
                   creating separate marketplaces.

           19.4.2  Notwithstanding the foregoing, neither VHA nor UHC shall be
                   obligated to enter into an agreement with Neoforma as
                   described in Subsection 19.4.1. In the event that either VHA
                   or UHC elects not to enter into such an agreement with
                   Neoforma, then that party's obligations to Neoforma shall be
                   limited to its guarantee under Section 19.1 hereunder.

20.  GENERAL PROVISIONS

     20.1  No Waiver. The delay or omission by any party to exercise or enforce
           any right or power of any provision of this Agreement shall not be
           construed as a waiver or relinquishment to any extent of such party's
           right to assert or rely upon any such provision or right in that or
           any other instance. A waiver by any party hereto of any of the
           covenants to be performed by any other or any breach thereof shall
           not

_______________________________

 * Confidential treatment requested.

                                       50



           be construed to be a waiver of any succeeding breach thereof or of
           any other covenant herein contained.

     20.2  Entire Agreement. This Agreement, the Exhibits attached hereto, and
           all other agreements contemplated by this Agreement to be agreed upon
           by the parties hereto pursuant to the terms of this Agreement (the
           "Contemplated Agreements"), together constitute the complete and
           exclusive agreement between the parties hereto, and supersede any and
           all prior agreements of the parties with respect to the subject
           matter hereof. Except in the case of Section 8.12 (which may be
           amended with the approval of VHA and UHC only), this Agreement, the
           Exhibits attached hereto and the Contemplated Agreements may be
           amended or modified, or any rights under it waived, only by a written
           document executed by all parties. For the avoidance of doubt, the
           term "Agreement", as used throughout this document, shall include the
           Contemplated Agreements.

     20.3  Publicity. Except as required by law or provided in this Agreement,
           no party will make any public statement, press release or other
           announcement relating to the terms of or existence of this Agreement
           without the prior written approval of all other parties. The parties
           will cooperate prior to the filing of any public document which may
           require the filing of this Agreement as an exhibit or the filing of a
           description thereof in order to preserve the confidentiality and
           proprietary information contained herein.

     20.4  Covenant of Good Faith. Each party agrees that, in its respective
           dealings with all other parties under or in connection with this
           Agreement, it shall act in good faith.

     20.5  Compliance with Laws and Regulations. Each of Neoforma and Novation
           shall perform its respective obligations under this Agreement in a
           manner that complies with applicable law, including, without
           limitation, identifying and procuring required permits and approvals.

     20.6  Assignment; Successors and Assigns. This Agreement will be binding on
           the parties hereto and their respective successors and permitted
           assigns. No party may, or will have the power to, assign this
           Agreement without the prior written consent of all other parties. For
           the purposes of this Section 20.6, any assignment by operation of
           law, under an order of any court, or pursuant to any Neoforma Change
           of Control, plan of merger, consolidation, reorganization, or
           liquidation or will be deemed an assignment for which prior consent
           is required, and any assignment made without such consent will be
           void and of no effect as between the parties. Notwithstanding the
           forgoing, no assignment made in respect of or as a result of any
           dissolution of Novation will be deemed an assignment for which prior
           consent is required, and such assignment will be valid.

     20.7  Governing Law. This Agreement will be governed by and construed in
           accordance with the laws of the State of New York, without regard to
           or application of conflicts of law rules or principles.

                                       51



     20.8  Notices. Any notice required or permitted by this Agreement shall be
           in writing and shall be deemed given if sent by prepaid registered or
           certified United States mail, return receipt requested, overnight
           mail with a nationally recognized overnight mail courier, or sent by
           facsimile or similar communication, and confirmed by such mail,
           postage prepaid, addressed to another party at the address shown
           below or at such other address for which such party gives notice
           hereunder. Notices will be deemed given five business days after
           deposit in the U.S. Mail, two business days after deposit with an
           overnight mail courier, or when confirmation of receipt is obtained
           if sent by facsimile or similar communication, or if by personal
           delivery, when received, as applicable:

If to Novation:                         With a copy to:

Novation, LLC                           Baker Botts L.L.P.
125 East John Carpenter Freeway         2001 Ross Avenue
Irving, Texas  75062                    Dallas, Texas  75201-2980
Facsimile: (972) 581-5778               Facsimile: (214) 953-6503
Attn:  General Counsel                  Attn: Sarah M. Rechter, Esq.

If to VHA:                              With a copy to:

VHA, Inc.                               Skadden, Arps, Slate, Meagher & Flom LLP
220 East Las Colinas Boulevard          1440 New York Avenue, N.W.
Irving, Texas 75039-5500                Washington, DC  20005
Facsimile: (972) 830-0391               Facsimile: (202) 393-3760
Attn:  Chief Financial Officer          Attn: C. Kevin Barnette, Esq.

If to UHC:                              With a copy to:

University Health System Consortium     McDermott, Will & Emery
2001 Spring Road, Suite 700             227 West Monroe Street
Oak Brook, Illinois 60523               Chicago, Illinois 60606
Facsimile: (630) 954-4730               Facsimile: (312) 984-7700
Attn:  Executive Vice President         Attn:  Virginia H. Holden, Esq.
       General Counsel

If to Neoforma:                         With a copy to:

Neoforma, Inc.                          Fenwick & West LLP
3061 Zanker Road                        Two Palo Alto Square
San Jose, California  95134             Palo Alto, California  94306
Facsimile:  (408) 468-4000              Facsimile: (650) 494-1417
Attn:  General Counsel                  Attn: Gordon K. Davidson, Esq.
                                              Ralph M. Pais, Esq.

     20.9  No Agency. The parties are independent contractors and will have no
           power or authority to assume or create any obligation or
           responsibility on behalf of each

                                       52



            other, except as expressly provided herein. This Agreement will not
            be construed to create or imply any partnership, agency or joint
            venture.

     20.10  Force Majeure.

            20.10.1  Subject to 20.10.2, no party shall be liable for any
                     default or delay in the performance of its obligations
                     under this Agreement if and to the extent such default or
                     delay is caused, directly or indirectly, by: flood,
                     earthquake, elements of nature or acts of God, riots, civil
                     disorders, rebellions or revolutions in any country, or any
                     other cause beyond the reasonable control of such party,
                     provided that (i) the non-performing party is without fault
                     in failing to prevent or causing such default or delay and
                     (ii) such default or delay cannot reasonably be
                     circumvented by the non-performing party through the use of
                     alternate sources, workaround plans or other means
                     (including with respect to Neoforma, by Neoforma executing
                     its disaster recovery plans).

            20.10.2  In such event, the non-performing party shall be excused
                     from further performance or observance of the obligation(s)
                     so affected for as long as such circumstances prevail and
                     such party continues to use commercially reasonable efforts
                     to recommence performance or observance whenever and to
                     whatever extent possible without delay. With respect to
                     Neoforma's performance, such efforts shall be no less than
                     the efforts used for any other customer of Neoforma. Any
                     party so delayed in its performance shall immediately
                     notify the party to whom performance is due by telephone
                     (to be confirmed in writing within two days after the
                     inception of such delay) and describe at a reasonable level
                     of detail the circumstances causing such delay.

            20.10.3  Notwithstanding anything in this Section 20.10 to the
                     contrary, upon the occurrence of an event described in
                     Subsection 20.10.1 that substantially prevents, hinders or
                     delays performance of services necessary for the
                     performance of "critical functions" of such party for more
                     than *, such party to whom such affected or delayed
                     performance is due will have the right to immediately
                     terminate this Agreement. For the purposes of this
                     Subsection 20.10.3, "critical functions" means with respect
                     to a party, those business functions that are reasonably
                     and in good faith determined by that party to be essential
                     and critical to its business operations or the business
                     operations of its Members.

     20.11  Interest. Any payment under this Agreement which is not paid when
            due, shall accrue interest at the lower of a monthly rate of 1.5% or
            the highest amount allowed by law.

______________________________

 * Confidential treatment requested.

                                       53



     20.12  Program Management. Neoforma and Novation shall meet to develop a
            program management plan to manage the delivery of Services
            hereunder. Such plan shall have features similar to those
            illustrated in Exhibit F.

     20.13  Severability. If for any reason a court of competent jurisdiction
            finds any provision or portion of this Agreement to be
            unenforceable, that provision of the Agreement will be enforced to
            the maximum extent permissible so as to effect the intent of the
            parties, and the remainder of this Agreement will continue in full
            force and effect.

     20.14  Counterparts. This Agreement may be executed in counterparts, each
            of which will be deemed an original, but all of which, together,
            will constitute one and the same instrument.

     20.15  Headings. Section headings are included for only convenient
            reference and do not describe the sections to which they relate.

     20.16  Section 365(n) Matters. Neoforma acknowledges that if Neoforma as a
            debtor-in-possession or a trustee in bankruptcy in a case under the
            U.S. Bankruptcy Code rejects this Agreement, the Contemplated
            Agreements, or any agreement supplementary hereto or thereto,
            Novation may elect to retain its rights under this Agreement, the
            Contemplated Agreements, or any agreement supplementary hereto or
            thereto, as and to the extent provided in Section 365(n) of the U.S.
            Bankruptcy Code. Upon the written request of Novation to Neoforma or
            the bankruptcy trustee, Neoforma or such bankruptcy trustee, as
            provided in Section 365(n) of the U.S. Bankruptcy Code, (i) shall
            provide to Novation the intellectual property for the Services as
            described in this Agreement, including all third-party software and
            all Neoforma-owned software, and (ii) shall not interfere with the
            rights of Novation as provided in this Agreement or any agreement
            supplementary hereto, including each Functionality Roadmap, the
            Service Level Specifications, or any escrow agreement that may be
            entered, to obtain such intellectual property from the bankruptcy
            trustee.

                                       54



       IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

NEOFORMA, INC.                               NOVATION, LLC


By:    /s/ Robert J. Zollars                 By:    /s/ Mark McKenna
   ----------------------------------------     --------------------------------

Name:  Robert J. Zollars                     Name:  Mark McKenna
     --------------------------------------       ------------------------------

Title: Chairman and Chief Executive Officer  Title: President
      -------------------------------------        -----------------------------

Date:  September 30, 2002                    Date:  September 30, 2002
     --------------------------------------       ------------------------------


VHA, INC.                                    UNIVERSITY HEALTH SYSTEM CONSORTIUM



By:    /s/ Curt Nonomaque                    By:    /s/ Robert J. Baker
   ----------------------------------------     --------------------------------

Name:  Curt Nonomaque                        Name:  Robert J. Baker
     --------------------------------------       ------------------------------

Title: Chief Financial Officer               Title: President and Chief
      -------------------------------------        -----------------------------
                                                    Executive Officer
                                                   -----------------------------

Date:  September 30, 2002                    Date:  September 30, 2002
     --------------------------------------       ------------------------------

                                             * Subject to approval by UHC's
                                             Governing Committee on October 16,
                                             2002
HEALTHCARE PURCHASING
PARTNERS INTERNATIONAL, LLC


By:    /s/ Mark McKenna
   ----------------------------------------

Name:  Mark McKenna
     --------------------------------------

Title: Chief Executive Officer
      -------------------------------------

Date:  September 30, 2002
     --------------------------------------


                  [Signature Page To Third Amended and Restated
                      Outsourcing and Operating Agreement]

                                       55




                                    EXHIBIT G

                                  MINIMUM FEES

     The Minimum Fees shall be determined by *; in any : *


     In determining the foregoing calculation, the *. By way of example *.

_______________________

   * Confidential treatment requested.


                                       G-1



                                    EXHIBIT H



*
_______________________

   * Confidential treatment requested.

                                       H-1



                                    EXHIBIT I

                                TARGET FEE LEVELS

*
_______________________

   * Confidential treatment requested.

                                       I-1



                                    EXHIBIT J

                                2002 ESTIMATED*

Date                                                          Payment
- -----------------------------------------------------------------------
*

_______________________

   * Confidential treatment requested.

                                       J-1




                                    EXHIBIT K

                          CURRENT FUNCTIONALITY ROADMAP

*




_______________________
 * Confidential Treatment Requested

                                       K-1



FUNCTIONALITY ROADMAP SEPTEMBER 30, 2002

Attached is the Functionality Roadmap for Marketplace@Novation for *.

[_]  "Future" column represents functionality to be considered in future
     releases. It does not represent a time commitment.

[_]  "Deferred or Not Doing" functional deliverables that have been moved out of
     * and needs validation to determine whether it stays on the roadmap are
     also in the Future Column. Validation might include *.

This version of the Committed Functional Roadmap is hereby accepted and approved
by Novation:

Signature: ______________________________________

Name: ___________________________________________

Date: ___________________________________________


To Signor: Initial each page of this Roadmap.




_______________________

   * Confidential treatment requested.

Neoforma and Novation Confidential               Novation Approver Initials
                                               Novation Approval Date: 9/30/2002

                                      K-2





_______________________

   * Confidential treatment requested.

Neoforma and Novation Confidential               Novation Approver Initials
                                               Novation Approval Date: 9/30/02


                                      K-3




                                    EXHIBIT L

                        COLLABORATIVE MARKETING AGREEMENT

Novation and Neoforma Marketing Communications, Product Marketing and Public
Relations departments agree to work collaboratively on the development of an
annual Marketing communications plan and distribution of all marketing
materials, all press releases and all messaging concerning Marketplace@Novation.
Specifically, Novation and Neoforma agree that in circumstances where specific
approvals are required by either party or both, such approvals will not be
unreasonably withheld. Further the parties agree to these specific processes:

   1.   Novation and Neoforma will collaborate on the development of overall
        messages and positioning of Marketplace@Novation. The owner and final
        decision maker will be Novation marketing. These messages will be
        reviewed and agreed to on a quarterly basis.

   2.   Neoforma will obtain Novation input and approval for any communications
        directed to VHA, UHC, HPPI members and suppliers (including Novation
        contract suppliers as well as non-contract suppliers who may participate
        in M@N) concerning Neoforma and/or Marketplace@Novation (48 hour
        turnaround).

   3.   A consensus will be reached between Novation and Neoforma when
        developing communications around technology applications, such as
        roadmaps, functionality rollouts and implementation of new products,
        directed to VHA, UHC, HPPI members and suppliers.

   4.   Neoforma-issued press releases that include messaging or positioning of
        Marketplace@Novation will reflect and support the
        collaboratively-developed overall messages as described in #1 above and
        require the approval of Novation Public Relations.

   5.   Novation and Neoforma agree to collaborate on the selection of members
        or contract suppliers for Marketplace@Novation PR and or Marketing
        initiatives that involve testimonials or "best practice" promotional
        activities in order to ensure that they are members or suppliers in good
        standing.

   6.   All jointly-issued press releases that include messages or positioning
        of Marketplace@Novation will be approved by both Neoforma and Novation
        Public Relations.

                                       L-1



   7.   All branded communications vehicles that include the
        Marketplace@Novation logo will also include the "powered by Neoforma"
        logo as specified in the Marketplace@Novation Branding Guidelines.

   8.   Neoforma and Novation will each obtain approval for the use of the
        other's logo(s).

   9.   The working teams should use the principles outlined above to come to
        consensus. If a situation arises where the working teams cannot reach
        agreement then issues should be escalated to the appropriate managers
        for resolution. It's anticipated that escalations will be rare.

                                       L-2



                                    EXHIBIT M

                        COLLABORATIVE DEVELOPMENT PROCESS

                         (WITH TECHNICAL SPECIFICATIONS)

Definitions

"Functionality Roadmap(s)" shall mean the document(s) setting forth the ideas
and deliverables that are proposed and approved by Novation and Neoforma for
implementation on the Novation Marketplace. Each such idea will be developed in
accordance with the collaborative development process and each will have a
Functionality Roadmap Completion Date (as defined below). The Functionality
Roadmaps will be monitored through the Functionality Roadmap (as defined
elsewhere in this Collaborative Development Process).

"Functionality Roadmap Completion Date", for Functionality Roadmaps is the date
that each Functionality Roadmap is (i) fully developed, ready for
implementation, and deployable for use in connection with the Novation
Marketplace and (ii) approved by Novation as complying in all material respects
with its vision, design and functionality specifications, which approval may not
be unreasonably withheld or delayed, by the applicable Functionality Roadmap
Completion Date.

"Member-User(s)" shall mean those Users that are registered participants within
the Member organizations. This term may also be used to include those Users that
are registered participants within Novation Marketplace Supplier organizations.

"Formulary" shall mean a listing of Products and other content, customized for a
Member or Member-User, that appears on the Novation Novation Marketplace or the
HPPI Novation Marketplace.

"Implementation Plan" shall mean a plan to implement the functionality
requirements, which shall consist of (A) a statement of work (such as a product
requirements document) describing the detailed functionalities to be provided by
Neoforma, (B) a "workplan," describing the respective responsibilities
(including deliverables) of Neoforma and Novation as well as the timetable for
fulfilling such responsibilities and (C) a "testing plan," describing the
process and timetable for the testing of functionalities before actual
implementation on the Novation Marketplace.

"Functionality Roadmap Change(s)" shall mean any approved functional deliverable
that will not or can not be delivered on time as committed to on the
Functionality Roadmap.

                                       M-1



"Planning Roadmap" shall mean the document that summarizes the ideas for
features and functions that may someday be implemented on the Novation
Marketplace. The ideas on the Planning Roadmap are non-binding on the parties.

"Post Production Functionality Roadmap Change(s)" shall mean any programmatic
change made to an existing functional deliverable that is already implemented
and available for Member Users on the Novation Marketplace.

"Technical Management Team" This team consists of designated representatives
from Neoforma, Novation, VHA, and UHC. It meets periodically and is the primary
decision making body for (i) all Planning Roadmap related decisions, (ii) final
Functionality Roadmap prioritization, (iii) escalated issue resolution decisions
for the collaborative development process, and (iv) other activities where
technology is used for the Novation Marketplace.



Capitalized terms that are not otherwise defined in this Collaborative
Development Process will have the meanings ascribed thereto in the Agreement.

                                       M-2




Introduction

Upon the timely receipt of content, instruction and specifications from the
appropriate parties, Neoforma will provide the Tools and API's and create the
technology infrastructure for the Novation Marketplace. These activities are
collectively referred to as the "Services".

Neoforma and Novation agree that this Collaborative Development Process
represents their understanding of the scope of the Services including the
collaborative development and change control processes, as of the Effective
Date. Neoforma and Novation also agree that the Services to be provided
hereunder will evolve and be modified and enhanced over time to keep pace with
technological advancements, user requirements, and improvements and changes in
the e-commerce marketplace. Neoforma and Novation will work collaboratively on
all phases of Novation Marketplace development including, without limitation,
general design, establishing functional specifications, system testing,
acceptance testing, and beta testing. Novation will have the final approval at
each phase of system development, and Novation must approve the Novation
Marketplace prior to going live, no such approvals to be unreasonably withheld
or delayed. Neoforma and Novation hereby initially designate * and * as their
respective representatives with authority to make such approvals and other
decisions as are anticipated herein, unless such decision-making authority is
expressly granted to another person or entity either herein or by Neoforma or
Novation in writing.

Neoforma and Novation shall meet at least quarterly to examine the (i) state of
technology, (ii) Neoforma's role as a leading provider of e-commerce services to
the healthcare industry, (iii) User (including Member) needs and concerns and
(iv) other relevant factors. Based on such examination, Neoforma and Novation
will agree on a statement of work for Services to be performed by Neoforma.

Neoforma and Novation agree that the description of Services set forth herein is
not complete and that such parties are required to prepare a more detailed and
complete description as provided for in the "Relationship Management" section of
this Collaborative Development Process.

The Functions and Responsibilities section included in this document is a guide
to the minimal levels of Functionality that are to be included in the Novation
Marketplace. The Outsourcing Agreement and the text of this Collaborative
Development Process shall be construed consistently, but in the event of any
conflict, the terms of the Outsourcing Agreement shall supercede any
inconsistent terms of this Collaborative Development Process.

The Functionality Roadmap shall be the tracking report that (i) documents
features and functions that have been proposed for future development, (ii)
tracks the features and functions that have been approved for development and
that are being developed for

_______________________
 * Confidential Treatment Requested

                                       M-3



implementation on the Novation Marketplace (as further described in the
applicable statement of work).

At the end of each development cycle, the completed functional deliverables will
be documented on the next version of the Functionality Roadmap and then tracked
thereafter by the Novation Marketplace Deliverable Tracking Report. The
deliverable tracking report will be maintained as an accurate record of all
delivered and existing Novation Marketplace functionality. It will also be the
record of functionality that is sun-setted over time due to evolving Member User
requirements. The Novation Marketplace Deliverable Tracking Report will be
maintained by Novation, and Neoforma will have visibility to and approval rights
over this report.

Neoforma acknowledges that proper operations of the Novation Marketplace are
critical to the business operations of Novation.

Relationship Management

Account Managers; Steering Committee

Neoforma and Novation shall designate account managers (each, an "Account
Manager"). The Account Managers shall have overall responsibility for day-to-day
management and administration of the Services provided under this Collaborative
Development Process.

Neoforma and Novation shall establish a steering committee (the "Steering
Committee") to monitor issues arising with respect to the Services and the
performance by Neoforma and Novation of their obligations hereunder. Through the
Steering Committee, Novation will have the opportunity to provide input
regarding the direction of implementation of new technology for the Novation
Marketplace and in connection with the Collaborative Development Process (as
defined below). The Steering Committee shall monitor overall Services
performance and review expanded Services and project requests. Neoforma and
Novation shall mutually determine the number of representatives they will assign
to the Steering Committee. Each of Neoforma and Novation may replace its members
of the Steering Committee after providing the other party with reasonable
advance written notice and after consultation with the other party. Each party
shall use reasonable efforts to minimize the turnover of individuals serving on
the Steering Committee. The Steering Committee shall meet as set forth below,
and each party's representatives on the Steering Committee shall have the
responsibility to notify that party's senior management of material issues
considered, and material actions taken, by the Steering Committee.

Reports and Meetings

Neoforma shall provide to Novation, commencing with the month after execution of
the Outsourcing Agreement, a comprehensive monthly performance report delivered
to Novation within five business days after the end of each month, in a form
mutually established by Neoforma and Novation, describing Neoforma's performance
of the

                                       M-4



Services in the preceding month. Such report may be subdivided into separate
monthly reports as mutually agreed by Neoforma and Novation.

As soon as practicable after the execution of the Outsourcing Agreement,
Neoforma and Novation shall determine an appropriate set of meetings to be held
between representatives of Novation and Neoforma. Neoforma shall prepare and
circulate an agenda sufficiently in advance to give participants an opportunity
to prepare for each meeting and shall incorporate into such agenda items that
Novation desires to discuss. At Novation's request, Neoforma shall prepare and
circulate minutes promptly after a meeting. At a minimum, such meetings shall
include the following:

     (i)   a monthly meeting among operational personnel representing Novation
           and Neoforma to discuss daily performance and planned or anticipated
           activities and changes that might adversely affect performance;

     (ii)  a quarterly management meeting of the Steering Committee to review
           the monthly performance reports for the quarter, review Neoforma's
           overall performance of the Services, review progress on the
           resolution of issues, provide a strategic outlook for Novation
           Marketplace requirements, and discuss such other matters as
           appropriate; and

     (iii) an annual senior management meeting to review relevant performance
           issues.

                                       M-5



Establishment of a Program Management Office

     Neoforma will maintain a Program Management Office (the "Program Management
Office" or "PMO"), which shall have representatives from Neoforma and a
designated representative from Novation. The Program Management Office will be
responsible for overseeing the day-to-day management of the tasks being
completed during the collaborative development process (as described below). In
addition, the Program Management Office will determine the appropriate parties
to make decisions regarding the collaborative development process, and to
coordinate timely responses. Additionally, the Program Management Office will
coordinate the maintenance of all documents related to the collaborative
development process for all Novation Marketplace functional deliverables,
including technical specifications.

With respect to this Collaborative Development Process, the PMO will

     .    Provide status as to the development activity for all functional
          deliverables on the Functionality Roadmap
     .    Be the central collection point for the status of all projects and
          their components
     .    Keep up to date and manage the information in a project plan status
          system that is available for a limited number of Novation managers to
          query and view.
     .    Summarize status, analyze and report all variances from the plan.
     .    Facilitate program development teams to determine critical path
          impacts, identify and analyze trends, and maintain an issues and error
          log, report these issues as appropriate to management.
     .    Facilitate all needed corrective action plans (e.g., plan adjustment,
          critical path re-configuration, issue log update, etc.)
     .    Report program status to program and senior management teams
     .    Manage change management and document control processes

                                       M-6



Collaborative Development Process.

Overview

The collaborative development process defines how the Technical Staffs at
Neoforma and Novation will work together in building Novation Marketplace
functionality. It defines four key interaction areas. They are:

   .   Visioning. Novation owns this activity for Novation Marketplace. Novation
       will work collaboratively with Neoforma to develop the direction (the
       Vision) that Neoforma needs to take in building Novation Marketplace
       functionality. This process will be completed when Novation delivers a
       document to Neoforma that clearly communicates this direction. This
       document is to include: i) directional statements (the Vision); ii)
       business justification for the directional statements; iii) a clear
       definition of the problems being solved for the stakeholders; iv) use
       cases and user acceptance criteria for how the resulting system
       enhancements would fit into the day to day processes of the stakeholders;
       v) adoption plans and goals, vi) other information as needed to support
       the proposed Vision.

       Additionally, Neoforma and Novation are responsible for continually
       sharing and communicating marketing research, customer/supplier input,
       plans for other Neoforma Marketplaces, etc. to each other. This permits
       Novation to include these elements into Novation's Vision statements. It
       is also acknowledged that Neoforma will have plans for other
       marketplaces that it can not share with Novation.

   .   Planning. Neoforma owns this activity. During this process, Neoforma
       takes Novation's Vision documents and determines the functional
       deliverables needed to support Novation's Vision. These deliverables are
       then added to the Planning Roadmap (usually over multiple releases), and
       the Planning Roadmap is reviewed by the joint Technical Management team.
       Then, as approved by the Technical Management Team, Neoforma creates and
       delivers to Novation detailed and fully specified functional deliverable
       requirements documents and/or build plans (including, for example: screen
       wire frames, resource allocations, costs, timings, etc.) for the
       functional deliverables within one or more release. Each detailed
       functional deliverable document is reviewed and approved by Novation. The
       Functionality Roadmap is then updated and taken to the Technical
       Management Team for their final approval. Upon approval, the
       Functionality Roadmap Completion Dates are set on the Functionality
       Roadmap.

       It is understood that Neoforma is building a Marketplace of which
       Novation Marketplace is a significant part. In the Planning Phase
       Neoforma will include and take into consideration requirements developed
       from sources outside of the Novation Visioning process. Any issues
       pertaining to functionality priority, scope, and timing that cannot be
       resolved at the team level, will be resolved by

                                       M-7



       the Technical Team. Should Neoforma and Novation not be able to agree on
       the deliverables, Novation has final approval over the Functionality
       Roadmap.

   .   Building and Testing. Neoforma and Novation jointly own this activity.
          .   Neoforma. Based upon Novation's approval of the Novation
              Marketplace Functionality Roadmap, Neoforma builds the Novation
              Marketplace functional deliverables as detailed in the functional
              deliverable requirements build plans that were created during the
              above Planning process. Neoforma then tests each functional
              deliverable based on its own quality assurance processes.

          .   Novation. Novation does the final user acceptance testing for all
              functional deliverables. The testing is completed based on jointly
              developed and approved user acceptance criteria and plans. Upon
              the successful completion of this testing, Novation approves the
              release of the functional deliverables. Novation has final
              approval over the release of all functional deliverables.

   .   Novation Marketplace Oversight. Management oversight of these processes
       is provided by 1) the Novation and Neoforma Account Managers, 2) the
       relationship managers from both organizations, and 3) by the Technical
       Management Team. Any issues pertaining to functionality priority, scope,
       and timing that cannot be resolved by parties 1 and 2, will be resolved
       by the Technical Management Team.

The Collaborative Development Process detailed herein has two parts.

       Part 1: The Collaborative Development Process Principles. These are
       included below and these principles summarize how the two teams will
       interact with each other on a daily basis.

       Part 2: Attached as an exhibit to this document, is a drawing labeled
       "The Collaborative Development Process Map." This is a more detailed
       overview of team interactions. This drawing may be modified from time to
       time as the interactions need to change and upon mutual agreement by both
       parties.

                                       M-8



Part 1: Collaborative Development Process Principles

The collaborative development process ("CDP" or the "Collaborative Development
Process") is a process involving many interactions between employees at Neoforma
and Novation. In summary, these employees work together as they prepare the
Novation Marketplace Vision statements, plan and build the functional
deliverables, and approve these functional deliverables for release to Member
Users.

The complex nature of this process is graphically depicted in a Collaborative
Development Process Map.

In addition to the above Collaborative Development Process Overview, the
following principles are fundamental to how the two teams will work together
throughout the collaborative development process. These principles are not
expected to change during the life of this Collaborative Development Process.
They will remain in force unless changed in writing by mutual agreement.

   .   For the purpose of developing Novation Marketplace direction and vision,
       Novation is responsible for the aggregation of all member input. Neoforma
       will work in partnership with Novation's designated employees in
       providing the input that it collects.
   .   Neoforma will coordinate its information gathering processes with
       Novation when obtaining market research information from Novation's
       Member Users.
   .   Novation is responsible for leading all Novation Marketplace related task
       forces and councils. Neoforma will participate in and provide support for
       these activities as needed.
   .   Neoforma and Novation will communicate their goals, desires, plans, etc.
       for the Novation Marketplace to each other. This is done so that this
       input can be considered during the Visioning Process of the Collaborative
       Development Process. As appropriate, Novation will include these plans,
       goals, etc in their Novation Marketplace business requirement documents.
   .   Neoforma will not develop and maintain separate vision or directional
       statements for the Novation Marketplace that have not gone through the
       Novation Visioning process.
   .   The Novation and Neoforma teams will work collaboratively to review
       Neoforma's written functional requirement documents (e.g. Product
       Requirements Document - Prods) in ensuring that they align with
       Novation's Vision, as provided in the Novation Vision documents. Each
       functional requirement document from Neoforma is to provide detailed
       descriptions of specific features and functions, including functional
       descriptions, screen designs/layouts, programmatic logic, data
       dependencies, and other needed specifications so that Novation has a
       clear understanding of what is to be built during each development cycle.
   .   Neoforma will use Novation's business requirement documents as the basis
       for creating its functional requirement documents for Novation
       Marketplace during

                                       M-9



       each Planning process. This closely aligns what Neoforma is building with
       what members and other stakeholders have requested during the Visioning
       process as lead by Novation. If new features are being proposed by
       Neoforma, the feature will be evaluated for inclusion in the Novation
       Marketplace.
   .   Novation must approve each functional requirement document (e.g. Product
       Requirements Document -PRD) before development work can begin. Exceptions
       to this will be approved in writing and sent to Neoforma. Novation must
       approve these documents within a jointly agreed upon timeframe,
       determined during the planning process.
   .   Neoforma will maintain and make available, detailed project plans for all
       Novation Marketplace functional deliverables. Each plan will include
       resources, tasks, milestones, estimated costs, and other information that
       will help Novation keep informed about where each functional deliverable
       is as it is being built or enhanced. Novation's PMO representative and a
       limited number of designated managers at Novation will have day to day
       visibility into the status of all planned, in process, and completed
       functional deliverables.

Part 2: The Collaborative Development Process Map

The Collaborative Development Process Map is attached hereto as Attachment 1.

Novation Marketplace Functionality Roadmap

Neoforma shall maintain the Functionality Roadmap, and through which Novation
and Neoforma will monitor the status of production and implementation of all
Functionality Roadmaps.

Establishment of Functionality Roadmap Completion Dates

During the Planning phase of the Collaborative Development Process, Neoforma and
Novation shall agree to production schedules, including completion dates (each a
"Functionality Roadmap Completion Date"), for all Functionality Roadmaps.

Document Control

The parties shall create a central repository of documents relating to the
Collaborative Development Process, including, without limitation; requirement
documents, technical specifications, data models, project plans, and test plans.
The repository shall be managed by the Program Management Office (PMO). These
documents will be kept current by the PMO.

                                      M-10



Change Management at Neoforma and Novation

Neoforma

Neoforma shall perform certain change management functions to rigorously control
and manage changes in any and all aspects of the Novation Marketplace. Changes
can happen during the building of Functionality Roadmaps, or after a
Functionality Roadmap is moved to Production.

Changes during the Collaborative Development Process

At a minimum, Neoforma's Change Management Process is to include the following
principles as they relate to the Novation Marketplace.

   .   A Change Control Process will be jointly developed and approved by both
       parties.
   .   Neoforma will vigorously enforce and maintain the approved change control
       process for all Functionality Roadmap Changes.
   .   Changes in Neoforma's Change Control Process must be communicated to and
       approved by Novation.
   .   Once a functional deliverable document is approved by Novation during the
       Planning Phase of the Collaborative Development Process, Neoforma will
       vigorously enforce strict change control processes and notify Novation of
       all material changes to any functional deliverable within 24 hours of
       deciding that a functional deliverable change is needed. Upon receipt of
       this change notification, the Novation responsible person for the
       functional deliverable(s) will work collaboratively with the appropriate
       Neoforma Product Manager to understand why a Functionality Roadmap Change
       is needed.
   .   All material changes to any Functionality Roadmap must be approved by
       Novation. A material change is one that: 1) changes the user experience
       as specified in the functional requirements document that was approved by
       Novation, 2) adds or deletes agreed upon features and/or functionality
       from what was specified in the functional requirements document that was
       approved by Novation, 3) affects business processes for any Novation
       Marketplace stakeholder.
   .   Until receiving Novation's approval for any given Functionality Roadmap
       Change, which will not be unreasonably withheld, Neoforma may not
       redeploy resources or invoke other plans to change any functional
       deliverable already implemented on the Novation Marketplace. Both parties
       will mutually agree upon how quickly each approval must be considered and
       when an answer must be provided to Neoforma. This time limit will be
       based upon the nature and time sensitivity of each change decision.
   .   Novation, or Neoforma on Novation's behalf, may initiate a Functionality
       Roadmap Change. This will occur if Novation fails to deliver on one (or
       more) of its assigned tasks on a Neoforma project plan. If this occurs,
       Novation acknowledges that this may cause Neoforma to miss a
       Functionality Roadmap on

                                      M-11



       the Functionality Roadmap, and that Neoforma will be considered to have
       met its commitments under the then current Functionality Roadmap.
   .   Neoforma's PMO will maintain a change control tracking system. Quarterly
       reports will be provided to Novation detailing all changes on a quarterly
       basis.

Changes Once a Functionality Roadmap is implemented on the Novation Marketplace

   .   A Change Control Process will be jointly developed and approved by both
       parties.
   .   Neoforma will vigorously enforce and maintain the approved change control
       process for all Post Production Functionality Roadmap Changes.
   .   Changes in Neoforma's Post Production Change Control Process must be
       communicated to and approved by Novation's management team.
   .   Once implemented on the Novation Marketplace, Neoforma will vigorously
       enforce strict change control processes and notify Novation of all Post
       Production Functionality Roadmap Changes within 24 hours of deciding that
       a change is needed. This notification will come from Neoforma to the
       appropriate Novation employee responsible for that functional
       deliverable(s), and to Novation's PMO representative. Upon receipt of
       this change notification, the Novation responsible person for the
       functional deliverable(s) will work collaboratively with the appropriate
       Neoforma Product Manager to understand why a Functionality Roadmap Change
       is needed.
   .   All material changes to any Post Production Functionality Roadmap(s) must
       be approved by Novation. A material change is one that: 1) changes the
       user experience as specified in the functional requirements document that
       was approved by Novation, 2) adds or deletes agreed upon features and/or
       functionality from what was specified in the functional requirements
       document that was approved by Novation, 3) affects business processes for
       any Novation Marketplace stakeholder.
   .   Until receiving Novation's approval for any given Post Production
       Functionality Roadmap Change, which will not be unreasonably withheld,
       Neoforma may not redeploy resources or invoke other plans to change any
       functional deliverable already implemented on the Novation Marketplace.
       Both parties will mutually agree upon how quickly each approval must be
       considered and when an answer must be provided to Neoforma. This time
       limit will be based upon the nature and time sensitivity of each change
       decision.
   .   Novation's approval for a Post Production Functionality Roadmap Change
       must be in writing.

Novation

Novation shall perform certain change management functions to rigorously control
and manage changes in any and all aspects of the information that it provides
to, or receives from Neoforma.

                                      M-12



   .   A Change Control Process will be jointly developed and approved by both
       parties.
   .   Novation will vigorously enforce and maintain the approved change control
       process for data that it sends to, or receives from Neoforma.
   .   Changes in Novation's Change Control Process must be communicated to and
       approved by Neoforma.
   .   Once implemented on the Novation Marketplace, Novation will vigorously
       enforce strict change control processes and notify Neoforma of all needed
       changes within 24 hours of deciding that a change is needed. This
       notification will come from Novation to Neoforma, and if known to the
       Neoforma employee responsible for effected functional deliverable(s).
       Upon receipt of this change notification, the Neoforma responsible person
       will work collaboratively with the appropriate Novation employee to
       understand why a change is needed.
   .   Until receiving Neoforma's approval for a Functionality Roadmap Change or
       a Post Production Functionality Roadmap Change, Novation may not redeploy
       resources or invoke other plans to change any functional deliverable
       unless absolutely necessary in keeping the Novation Marketplace
       operational.
   .   Neoforma's approval for a Post Production Functionality Roadmap or
       Functionality Roadmap Change must be in writing.

Roadmap Process.

Novation and Neoforma will use the CDP as a standard for planning all functional
deliverables for the Novation Marketplace. All desired functionality will be
maintained in a Planning Roadmap, and Neoforma and Novation's agreed upon and
committed functionality will be tracked in the Functionality Roadmap.

The Planning Roadmap includes ideas and desired functionality for a rolling 12
month period (in quarterly increments), and the Functionality Roadmap will cover
committed development activities for a rolling 6 month period (in quarterly
increments).

Features and functions that are on the Planning Roadmap are simply proposed
directional statements, but items on the Functionality Roadmap must be sized,
scoped, resource planned, and have articulated plans for implementation before
they are added to the Functionality Roadmap.

An item on the Functionality Roadmap is considered to have been delivered by
Neoforma if the Functionality Roadmap Completion Date is met. This date will
always be considered to be the last day of the calendar month for the quarter as
specified on the Functionality Roadmap.

The joint Novation Marketplace technical management team reviews and approves
the Planning and Functionality Roadmaps. Additionally, this team assures that
the Collaborative Development Process is followed and they resolve issues should
there be competing priorities for all Novation Marketplace functional
deliverables.

                                      M-13



Functions and Responsibilities

This section is a guide to the minimal level of Functionality that is to be
included in the Novation Marketplace.

If noted by the letters "CDP" after the listed functionality, it means that it
will be planned, defined and developed in accordance with the CDP but is not a
required functionality unless mutually agreed to by Novation and Neoforma. All
other functions and responsibilities are managed outside of the CDP.

*


Data Communications

..    Novation will provide to Neoforma from time to time, as agreed by Neoforma
     and Novation, information regarding membership organizations, Members,
     contract suppliers, contract product, pricing, and content. Additionally,
     Neoforma and Novation will develop a process for defining and transporting
     data from Novation and HealthVision systems to Neoforma. For all such
     communications, Neoforma and Novation will agree upon the specific data
     elements that are required, the format of the data, and the methodology for
     the communication. Neoforma and Novation also will agree to the frequency
     of full data refreshes in order to better facilitate the synchronization of
     information between Neoforma and Novation.

..    Novation shall establish change management functions to rigorously control
     and manage changes in any and all data stored in the system of record.
     Within 30 days after the date of the Outsourcing Agreement, Novation will
     develop with Neoforma a data Novation Marketplace management process, which
     shall include:

              (i)     Definition of data Novation Marketplace requirements.

              (ii)    Format of the data to be communicated.

              (iii)   Methodology by which data will be communicated between to
                      Neoforma, Novation, HealthVision, and other applicable
                      related companies.

__________________________

  * Confidential treatment requested

                                      M-14



Implementation Reporting and Processes

Neoforma and Novation shall develop and mutually agree to an implementation
process (the "Implementation Process") for each type of implementation (i.e., a
different Implementation Process may be required for each of distributors,
manufacturers, Members, and other Users). Additionally, Neoforma and Novation
will work with representatives from manufacturers, distributors, Members and
Other Users in an effort to continuously improve their respective Implementation
Processes.

Neoforma is responsible for the following communications to Novation as it
implements manufacturers, distributors, Members, and Other Users on the Novation
Marketplace.

..   The service delivery group will provide a weekly report that summarizes all
    implementation activity.

..   Neoforma will maintain an accurate Implementation Process for each type of
    implementation (e.g., for distributors, manufacturers, Members, and other
    Users).

..   Neoforma will prepare individualized Implementation Process documents for
    each distributor, manufacturer, Member, and User implementation.

..   Neoforma will provide electronic copies of the individualized Implementation
    Process plans prior to the start of each implementation and Novation will be
    updated as changes occur in the individualized plans.

..   Neoforma will inform Novation of all changes to the overall Implementation
    Process. At least annually, or more frequently if appropriate, there will be
    joint meetings to fully review the Implementation Process.

..   Neoforma and Novation will provide a monthly implementation "report card"
    that can be shared with internal management and other parties, as
    appropriate. The contents of this report card will be jointly developed by
    Neoforma and Novation.

All such communications shall be provided to Novation at times and in a manner
mutually agreed to by Neoforma and Novation.

                                      M-15



Technical and Software Issues

System Documentation

On a quarterly basis Neoforma will provide Novation with updated versions of
then-current system design specifications documentation so that Novation remains
appraised of all current features and functions of the system.

Source Code Escrow Agreement

Promptly after execution of the Source Code Escrow Agreement, Neoforma shall
deliver to the Escrow Agent specified therein both printed and electronic copies
of all source code (along with complete copies of all application design
specifications, user manuals, etc.) for any and all applications (i) developed
by Neoforma or (ii) developed by third-parties but in as to which Neoforma has
the right to access the source code, in each case, used by any member of VHA,
UHC or HPPI in connection with the Novation Marketplace. Neoforma will, on a
quarterly basis, update such copies of source code as changes to such Novation
Marketplace technology are made. All fees and expenses charged by the Escrow
Agent will be borne by Novation.

From time to time, Novation may, at its option and expense, request that the
completeness and accuracy of the source code be verified. Such verification
shall be performed in accordance with the terms of the Source Code Escrow
Agreement.

The source code will be released from escrow to Novation upon the occurrence of
one or more specified "release events," to be more fully described in the Source
Code Escrow Agreement which, at a minimum, shall include (i) the delivery by
Novation of any notice of termination under Sections 9.3 and 9.4 of the
Outsourcing Agreement and (ii) the material breach by Neoforma of its service
obligations under Section 9.9 of the Outsourcing Agreement after the delivery by
Novation of any notice of termination under Sections 9.5 and 9.6 of the
Outsourcing Agreement.

Software Support

Neoforma is administratively and financially responsible for obtaining and
maintaining support for all software, hardware, database and other technical
components of the Novation Marketplace. Neoforma and Novation will meet from
time to time to discuss support requirements that materially impact upon the
Services, and Neoforma will provide 90 days notice to Members if a current
version of a technical component is to be eliminated or replaced (if such a
change may have a material impact upon the Services).

Software Standards

Novation and Neoforma will from time to time meet to discuss all software
standards used in the development and support of the Novation Marketplace.

                                      M-16



Systems Maintenance; Outages; Disaster Recovery

Scheduled System Maintenance Windows

Neoforma will schedule systems maintenance activities only within the following
maintenance windows:

      --------------------------------------------------------------------------
      Outage Period                           Outage Window
      --------------------------------------------------------------------------
      Friday Evening (Primary Window)         8PM to 2 AM Saturday morning (PST)
      --------------------------------------------------------------------------
      Saturday Evening (Secondary Window)     8PM to 2 AM Sunday morning (PST)
      --------------------------------------------------------------------------
      Sunday Evening (Tertiary Window)        6PM to 12AM Monday morning (PST)
      --------------------------------------------------------------------------

Whenever possible, maintenance will be scheduled within the Primary Window.
Alternate times outside of these windows must be negotiated with Novation at
least 48 hours in advance, and used only if critically important to the
continued operation of the Novation Marketplace.

Notification of System Maintenance

Neoforma is to provide Novation with at least 2 business days of advance notice
of all scheduled system outages.

Notification of Unscheduled Outages

If for any reason the Novation Marketplace becomes inoperative, or a critical
systems component of the Novation Marketplace is inoperative, outside of a
scheduled system maintenance period, Neoforma will notify Novation within 30
minutes after Neoforma discovers that the outage has occurred. Neoforma will
notify Novation within 30 minutes after systems restoration that such
restoration has occurred. Within one business day of systems restoration,
Neoforma is to notify Novation as to (i) the probable cause of the outage, (ii)
the number of Members and Member-Users that were affected and (ii) the number of
transactions either queued or rejected during the outage.

Using input from Novation, Suppliers, Members, and other Users, Neoforma will
develop and update from time to time as needed the notification procedures that
will be used to inform affected parties about significant service interruptions
and/or system outages, should they occur. These notification procedures will be
documented in a process and procedures section of the Neoforma disaster recovery
plan

Neoforma will review the notification processes and procedures in its disaster
recover plan with manufacturers, distributors, and member users during the
Implementation Process. Should a manufacturer, distributor, Member, or other
User request certain notification processes, Neoforma will use its best efforts
to honor such requests.

                                      M-17



Order Queuing During Systems Maintenance or Outage

Neoforma is to execute its best efforts to queue all orders and other inbound
and outbound transactions in a safe holding area during all scheduled
maintenance and unscheduled systems outage periods. All queued transactions are
to be immediately processed as soon as safe to do so upon systems restoration.

Hot Site Backup Synchronization with the Primary Site

The hot site will be updated as needed to support functionality and services
that are added to the Novation Marketplace.

   1.  Novation agrees that Neoforma may accumulate its Hot Site upgrades over a
       calander quarter, and implement all of the enhancements at the end of
       each quarter.
   2.  Web Applications. Neoforma and Novation will identify the web based
       applications that must be supported by the Hot Site. This will be done as
       a standard part of the Collaborative Development Process. If required,
       updates will be made to the applications that operate at the Hot Site
       based upon the requirements detailed in the functional requirement vision
       and/or planning documents created during the Collaborative Development
       Process.
   3.  Hot site support for NeoConnect, the data warehouse, and other
       infrastructure components will be discussed quarterly.

A joint Neoforma and Novation team will be established to review all of the
upgrades needed for the Hot Site. This team will meet quarterly. This team will
discuss and mutually agree upon the services being supported by the hot site
backup facility, and the level of application synchronization between the
primary and hot backup sites.

Backup, Disaster Recovery and Storage

Neoforma shall provide backup, disaster recovery and storage capabilities so as
to maximize availability of the Services during an event that would otherwise
affect the delivery of the Services.

Neoforma will maintain a "hot site" disaster recovery site which is able to
support the processing and communication of EDI and/or XML transactions between
the Users and their Suppliers (a "hot site" being defined as a fully equipped
computer center which provides one or more computer models and the necessary
peripheral equipment to replicate the data processing from the primary computer
site, including backup power supplies, redundant environmental conditioning,
communications lines, fire protection and warning devices, intrusion-detection
devices, physical security, and adequate office space for personnel to conduct
normal Novation Marketplace operations). Should a disaster occur at the primary
site of the Novation Marketplace, the system should automatically sense the
outage and begin processing the EDI and XML transactions at the

                                      M-18



hot site and continue until service is restored at the primary site. Neoforma
will continually keep Novation informed as to the location of the hot site.

Neoforma must use its best efforts to ensure that the automatic failover
software and hardware systems work properly between the primary and hot backup
sites. At a minimum, failover processes and manual procedures must be tested
monthly, unless otherwise approved in writing by Novation, and, should the hot
backup system not work properly, immediate action must be taken to resolve any
and all problems. Upon request, Neoforma will provide Novation with reasonable
documentation of the date of such tests, the results of each such test, and any
corrective actions taken in response to errors and any other issues discovered
through such tests.

Backup and Disaster Recovery Plan

Neoforma shall adopt and maintain a Novation Marketplace Backup and Disaster
Recovery Plan which describes (i) the manner in which Neoforma shall perform
backup and disaster recover functions, and (ii) Novation's priorities for backup
and disaster recovery and methods for changing those priorities. Novation will
continually have access to the plan and may, from time to time, meet with
Neoforma to discuss the plan.

Other Disaster Recovery Duties

Neoforma shall also have responsibility to:

       (i)      Maintain an uninterruptible power supply (UPS), to both the
                primary site and "hot site" facilities, with fuel supply and
                auxiliary generator to ensure continuity in the event of an
                interruption in ordinary power supply, and perform routine
                maintenance to ensure reliability.

       (ii)     Maintain off site storage of the Novation Marketplace's data,
                software and disaster-recovery related documentation to
                support disaster recovery.

       (iii)    In the event of a disaster, assume responsibility for operating
                the hardware and providing the functions in accordance with the
                disaster recovery plan.

                                      M-19



                                  Attachment 1
                      Collaborative Development Process Map


                                        *


__________________________

  * Confidential treatment requested.

                                      M-20



                                    EXHIBIT N

                          SERVICE LEVEL SPECIFICATIONS

1.   GENERAL PROVISIONS

     1.1. General

          Neoforma acknowledges and agrees that the critical importance of
          certain of Novation's business functions (e.g., those tied to
          Novation's present and future revenue streams and the strategies
          therefore) require that certain metrics focus on performance measures
          that are a combination of quantitative and qualitative measures (e.g.,
          a qualitative measure of Neoforma's overall responsiveness in meeting
          Novation's business needs and schedules). As further described in this
          Service Level Specifications, Neoforma shall be committed to a process
          to develop such metrics and to define Neoforma's responsibilities in
          that regard.

          The Service Levels set forth in this Service Level Specifications are
          intended to measure Neoforma's performance of the Services. Commencing
          with the initial provision of the Services, Neoforma shall perform the
          Services so as to meet or exceed the Type I Service Levels set forth
          in this Service Level Specifications. Neoforma shall perform the
          Services so as to meet or exceed the Type II Service Levels as they
          are established. The detailed definitions of Type I Service Levels are
          set forth in Article 2. Type II Service Levels shall be established in
          accordance with the Service Level establishment procedure set forth in
          Section 1.4.

          Neoforma and Novation agree that this Service Level Specifications
          represents their agreement as to the Service Levels as of the
          Effective Date. As the Services provided pursuant to the Outsourcing
          Agreement are changed, modified or enhanced (i) as a result of the
          development of Implementation Plans for each new release or (ii) from
          time to time through the provision of additional Services, Neoforma
          and Novation will review the Service Levels then in effect and will in
          good faith mutually determine whether such Service Levels should be
          adjusted and whether additional Service Levels should be implemented.

          Capitalized terms used in this Service Level Specifications shall have
          the respective meanings set forth herein. Other terms used in this
          Service Level Specifications are defined in Attachment 1 hereto, the
          Outsourcing Agreement or the Collaborative Development Process.

                                       N-1



     1.2. Reporting

     (a)  On or before the six-month anniversary of the Effective Date, Neoforma
          and Novation shall establish an appropriate set of periodic reports to
          be delivered by Neoforma to Novation from time to time regarding the
          provision of the Services by Neoforma. These reports may include
          information of the following type: a monthly status report that (i)
          assesses, for each Service Level, the degree to which Neoforma has
          attained or failed to attain the pertinent Service Level including
          measurements with respect to the Service Levels, (ii) summarizes the
          status of problem resolution efforts and other initiatives and (iii)
          explains deviations from the Service Levels and includes plans, in
          reasonable detail, for corrective action.

     (b)  The monthly status reports shall include a set of hard and soft copy
          reports to verify Neoforma's performance and compliance with the
          Service Levels. If feasible, such reports shall also be made available
          to Novation on-line. The raw data and detailed supporting information
          shall be deemed Novation Data under the Outsourcing Agreement. Such
          reports shall be provided on or before the 20/th/ day of the month
          reflecting Neoforma's performance of the Services during the
          immediately preceding month.

     1.3. Service Level Types

          (a)  Certain Service Levels are established as of the Effective Date
          (each, a "Type I Service Level"), and are set forth in Article 2 and
          summarized in Attachment 3. Type I Service Levels shall be reviewed
          from time to time as described in Section 1.4.

          (b)  The remaining Service Levels are undefined as of the Effective
          Date (each, a "Type II Service Level"). Type II Service Levels shall
          be subject to the Service Level establishment procedure set forth in
          Section 1.4.

          (c)  All Service Levels are subject to continuous improvement
          described in Section 1.5.

     1.4. Establishment and Review of Service Levels

          (a)  This Section 1.4(a) identifies Neoforma's and Novation's
               obligations with regard to the establishment and review of
               Service Levels. On or before the two-month anniversary of the
               Effective Date, Neoforma and Novation shall develop Service Level
               metrics to be published and maintained by the Program Management
               Office. The PMO will be responsible for the following with
               regards to Service Level metrics:

                                       N-2



               (i)   Defining the overall Service Level program between Neoforma
                     and Novation, including, without limitation, the Service
                     Level Credit payments and other consequences for Neoforma's
                     failure to meet any Service Level (including Type I and
                     Type II Service Levels). The definition of such Service
                     Level Credit payments and other consequences shall include,
                     without limitation, a methodology whereby Neoforma shall
                     provide to Novation a credit, calculated as a percentage
                     (up to * %) of the Monthly Fees. Such methodology shall (A)
                     include a mechanism whereby an accelerator or multiplier
                     factor shall apply to each of the different levels of
                     severity or periods of time associated with Neoforma's
                     failure to meet such Service Level and (B) be designed to
                     increase the amount of the Service Level Credit applicable
                     to Neoforma's failure to meet such Service Level as such
                     level of severity or the time period of Neoforma's
                     nonperformance increases. Any such Service Level Credit
                     methodology shall be subject to the provisions of Section
                     16.3 (including the limitations set forth therein).

               (ii)  Reviewing the Type I Service Levels (x) during the
                     preparation of the Implementation Plan for each new release
                     and (y) from time to time during the Term. In connection
                     with such review, the PMO shall examine the (i) Services to
                     be provided , (ii) state of technology, (ii) Neoforma's
                     role as a leading provider of e-commerce services to the
                     healthcare industry, (iii) User (including Member) needs
                     and concerns and (iv) other relevant factors.

               (iii) During the six-month period commencing on the Effective
                     Date and from time to time during the Term, jointly
                     proposing, defining, documenting and implementing Service
                     Level metrics for Type II Service Levels that shall include
                     additional Service Levels. The PMO shall adhere to the
                     provisions of this Service Level Specifications and the
                     establishment and review procedures described in Attachment
                     2.

          (b)  Except as expressly stated otherwise in this Service Level
               Specifications, the addition, deletion or modification of Service
               Levels shall be subject to the mutual agreement of Neoforma and
               Novation.

__________________________

  * Confidential treatment requested.

                                       N-3



          (c)  Neoforma and Novation agree that if they are unable to agree upon
               any of the Service Levels that are to be established, such
               disagreement will be treated as a Disputed Matter subject to the
               dispute resolution and arbitration provisions set forth in
               Section 18 of the Outsourcing Agreement.

     1.5. Continuous Improvement

          (a)  Neoforma and Novation acknowledge that Service Levels will be
               subject to continuous improvement during the Term, and will be
               adjusted through the review process described in Section 1.5(b).

          (b)  From time to time and no less frequently than annually during the
               Term, Neoforma and Novation shall jointly review (i) the
               then-current Service Levels, (ii) the percentage difference
               between Neoforma's actual performance and the then-current
               Service Levels and (iii) information indicating industry-wide
               improvements of delivery of substantially similar services. The
               Service Levels shall be adjusted based on the review described in
               the preceding sentence.

     1.6. Failure to Meet Service Levels

          (a)  If Neoforma fails to meet any Service Level, then Neoforma shall
               (i) promptly perform a root-cause analysis to identify the cause
               of such failure, (ii) provide a report to Novation in accordance
               with Section 1.2, and (iii) take such action as may be necessary
               or appropriate to avoid such failure in the future and begin to
               meet the Service Level as promptly as practicable.

          (b)  If Neoforma fails to meet a Service Level, Neoforma shall credit
               the applicable Service Level Credit to Novation on the monthly
               invoice immediately following the report of such failure to
               Novation. In no event shall the total amount of Service Level
               Credits credited to Novation with respect to failures to meet any
               Service Levels occurring in a single month exceed, in the
               aggregate, * of Monthly Fees. If any Service Level Credit remains
               outstanding upon the expiration or termination of this
               Outsourcing Agreement and no Service charges remain payable,
               Neoforma shall pay Novation such remaining amount in cash within
               30 days after such expiration or termination.

__________________________

  * Confidential treatment requested.

                                       N-4



          (c)  Neoforma shall notify Novation in writing if Novation becomes
               entitled to a Service Level Credit as part of the monthly status
               report referred to in Section 1.2. Such notice shall specify the
               performance failure and the amount of the Service Level Credit
               that Novation is entitled to receive.

    1.7.  Quality Assurance

          Neoforma shall provide and implement such quality assurance procedures
          as may be necessary or appropriate for the Services to be provided in
          accordance with the Service Levels. Such procedures will include
          checkpoint reviews, testing and other procedures that will enable
          Novation to monitor the quality of Neoforma's performance and upon
          Novation's request, will be provided to Novation.

    1.8   Measurement and Monitoring Tools

          Neoforma shall utilize such measurement and monitoring tools and
          procedures as may be necessary or appropriate to measure and report on
          Neoforma's performance of the Services against the applicable Service
          Levels. Such measurement and monitoring shall permit reporting at a
          level of detail sufficient to verify compliance with the Service
          Levels and shall be subject to audit by Novation in accordance with
          Section 17 of the Outsourcing Agreement. Neoforma shall provide
          Novation with information and access to such tools and procedures upon
          Novation's request.

    1.9   Customer Satisfaction

          No later than the 12-month anniversary of the Effective Date and on an
          annual basis thereafter during the Term, Neoforma shall conduct a
          satisfaction survey using a mutually agreed upon survey to capture
          Novation and Member perceptions in respect of the delivery of the
          Services. Neoforma shall provide the survey and proposed distribution
          list therefore to Novation for its review and approval. The
          individuals set forth in Neoforma's proposed distribution list shall
          be a representative sample of Novation end users of the Services and
          senior management of Novation. Neoforma shall provide Novation with
          the results of such survey. Promptly thereafter, the Parties shall
          jointly review such results and identify any areas of customer
          dissatisfaction. Neoforma shall prepare a remedial plan and take such
          action as may be necessary or appropriate to remedy the causes of any
          recurring or significant customer dissatisfaction. Alliance members
          may conduct their own surveys and share these with Neoforma. In order
          to coordinate communications, the alliances will share pending survey
          language and timing with Neoforma marketing prior to distribution.

                                       N-5




2.   DETAILED DEFINITION OF SERVICE LEVELS

     2.1  Systems Up Time

          Neoforma is responsible for maintaining a system service level of at
          least *%. This means that excluding any scheduled system
          maintenance activities, the Novation Marketplace will be available for
          use by all Users at least *% of the time, 365 days a year, 24 hours
          a day. Systems Up Time shall be measured on a quarterly basis.

     2.2  Transaction Throughput Requirements

          For the purpose of this Service Level Specifications, (i) a
          "Transaction" is defined as any structured business document (EDI or
          XML) that is processed by the Novation Marketplace and (ii) "time
          within Novation Marketplace Operating Environment" is defined as the
          period of time during which the Novation Marketplace receives a
          Transaction, processes the Transaction and delivers it to an external
          organization (such as a Member-User, Supplier or other external
          entity) for further action. Neoforma is responsible for ensuring that
          the Novation Marketplace processes the various types of Transactions
          set forth below within the following time requirements:



                                                            Maximum Time Within
Type of Transaction                                  Novation Marketplace Operating Environment
- -----------------------------------------------------------------------------------------------
                                                  
Purchase Orders from User                            *
Change Purchase Orders                               *
Purchase Order Acknowledgments from Supplier         *
Ship Notices from Supplier                           *
Invoices from Supplier                               *
Price Files from Novation Marketplace to User        *
Price Files from Suppliers to Members                *
All Outbound Fax Transactions (CDP)                  *
All Other Non-Fax Transactions                       *


     2.3  Novation Marketplace User Capacity

          Neoforma will ensure that the Novation Marketplace is capable of
          supporting a User capacity of (i) * total named Users with independent
          log-ins by *, with additional capability to scale to * named Users
          with independent log-ins afterwards if and when needed by Novation,
          and (ii) * Users accessing the Novation Marketplace simultaneously
          (with "simultaneously" being defined as within a one second time
          period). In

_____________________________

 * Confidential treatment requested.

                                       N-6



           connection with the development of the Implementation Plan, Neoforma
           and Novation shall develop a methodology to more accurately measure
           the Novation Marketplace's User Capacity.

     2.4   Novation Marketplace Content Capacity

           Neoforma will ensure that the Novation Marketplace is capable of
           supporting (i) *, (ii) * and (iii) *.

     2.5   Total Transaction Capacity

           Neoforma will ensure that the Novation Marketplace is capable of
           supporting the following number of total Transactions annually by the
           following dates:

Number of Annual Transactions Supported                       by December 31 of
- -------------------------------------------------------------------------------

     *

     2.6   Peak Time Transactions Capacity

           Neoforma will ensure that the Novation Marketplace is capable of
           supporting the following number of "Peak Time Transactions" (defined
           as Transactions which utilize the Novation Marketplace in a
           high-traffic period measuring five minutes) by the following dates:

Number of Peak Time Transactions Supported                    by December 31 of
- -------------------------------------------------------------------------------

     *

     2.7   Network Connection Speed

           Neoforma will ensure that the Novation Marketplace will provide (i)
           network connections at speeds of * or greater and (ii) backup
           internet connections at speeds of * or greater. Additionally, these
           data communication speeds will be reviewed, and the system will be
           upgraded to higher speeds as data communication technologies with
           desired specifications become cost effective.

_____________________________

 * Confidential treatment requested.

                                       N-7



     2.8   Development/Test/Production Environments

           Parties agree to develop a process that provides for versioning and
           revision control in the production environment. Parties also agree
           that a testing environment will be accessible to Novation across the
           Internet for the purpose of pre-production approvals.

                                       N-8



                                  Attachment 1

                                   Definitions

"Monthly Fees" means the total of all Contract Transaction Fees and Non-Contract
     Transaction Fees collected by Neoforma during any calendar month.

"Service Level Credit" means the amount to be credited to Novation upon any
     failure to meet a particular Service Level, which, in the aggregate, shall
     be equal * of the Monthly Fees for the month in which Neoforma failed to
     meet such Service Level.


_____________________________

 * Confidential treatment requested.

                                       N-9



                                  Attachment 2

                       Service Level Establishment Process

Set forth below is the process by which Neoforma and Novation will develop Type
II Service Levels during the Term.

1.   Establishment of Type II Service Levels

     1.1  Identification. The PMO shall meet regularly to carry out Neoforma's
          and Novation's responsibilities described in this Service Level
          Specifications. Within the applicable timeframes, the PMO shall
          deliver a report to Neoforma and Novation that contains (i) a detailed
          description of the proposed Type II Service Level and how it will be
          measured, (ii) the purpose of the proposed Service Level, and (iii) a
          recommendation of an appropriate measurement period to measure such
          Service Level. None of the foregoing items may contravene the
          provisions of this Service Level Specifications.

     1.2  Measurement. Within 30 days after mutual agreement of Neoforma and
          Novation to proceed to measure any of such proposed Service Levels,
          Neoforma shall commence the applicable measurement period relating to
          each proposed Service Level.

     1.3  Implementation. Upon completion of the applicable measurement period,
          Neoforma and Novation will meet to consider the reports provided, the
          materials prepared by the PMO and the data collection results
          presented by Neoforma or Novation. Within 30 days of such first
          consideration, Neoforma and Novation shall implement such proposed
          Service Level. Neoforma shall begin reporting on such Service Level
          during the next succeeding measurement window.

                                      N-10




                                  Attachment 3

                          Type I Service Levels Summary



- -------------------------------------------------------------------------------------------------------------------------
                                                                                         BASE LEVEL SERVICE
               MEASUREMENT                           DEFINITION                                TARGET
- -------------------------------------------------------------------------------------------------------------------------
                                                                          
Systems Up Time                           Percent of time Novation              *%
                                          Marketplace is available to all       (24 hours a day, 365 days a year)
                                          Users, excluding scheduled
                                          maintenance
- -------------------------------------------------------------------------------------------------------------------------
Novation Marketplace User Capacity        Total number of named Users with      * (with capability to scale up to *
                                          independent log-ins which the         afterwards if and when needed by
                                          Novation Marketplace can              Novation)
                                          support

- -------------------------------------------------------------------------------------------------------------------------
Simultaneous User Capacity                Number of Users accessing the         *
                                          Novation Marketplace
                                          simultaneously which the
                                          Novation Marketplace can support

- -------------------------------------------------------------------------------------------------------------------------
Content Capacity                          Amount of data which the              *
                                          Novation Marketplace can support


- -------------------------------------------------------------------------------------------------------------------------
Total Transaction Capacity                Number of Transactions which the      *
                                          Novation Marketplace can support
                                          annually
- -------------------------------------------------------------------------------------------------------------------------
Peak Time Transactions Capacity           Number of Transactions which the      *
                                          Novation Marketplace can support
                                          in a high-traffic period measuring
                                          5 minutes

- -------------------------------------------------------------------------------------------------------------------------
Transaction Throughput Requirements       Maximum time within the Novation      PO's from User    *
                                          Marketplace for various types of      Change PO's       *
                                          Transactions                          PO Acknow.                  *
                                                                                Ship Notices from Supp.     *
                                                                                Invoices from Supplier      *
                                                                                Price Files, Ex. to User       *
                                                                                Price Files, Supplier to User  *
                                                                                Outbound Fax Trans.            *
                                                                                Other Non-Fax Trans.           *

- -------------------------------------------------------------------------------------------------------------------------
Network Connection Speed                  Novation Marketplace connection       * for network connections;
                                          speed minimum requirements            * for backup internet connections
- -------------------------------------------------------------------------------------------------------------------------


_____________________________

 * Confidential treatment requested.

                                      N-11