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

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                ------------------------------------------------

                             Washington, D.C. 20549
                             ----------------------

                                    FORM 10-K
                                    ---------

(Mark One)

[X]   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934

                   For the fiscal year ended December 31, 2001

                                       OR

[_]   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

                         Commission file number 0-26190

                                US ONCOLOGY, INC.

             (Exact name of registrant as specified in its charter)

                           ---------------------------

           Delaware                                      84-1213501
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

16825 Northchase Drive, Suite 1300, Houston, Texas          77060
    (Address of principal executive offices)              (Zip Code)

       Registrant's telephone number, including area code: (832) 601-8766

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

                                      None
           Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock ($.01 par value)
                                (Title of class)

                    Series A Preferred Stock Purchase Rights
                                (Title of class)

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

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

      The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 21, 2002 was $645,462,369 (based upon the closing
sales price of the Common Stock on The Nasdaq Stock Market on March 21, 2002 of
$8.42 per share). For purposes of this calculation, shares held by
non-affiliates exclude only those shares beneficially owned by executive
officers, directors and stockholders beneficially owning 10% or more of the
outstanding Common Stock.

      There were 93,157,809 shares of the Registrant's Common Stock outstanding
on March 21, 2002. In addition, as of March 21, 2002, the Registrant had agreed
to deliver approximately 6,725,417 shares of its Common Stock on certain future
dates for no additional consideration.

                       DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the Registrant's Proxy Statement issued in connection with the
 Registrant's 2002 Annual Meeting of Stockholders are incorporated by reference
                             into Part III hereof.

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PART I

As used in this report, unless the context otherwise requires, the terms, "US
Oncology," the "Company," "we," "our" and "us" refer to US Oncology, Inc. and
its consolidated subsidiaries.

Item 1. Business

      US Oncology is America's premier cancer care services company. We support
the cancer care community by providing practice management, oncology
pharmaceutical management, outpatient cancer center operations and cancer
research and development services. Our 868 network physicians provide care to
patients in over 450 locations, including 77 outpatient cancer centers and 12
Positron Emission Tomography (PET) installations, across 27 states. In 2001, we
estimate that our network physicians provided care to over 500,000 cancer
patients, including approximately 200,000 new patients, representing 15% of the
nation's newly diagnosed cancer cases.

      Our network's community-based focus allows our affiliated physicians to
provide to patients locally the latest advances in therapies, research and
technology, often within a single outpatient setting. As a result, patients
access the best possible treatment with the least amount of disruption to their
daily lives. Our nationwide presence enables us to rapidly implement best
practices and share new discoveries, and our network's size affords competitive
advantages in areas such as purchasing, information systems, access to clinical
research and leading edge technology.

      On June 15, 1999, a wholly owned subsidiary of US Oncology, Inc. merged
with Physician Reliance Network, Inc. ("PRN"), a cancer management company. As a
result of the merger, PRN became a wholly owned subsidiary of US Oncology, Inc.,
and each holder of PRN common stock received 0.94 shares of our common stock for
each PRN share held. This transaction, which is referred to as the "AOR/PRN
merger," was accounted for under the pooling of interests method of accounting
and treated as a tax-free exchange. Our financial statements included in this
report have been retroactively restated to combine the accounts of US Oncology
(formerly known as American Oncology Resources, Inc. ("AOR")) and PRN for all
periods presented using their historical bases.

      US Oncology was incorporated in October 1992 under the laws of the State
of Delaware. Our principal executive offices are located at 16825 Northchase
Drive, Suite 1300, Houston, Texas, and our telephone number is (832) 601-8766.
Our common stock is traded on the Nasdaq Stock Market under the symbol "USON."

Our Operations

      We provide our network physicians with a comprehensive set of services
that empowers them to offer to cancer patients in outpatient settings a full
continuum of care, including professional medical services, chemotherapy
infusion, radiation oncology services, stem cell transplantation, clinical
laboratory, diagnostic radiology, pharmacy services and patient education. The
services include:

      Oncology Pharmaceutical Management Services. We purchase and manage
specialty oncology pharmaceuticals for our network physicians. We are one of the
largest buyers of oncology pharmaceuticals within the United States, purchasing
more than $700 million in cancer drugs annually on behalf of our network
physicians. In addition, we operate 31 licensed pharmacies and over 400
admixture sites that are staffed with 51 pharmacists and 180 pharmacy
technicians.

      Outpatient Cancer Center Operations. We develop and manage comprehensive,
community-based cancer centers, which integrate all forms of outpatient cancer
care, from the most advanced laboratory and radiology diagnostic capabilities to
chemotherapy and radiation therapy. We provide a "turn-key" service, developing
centers from the preliminary feasibility study through full operational status,
including site acquisition, architectural design, construction management,
equipment evaluation and acquisition, physician and technical staff recruiting
and billing and collection services. We have developed and manage 77
comprehensive outpatient cancer centers located in urban, suburban and rural
settings. Overall, we maintain over 1.2 million square feet of medical office
space and an installed base of 112 linear accelerators, 59 Computerized Axial
Tomography (CT) units and 12 PET units.

      Cancer Research and Development Services. We facilitate a broad range of
cancer research and development activities through our network. We contract with
pharmaceutical and biotechnology firms to provide a


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comprehensive range of services, from study concept and design to regulatory
approval, including complete Phase I through Phase IV trials, recruitment of
studies, protocol writing and scientific approval process, supported by a single
Clinical Review Advisory Board. Our 1,100 research team members, working in
conjunction with our network of 650 participating physicians in more than 330
research locations, conduct approximately 100 clinical trials each year with
accruals of more than 3,500 patients during 2001.

      Other Practice Management Services. We act as the exclusive manager and
administrator of all day-to-day nonmedical business functions connected with our
affiliated practices. As such, we are responsible for physician recruiting, data
management, accounting, systems, compliance and capital allocation to facilitate
growth in practice operations.

Physician Practice Management Model

      Currently, we provide all of our services to the practices in our network
under long-term comprehensive service agreements. When we entered into each
agreement, we paid consideration to physicians to purchase the nonmedical assets
of their practices and to enter into service agreements. Utilizing this strategy
(sometimes referred to as the "physician practice management" or "PPM" business
model), we have assembled the nation's largest network of oncologists, who care
for 15 percent of the nation's new cancer cases annually. However, the PPM model
relies on significant and recurring capital investments in intangible assets in
order to expand the network. Going forward we generally do not intend to add
physicians to our network in new markets through the PPM model. Rather, we will
contract with practices to provide our core services on a non-PPM basis. See the
discussion under "--Strategic Repositioning."

      Under the PPM model, in connection with affiliating with a practice, we
entered into a service agreement with the practice and purchased the practice's
nonmedical assets. In consideration of these arrangements, we typically
delivered cash and subordinated promissory notes and agreed to deliver shares of
our common stock at specified future dates (typically on the second through
fifth anniversaries of the closing date). In addition, in most of our affiliated
practices, each physician entered into an employment or non-competition
agreement with the practice. We do not provide medical care to patients or
employ any of the affiliated practices' clinical staff who provide medical care.
However, under the terms of the service agreements with the practices, we are
responsible for the compensation and benefits of the practices' non-physician
medical personnel, and our financial statements reflect the costs of such
compensation and benefits.

      The service agreements with the practices generally have contractual terms
of 40 years. These agreements provide that they cannot be terminated by the
practices or by us without cause. Each agreement provides for payment to us of a
service fee and reimbursement of all practice costs as consideration for our
services. Some of the service agreements, known as the "earnings model"
agreements, provide that this fee is a percentage of the practice's earnings
before income taxes. In others, known as "net revenue model" agreements, the fee
consists of a fixed fee, a percentage fee (in most states) of the practice's net
revenues and, if certain performance criteria are met, a performance fee. Where
our service agreement follows the net revenue model, the practice is entitled to
retain a fixed portion of net revenue before the service fee (other than
practice operating costs) is paid to us. The effect of this priority of payments
under the net revenue model agreements is that we bear a disproportionate share
of increasing practice costs. This is because if, after payment of operating
expenses, there are not sufficient amounts available to pay both the fixed
management fee and the fixed percentage to be retained by the practice, the
entire amount of such shortfall is a reduction to our management fee. For this
reason, we believe that the net revenue model does not provide adequate
incentives for our practices to manage costs efficiently.

      Beginning in the Fall of 2000, we commenced a network-wide initiative to
convert our affiliated practices from the net revenue model to the earnings
model. We believe that the earnings model more appropriately aligns our economic
interests with those of our affiliated practices, particularly in a rising cost
environment. In addition, we have negotiated, and intend to continue to
negotiate, terminations of certain service agreements that we do not believe
will attain satisfactory performance under either model. During 2001, we
successfully converted twelve practices formerly under the net revenue model to
the earnings model. We continue to pursue other conversions. Changing the manner
in which fees are calculated has and will in some cases result in management
fees that are, at least in the short term, lower than those that would have been
received under the net revenue model. For the fourth quarter of 2001, 63% of our
revenue was derived from practices under the earnings model as of March 11,
2002, and several other additional affiliated practices are currently in
negotiations regarding conversion to this model. We


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intend to continue to convert practices under the revenue model to the earnings
model or to allow them to terminate their PPM arrangement and adopt the service
line structure, as described below under "--Strategic Repositioning."

Strategic Repositioning

      In September 2001, we announced an initiative to offer our core
cancer-related services nationwide to oncology practices that are outside of our
current network under what we call the "service line structure." Oncology
practices will now be able to contract for our services without entering into
comprehensive service agreements that call for our involvement in all business
aspects of their day-to-day operations. Under the service line structure, we
will no longer pay consideration to physicians in new markets to acquire the
nonmedical assets of their practices. We believe that this new strategic
initiative will enable us to expand our oncology network to meet the growing
demand for cancer care services without the recurring capital investments in
intangible assets, limited return on assets, increased compliance requirements
and reimbursement risks and the delays inherent in expanding under the PPM
model. The service line structure will also allow significant numbers of new
physicians to affiliate with us and utilize our core services while maintaining
complete ownership and control of their oncology practices' assets. In February
of 2002, we executed definitive agreements with the first external practice to
adopt the service line structure and expect to begin providing services to that
practice during the second quarter of 2002.

      Our existing affiliated practices will remain in the network and be given
a choice of maintaining a PPM relationship with us or transitioning to a service
line relationship. We believe that conversion to the service line arrangement
will allow physicians to regain management control of their practices and
effectively increase physician compensation, while allowing them to retain
access to virtually all of our core services at market based rates. If all
affiliated practices transition to the service line structure, we would expect
the potential financial impact could include significant, but largely non-cash,
restructuring and reorganization costs, and a reduction in our earnings related
to those practices. We do not think that all of our practices will transition to
the service line structure in the near future. We also cannot accurately predict
which practices will transition or when they will do so. Thus, we are unable to
more accurately predict the financial impact of this transition until practices
agree to change structures.

      Although we will no longer expand into new markets under the PPM model, we
may expand certain practices that continue to operate under the existing PPM
model. Existing affiliated practices that choose to remain under the PPM model
will continue to be managed according to existing agreements, and we will
continue to attempt to convert net revenue model service agreements to the
earnings model. In certain cases, we may acquire the nonmedical assets of
additional physician practices under the PPM model and integrate those
physicians with an existing practice under the PPM model.

      While we believe that the service line structure will be attractive to
practices in our existing network, we are not currently able to predict the
number of practices and physicians that may transition to this new model or the
timing of negotiations and implementation of such transitions. As our existing
practices complete their evaluation of the service line structure, we believe
many will elect to make the transition to that structure. At the same time,
however, we are firmly committed to our existing operations and believe that our
repositioning will be successful if our affiliated practices convert to either
the earnings model within the PPM structure or the service line structure.

Service Line Structure

      To implement our service line strategy, we will be internally reorganized
into three divisions. We will manage and operate our business under distinct
service lines, and expect to begin segment reporting according to those service
lines in 2002. For management and reporting purposes, our existing PPM
operations will be divided into the various service line offerings included in
the PPM relationship.

Oncology Pharmaceutical Management

      This division would offer the pharmaceutical management services we
currently provide to our network physicians. We expect to retain a
market-competitive service fee that is a percentage of the cost of all drugs
purchased on behalf of clients. Based on current network volume, and our
preliminary assumptions with respect to our potential fees, this division would
generate more than $780 million in annual revenues from currently affiliated
practices.


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      The oncology pharmaceutical management service line combines all of our
core competencies and service offerings related to oncology drugs into a single,
coordinated business division. We expect the division to provide a
comprehensive, integrated solution to all of the drug needs of an oncology
practice, from purchasing drugs and supplies to mixing and managing drugs for
infusion, to post-use evaluation and data aggregation. The division is aimed at
providing efficient, high quality management of drugs from the manufacturer to
the patient, including the following service offerings:

      .     Purchasing. Coordination of purchasing for oncology drugs and Group
            Purchasing Organization services.

      .     Inventory Management. Tracking of drug usage and reduction of waste,
            implementation of network-wide systems and protocols and
            coordination of drug replacement assistance with respect to unused
            expired drugs and drugs for indigent patients.

      .     Admixture Services. Coordination of comprehensive mixing services
            for oncology drugs.

      .     Information Services. Data aggregation and analysis regarding drug
            usage for use by physicians, pharmaceutical companies and patients.

      .     National Network Participation. Coordination of meetings and
            discussions among other network physicians regarding treatment
            protocols, drug effectiveness and other pharmacy-related issues.

      .     Retail Pharmacy. In addition to providing pharmaceutical services
            for our affiliated practices that allow them to infuse drugs in
            their offices, we expect that the oncology pharmaceutical management
            division will permit us to participate in the market for retail
            pharmaceuticals in the oncology arena. Although most oncology drugs
            continue to be administered in the physician's office, in the event
            additional self-administered therapies become available, our network
            of trained pharmacists, combined with the other core competencies of
            the network, will enable us to serve patients in a convenient retail
            pharmacy context also.

      Under the service line structure, pharmaceutical management services
contracts will have a term of up to five years. We will be responsible for
providing all of the services outlined above and will be paid on a per-dose
basis an amount reflecting our cost per dose plus an agreed upon percentage. In
addition, the practices will pay a per-dose admixture fee. The practices will
also be required to acquire substantially all of their drugs through us and to
use our admixture services. Under all contracts we will bear the costs and risks
of ownership of pharmaceuticals and will be able to capture the benefits of any
drug efficiencies resulting from our mixing operations. We will act as a group
purchasing organization on behalf of the practices and will receive a fee from
pharmaceutical manufacturers for this service. In addition, under the contracts,
we will own data gathered in connection with our pharmaceutical services and
intend to enter into agreements to sell such data to pharmaceutical companies
and to others.

Outpatient Cancer Center Operations

      This division will contract with oncology practices and clinics to provide
expertise in outpatient cancer center development and operations and access to
capital for development. The portfolio of service offerings includes the full
range of outpatient cancer center development and management, including
deployment of radiation therapy and diagnostic technology, including PET. Both
the economic arrangement and the types of services offered by this division
under the service line structure remain largely unchanged from the manner in
which we conduct business in this segment today at earnings model practices.
Based on current network performance and our existing affiliated practices, this
division would produce more than $280 million in annual net patient revenues.

      The division provides a "turn-key" service, developing centers from the
preliminary feasibility study through full operational status, including site
acquisition, architectural design, construction management, equipment evaluation
and acquisition, and physician and technical staff recruiting. Once a center is
operational, the division provides full operations and facilities management,
including marketing and other related services. Practices benefit from having
access to low-cost capital, operational expertise gained from pioneering
outpatient cancer centers, the latest technology to enhance patient care and
diversified revenue sources.


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      We currently manage 77 comprehensive outpatient cancer centers located in
urban, suburban and rural settings under PPM arrangements. We manage over 1.2
million square feet of medical office space, an installed base of 112 linear
accelerators, 59 CT units and 12 PET units.

      The Outpatient Cancer Center Operations division manages all aspects of
the development and operation of comprehensive outpatient cancer centers.
Throughout all stages of the process of developing and operating a cancer
center, we and the local physicians collectively make all material decisions and
coordinate strategic and planning activities, including:

      .     Market Evaluation. Market assessment, including evaluation of
            competition, alternative treatment sources, demographic trends,
            referral patterns and patient base and assessment of opportunities
            for expansion.

      .     Pre-Construction Analysis and Planning. Site selection, managing
            planning and zoning requirements, developing preliminary space
            requirements, coordinating certificate of need or similar approval
            process, conducting site engineering and environmental studies,
            developing a master site plan, preliminary project cost estimates,
            financial planning and a preliminary staffing and equipment plan.

      .     Construction. Coordination and supervision of all aspects of the
            construction of the cancer center including analysis of conformity
            with project costs and schedule goals.

      .     Equipment Services. Equipping and furnishing the center,
            coordinating installation and in-service training for center staff
            and maintaining of equipment.

      .     Personnel. Setting appropriate staffing levels and evaluating,
            retaining and training the necessary technical and other staff to
            operate the center, including physicists, dosimetrists, radiation
            therapists, nurses, social workers, dieticians, secretaries,
            clerical staff, data managers and research staff.

      .     Operations. Management of all of the day-to-day business operations
            of the cancer center, including provision of supplies, management of
            necessary information systems, front office operations, billing and
            collection, financial planning and reporting, benchmarking and
            introduction of network best practices.

      .     Marketing, Payor Relationships and Strategic Planning. Assistance in
            developing competitive fee schedules and negotiations with payors,
            monitoring of payor contract compliance, marketing and strategic
            planning services, including physician recruitment, strategic
            partnerships and new service opportunities.

      Under the service line structure, Outpatient Cancer Center Operations will
be conducted pursuant to leases and service agreements with fifteen-year terms.
Under the leases for both equipment and real estate, the affiliated practices
will pay our economic cost related to the property plus, in the case of
radiation assets, an amount sufficient to give us a predetermined return on
invested capital. In addition, we will receive a service fee equal to 30% of net
earnings from radiation operations, subject to a fee rebate to the extent
certain performance criteria are achieved by the practice. The agreements will
include mutual non-competition covenants. In addition, practices will be
required to utilize our pharmaceutical management services within the cancer
centers.

Cancer Research and Development Services

      This division will provide a full range of oncology drug development
services, from study concept and design to regulatory approval, including
complete Phase I-IV clinical trials. The division will contract with
pharmaceutical and biotechnology firms and focus on bringing investigational
therapies to cancer patients through our network of community-based oncology
researchers.

      The division provides a complete range of research and development support
services, including recruitment of studies, protocol writing and scientific
approval process, supported by a single Clinical Review Advisory Board. A team
of research professionals, which includes the study principal investigator, site
investigator,


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site sub-investigator, research nurse/coordinator, clinical research assistants,
project managers and data coordinator/manager, supervises each research project.
Study management services include study initiation and monitoring, patient
accrual, project management, protocol implementation, data management and
statistical analysis. A single Institutional Review Board provides research
oversight.

      We currently supervise 98 clinical trials with accruals of more than 3,500
patients during 2001. We have completed more than 200 trials in conjunction with
our network of 650 participating physicians in more than 330 research locations.
We actively participated in clinical research trials that resulted in nine new
drugs in five years.

      The Cancer Research and Development service line provides a range of
services designed to give affiliated practices and their patients access to a
wide selection of the latest clinical trials. This division is also responsible
for our stem cell transplant program. We will contract with pharmaceutical
companies and others needing research services, generally on a per trial basis.
We will pay physicians for each trial based upon economic considerations unique
to each trial.

Other Key Support Services

      Under the service line structure, we will continue to offer certain other
services in which we have developed expertise as a result of operating under the
PPM Model. These services include:

      .     marketing
      .     recruiting of physicians and staff
      .     continuing education
      .     network communications
      .     public policy and patient advocacy

Transition from PPM Model to Service Line Structure

      We believe that the PPM model has afforded us the opportunity to greatly
improve the quality of community-based cancer care in the United States and to
assemble a nationwide network. We have developed core competencies relating to
oncology pharmaceutical management, cancer center development and operations and
cancer research and drug development services. We have also established
ourselves as the market leader in providing these services to oncology practices
in the United States.

      Nevertheless, management believes that the PPM model has limited growth
opportunities: access to capital is limited because the capital markets perceive
risks in the PPM structure, growth by practice acquisition is capital intensive,
and there are only a limited number of oncology practices available for
acquisition because of valuation difficulties and the perception of many
physicians that a PPM relationship diminishes their local control.

      With respect to those practices who elect to transition from the PPM model
to the service line structure, we would be able to eliminate the distractions of
lesser-valued services and reduce indebtedness. In addition, going forward under
the service line structure allows us to:

      .     increase and accelerate participation in the growing cancer services
            market
      .     reduce capital expenditures necessary to add practices
      .     improve shareholder value and capital structure through a less
            capital-intensive model
      .     prepare for future reimbursement and technology changes

      If all current affiliated practices transitioned to the service line
structure, thus eliminating the medical oncology practice management
responsibilities and related fees, we expect that there would be reduction in
long-term and intangible assets currently reflected on our balance sheet and
transitional and restructuring costs. As practices transition to this service
line structure, we would expect the financial impact to be a reduction in debt,
restructuring and reorganization costs, mostly non-cash related, and a reduction
in our earnings related to those practices. We cannot assess at this time which,
or how many, practices will adopt the service line structure, and the exact
extent of the above-described financial impacts will depend on which practices
convert.


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      It is not integral to our strategy that all or any of our currently
affiliated practices adopt the service line structure, and we currently expect
that a large percentage of existing affiliated practices will stay on the PPM
model for the foreseeable future. With respect to continuing PPM relationships,
we will continue to negotiate conversions to the earnings model and otherwise
manage these practices in accordance with their service agreements. We remain
fully committed to those practices with which we have PPM relationships and will
continue to provide the complete range of PPM services to them.

Competition

      Some of our competitors have greater financial, technical, marketing and
managerial resources than we have. To the extent that competitors are owned by
pharmaceutical manufacturers, retail pharmacies, insurance companies, HMOs or
hospitals, they may have pricing advantages that are unavailable to us and other
independent companies. While competition is often based primarily on price and
quality of service, it can also be affected by the ability to develop and
maintain relationships with patients and referral sources, depth of product
line, technical support systems, specific patient requirements and reputation.

      Pharmaceutical Management. The specialty pharmaceutical industry is highly
competitive and is undergoing consolidation. The industry is fragmented, with
many public and private companies focusing on different product or customer
niches. We are unique in our exclusive focus on oncology pharmaceuticals. Some
of our current and potential competitors include:

      .     specialty pharmacy distributors, such as Accredo Health,
            Incorporated, Caremark Rx, Inc., Priority Healthcare Corporation and
            Gentiva Health Services, Inc.;

      .     specialty pharmacy divisions of national wholesale distributors;

      .     pharmacy benefit management companies, such as Express Scripts, Inc.
            (minority-owned by New York Life Insurance Co.), Merck-Medco Managed
            Care, LLC (an affiliate of Merck & Co., Inc.) and AdvancePCS;

      .     hospital-based pharmacies;

      .     retail pharmacies;

      .     home infusion therapy companies;

      .     group purchasing organizations (GPOs);

      .     manufacturers that sell their products both to distributors and
            directly to users, including clinics and physician offices; and

      .     hospital-based comprehensive cancer care centers and other alternate
            site health care providers.

      Outpatient Health Care Centers. Outpatient care is a growing trend, but
the sector is highly fragmented, with no other company focusing exclusively on
comprehensive cancer centers. Many hospitals and regional medical centers
operate outpatient care centers, offering primary care, urgent care, diagnostic
imaging like MRIs and heart scans, minor surgery (known as ambulatory surgery
centers or ASCs), and a range of other specialties including oncology. Although
fragmented and predominantly locally-focused, our strongest competitors are
hospitals or joint ventures between hospitals and oncology practices who
finance, build and operate comprehensive cancer centers adjacent to a large
hospital or as a satellite location within the hospital system. Companies such
as SurgiCare, Inc. (for ASCs) and Outpatient Imaging Affiliates (for diagnostic
radiology imaging) also build and operate outpatient care centers, often in
partnership with hospitals or HMOs. Some of these companies could attempt to
enter or expand their presence in the oncology market.

      Affiliated Practices. Our profitability depends in large part on the
continued success of our affiliated practices. The business of providing health
care services is highly competitive. The affiliated practices face


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competition from several sources, including sole practitioners, single- and
multi-specialty practices, hospitals and managed care organizations.

Regulation

      General. The health care industry is highly regulated, and there can be no
assurance that the regulatory environment in which we and our affiliated
practices operate will not change significantly and adversely in the future. In
general, regulation and scrutiny of health care providers and related companies
are increasing.

      There are currently several federal and state initiatives relating to the
provision of health care services, the legal structure under which those
services are provided, access to health care, disclosure of health care
information, costs of health care and the manner in which health care providers
are reimbursed for their services. One of these initiatives being conducted by
the Office of the Inspector General is focusing on, among other issues, clinical
research, physician coding, pharmaceutical relationships, credit balances and
group purchasing organization activities, which may result in government actions
that could negatively impact our operations. It is not possible to predict
whether any such initiatives will result in new or different rules or
regulations or other actions or what their form, effective dates or impact on us
will be.

      Our affiliated practices are intensely regulated at the federal, state and
local levels. Although these regulations often do not directly apply to us, if a
practice is found to have violated any of these regulations and, as a result,
suffers a decrease in its revenues or an increase in costs, our results of
operations might be materially and adversely affected.

      Licensing and Certificate of Need Requirements. Every state imposes
licensing requirements on clinical staff, individual physicians and on
facilities operated or utilized by health care providers. Many states require
regulatory approval, including certificates of need, before (1) establishing
certain types of health care facilities, (2) offering certain services or (3)
expending amounts in excess of statutory thresholds for health care equipment,
facilities or programs.

      Privacy Regulations. The Department of Health and Human Services published
new privacy regulations on December 28, 2000 under the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"). Currently, the privacy
regulations are subject to further comment or revision by the new executive
administration. When final, the privacy regulations may impact our operations
with respect to the transfer of data between us and the affiliated practices.
Already adopted in final form, and also a part of HIPAA, are security and
electronic signature standards that regulate how we maintain personally
identifiable health information in our databases. We believe we are taking
appropriate measures to comply with these requirements, which will require
significant expenditures by us.

      Fee-Splitting; Corporate Practice of Medicine. The laws of many states
prohibit physicians from splitting professional fees with non-physicians and
prohibit non-physician entities, such as US Oncology, from practicing medicine
and from employing physicians to practice medicine. The laws in most states
regarding the corporate practice of medicine have been subjected to limited
judicial and regulatory interpretation. We believe our current and planned
activities do not constitute fee-splitting or the practice of medicine as
contemplated by these laws. However, there can be no assurance that future
interpretations of such laws will not require structural and organizational
modification of our existing relationships with the practices. In addition,
statutes in some states in which we do not currently operate could require us to
modify our affiliation structure.

      Medicare/Medicaid Fraud and Abuse Provisions. Federal law prohibits the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of Medicare or state health program patients or patient care
opportunities, or in return for the purchase, lease or order of any item or
service that is covered by Medicare or a state health program. Pursuant to this
law, the federal government has pursued a policy of increased scrutiny of
transactions among health care providers in an effort to reduce potential fraud
and abuse relating to government health care costs.

      The Medicare and Medicaid anti-kickback amendments (the "Anti-Kickback
Amendments') provide criminal penalties for individuals or entities
participating in the Medicare or Medicaid programs who knowingly and willfully
offer, pay, solicit or receive remuneration in order to induce referrals for
items or services reimbursed


                                       8
<PAGE>

under such programs. In addition to federal criminal penalties, the Social
Security Act provides for civil monetary penalties and exclusion of violators
from participation in the Medicare or Medicaid programs.

      A violation of the Anti-Kickback Amendments requires the existence of all
of these elements: (i) the offer, payment, solicitation or receipt of
remuneration; (ii) the intent to induce referrals; (iii) the ability of the
parties to make or influence referrals of patients; (iv) the provision of
services that are reimbursable under any governmental health programs; and (v)
patient coverage under any governmental program. Fulfilling all of the
requirements of the applicable regulatory safe harbors ensures that a party has
not violated the Anti-Kickback Amendments. We believe that all compensation we
receive is for our services. We also believe that we are not in a position to
make or influence referrals of patients or services reimbursed under any
governmental health programs to our affiliated practices. Consequently, we do
not believe that the service fees payable to us should be viewed as remuneration
for referring or influencing referrals of patients or services covered by such
programs as prohibited by the Anti-Kickback Amendments. To our knowledge, there
have been no case law decisions regarding service agreements similar to ours
that would indicate that such agreements violate the Anti-Kickback Amendments.
Further, we believe that since we are not a provider of medical services, and
are not in a position to refer patients to any particular medical practice, the
remuneration we receive for providing services does not violate the
Anti-Kickback Amendments. Because of the breadth of the Anti-Kickback Amendments
and the government's active enforcement thereof, there can be no assurance,
however, that future interpretations of such laws will not require modification
of our existing relationships with practices.

      Prohibitions of Certain Referrals. The Omnibus Budget Reconciliation Act
of 1993 ("OBRA") includes a provision that significantly expands the scope of
the Ethics in Patient Referral Act, also known as the "Stark Bill." The Stark
Bill originally prohibited a physician from referring a Medicare or Medicaid
patient to any entity for the provision of clinical laboratory services if the
physician or a family member of the physician had an ownership interest in or
compensation relationship with the entity. The revisions to the Stark Bill
prohibit a referral to an entity in which the physician or a family member has
an ownership interest or compensation relationship if the referral is for any of
a list of "designated health services." The Stark Bill and its current and
future regulations apply directly to physicians, not to us. There can be no
assurance, however, that interpretations of such laws will not indirectly affect
our existing relationships with affiliated practices.

      Pharmacy Regulation. Our pharmaceutical service line, and our pharmacies
in particular, are subject to the operating and security standards of the Food
and Drug Administration (the "FDA"), the United States Drug Enforcement
Administration, various state boards of pharmacy and comparable agencies. Such
standards affect the prescribing of pharmaceuticals (including certain
controlled substances), operating of pharmacies (including nuclear pharmacies),
and packaging of pharmaceuticals. Complying with the standards, especially as
they change from time to time, could be extremely costly for us and could limit
the manner in which we implement this segment. Additionally, although the
pharmacies shall seek reimbursement only from the practices and never from any
third party payor, their existence and operation makes us a provider. While we
believe that our arrangements with our affiliated practices comply with the
Anti-Kickback Amendments and any relevant safe harbors as well as the Stark Law
and its exceptions, there can be no assurance that our pharmacy function will
not subject us to additional governmental review or an adverse determination.

      Antitrust. We and our affiliated practices are subject to a range of
antitrust laws that prohibit anti-competitive conduct, including price fixing,
concerted refusals to deal and division of markets. We believe we are in
compliance with these laws, but there can be no assurance that a review of US
Oncology or our affiliated practices would not result in a determination that
could adversely affect our operations and the operations of our affiliated
practices.

      Reimbursement Requirements. In order to participate in the Medicare and
Medicaid programs, our affiliated practices must comply with stringent
reimbursement regulations, including those that require certain health care
services to be conducted "incident to" or otherwise under a physician's
supervision. Satisfaction of all reimbursement requirements is required under
our compliance program. The practices' failure to comply with these requirements
could negatively affect our results of operations.

      Enforcement Environment. In recent years, federal and state governments
have launched several initiatives aimed at uncovering behavior that violates the
federal civil and criminal laws regarding false claims and fraudulent billing
and coding practices. Such laws require physicians to adhere to complex
reimbursement requirements


                                       9
<PAGE>

regarding proper billing and coding in order to be compensated for medical
services by governmental payors. Our compliance program requires adherence to
applicable law and promotes reimbursement education and training; however,
because we perform services for our practices, it is likely that governmental
investigations or lawsuits regarding practices' compliance with reimbursement
requirements would also encompass our activities. A determination that billing
and coding practices of the affiliated practices are false or fraudulent could
have a material adverse effect on us.

      The Federal False Claims Act is a frequently employed vehicle for
identifying and enforcing billing, reimbursement and other regulatory
violations. In addition to the government bringing claims under the Federal
False Claims Act, qui tam, or "whistleblower," actions may be brought by private
individuals on behalf of the government. A violation under the False Claims Act
occurs each time a claim is submitted to the government or each time a false
record is used to get a claim approved, when the claim is false or fraudulent
and the defendant acted knowingly. Under the False Claims Act, defendants face
exclusion from the Medicare/Medicaid programs and monetary damages of $5,500 to
$11,000 for each false claim, as well as treble damages.

      Compliance. We have a comprehensive compliance program designed to assist
us, our employees and our affiliated practices in complying with applicable law.
We regularly monitor developments in health care law and modify our agreements
and operations as changes in the business and regulatory environment require.
While we believe we will be able to structure all of our agreements and
operations in accordance with applicable law, there can be no assurance that our
arrangements will not be successfully challenged.

Employees

      As of December 31, 2001, we directly employed 3,581 people. As of December
31, 2001, the affiliated practices employed 4,673 people (excluding the network
physicians). Under the terms of the service agreements with the affiliated
practices, we are responsible for the practice compensation and benefits of the
practices' non-physician medical personnel. No employee of US Oncology or of any
affiliated practice is a member of a labor union or subject to a collective
bargaining agreement. We consider our relations with our employees to be good.

Service Marks

      We have registered the service mark "US Oncology" with the United States
Patent and Trademark Office.

Item 2. Properties

      We lease our corporate headquarters in Houston, Texas. We or the
affiliated practices own, lease or sublease the facilities where the clinical
staffs provide medical services. In connection with the development of
integrated cancer centers, we have acquired land valued at approximately $21.0
million. We anticipate that, as our affiliated practices grow, expanded
facilities will be required.

      In addition to conventional medical office space, we have developed
comprehensive cancer centers that are generally free-standing facilities in
which a full range of outpatient cancer treatment services is offered in one
facility. At December 31, 2001, we operated 77 integrated cancer centers and had
four cancer centers under development. Of the 77 cancer centers operated by us,
50 are leased and 27 are owned, ranging in size from 4,700 square feet to
112,400 square feet.

Item 3. Legal Proceedings

      The provision of medical services by our affiliated practices entails an
inherent risk of professional liability claims. We do not control the practice
of medicine by the clinical staff or their compliance with regulatory and other
requirements directly applicable to practices. In addition, because the
practices purchase and resell pharmaceutical products, they face the risk of
product liability claims. Although we maintain insurance coverage, successful
malpractice, regulatory or product liability claims asserted against us or one
of the practices could have a material adverse effect on us.

      In November 1999, we disclosed that we and one of our formerly affiliated
practices were the subject of allegations that the practice's billing practices
may violate the Federal False Claims Act. These allegations are


                                       10
<PAGE>

contained in two qui tam complaints, commonly referred to as "whistle-blower"
lawsuits, filed under seal prior to the AOR/PRN merger. The U.S. Department of
Justice has determined that it will not intervene in those qui tam suits. In
these suits, the individual who filed the complaint may choose to continue to
pursue litigation in the absence of government intervention, but has not yet
indicated an intent to do so.

      We have become aware that we and certain of our subsidiaries and
affiliated practices are the subject of additional qui tam lawsuits that remain
under seal, meaning that they were filed on a confidential basis with a U.S.
federal court and are not publicly available or disclosable. To date, the United
States has not intervened in any such suit against us. Because the complaints
are under seal, and because the Department of Justice and we are in the process
of investigating the claims, we are unable to assess at this time the
materiality of these lawsuits. Because qui tam actions are filed under seal,
there is a possibility that we could be the subject of other qui tam actions of
which we are unaware. We intend to continue to investigate and vigorously defend
ourselves against any and all such claims, and we continue to believe that we
conduct our operations in compliance with law.

      Qui tam suits are brought by private individuals, and there is no minimum
evidentiary or legal threshold for bringing such a suit. However, the Department
of Justice is legally required to investigate the allegations in these suits.
The subject matter of many such claims may relate both to our alleged actions
and alleged actions of an affiliated practice. Because the affiliated practices
are separate legal entities not controlled by us, such claims necessarily
involve a more complicated, higher cost defense, and may adversely impact the
relationship between us and the practices. If the individuals who file
complaints and/or the United States were to prevail in these claims against us,
and the magnitude of the alleged wrongdoing were determined to be significant,
the resulting judgment could have a material adverse financial and operational
effect on us including potential limitations in future participation in
governmental reimbursement programs. In addition, addressing complaints and
government investigations requires us to devote significant financial and other
resources to the process, regardless of the ultimate outcome of the claims.

      We and our network physicians are defendants in a number of lawsuits
involving employment and other disputes and breach of contract claims. In
addition, we are involved from time to time in disputes with, and claims by, our
affiliated practices against us. Although we believe the allegations are
customary for the size and scope of our operations, adverse judgments,
individually or in the aggregate, could have a material adverse effect on us.

Forward-Looking Statements and Risk Factors

      The following are or may contain forward-looking statements within the
meaning of the U.S. federal securities laws: (i) certain statements, including
possible or assumed future results of operations, contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," (ii)
any statements contained herein regarding the prospects for our business or any
of our services; (iii) any statements preceded by, followed by or that include
the words "believes," "expects," "anticipates," "intends," "estimates," "plans"
or similar expressions; and (iv) other statements contained herein regarding
matters that are not historical facts.

      Our business and results of operations are subject to risks and
uncertainties, many of which are beyond our ability to control or predict.
Because of these risks and uncertainties, actual results may differ materially
from those expressed or implied by forward-looking statements, and investors are
cautioned not to place undue reliance on such statements, which speak only as of
the date thereof.

      In addition to the specific risk factors described below, important
factors that could cause actual results to differ materially include, but are
not limited to, our success in implementing our proposed service line structure
described herein, the degree to which practices currently managed by us convert
to the earnings model or the service line structure rather than terminate their
affiliation, our ability to attract and retain additional physicians and
practices under the service line structure, our ability to obtain financing,
government regulations and enforcement, reimbursement for health care services,
changes in cancer therapy or the manner in which cancer care is delivered, drug
utilization, our ability to create and maintain favorable relationships with
pharmaceutical companies and other suppliers, and the operations of affiliated
practices. Below is a more detailed discussion of certain of these risks and
uncertainties.

      The cautionary statements contained or referred to herein should be
considered in connection with any written or oral forward-looking statements
that may be issued by us or persons acting on our behalf. We do not


                                       11
<PAGE>

undertake any obligation to release any revisions to or to update publicly any
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

      In general, because our revenues depend upon the revenues of our
affiliated practices, any of the risks below that harm the economic performance
of the practices will, in turn, harm us.

Declining reimbursement for pharmaceutical products used by oncologists could
adversely affect us.

      We cannot assure you that payments under state or federal government
programs will remain at levels comparable to present levels or will be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to these programs. We also cannot assure you that the services that we
provide and the facilities that we operate meet or will continue to meet the
requirements for participation in these programs.

      There is a continued risk of declining reimbursement for pharmaceuticals
used by oncologists as a result of changes in reimbursement methodology.
Currently, Medicare and most Medicaid programs reimburse providers for oncology
drugs based on the Average Wholesale Price (AWP) of the drugs. AWP is determined
by third-party information services using data furnished by pharmaceutical
companies. During 2000, the U.S. Department of Health and Human Services
announced its intention to change the basis of AWP, which would have resulted in
substantially lowered reimbursement from federal government programs for
chemotherapy agents and other pharmaceutical agents used by oncologists, without
any adjustment in reimbursement for services and other costs related to
chemotherapy. This would have resulted in oncologists incurring losses for the
administration of many chemotherapy treatments. Although the federal government
later stated that reimbursement levels for pharmaceuticals used to treat cancer
would not be reduced at that time, the agency responsible for the Medicare
program announced its belief that there is still a need to modify its
reimbursement scheme for pharmaceuticals. As a result of congressional action,
the General Accounting Office and Centers for Medicaid and Medicare Services
(CMS) conducted a comprehensive study to develop a more accurate reimbursement
methodology for outpatient cancer therapy services. The study was completed and
published in September of 2001, and the agencies and Congress continue to
discuss appropriate changes in reimbursement in response to the study. It is not
possible to assess the likely outcome of any change in reimbursement for
oncology services, particularly reimbursement of pharmaceuticals, whether
through federal agency initiatives or through the calculation of AWP from
information supplied by pharmaceutical companies. It is possible that changes in
reimbursement that are ultimately adopted or implemented could have a material
adverse effect on our operations and financial condition, either directly in the
case of our affiliated practices, particularly those on the revenue model, or
indirectly in the case of service line customers as a result of decreased
financial performance of such customers.

If our affiliated practices terminate their agreements with us, we could be
seriously harmed.

      Our practices may attempt to terminate their agreements with us. If any of
our larger practices were to succeed in such a termination, other than in
connection with a transition to the service line structure, we could be
seriously harmed. From time to time, we have disputes with physicians and
practices which could result in harmful changes to our relationship with them or
a termination of a service agreement if adversely determined. We are also aware
that some practices affiliated with other health care companies have attempted
to end or restructure their affiliations, although they do not have a
contractual right to do so, by arguing that their affiliations violate some
aspect of health care law. For example, some physicians have claimed that the
fee arrangements violate federal or state prohibitions on splitting fees with
physicians. If some of our network physicians or affiliated practices were able
to successfully make such arguments and terminate their affiliation with us,
there could be a materially adverse effect on us.

If a significant number of physicians leave our affiliated practices, we could
be seriously harmed.

      Our affiliated practices usually enter into employment or non-competition
agreements with their physicians that provide some assurance to both the
practice and to us with respect to continuing revenues. We and our affiliated
practices try to maintain such contracts. However, if a significant number of
physicians terminate their relationships with our affiliated practices, we could
be seriously harmed.


                                       12
<PAGE>

Our affiliated practices may be unable to enforce non-competition provisions
with departed physicians.

      Most of the employment agreements between the practices and their
physicians include a clause that prevents the physician from competing with the
practice for a period after termination of employment. We cannot predict whether
a court will enforce the non-competition covenants in the agreements. If
practices are unable to enforce the non-competition provisions of their
employment agreements, we could be seriously harmed.

Our repositioning is placing significant stress on our network and on our
relationships with physicians.

      Our repositioning is placing significant stress on our network and on our
relationships with physicians. Conversions to the service line structure and the
net income model require that the physicians devote significant time and
resources to learning about and assessing the value of our new models. In
addition, physicians may be anxious about taking part in a new and untested
business model for us. To the extent we are not successful in developing new
relationships and maintaining our current relationships with physicians because
of these additional pressures, our business and results of operations could be
harmed.

We may encounter difficulties in managing our network of affiliated practices.

      We do not control the practice of medicine by the physicians or their
compliance with regulatory and other requirements directly applicable to
practices. At the same time, an affiliated practice may have difficulty in
effectively influencing the practices of its individual physicians. In addition,
we have only limited control over the business decisions of the practices even
under the PPM model. As a result, it is difficult to implement standardized
practices across the network, and this could have an adverse effect on cost
controls, regulatory compliance, our profitability and the strength of our
network.

Continued review of pharmaceutical companies and their pricing and marketing
practices could result in lowered reimbursement for pharmaceuticals.

      Continued review of pharmaceutical companies by government payors could
result in lowered reimbursement for pharmaceuticals, which could harm us. As
indicated above, the federal government is reconsidering the manner in which
health care providers, including oncologists, are reimbursed for the
pharmaceutical agents they use to treat patients. In addition, we are aware of
various investigations and lawsuits filed against manufacturers of oncology
drugs. These investigations relate to the manner in which those companies report
data used in determining AWP and to marketing and other practices. As a result
of these investigations, a number of pharmaceutical manufacturers have entered
into or are discussing settlements with the government that could result in
lower reimbursement. Furthermore, possibly in response to such scrutiny, some
pharmaceutical manufacturers could alter AWP and pricing to reduce the margin
between reported AWP and the sales price of some oncology drugs. Any such change
could have an adverse effect on oncologists, which in turn could adversely
affect us. Finally, as a group purchasing organization that is a significant
purchaser of pharmaceutical agents paid for by government programs, we and our
network of affiliated practices could become involved in these investigations or
lawsuits, or may become a target of such pharmaceutical-related scrutiny. Any of
these events could have a material adverse effect on us.

Our service fee arrangements with many of our affiliated practices subject us to
disproportionate economic risk.

      Currently, each service agreement provides for payment to us of a service
fee plus reimbursement of all practice costs, and the economic arrangements in
our service agreements with affiliated practices fall into two principal
categories. Some of our agreements, known as the "earnings model" agreements,
provide that the service fee is a percentage of the practice's earnings before
income taxes. In others, known as "net revenue model" agreements, the fee
consists of a fixed fee, a percentage fee (in most states) of the practice's net
revenues and, if certain performance criteria are met, a performance fee. Where
the service agreement follows the net revenue model, the practice retains a
fixed portion of net revenue before any service fee (other than practice
operating costs) is paid to us. Under these net revenue agreements, therefore,
we disproportionately bear the economic impact of increasing or declining
margins. Our costs of operations have increased, primarily due to an increase in
expensive, single-source drugs and compensation and benefits, which has resulted
in a disproportionate decline in our operating margin, even as practice
profitability continues to grow. We are seeking to convert practices to the
earnings model


                                       13
<PAGE>

or the service line structure, which eliminates this disproportionate economic
risk. If we are not successful, then continuing to provide services under the
net revenue model agreements could have a material adverse effect on us.

Increased governmental regulation could adversely affect our operating results
or financial condition.

      The health care industry is highly regulated and there can be no assurance
that the regulatory environment in which we operate will not change
significantly and adversely in the future. State and federal governments have
increasingly undertaken efforts to control growing health care costs through
legislation, regulation and voluntary agreements with medical care providers and
pharmaceutical companies. If future government cost containment efforts limit
the profits that can be derived on new drugs, then profit margins on
pharmaceutical products could decrease and clinical research spending on
pharmaceutical products may also decrease, which could decrease the business
opportunities available to us and affect our results of operations and financial
condition.

      Our pharmaceutical segment is subject to the operating and security
standards of the Food and Drug Administration (the "FDA"), the United States
Drug Enforcement Administration, various state boards of pharmacy and comparable
agencies. Such standards affect the prescribing of pharmaceuticals (including
certain controlled substances), operating of pharmacies (including nuclear
pharmacies), and packaging of pharmaceuticals. Complying with those standards,
especially as they change from time to time, could be extremely costly for us
and could limit the manner in which we implement this segment.

      The laws of many states prohibit unlicensed, non-physician-owned entities
or corporations (such as US Oncology) from performing medical services, or in
certain instances, prohibit physicians from splitting fees with non-physicians,
including US Oncology. We do not believe that we engage in the unlicensed
practice of medicine or the delivery of medical services in any state, and are
not licensed to practice medicine in states which permit such licensure. In many
jurisdictions, however, the laws restricting the corporate practice of medicine
and fee-splitting have been subject to limited judicial and regulatory
interpretation and, therefore, there is no assurance that upon review some of
our activities would not be found to be in violation of such laws. If such a
claim were successfully asserted against us, we could be subject to civil and
criminal penalties, the imposition of which could have a material adverse effect
on our operations, cash flows and financial condition.

      In general, regulation and scrutiny of health care providers and related
companies are increasing. In addition, we may be adversely affected by aspects
of some other health care proposals, including cutbacks in Medicare and Medicaid
programs, containment of health care costs on an interim basis by means that
could include a freeze on rates paid to health care providers, greater
flexibility to the states in the administration of Medicaid, and developments in
federal and state health information requirements, including the standardization
of electronic transmission of some administrative and financial information.

The current regulatory environment in the health care industry continues to
negatively impact us.

      Because of the complexity and uncertainty of the regulations that govern
companies and individuals in the health care sector, we expend significant
resources in our comprehensive compliance program. In addition, the government
is empowered to investigate all business activities of health care companies,
including lawful ones, and exerts considerable leverage in such investigations
as a result of the significant penalties that may apply in the event of any
violation of health care law. Furthermore, government programs often are
administered and enforced by multiple agencies and entities that may themselves
have differing interpretations of health care regulations, and enforcement
authorities have taken the position that complying with specific instructions of
such entities may not, by itself, be determinative of the lawfulness of any
actions. Because of these factors and the high cost of defending or addressing
any investigation or allegation regarding health care law violations, we must
from time to time forego business opportunities that we believe to be lawful, if
there is a possibility that such activities could be perceived or later
interpreted as inappropriate or unlawful or could invite government
investigation.

Loss of revenues or a decrease in income of our affiliated practices could
adversely affect our results of operations.

      Our revenue currently depends on revenue generated by affiliated
practices. Loss of revenue by the practices could seriously harm us. It is
possible that our affiliated practices will not be able to maintain successful
medical practices. In addition, under our current service agreements and under
the outpatient cancer center


                                       14
<PAGE>

operations service line, the fees payable to us depend upon the profitability of
the practices. Even under those service agreements where the service fee is
based on the revenues of the practices, and not on their earnings, a priority of
payments provision mandates that we will be paid last. Any failure by the
practices to contain costs effectively will adversely impact our results of
operations in those areas. Because we do not control the manner in which our
practices conduct their medical practice (including drug utilization), our
ability to control costs related to the provision of medical care is limited.
Furthermore, the affiliated practices face competition from several sources,
including solo practitioners, single- and multi-specialty practices, hospitals
and managed care organizations. Although we are offering our affiliated
practices the option of converting to the service line structure, which would
eliminate our direct risk related to practice profitability with respect to
medical oncology, we have limited ability to discontinue or alter our service
arrangements with practices, even where continuing to manage such practices
under existing arrangements is economically detrimental to us.

Our business could be adversely affected if relations with any of our
significant pharmaceutical suppliers are terminated or modified.

      Our ability to purchase pharmaceuticals, or to expand the scope of
pharmaceuticals purchased, from a particular supplier is largely dependent upon
such supplier's assessment of the value of our network. To the extent that our
transition to the service line structure causes pharmaceutical suppliers to
perceive our network as less valuable, our relationships with such suppliers
could be harmed. Our inability to purchase pharmaceuticals from any of our
significant suppliers could have a material adverse effect on our business,
results of operations and financial condition because many suppliers own
exclusive patent rights and are the sole manufacturers of certain
pharmaceuticals. If we were unable to purchase patented products from any such
supplier on favorable terms or at all, we could be required to purchase such
products from other distributors on less favorable terms, and our profit margin
on such products could be eliminated.

Our development of new cancer centers could be delayed or result in serious
liabilities, and the centers may not be profitable.

      The development of integrated cancer centers is subject to a number of
risks, including obtaining regulatory approval, delays that often accompany
construction of facilities and environmental liabilities that arise from
operating cancer centers. Any failure or delay in successfully building and
operating integrated cancer centers or in avoiding liabilities from operations
could seriously harm us. In addition, new cancer centers may incur significant
operating losses during their initial operations, which could materially
adversely affect our operating results, cash flows and financial condition.

We rely on the ability of our affiliated practices to grow and expand.

      We rely on the ability of our affiliated practices to grow and expand. Our
affiliated practices may encounter difficulties attracting additional physicians
and expanding their operations. The failure of practices to expand their patient
base and increase revenues could harm us.

We operate in a highly competitive industry.

      We may have existing competitors, as well as a number of potential new
competitors, that have greater name recognition and significantly greater
financial, technical and marketing resources than we do. This may permit our
competitors to devote greater resources than we can to the development and
promotion of their services. These competitors may also undertake more
far-reaching marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to existing and potential employees. In addition,
implementation of our service line structure will bring us into competition with
numerous additional competitors, including specialty pharmacy companies, medical
facilities operators and a variety of clinical research entities.

      We also expect our competitors to develop strategic relationships with
providers, pharmaceutical companies and payors, which could result in increased
competition. The introduction of new and enhanced services, acquisitions,
industry consolidation and the development of strategic relationships by our
competitors could cause price competition, a decline in sales or a loss of
market acceptance of our services, or make our services less attractive. In
addition, in developing cancer centers, we compete with a number of tax-exempt
non-profit


                                       15
<PAGE>

organizations that can finance acquisitions and capital expenditures on a
tax-exempt basis or receive charitable contributions unavailable to us.

      With respect to research activities, the contract research organization
industry is fragmented, with several hundred small limited-service providers and
several large full-service contract research organizations with global
operations. We compete against large contract research organizations that may
have access to more financial resources than we do.

      We expect that industry forces will have an impact on us and our
competitors. In recent years, the health care industry has undergone significant
changes driven by various efforts to reduce costs, including national health
care reform, trends toward managed care, limits in Medicare coverage and
reimbursement levels, consolidation of health care services companies and
collective purchasing arrangements by office-based health care practitioners.
The changes in our industry have caused greater competition among us and similar
businesses. Our inability to predict accurately, or react competitively to,
changes in the health care industry could adversely affect our operating
results. We cannot assure you that we will be able to compete successfully
against current or future competitors or that competitive pressures will not
have a material adverse effect on our business, financial condition and results
of operations.

Our success depends on our ability to attract and retain highly qualified
technical staff and other key personnel, and we may not be able to hire enough
qualified personnel to meet our hiring needs.

      Our ability to offer and maintain high quality service is dependent upon
our ability to attract and maintain arrangements with qualified professional and
technical staff, and with executives on our management team. There is a high
level of competition for such skilled personnel among other health care
providers, research and academic institutions, government entities and other
organizations. We cannot assure you that our contractual arrangements with such
staff can be maintained on terms advantageous to us. In addition, if one or more
members of our management team become unable or unwilling to continue in their
present positions, we could also be harmed.

Our failure to remain technologically competitive could adversely affect our
business.

      Rapid technological advancements have been made in the radiation oncology
and diagnostic imaging industry. Although we believe that our equipment and
software can generally be upgraded as necessary, the development of new
technologies or refinements of existing technologies might make existing
equipment technologically obsolete. If such obsolescence were to occur, then we
may be compelled to incur significant costs to replace or modify the equipment,
which could have a material adverse effect on our financial condition, results
of operations and cash flow. In addition, some of our cancer centers compete
against local centers which may contain more advanced imaging or radiation
therapy equipment or provide additional technologies. Our performance is
dependent upon physician and patient confidence in the superiority of our
technology and equipment over those of our competitors.

      Advances in other cancer treatment methods, such as chemotherapy, surgery
and immunotherapy, or in cancer prevention techniques, could reduce demand or
eliminate the need for the radiation therapy services provided at the cancer
centers we operate. The development and commercialization of new radiation
therapy technologies could have a material adverse effect on our business,
operating results and financial condition.

We may be unable to satisfy our additional financial needs.

      Continuing to expand our lines of business in accordance with our business
growth plan and expected capital needs will require substantial capital
resources. Operation of the cancer centers will require recurring capital
expenditures for renovation, expansion and the purchase of costly medical
equipment and technology. It is likely that our capital needs in the next
several years will exceed the capital generated from our operations. Thus, we
may wish to incur additional debt or issue additional debt or equity securities
from time to time. Capital available for health care companies, whether raised
through the issuance of debt or equity securities, has recently been quite
limited and may continue to be difficult to obtain. Consequently, we may be
unable to obtain sufficient financing on terms satisfactory to us or at all. If
additional funds are raised through the incurrence of debt, then we may become
subject to restrictions on our operations and finances.


                                       16
<PAGE>

Our working capital could be impacted by delays in reimbursement for services.

      The health care industry is characterized by delays that typically range
from three to six months between when services are provided and when the
reimbursement or payment for these services is received. Under our existing
service agreements and the new cancer center operations service line, our
working capital is dependent on such collections. This makes working capital
management, including prompt and diligent billing and collection, an important
factor in our results of operations and liquidity in those areas. We cannot
assure you that trends in the industry will not further extend the collection
period and negatively impact our working capital.

We may be unsuccessful at negotiating contracts with third-party payors on
behalf of our practices, which could result in lower operating margins.

      We are responsible for negotiating payor contracts on behalf of our
network physicians under the PPM model and will also be responsible for such
contracting activities for radiation oncologists and diagnostic radiologists
under the cancer center operations service line. Commercial payors, such as
managed care organizations and traditional indemnity insurers, are increasingly
requesting fee structures and other arrangements that require health care
providers to assume all or a portion of the financial risk of providing care.
The lowering of reimbursement rates, increasing review of bills for services and
negotiating for reduced contract rates could have a material adverse effect on
our results of operations and liquidity with respect to our existing service
agreements and cancer center operations under the service line structure.

Loss of revenue by our affiliated practices caused by the cost containment
efforts of third-party payors could harm us.

      Physician practices typically bill third-party payors for the health care
services provided to their patients. Third-party payors such as private
insurance plans and commercial managed care plans negotiate the prices charged
for medical services and supplies in order to lower the cost of the health care
services and products they pay for, thus increasing their own profits.
Third-party payors also try to influence legislation to lower costs. Third-party
payors can also deny reimbursement for medical services and supplies by stating
that they believe a treatment was not appropriate, and these reimbursement
denials are difficult to appeal or reverse. Our affiliated practices also derive
a significant portion of their revenues from governmental programs.
Reimbursement by governmental programs generally is not subject to negotiation
and is established by governmental regulation. In addition, Medicare
reimbursement rates for services our network physicians provide (other than for
chemotherapy agents or lab services) declined effective April 1, 2002 as a
result of the application of a statutory formula designed to link growth in
government health care spending to growth in the economy generally. There is a
risk that other payors could reduce rates of reimbursement to match this
decline. Our management fees under the PPM model, as well as our operating fees
for cancer center operations under the service line structure, are dependent on
the financial performance of the practices and would be adversely affected by a
reduction in reimbursement. In addition, to the extent oncologists, as our
customers, are impacted adversely by reduced reimbursement levels, our business
could be harmed generally.

We face the risk of qui tam litigation relating to regulations governing billing
for medical services.

      We are currently aware of various qui tam lawsuits in which we and/or our
subsidiaries or affiliated practices are named as defendants. Because qui tam
lawsuits are filed under seal, we could be named in other such suits of which we
are not aware. In addition, as the federal government intensifies its focus on
billing, reimbursement and other health care regulatory areas, private
individuals are also bringing more qui tam lawsuits because of the potential
financial rewards for such individuals. For the past several years, the number
of qui tam suits filed against health care companies and the aggregate amount of
recoveries under such suits have increased significantly. This trend increases
the risk that we may become subject to additional qui tam lawsuits.

      Although we believe that our operations comply with law and intend to
vigorously defend ourselves against allegations of wrongdoing, the costs of
addressing such suits, as well as the amount of any recovery in the event of a
finding of wrongdoing on our part, could be significant. The existence of qui
tam litigation involving us may also strain our relationships with
pharmaceutical suppliers or our network physicians, particularly those
physicians or practices named in such suits. Furthermore, our involvement in
those qui tam lawsuits, and the uncertainty such suits create, may adversely
affect our ability to raise capital.


                                       17
<PAGE>

Our services could give rise to liability from clinical trial participants and
the parties with whom we contract.

      In connection with clinical research programs, we provide several services
that are involved in bringing new drugs to market, which is time consuming and
expensive. Such clinical research involves the testing of new drugs on human
volunteers. The provision of medical services entails an inherent risk of
professional malpractice and other similar claims. If we do not perform our
services to contractual or regulatory standards, the clinical trial process and
the participants in such trials could be adversely affected. Clinical research
involves the inherent risk of liability for personal injury or death to patients
resulting from, among other things, unforeseen adverse side effects or improper
administration of the new drugs by physicians. In certain cases, these patients
are already seriously ill and are at risk of further illness or death. These
events would create a risk of liability to us from either the pharmaceutical
companies with which we contract or the study participants.

      We also contract with physicians to serve as investigators in conducting
clinical trials. Third parties could possibly claim that we should be held
liable for losses arising from any professional malpractice of the investigators
with whom we contract or in the event of personal injury to or death of persons
for the medical care rendered by third-party investigators, and we would
vigorously defend any such claims. Nonetheless it is possible that we could be
held liable for such types of losses.

We could be subject to malpractice claims and other harmful lawsuits not fully
covered by insurance.

      We could also be implicated in claims related to medical services provided
by our network physicians. We cannot assure you that claims, suits or complaints
relating to services delivered by a network physician will not be assessed
against us in the future. In addition, because network physicians prescribe and
dispense pharmaceuticals and we will maintain pharmacy operations, we and our
network physicians could be subject to product liability claims.

      Although we maintain insurance believed to be adequate both as to risks
and amounts, there can be no assurance that any claim asserted against us for
professional or other liability will be covered by, or will not exceed the
coverage limits of, such insurance. The availability and cost of professional
liability insurance varies widely from state to state and is affected by various
factors, many of which are beyond our control. There can be no assurance that we
will be able to maintain insurance in the future at a cost that is acceptable to
us, or at all. Therefore, successful malpractice, regulatory or product
liability claims asserted against us that are not fully covered by insurance
could have a material adverse effect on our operating results. During February
2002, PHICO Insurance Company, which had been our and our affiliated practices'
primary malpractice insurer, was placed in liquidation. Although state guaranty
associations provide some coverage for insured claims in the event of insurer
insolvency, if we or our affiliated practices are unable to receive sufficient
coverage as a result of the insolvency, we could be harmed.

Proposed and final confidentiality laws and regulations may create a risk of
liability, increase the cost of our business or limit our service offerings.

      The confidentiality of patient-specific information and the circumstances
under which such records may be released for inclusion in our databases or used
in other aspects of our business are subject to substantial governmental
regulation. Legislation governing the possession, use and dissemination of
medical information and other personal health information has been proposed or
adopted at both the federal and state levels. Such regulations may require us to
implement new security measures, which may require substantial expenditures or
limit our ability to offer some of our products or services, thereby negatively
impacting the business opportunities available to us. A risk of civil or
criminal liability exists if we are found to be responsible for any violation of
applicable laws, regulations or duties relating to the use, privacy or security
of health information.

      On December 28, 2000, the Secretary of the Department of Health and Human
Services issued the final rule on Standards for Privacy of Individually
Identifiable Health Information to implement the privacy requirements for the
Health Insurance Portability and Accountability Act of 1996. These regulations
generally impose standards for covered entities transmitting or maintaining
protected data in an electronic, paper or oral form with respect to the rights
of individuals who are the subject of protected health information. They also
establish limitations on and procedures for the exercise of those individuals'
rights and the uses and disclosures of protected health information. Such
regulations could inhibit third-party processors in using, transmitting or
disclosing health data (even if the data


                                       18
<PAGE>

has been de-identified) for purposes other than facilitating payment or
performing other clearinghouse functions, which would restrict our ability to
obtain and use data in our services. In addition, these regulations could
require us to establish uniform specifications for obtaining de-identified data
so that de-identified data obtained from different sources could be aggregated.
While the impact of developments in legislation, regulations or the demands of
third-party processors is difficult to predict, each could materially adversely
affect our business.

If we cannot effectively market and implement the service line structure, it
would materially and adversely affect our business and results of operations.

      Because the service line structure is an untested business model, we
cannot assure you that it will attain broad market acceptance or that we will be
able to effectively market it to, and implement it for, new practices outside of
our existing network on terms acceptable to us or at all. We will incur
significant costs to attract and negotiate such arrangements and to develop our
infrastructure in advance of revenues being produced by such arrangements.
Delays or failures to effectively market the service lines to new practices and
implement service line operations with them could harm us. In addition,
non-competition covenants in our existing service agreements with practices may
limit our ability to offer the service line structure to other practices within
markets that we already serve.

Under the service line structure, we anticipate a decline in operating cash
flow, which could harm us.

      If practices currently managed by us terminate their existing service
agreements with us and we instead provide services to them under the service
line structure, we expect to generate less operating cash flow than we currently
do with respect to most such practices. Such reduction in cash flow could
materially adversely affect us and our results of operations.

      Each conversion of an affiliated practice to the service line structure
could represent a significant reduction in our cash flow. In addition,
conversions to the earnings model may adversely impact cash flow. We cannot be
sure how many practices will convert and the timing of such conversions.
Although we have some control over the timing, we cannot assure you when these
conversions will occur. As a result, during the transition, our cash flow may be
subject to unpredictable fluctuations.

The nature of our receivables will change with respect to the oncology
pharmaceutical management service line.

      Currently, our accounts receivable consist principally of payments that we
bill and collect from third party payors on behalf of our affiliated practices.
Under the pharmaceutical management service line, we will instead bill and
collect payments from the practices. We have no experience in billing and
collecting from affiliated practices. The practices will have responsibility for
billing and collecting from third party payors with respect to the drugs. If we
are not successful in billing and collecting from affiliated practices or if
such practices are not successful in managing their billing and collections from
third-party payors, we may have decreased cash flow from pharmaceutical sales.

Under the service line structure, our agreements with affiliated practices will
have shorter terms than our existing agreements, and we will have less input
with respect to the business operations of the practices.

      Currently, we provide management services to practices under long-term
agreements that generally have 40-year terms and that are not terminable except
under specified circumstances. These agreements allow us to be the exclusive
provider of management services, including each of the services contemplated
under the service line structure, to each of the practices. In addition, under
those agreements, the practices are required to bind their physicians to
specified employment terms and restrictive covenants. Under the service line
structure, our agreements with affiliated practices will have shorter terms,
between five to fifteen years, and may be terminable in the event of certain
performance deficiencies based on market standards. A number of the other input
mechanisms that we currently have with respect to affiliated practices will also
be eliminated. This loss of input may increase the extent to which affiliated
practices may change their internal composition to our detriment and may result
in arrangements that are easier for individual physicians and practices to exit,
exposing us to increased competition from other firms, especially in the
pharmacy management sector. Departure of a significant number of physicians or
practices from participation in our service line structure could harm us.


                                       19
<PAGE>

If we are not successful in transitioning our existing affiliated practices that
wish to move to the new service line structure, our business and results of
operations could be harmed.

      As part of the implementation of the service line structure, we intend to
offer to our existing affiliated practices the ability to terminate their
existing service agreements, purchase their medical oncology operating assets
from us, and adopt the service line structure. While we believe that the service
line structure will be attractive to our existing network and that the
transition will be desirable, we do not have the unilateral right to cause the
termination of existing service agreements and the related transition to our
service line structure. We intend to continue to manage practices that do not
wish to adopt the service line structure, which will prevent us from realizing
certain of the operating efficiencies that could be gained from a complete
transition to the service line structure. Transitioning those affiliated
practices that wish to adopt the service line structure also entails significant
implementation and execution risk, including returning to the affiliated
practices certain operating functions such as information technology, employee
benefits, insurance and other local management functions. A failure to
successfully implement this transition may create significant management
distractions and otherwise limit the success of the service line structure. For
these reasons, failure to successfully transition currently affiliated practices
that wish to move to the service line structure could harm us.

      In order to adopt the service line structure, our existing affiliated
practices will require substantial capital resources. Although we are attempting
to facilitate the financing by negotiating with a single source for all
practices that wish to transition, there is no assurance that the practices will
be successful in implementing new financing arrangements. Failure of the
practices to obtain financing would adversely affect our ability to transition
to the service line structure and could materially and adversely affect our
business and results of operations.

      The process of negotiating with existing affiliated practices that want to
move to the service line as to the termination of service agreements and the
signing of new agreements could take longer than anticipated. In addition, we
could face unanticipated difficulties in transitioning the practices, including
system conversion problems, lawsuits and other logistical hurdles, and also be
subject to duplicative costs during the transition process.

Under the service line structure, we will significantly increase our ownership
and operation of licensed pharmacies, which will subject us to various new state
and federal regulations.

      Our pharmaceutical segment is subject to the laws and regulations of the
Food and Drug Administration (the "FDA"), the United States Drug Enforcement
Administration, various state boards of pharmacy and comparable agencies. Such
laws, regulations and regulatory interpretations affect the prescribing of
pharmaceuticals, purchasing, storing and dispensing of controlled substances,
operating of pharmacies (including nuclear pharmacies), and packaging of
pharmaceuticals. Violations of any of these laws and regulations could result in
various penalties, including suspension or revocation of our licenses or
registrations or monetary fees. As a health care provider, we will, under the
service line structure, subject our affiliated physicians to the federal "Stark
Self-Referral Laws," which prohibit a referral to an entity in which the
physician or the physician's family member has an ownership interest or
compensation relationship if the referral is for any of a list of "designated
health services." Further, while the PPM model currently subjects us to scrutiny
under the federal Medicare and Medicaid anti-kickback law, that provides
criminal penalties for individuals or entities participating in the Medicare or
Medicaid programs that knowingly and willfully offer, pay, solicit or receive
remuneration in order to induce referrals for items or services reimbursed under
such programs, the law will apply to the service line structure in additional
ways as a result of our becoming a pharmacy provider. Complying with those
standards, especially as they change from time to time, could be extremely
costly for us and could limit the manner in which we implement the service line
structure. In addition, we cannot assure you that we will be successful in
obtaining all necessary pharmaceutical licenses in a timely manner or at all.

Our stock price may fluctuate significantly, which may make it difficult to
resell your shares when you want to at prices you find attractive.

      The market price of our common stock has been highly volatile. This
volatility may adversely affect the price of our common stock in the future. You
may not be able to resell your shares of common stock following periods of
volatility because of the market's adverse reaction to this volatility. We
anticipate that this volatility, which frequently affects the stock of health
care service companies, will continue. Factors that could cause such volatility
include:


                                       20
<PAGE>

      .     Our quarterly operating results,

      .     Deviations in results of operations from estimates of securities
            analysts (which estimates we neither endorse nor accept the
            responsibility for),

      .     General economic conditions or economic conditions specific to the
            health care services industry,

      .     Regulatory or reimbursement changes and

      .     Other developments affecting us, our competitors, vendors such as
            pharmaceutical companies or others in the health care industry.

      On occasion, the equity markets have experienced significant price and
volume fluctuations. These fluctuations have affected the market price for many
companies' securities even though the fluctuations are often unrelated to the
companies' operating performance.

We have not paid dividends and do not expect to in the future, which means that
the value of our shares cannot be realized except through sale.

      We have never declared or paid cash dividends. We currently expect to
retain earnings for our business and do not anticipate paying dividends on our
common stock at any time in the foreseeable future. Because we do not anticipate
paying dividends, it is likely that the only opportunity to realize the value of
our common stock will be through a sale of those shares. The decision whether to
pay dividends on common stock will be made by the board of directors from time
to time in the exercise of its business judgment. We are currently precluded
from paying dividends by the terms of our credit facilities.

Our shareholder rights plan and anti-takeover provisions of the certificate of
incorporation, bylaws and Delaware law could adversely impact a potential
acquisition by third parties.

      Our shareholder rights plan and anti-takeover provisions of the
certificate of incorporation, bylaws and Delaware law could adversely impact a
potential acquisition by a third party. We have a staggered board of directors,
with three classes each serving a staggered three-year term. This classification
has the effect of generally requiring at least two annual stockholder meetings,
instead of one, to replace a majority of the members of the board of directors.
Our certificate of incorporation also provides that stockholders may act only at
a duly called meeting and that stockholders' meetings may not be called by
stockholders. Furthermore, our certificate of incorporation permits the board of
directors, without stockholder approval, to issue additional shares of common
stock or to establish one or more classes or series of preferred stock with
characteristics determined by the board. We have also adopted a shareholder
rights plan, which would significantly inhibit the ability of another entity to
acquire control of US Oncology through a tender offer or otherwise without the
approval of our board of directors. These provisions could discourage potential
acquisition proposals and could delay or prevent a change in control. These
provisions are intended to increase the likelihood of continuity and stability
in our board of directors and in the policies formulated by it and to discourage
certain types of transactions that may involve an actual or threatened change of
control, reduce our vulnerability to an unsolicited acquisition proposal and
discourage certain tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares, and, as a consequence, they inhibit fluctuations in the
market price of our shares that could result from actual or rumored takeover
attempts. In addition, these provisions could limit the price that certain
investors might be willing to pay in the future for shares of common stock. Such
provisions also may have the effect of preventing changes in our management.

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

      No matters were submitted to a vote of security holders during the fourth
quarter of 2001.


                                       21
<PAGE>

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

      Our common stock is traded on The Nasdaq Stock Market under the symbol
"USON." The high and low closing sale prices of the common stock, as reported by
The Nasdaq Stock Market, were as follows for the quarterly periods indicated.

Year Ended December 31, 2000                              High            Low
                                                          ----            ---

Fiscal Quarter Ended March 31, 2000                       $ 6.81          $ 3.81

Fiscal Quarter Ended June 30, 2000                        $ 5.47          $ 3.25

Fiscal Quarter Ended September 30, 2000                   $ 5.59          $ 3.88

Fiscal Quarter Ended December 31, 2000                    $ 7.00          $ 4.14

Year Ended December 31, 2001                              High            Low
                                                          ----            ---
Fiscal Quarter Ended March 31, 2001                       $10.94          $ 6.27

Fiscal Quarter Ended June 30, 2001                        $ 9.24          $ 7.47

Fiscal Quarter Ended September 30, 2001                   $ 8.97          $ 6.55

Fiscal Quarter Ended December 31, 2001                    $ 8.04          $ 3.95

      As of March 21, 2002, there were approximately 15,500 holders of the
common stock. We have not declared or paid any cash dividends on our common
stock. The payment of cash dividends in the future will depend on our earnings,
financial condition, capital needs and other factors deemed pertinent by our
board of directors, including the limitations, if any, on the payment of
dividends under state law and then-existing credit agreements. It is the present
policy of our board of directors to retain earnings to finance the operations
and expansion of business. Our credit facilities currently prohibit the payment
of cash dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Liquidity and Capital Resources."


                                       22
<PAGE>

Recent Sales of Unregistered Securities

      Under the PPM model, in connection with each affiliation transaction
between a practice and us, we purchased the nonmedical assets of, and entered
into a long-term service agreement with, that practice. In consideration for
that arrangement, we typically paid cash, issued subordinated promissory notes
(in general, payable on each of the second through seventh anniversaries of the
closing date at an annual interest rate of seven percent) and unconditionally
agreed to deliver shares of common stock at specified future dates (in general,
on each of the second through fifth anniversaries of the closing date).

      The following table describes private placements by us in connection with
affiliation transactions of its securities during 2001. Each sale was a private
placement made in connection with a transaction, described in general in the
preceding paragraph, to affiliated physicians, the overwhelming majority of whom
are accredited investors. No underwriter was involved in any such sale, and no
commission or similar fee was paid with respect thereto. Each sale was not
registered under the Securities Act of 1933 in reliance on Section 4(2) of such
Act and Rule 506 enacted thereunder.

<TABLE>
<CAPTION>
                                                             Number of Shares of    Aggregate Principal
     Date of Transaction           Number of Physicians        Common Stock/1/        Amount of Notes
     -------------------           --------------------        ---------------        ---------------
                                                                                        (in dollars)
<S>                                          <C>                    <C>                  <C>
         January 2001                        3                      31,206               $ 330,000
        February 2001                        1                      12,223                 277,000
          March 2001                         2                       6,165                 538,000
          July 2001                          1                       8,899                 102,000
        September 2001                       1                      28,016                 541,000
</TABLE>

----------
/1/   In connection with each affiliation transaction, we unconditionally agree
      to deliver shares of common stock at specified future dates (typically on
      each of the second through fifth anniversaries of the closing date).


                                       23
<PAGE>

Item 6. Selected Financial Data

      The selected consolidated financial information set forth below is
qualified by reference to, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere in
this report.

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                           2001           2000           1999            1998         1997
                                                           ----           ----           ----            ----         ----
                                                                        (in thousands, except per share data)
<S>                                                     <C>            <C>            <C>            <C>            <C>
Statement of Operations Data:
Revenue .............................................   $ 1,505,024    $ 1,324,154    $ 1,092,941    $   836,596    $ 625,413
Operating expenses:
     Pharmaceuticals and supplies ...................       780,072        651,214        521,087        357,766      250,425
     Field compensation and benefits ................       322,473        277,962        215,402        172,298      143,210
     Other field costs ..............................       179,479        161,510        134,635        107,671       87,232
     General and administrative .....................        47,988         54,723         39,490         38,325       31,809
     Bad debt expense ...............................            --         10,198             --             --       37,841
     Impairment, restructuring and other charges ....         5,868        201,846         29,014             --           --
     Depreciation and amortization ..................        71,929         75,148         65,072         48,463       35,194
                                                        -----------    -----------    -----------    -----------    ---------
                                                          1,407,809      1,432,601      1,004,700        724,523      585,711
                                                        -----------    -----------    -----------    -----------    ---------
Income (loss) from operations .......................        97,215       (108,447)        88,241        112,073       39,702
Interest income (expense), net ......................       (22,511)       (26,809)       (22,288)       (15,908)     (12,474)
Gain on investment in common stock
   (unrealized in 1999) .............................            --         27,566         14,431             --           --
                                                        -----------    -----------    -----------    -----------    ---------
Income (loss) before income taxes ...................        74,704       (107,690)        80,384         96,165       27,228
Income tax provision (benefit) ......................        28,388        (35,047)        32,229         36,184       11,593
                                                        -----------    -----------    -----------    -----------    ---------
Net income (loss) ...................................   $    46,316    $   (72,643)   $    48,155    $    59,981    $  15,635
                                                        ===========    ===========    ===========    ===========    =========

Net income (loss) per share - basic .................   $      0.46    $     (0.72)   $      0.48    $      0.61    $    0.17
Shares used in per share computation - basic ........       100,063        100,589        100,183         97,647       93,168

Net income (loss) per share - diluted ...............   $      0.46    $     (0.72)   $      0.47    $      0.60    $    0.16
Shares used in per share computations - diluted .....       100,319        100,589        101,635         99,995       97,198

<CAPTION>
                                                                                      December 31,
                                                             2001          2000           1999           1998          1997
                                                             ----          ----           ----           ----          ----
                                                                                     (in thousands)
<S>                                                     <C>            <C>            <C>            <C>            <C>
Balance Sheet Data:
       Working capital ..............................   $   110,741    $   194,484    $   280,793    $   178,262    $ 121,221
       Service agreements, net ......................       379,249        398,397        537,130        467,214      431,068
       Total assets .................................     1,092,962      1,197,467      1,298,477      1,033,528      883,430
       Long-term debt, excluding current maturities .       128,826        300,213        360,191        234,474      189,377
       Stockholders' equity .........................       676,768        624,338        707,164        629,798      554,298
</TABLE>


                                       24
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operation

Introduction

      The following discussion should be read in conjunction with the financial
statements, related notes and other financial information appearing elsewhere in
this report. In addition, see "Forward-Looking Statements and Risk Factors."

General

      We provide comprehensive services in the oncology field, with the mission
of expanding access to and improving the quality of cancer care in local
communities and advancing the delivery of care. We offer the following services:

      .     Purchase and manage the inventory of cancer related drugs for
            affiliated practices. Annually, we are responsible for purchasing,
            delivering and managing more than $700 million of pharmaceuticals
            through a network of more than 400 admixture sites, 31 licensed
            pharmacies, 51 pharmacists and 180 pharmacy technicians.

      .     Construct and manage free standing cancer centers that provide
            treatment areas and equipment for medical oncology, radiation
            therapy and diagnostic radiology. We operate 77 integrated
            community-based cancer centers and manage over one million square
            feet of medical office space.

      .     Expand diagnostic capabilities of practices through installation and
            management of PET technology, typically in a cancer center setting.
            We have installed and continue to manage 12 PET units, as well as 59
            Computerized Axial Tomography (CT) units.

      .     Coordinate and manage cancer drug research trials for pharmaceutical
            and biotechnology companies. We currently manage 98 clinical trials,
            with accruals of more than 3,500 patients during 2001, supported by
            our network of over 650 participating physicians in more than 330
            research locations.

      Our network provides these services to oncology practices comprising over
450 sites, with over 8,000 employees and 868 physicians. We are not a provider
of medical services, but we provide comprehensive services to oncology
practices, including management and capital resources, data management,
accounting, compliance and other administrative services. The affiliated
practices offer comprehensive and coordinated medical services to cancer
patients, integrating the specialties of medical and gynecologic oncology,
hematology, radiation oncology, diagnostic radiology, and blood and marrow stem
cell transportation.

      Our revenue consists primarily of service fees paid by the oncology
practices. We and our affiliated practices have entered into long-term
agreements under which we provide services, and the practices pay a fee and
reimburse us for all practice costs. Under some agreements, the fees are based
on practice earnings before income taxes (known as the "earnings model"). In
others, the fee consists of a fixed fee, a percentage fee (in most states) of
the practice's net revenues and, if certain performance criteria are met, a
performance fee (known as the "net revenue model"). Where our service agreements
follow the net revenue model, the practice is entitled to retain a fixed portion
of net revenue before any service fee (other than practice operating costs) is
paid to us.

Conversion to Earnings Model

      We believe that the earnings model properly aligns practice priorities
with respect to appropriate business operations and cost control, with us and
the practice sharing proportionately in practice profitability, while the net
revenue model results in us disproportionately bearing the impact of increases
or declines in operating margins. For this reason, we have, during 2001, been
negotiating with practices under the net revenue model to convert to the
earnings model. Since the beginning of 2001 and through March 11, 2002, fourteen
practices accounting for 21.7% of our affiliated practices' total net patient
revenue in 2001 have converted to the earnings model. In addition, we continue
to sever our non-strategic practice relationships. During 2001, we negotiated
separations with four such


                                       25
<PAGE>

practices comprising 21 physicians and accounting for 3.5% of 2000 net patient
revenue. 60% of our revenue in 2001 is attributable to practices on the earnings
model as of December 31, 2001.

Implementation of Service Line Structure

      On October 1, 2001, we commenced a strategy to focus our operations on
three core service lines: oncology pharmaceutical management, outpatient cancer
center operations, and cancer research and development services. We have begun
marketing these core services outside our network through a non-PPM (physician
practice management) model. All of our affiliated practices are being afforded
the opportunity to terminate their existing service agreements and enter into
new arrangements under the service line structure. We cannot assure you as to
how many practices will take this opportunity, and we currently expect that a
large percentage of existing affiliated practices will remain on the PPM model
for the foreseeable future. As practices transition to this service line
structure, we would expect the financial impact to be a reduction in debt,
restructuring and reorganization costs, mostly non-cash related, and a reduction
in our earnings related to those practices. We do not think that all of our
practices will transition to the service line structure in the near future, but
we are unable to accurately predict which practices will transition or when they
will do so. Thus, we are unable to more accurately predict the financial impact
of this transition until practices agree to change structures. For those
practices that remain on the PPM model, we will continue to negotiate with "net
revenue model" practices to move to the "earnings model," and otherwise to
manage those practices pursuant to existing agreements.

      We believe that our PPM business has advanced cancer care by aggregating
the nation's largest network of premier oncologists, who care for 15% of the
nation's new cancer cases annually. Today, our network provides access to
advanced cancer therapeutics, diagnostic technologies and the nation's largest
integrated cancer research platform. Our initiatives over the last 18 months
have resulted in an improved capital structure and operating platform for this
business. However, growing the PPM business model relies on significant and
recurring capital investments in intangible assets, resulting in a high cost of
capital and limiting our return on assets. We believe that the service line
structure affords us the opportunity to continue participating in the growth of
the oncology industry by unlocking the value of our core competencies with
significantly reduced and better-focused capital needs. In addition, we believe
that our affiliated practices will benefit from adoption of the service line
structure: physician compensation would increase, management control would
return to the local practices and the affiliated practices would receive the
benefits of our core services. We will support network physicians and their
practices throughout the transition process and continue building on long-term
relationships by providing and expanding the high quality services that
physicians have become accustomed to as part of our network. We believe the
service line structure, because it does not have the constraints of the PPM
model, creates an opportunity for higher growth for both us and our network of
affiliated practices.

      With an expanded market and proven services, we expect to continue to grow
our network of premier oncologists. Network physicians can offer their patients
continued access to high quality cancer care in a convenient, cost-effective,
community-based, outpatient setting. However, we do expect to incur substantial
costs in connection with the development of our service line structure,
including marketing and sales costs and infrastructure expenditures.

Critical Accounting Policies and Estimates

      Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate these estimates, including
those related to service agreements, accounts receivable, intangible assets,
income taxes, and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. The introduction of a new business model,
the service line structure, and the coincident stress it is placing on our
network, represent changes in our business and may make our historical
experiences less informative in making future estimates. These estimates form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.


                                       26
<PAGE>

      Management believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. Please refer to the notes to our consolidated
financial statements, particularly Note 1, for a more detailed discussion of
such policies.

      Our consolidated financial statements include the results of US Oncology,
Inc. and its wholly-owned subsidiaries. We do not include the results of our
affiliated practices (and the amounts they retain for physician compensation),
since we have determined that our relationships with the practices under our
service agreements do not warrant consolidation under the applicable accounting
rules. However, we do include all practice expenses (other than physician
compensation) in our financial statements, since we are legally obligated for
these costs under our service agreements. This policy means that trends in, and
effects of, the compensation levels of our physicians are not readily apparent
from our statements of operations and comprehensive income. However, as our
discussion regarding conversions from the net revenue model emphasizes, the
relationship between net patient revenue and our revenue is important in
understanding our business. For this reason we include information regarding net
patient revenue and amounts retained by physicians in this report and in the
notes to our consolidated financial statements.

      We record net patient revenue for services to patients at the time those
services are rendered, based upon established or negotiated charges, reduced by
management's judgment as to allowances for accounts that may be uncollectible.
When final settlements of the charges are determined, we report adjustments for
any differences between actual amounts received and our estimated adjustments
and allowances. These adjustments can result in decreased net patient revenues
due to a number of factors, such as a deterioration in the financial condition
of payors or patients which decreases their ability to pay.

      We calculate our revenue by reducing net patient revenue by the amount
retained by the practices, primarily for physician compensation. We recognize
service fees as revenue when the fees are earned and deemed realizable based
upon our agreements with the practices, taking into account the priority of
payments for amounts retained by revenue model practices.

      To the extent we are legally permitted to do so, we purchase from our
affiliated practices the accounts receivable those practices generate by
treating patients. We purchase the accounts for their net realizable value,
which in management's judgment is our estimate of the amount that we can
collect, taking into account contractual agreements that would reduce the amount
payable and allowances for accounts that may otherwise be uncollectible. If we
determine that accounts are uncollectible after we have purchased them from a
practice, our contracts require that practice to reimburse us for the additional
uncollectible amount. However, such a reimbursement to us would also reduce the
practice's revenue for the applicable period, since we base net patient revenue
on the same estimates we use to determine the purchase price for accounts
receivable. Such a reduction would reduce physician compensation and, because
our management fees are partly based upon practice revenues, would also reduce
our future service fees. Typically, the impact of these adjustments on our fees
is not significant. However, reimbursement rates relating to health care
accounts receivable, particularly governmental receivables, are complex and
change frequently, and could in the future adversely impact our ability to
collect accounts receivable and the accuracy of our estimates.

      Our balance sheet includes intangible assets related to our service
agreements, which reflect our costs of purchasing the rights to manage our
affiliated practices. From time to time, we review the carrying value of our
service agreements, particularly when changes in circumstances suggest that the
amount reflected on our balance sheet may not be recoverable. In this review, we
deem the amount of a service agreement asset to be unrecoverable if we
anticipate that the undiscounted cash flows from the relevant service agreement
over its remaining life will be less than the amount on the balance sheet. If in
management's judgment the carrying value of a service agreement is not
recoverable, we reduce the value of that asset on our books to equal our
estimate of discounted future cash flows from that service agreement. In
estimating future cash flows, management considers past performance as well as
known trends that are likely to affect future performance. As disclosed in
"Forward Looking Statements and Risk Factors," there are a number of factors we
cannot accurately predict that could impact practice performance and which could
cause our assessment of cash flows to be incorrect. In addition, we have to make
judgments about the timing and amounts of those reductions, which are known as
impairment charges, and those reductions also reduce our income. Our results for
2000 reflected an impairment charge of $138.1 million resulting from such a
determination regarding certain of our service agreements.


                                       27
<PAGE>

      In the same fashion, when we determine termination of a service agreement
is likely, we reduce the carrying value of certain assets related to that
service agreement to reflect our judgment of reductions in the value of those
assets, taking into account amounts we anticipate recovering in connection with
that termination as part of our estimation of future cash flows to be realized
from the related assets. Amounts we may deem recoverable in connection with a
termination include estimates of amounts a practice will pay us to buy back its
operating assets and working capital and, in some cases, may include liquidated
damages or termination fees. Because contract terminations are negotiated
transactions, we may not always estimate these amounts correctly. We do not have
the right to unilaterally terminate our service agreements without cause, and we
will not terminate an agreement (absent cause) unless we are able to negotiate
an acceptable settlement of the agreement. Sometimes we may change our
determination as to whether or not we are likely to terminate an agreement due
to changes in circumstances. We periodically assess those agreements we have
determined are likely to be terminated to verify that such termination is still
likely. In addition, at the time an agreement is terminated we recognize a
charge, if necessary, to eliminate any remaining carrying value for that
agreement and certain related assets from our balance sheet. During 2001, we
changed our initial assessment as to three of the agreements that we had
previously determined were likely to be terminated and revised some of our
estimates with respect to those agreements because the affiliated practices
instead decided to convert to the earnings model. We also made additional
reductions in the carrying amount of assets related to other service agreements,
which we now believe are likely to be terminated. In addition, we recovered more
from some service agreement terminations than we had predicted in our impairment
analysis, resulting in a benefit to us in the fourth quarter of 2001. The net
effect of these adjustments was immaterial in the fourth quarter of 2001. See
Note 11 to the financial statements included in this report.

      In connection with our introduction of the service line structure, we have
announced the repositioning of our management structure to operate under
distinct service lines. Financial and operations management and reporting will
be conducted prospectively according to the separate service lines, even for
existing affiliate practices under the PPM model. For this reason, and to better
inform investors regarding our business and the status of service line
implementation, we intend to commence segment reporting according to service
lines in the first quarter of 2002.

      From time to time, the Financial Accounting Standards Board, the
Securities and Exchange Commission and other regulatory bodies seek to change
accounting rules, including rules applicable to our business and financial
statements. For example, during 1998, the Securities and Exchange Commission
mandated that we change our amortization period for service agreement assets
from 40 years to 25 years. In that case, the accounting change was implemented
prospectively and did not require a restatement of our prior financial
statements. However, we cannot assure you that future changes in accounting
rules would not require us to make such a restatement.

      Currently, there is a tentative conclusion regarding accounting treatment
of off-balance sheet financing vehicles. A change in accounting rules relating
to off-balance sheet financing might require us to change our accounting
treatment of our synthetic lease financing. On February 27, 2002, the Financial
Standards Accounting Board determined that synthetic lease properties meeting
certain criteria would be required to be recognized as assets with a
corresponding liability effective January 1, 2003. Our synthetic lease meets
these criteria. The determination is not final and is subject to additional
rule-making procedures, but assuming the determination becomes a formal
accounting pronouncement and we do not alter the arrangement to maintain
off-balance sheet treatment under the new rules, we would expect to recognize
$72.0 million in additional property and equipment with a corresponding
liability on our balance sheet as of January 1, 2003. The possible impact of
such a change is discussed below in "--Liquidity and Capital Resources."


                                       28
<PAGE>

Results of Operations

      We are affiliated with the following number of physicians by specialty:

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                     2001             2000           1999
                                                                     ----             ----           ----
<S>                                                                   <C>              <C>            <C>
Medical oncology..........................................            673              659            625
Radiation oncology........................................            125              122             97
Other.....................................................             70               88             84
                                                                   ------           ------         ------
                                                                      868              869            806
                                                                   ======           ======         ======
States....................................................             27               27             27
</TABLE>

      The following table sets forth the sources of the growth in the number of
physicians affiliated with us:

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                     2001             2000           1999
                                                                     ----             ----           ----
<S>                                                                   <C>              <C>            <C>
Affiliated physicians, beginning of period................            869              806            719
Physician practice affiliations...........................              8               30             41
Recruited physicians......................................             64               72             61
Retiring/other departure..................................            (73)             (39)           (15)
                                                                   ------           ------         ------
Affiliated physicians, end of period......................            868              869            806
                                                                   ======           ======         ======
</TABLE>

      The following table sets forth the number of cancer centers and positron
emission tomography (PET) machines managed by us and the number of the network's
clinical research accruals:

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                    2001              2000           1999
                                                                    ----              ----           ----
<S>                                                                <C>               <C>            <C>
Cancer centers............................................            77                72             60
PETs......................................................            12                 4              1
Research accruals.........................................         3,639             3,436          3,062
</TABLE>

      The following table sets forth the percentages of revenue represented by
certain items reflected in our Statement of Operations and Comprehensive Income.
This information should be read in conjunction with our consolidated financial
statements and notes thereto.

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                     2001             2000           1999
                                                                     ----             ----           ----
<S>                                                                 <C>              <C>            <C>
Revenue                                                             100.0%           100.0%         100.0%
Operating expenses:
       Pharmaceuticals and supplies.......................           51.8             49.2           47.7
       Field compensation and benefits....................           21.4             21.0           19.7
       Other field costs..................................           11.9             12.2           12.3
       General and administrative.........................            3.2              4.1            3.6
       Bad debt expense...................................             --              0.8             --
       Impairment, restructuring and other charges........            0.4             15.2            2.7
       Depreciation and amortization......................            4.8              5.7            6.0
                                                                   ------           ------         ------
                                                                     93.5            108.2           92.0
                                                                   ------           ------         ------
Income (loss) from operations.............................            6.5             (8.2)           8.0
Interest expense, net.....................................            1.5              2.0            2.0
Other (income) expense....................................             --             (2.1)          (1.3)
                                                                   ------           ------         ------
Income (loss) before income taxes.........................            5.0             (8.1)           7.3
Income tax provision (benefit)............................            1.9             (2.6)           2.9
                                                                   ------           ------         ------
Net income (loss).........................................            3.1%            (5.5)%          4.4%
                                                                   ======           ======         ======
</TABLE>


                                       29
<PAGE>

2001 Compared to 2000

      Our revenue increased to $1.505 billion, an increase of 13.7%, while our
operating margin (which we define as earnings before income taxes, interest,
depreciation, amortization, bad debt expense, gain on investment in common stock
and impairment, restructuring and other charges as a percentage of revenue)
declined from 13.5% in 2000 to 11.6% in 2001, excluding unusual charges of $5.9
million and $201.8 million, respectively, included in impairment, restructuring
and other charges, $10.2 million for bad debt expense in 2000, and $27.6 million
for gain in investment in common stock in 2000. The factors that contributed to
the decrease in operating margins were (i) the continued increase in utilization
of more expensive single-source drugs, (ii) increase in personnel costs, (iii)
practices under the net revenue model not bearing their proportionate share of
increased operating costs and (iv) reduction in management fees resulting from
conversions to the earnings model and other service agreement modifications and
terminations.

      Revenue. Revenue increased from $1.324 billion for 2000 to $1.505 billion
for 2001, an increase of $180.9 million, or 13.7%. The increase in revenue is
attributable to the growth in practices' net patient revenue offset by amounts
retained by the practices. The following presents the manner in which our
revenue is determined (in thousands):

                                                      Year Ended December 31,
                                                       2001              2000
Net patient revenue........................         $1,934,646       $1,718,620
Amounts retained by practices..............           (429,622)        (394,466)
                                                    ----------       ----------
Revenue....................................         $1,505,024      $1,324,154
                                                    ==========       ==========

      Net patient revenue for services to patients by the affiliated practices
is recorded when services are rendered based on established or negotiated
charges reduced by contractual adjustments and allowances for accounts that may
be uncollectible. Differences between estimated contractual adjustments and
final settlements are reported in the period when final settlements are
determined. Net patient revenue of the practices is reduced by amounts retained
by the practices under our service agreements to arrive at our service fee
revenue.

      During 2001, we agreed to terminate the service agreements with four
affiliated practices. We recognized revenue of $60.1 million during 2000 from
these service agreements. For practices managed throughout 2001 and 2000, net
patient revenue in 2001 increased $242.8 million, or 14.6%, as compared to 2000.
Net patient revenue growth was attributable to increases in: (i) anticancer
pharmaceuticals usage, (ii) an increase in medical oncology visits and (iii)
increased radiation and diagnostic revenue. The total number of network
physicians essentially remained flat. The increase in anticancer pharmaceuticals
revenue was attributable primarily to a continued increase in utilization of
more expensive, lower-margin, principally single-source drugs and a modest
increase in medical oncology visits. The increase in radiation and diagnostic
revenue was attributable to the opening of five additional cancer centers and
eight additional PET centers during 2001 and growth in revenue of 72 cancer
centers opened prior to 2001.

      Amounts retained by practices increased from $394.5 million for 2000 to
$429.6 million for 2001, an increase of $35.2 million, or 8.9%. Adjusting for
the disaffiliations mentioned above, amounts retained by the practices increased
$43.5 million, or 11.5%, as compared to the previous year. Such increases in
amounts retained by practices are directly attributable to the growth in net
patient revenue, combined with the increase in profitability of practices.


                                       30
<PAGE>

      The following is our revenue attributed to the two principal service fee
models--the earnings model and the net revenue model (in thousands):

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                       -----------------------
                                                 2001                           2000
                                                 ----                           ----
                                       Revenue             %          Revenue           %
                                       -------           -----        -------         -----
<S>                                  <C>                 <C>         <C>              <C>
Earnings model...................    $   902,190          60.0%      $  551,532        41.7%
Net revenue model................        583,032          38.7%         745,843        56.3%
Other............................         19,802           1.3%          26,779         2.0%
                                      ----------         -----       ----------       -----
                                      $1,505,024         100.0%      $1,324,154       100.0%
                                      ==========         =====       ==========       =====
</TABLE>

      Practices' compensation under the net revenue model is not proportionately
impacted by increasing operating costs. As a result, we announced in November
2000 our initiative to convert all net revenue model agreements to earnings
model agreements. We believe the earnings model properly aligns practice
priorities with proper cost control, with the practice and us sharing
proportionately in revenue, operating costs and profitability. As of March 11,
2002, fourteen practices accounting for 21.7% of our affiliated practices' net
patient revenue in 2001 had converted from the net revenue model to the earnings
model since December 31, 2000. 60.0% of our revenue for 2001 was derived from
practices with earnings model service agreements as of December 31, 2001, and
38.7% was derived from practices with net revenue model service agreements as of
such date, as compared to 41.7% and 56.3%, respectively, in 2000. Amounts
retained by practices decreased from 23.0% of net patient revenue for 2000 to
22.2% for 2001. Such decrease is mainly attributable to a higher percentage of
our revenue being derived from earnings model service agreements as a result of
conversions of net revenue model agreements to the earnings model and
terminations of agreements with net revenue model practices.

      In converting practices to the earnings model, we are attempting to move
towards a standardized service fee equal to 30% of practice earnings, subject to
adjustments. We are also providing certain economic incentives within our
service agreements, both in connection with earnings model conversions and
otherwise, to meet or exceed predetermined thresholds for return on invested
capital. In some cases, the conversions and incentives may represent a reduction
in management fees that would have been realizable under the previously existing
fee arrangement.

      From time to time we may also make concessions to practices or alter
service agreements to address specific practice concerns or economic conditions
within a given practice, which we believe enhance our relationships with
physicians and provide greater stability to our network. We believe that the
standardization of our fee arrangements to a consistent earnings model, combined
with incentives to enhance return on invested capital, is the model that most
appropriately aligns our incentives with those of our network physicians and
provides a stable platform for future growth. However, in the short term at
least, the impact of these changes in our fee structure may be flat or reduced
management fees when compared to fees that would have been achievable under
previously existing agreements. As we have previously disclosed and as discussed
below, in the event practices currently managed by us under PPM arrangements
choose to adopt the service line structure, our fees from those practices would
drop significantly and permanently.

      Medicare and Medicaid are the practices' largest payors. During 2001,
approximately 40% of the practices' net patient revenue was derived from
Medicare and Medicaid payments and 37% and 35% was so derived in 2000 and 1999,
respectively. This percentage varies among practices. No other single payor
accounted for more than 10% of our revenues in 2001, 2000 or 1999.

      Pharmaceuticals and Supplies. Pharmaceuticals and supplies expense, which
includes drugs, medications and other supplies used by the practices, increased
from $651.2 million in 2000 to $780.1 million in 2001, an increase of $128.9
million, or 19.8%. As a percentage of revenue, pharmaceuticals and supplies
increased from 49.2% in 2000 to 51.8% in 2001. This increase was primarily due
to: (i) a shift in the revenue mix to a higher percentage of revenue from drugs,
(ii) increases in acquisition prices of drugs, (iii) a shift to lower margin
drugs and (iv) with respect to practices operating under the net revenue model,
our disproportionately bearing the impact of increasing operating costs.

      We expect that third-party payors, particularly government payors, will
continue to negotiate or mandate the reimbursement rate for pharmaceuticals and
supplies, with the goal of lowering reimbursement rates, and that


                                       31
<PAGE>

such lower reimbursement rates as well as shifts in revenue mix may continue to
adversely impact our margins with respect to such items. Current governmental
focus on average wholesale price (AWP) as a basis for reimbursement could also
lead to a wide-ranging reduction in the way pharmaceuticals are reimbursed by
governmental payors. We also continue to believe that single-source drugs,
possibly including oral drugs, will continue to be introduced at a rapid pace,
thus further impacting margins. In response to this decline in margin relating
to certain pharmaceutical agents, we have adopted several strategies. The
successful conversion of net revenue model practices to the earnings model will
help reduce the impact of the increasing cost of pharmaceuticals and supplies.
Likewise, the implementation of the service line structure should have a similar
effect. In addition, we have numerous efforts underway to reduce the cost of
pharmaceuticals by negotiating discounts for volume purchases and by
streamlining processes for efficient ordering and inventory control and are
assessing other strategies to address this trend. We also continue to expand our
business into areas that are less affected by lower pharmaceutical margins, such
as radiation oncology and diagnostic radiology. However, as long as
pharmaceuticals continue to become a larger part of our revenue mix as a result
of changing usage patterns (rather than growth), we believe that our overall
margins will continue to be adversely impacted.

      Field Compensation and Benefits. Field compensation and benefits, which
include salaries and wages of the operating units' employees, increased from
$278.0 million in 2000 to $322.5 million in 2001, an increase of $44.5 million
or 16.0%. As a percentage of revenue, field compensation and benefits increased
from 2l.0% in 2000 to 21.4% in 2001. The increase is attributed to increases in
employee compensation rates to address shortages of certain key personnel such
as oncology nurses and radiation technicians.

      Other Field Costs. Other field costs, which consist of rent, utilities,
repairs and maintenance, insurance and other direct field costs, increased from
$161.5 million in 2000 to $179.5 million in 2001, an increase of $18.0 million
or 11.1%. As a percentage of revenue, other field costs decreased from 12.2% in
2000 to 11.8% in 2001 due to economies of scale.

      General and Administrative. General and administrative expenses decreased
from $54.7 million in 2000 to $48.0 million in 2001, a decrease of $6.7 million,
or 12.3%. As a percentage of revenue, general and administrative costs decreased
from 4.1% in 2000 to 3.2% for 2001. We restructured general and administrative
departments in December 2000 and March 2001, eliminating approximately 50
positions, closing offices and abandoning information system initiatives, which
resulted in restructuring and other charges recorded in the fourth quarter of
2000 and first quarter of 2001 (see Impairment, Restructuring and Other
Charges).

      Bad Debt Expense. In late 1999, we installed a patient billing system in
thirteen practices with approximately $336 million in annual net patient
revenues. During 2000, we experienced limitations in this system that caused
significant delays and errors in patient billing and collection processes.
Although the vendor assisted in correcting some deficiencies in the billing
system, collecting some patient accounts became impractical. In the fourth
quarter of 2000, we determined that the system problems required a $10.2 million
charge for bad debt expense. Because of the numerous distractions borne by the
practices in the system conversion, we elected not to include this amount in the
computation of practice results. In connection with a settlement with the vendor
of that system, that vendor agreed to provide us with a replacement system at
significantly reduced rates.

      Impairment, Restructuring and Other Charges. During 2001, we recognized
impairment, restructuring and other charges of $5.9 million, net, and during
2000, we recognized impairment, restructuring and other charges of approximately
$201.8 million. The charges are summarized in the following table and discussed
in more detail below (in thousands):

                                                       Year Ended December 31,
                                                      2001                2000
                                                      ----                ----
Impairment charges                                  ($3,376)            $170,130
Restructuring charges                                 5,868               16,122
Other charges                                         3,376               15,594
                                                    -------             --------
Total                                               $ 5,868             $201,846
                                                    =======             ========


                                       32
<PAGE>

                               Impairment Charges
                               ------------------

      In the fourth quarter of 2001, we recorded a net gain on separation of
$3.4 million, pre-tax, on the termination of certain service agreements and
related assets. In the fourth quarter of 2000, we recorded a pre-tax, non-cash
charge of $170.1 million related to the impairment of certain service agreements
and other assets, as follows (in thousands):

                                                            2001            2000
                                                            ----            ----
Impairment of service agreements                              --        $138,128
Impairment of assets (gain on separation)
  related to termination of service agreements           ($3,376)         32,002
                                                         -------        --------
                Total                                    ($3,376)       $170,130
                                                         =======        ========

      Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(FAS 121), requires that companies periodically assess their long-lived assets
for potential impairment. In accordance with this requirement, from time to time
we evaluate our intangible assets for impairment. For each of our service
agreements, this analysis involves comparing the aggregate expected future cash
flows under the agreement to its carrying value as an intangible asset on our
balance sheet. In estimating future cash flows, we consider past performance as
well as known trends that are likely to affect future performance. In some cases
we also take into account our current activities with respect to that agreement
that may be aimed at altering performance or reversing trends. All of these
factors used in our estimates are subject to error and uncertainty.

      In 1999, we noted a significant increase in operating costs, most notably
the cost of pharmaceuticals, which increased by 5% as a percentage of revenue
from 1998 to 1999. We believed that some of this increase was attributable
either to inefficiencies arising directly from the AOR/PRN merger and the
integration of the formerly separate companies, or from delays in implementation
of cost containment strategies during the first half of 1999 pending
consummation of the merger. In addition, we continued to believe that we had
developed effective strategies to diversify revenues away from medical oncology
and to curtail the increase in drug prices and otherwise contain costs. As the
remaining lives of our service agreements were substantially longer than their
estimated recovery periods, and because we believed that we would be able to
reverse or slow many of the negative cost trends, we did not believe any
impairment provisions were necessary at that time.

      During 2000, we continued to experience adverse trends in operating
margins. Although our strategies to lower pharmaceutical costs slowed the rate
of increase, pharmaceutical costs continued to rise, reducing operating margins
during 2000. Single-source drug use continued to grow, and treatment protocols
involving a greater number of different, expensive drugs for each patient were
also becoming more common. Based upon the significant increase in the number of
oncological pharmaceuticals (which would upon approval be new single-source
drugs) in development, we believed the trend towards increased use of
lower-margin pharmaceuticals would continue. We also experienced increased
pressure on reimbursement from payors, including significant initiatives with
respect to government programs, to reduce oncology reimbursements, particularly
for pharmaceuticals. Moreover, we became increasingly aware of growing
complexity in the administrative aspects of the practices and rising personnel
costs in the health care sector, neither of which were being effectively slowed
or stopped by anticipated economies of scale and other efficiencies arising from
the merger. Even though the practices' profitability continued to increase
significantly during this period, because practices that operate under the net
revenue model do not share in increasing operating costs, we shared
disproportionately in the decline in operating margins. Based upon these trends
our management determined during the latter part of 2000 that the cost of
operating in the oncology sector was continuing to increase and that this trend
was likely to continue, regardless of our action, in the next several years. For
this reason, we determined that rising costs, and our disproportionately sharing
in these costs under the net revenue model, would be an integral part of our
forecast of future cash flows in an impairment analysis with respect to our
service agreements.

      In our impairment analysis for the fourth quarter of 2000, we incorporated
additional assumptions regarding rising cost trends. With respect to service
agreements under the net revenue model, we have greater exposure in an
environment of rising costs because practices retain a portion of revenues
before any fees are paid. Therefore, our impairment review focused primarily on
net revenue model service agreements. Using current


                                       33
<PAGE>

assumptions, many of our net revenue model service agreements would contribute
decreasing cash flows in the immediate future and then begin contributing
negative cash flows. Although management commenced during the fourth quarter of
2000 an initiative to convert net revenue model agreements to earnings model
agreements, there can be no assurance as to the number of conversions that will
be achieved. Substantial differences between the estimates used in the
impairment analysis and actual trends occurring in the future could result in
future additional impairment charges, or in certain practices experiencing
better than expected future cash flows, than those currently forecast. The
charge for impairment of service agreements related to thirteen practices with a
total net book value of $145 million as of December 31, 2000 prior to the
impairment charge. Certain of the projected cash flows related to our service
agreements may result in negative cash flows if cost increases continue. No
provision has been made for potential losses under these contracts as such
amounts are not yet probable and reasonably estimable.

      We had impaired assets of approximately $32.0 million during 2000 for the
difference between the carrying value of the assets related to certain practices
with which we anticipated terminating our agreements and the consideration
expected to be received upon termination of our service agreements with those
practices. In the fourth quarter of 2001, we recognized a net gain on separation
of approximately $3.4 million relating to service agreement terminations.
Included in this net gain is approximately $9.0 million arising from final
settlements with several practices with which we terminated our relationships
where the ultimate settlements were more beneficial to us than we estimated
during 2000 and resulted in our recognizing in the fourth quarter of 2001 the
forgiveness of $1.5 million in notes payable by us to physicians, the waiver by
the physicians of their rights to receive $1.2 million of our common stock
previously recognized by us as an obligation when we affiliated with the
physicians, and additional consideration received by us in connection with the
terminations of $6.3 million in excess of the carrying value of the net assets
of the terminated practices, less a charge of $5.6 million recognized during the
fourth quarter of 2001 for the difference between the carrying value of certain
assets and the amount we expect to realize upon those assets, as determined in
the fourth quarter of 2001.

                              Restructuring Charges
                              ---------------------

      In the fourth quarter of 2000, we comprehensively analyzed our operations
and cost structure, with a view to repositioning ourselves to effectively
execute our strategic and operational initiatives. This analysis focused on our
non-core assets and activities we had determined were not consistent with our
strategic direction. We have recognized and accounted for these costs in
accordance with the provisions of Emerging Issues Task Force Consensus No. 94-3,
"Accounting for Restructuring Costs." As a result of this analysis, during the
fourth quarter, we recorded the following charges (in thousands):

<TABLE>
<CAPTION>
                              Restructuring                                                                   Accrual at
                                Expense in                      Asset         Accrual at                     December 31,
                                   2000         Payments     Write-downs   December 31, 2000   Payments          2001
                                   ----         --------     -----------   -----------------   --------          ----
<S>                              <C>            <C>             <C>              <C>            <C>            <C>
Abandonment of IT
systems                          $ 6,557             --         $ (6,557)            --            --              --
Impairment of home health
  business                         6,463             --           (6,463)            --            --              --
Severance of employment
  agreement                          466        $   (36)              --         $  430         $(215)         $  215
Site closures                      2,636           (562)            (655)         1,419          (338)          1,081
                                 -------        -------         --------         ------         -----          ------
Total                            $16,122        $  (598)        $(13,675)        $1,849         $(553)         $1,296
                                 =======        =======         ========         ======         =====          ======
</TABLE>

      As indicated above, during the fourth quarter of 2000, we decided to
abandon our efforts to pursue some of our information systems initiatives,
including the clinical information systems and e-commerce initiatives, and
recognized a charge of $6.6 million. In one market where we agreed to manage the
oncology operations of a hospital system, we decided to abandon and sell a home
health business that is no longer consistent with our strategy in that market.
As a result, we recorded a charge of $6.5 million during the fourth quarter of
2000. As part of the restructuring, we terminated the duties of an executive,
with contractual severance payments totaling approximately $430,000 over the
next two years. We also determined that we will close several sites, abandoning
leased and owned facilities, and recognized a charge of $2.6 million for
remaining lease obligations and the difference in the net book value of the
owned real estate and its expected fair value.


                                       34
<PAGE>

      In the first quarter of 2001, we announced plans to further reduce
overhead costs through reducing corporate staff, consolidating administrative
offices, closing additional facilities and abandoning certain software
applications. We have recognized and accounted for these costs in accordance
with the provisions of Emerging Issues Task Force Consensus No. 94-3,
"Accounting for Restructuring Costs." As a result, we recorded the following
pre-tax charges during the first quarter of 2001 (in thousands):

<TABLE>
<CAPTION>
                                Restructuring                         Asset         Accrual at
                                   Expenses         Payments       Write-downs   December 31, 2001
                                   --------         --------       -----------   -----------------
<S>                                 <C>             <C>               <C>             <C>
Costs related to personnel
   reductions                       $3,113          $(2,900)             --           $  213
Closure of facilities                2,455           (1,323)             --            1,132
Abandonment of software
   applications                        300               --           $(300)              --
                                    ------          -------           -----           ------
Total                               $5,868          $(4,223)          $(300)          $1,345
                                    ======          =======           =====           ======
</TABLE>

      As indicated above, during the first quarter of 2001, we announced plans
to reduce corporate overhead and eliminated approximately 50 positions. As a
result, we recorded a charge of $3.1 million. We also determined that we will
close several sites, abandoning leased facilities, and recognized a charge of
$2.5 million for remaining lease obligations and related improvements. In
addition, we decided to abandon certain software applications and recorded a
charge of $300,000.

                                  Other Charges
                                  -------------

During 2001 and 2000, we recorded other charges, net, as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  2001             2000
                                                                  ----             ----
<S>                                                             <C>              <C>
Cashless stock option exercise costs                                 --          $ 2,462
Investigation and contract separation costs                          --            3,372
Practice accounts receivable and fixed asset write-off          $ 1,925            5,110
Credit facility and note amendment fees                              --            2,375
Management recruiting and relocation costs                           --            1,275
Vacation pay accrual-change in policy                                --            1,000
Other                                                             1,451               --
                                                                -------          -------
                                                                $ 3,376          $15,594
                                                                =======          =======
</TABLE>

      In the fourth quarter of 2001, we recognized unusual charges including:
(i) $1.9 million of practice accounts receivable and fixed asset write-off, (ii)
a $1.0 million charge related to our estimated exposure to losses under an
insurance policy where the insurer has become insolvent (see Note 12), and (iii)
$451,000 of consulting costs incurred in connection with development of our
service line structure. The negative impact of these charges was wholly offset
by the net gain on separation of $3.4 million we recognized during the fourth
quarter of 2001, which is discussed above in "Impairment Charges."

      In the fourth quarter of 2000, we recognized a pre-tax $2.5 million
non-cash charge related to the cashless exercise of 1.6 million stock options by
our Chairman and Chief Executive Officer (the "optionee"), due to the
termination of the stock option plan under which the options were granted, in
accordance with Financial Accounting Standards Board (FASB) Interpretation No.
44. To consummate the exercise, the optionee surrendered approximately 1.3
million shares having an average strike price of $3.44 to satisfy exercise price
and tax liability with respect to all options. As a result of this transaction,
the optionee received approximately 300,000 shares of common stock. We also
realized an offsetting $1.0 million reduction in our federal income tax
obligation as a result of this transaction.


                                       35
<PAGE>

      During the third quarter and second quarter of 2000, we incurred costs of
$206,000 and $1.7 million, respectively, in connection with the qui tam lawsuits
described in Part I, Item 3, of this report, consisting primarily of auditing
and legal fees and related expenses. In addition, we incurred $1.5 million of
costs in the second quarter of 2000 consisting of intangible asset and
receivable write-downs as a result of terminating our affiliation with a sole
practitioner and with the practice named in the qui tam lawsuits.

      We also recognized other charges totaling approximately $9.8 million in
2000. These charges consisted of: (i) $5.1 million of receivables from
affiliated practices that are not considered to be recoverable; (ii) $2.4
million for bank and noteholder fees associated with amending the credit
facilities to accommodate debt covenant compliance related to unusual charges;
(iii) $1.3 million related to expenses to recruit and relocate certain members
of the current management team; and (iv) $1.0 million for a change in our
vacation policy.

      We have recognized a deferred income tax benefit for substantially all of
these charges in 2000 as many of the items will be deductible for income tax
purposes in future periods, and we believe, after considering all historical and
expected future events, that sufficient income will be earned in the future to
realize these benefits.

      Depreciation and Amortization. Depreciation and amortization expense
decreased from $75.1 million in 2000 to $71.9 million in 2001, a decrease of
$3.2 million, or 4.3%. The decrease is primarily due to the $170.1 million
impairment of long-lived assets and service agreement assets recognized in the
fourth quarter of 2000.

      Interest. Net interest expense decreased from $26.8 million in 2000 to
$22.5 million in 2001, a decrease of $4.3 million or 16.0%, due to a decline in
interest rates throughout 2001 on our variable rate indebtedness and a lower
level of borrowings as a result of payments made from improved cash flows from
more efficient business office operations.

      Other Income. Other income of $27.6 million in 2000 represents the gain on
shares of common stock of ILEX Oncology, Inc. sold during the first quarter of
2000.

      Income Taxes. In 2001, we recognized tax expense of $28.4 million
resulting in an effective tax rate of 38.0%, as compared to (32.5)% in 2000. The
increase in the effective rate was due to the benefit recognized in 2000 as a
result of the impairment, restructuring and other charges and no state tax
benefit being recognized in 2000 for intangible write-offs in certain states.

      Net Income/Loss. Net income (loss) increased from a net loss of $72.6
million in 2000 to $46.3 million in net income in 2001, an increase of $119.0
million. Excluding charges for impairments, restructurings and other costs,
costs related to bad debt expense and the gain on investment in common stock for
both years, net income for 2001 would have been $50.0 million or $0.50 per
share, as compared to $47.6 million or $0.47 per share in 2000, an increase of
$2.3 million. The charges were attributable to the factors described in the
preceding paragraphs.

2000 Compared to 1999

      Our revenue increased to $1.324 billion, an increase of 21.2%, while our
operating margin declined from 16.7% to 13.5%, excluding unusual charges of
$201.8 million and $29.0 million in 2000 and 1999, respectively. Revenue growth
is attributed to an increase in the practices' net patient revenue, partially
offset by amounts retained by the practices, primarily for physician
compensation. Factors that contributed to the decrease in operating margins were
(i) the continued increase in utilization of more expensive single-source drugs,
(ii) increase in personnel costs and (iii) practices under the net revenue model
not bearing their proportionate share of increased operating costs.

      During the year 2000, we recorded the following unusual charges:

      .     $170.1 million related to the impairment of certain service
            agreements and other assets, which is primarily the impairment of
            service agreements for which management determined that the carrying
            value was in excess of future cash flow (on an undiscounted basis)
            for such service agreements;

      .     $16.1 million of restructuring charges, including those related to
            site closures and consolidation of services;


                                       36
<PAGE>

      .     $10.2 million of additional bad debt expense relating to receivable
            collectibility estimates as a result of problems stemming from
            system integrations;

      .     $9.8 million related primarily to write-offs of amounts due from
            physicians and additional bank and noteholder financing fees;

      .     $3.4 million in connection with qui tam lawsuits, primarily legal,
            audit and related expenses, and in asset write downs relating to
            affiliation terminations; and

      .     $2.5 million related to the cashless exercise of 1.6 million stock
            options by our Chairman and Chief Executive Officer, due to the
            termination of the stock option plan under which these options were
            granted.

Of these charges, $208.7 million were recognized in the fourth quarter. All are
discussed in more detail below.

      During the year 1999, we recorded unusual charges totaling $29.0 million
relating to the AOR/PRN merger.

      Revenue. Revenue increased from $1.093 billion for 1999 to $1.324 billion
for 2000, an increase of $231.2 million, or 21.1%. The increase in revenue is
attributable to the growth in practices' net patient revenue offset by amounts
retained by the practices. The following presents the manner in which the our
revenue is determined (in thousands):

                                                   Year Ended December 31,
                                                 2000                   1999
                                                 ----                   ----

Net patient revenue ..............           $ 1,718,620            $ 1,407,494
Amounts retained by practices ....              (394,466)              (314,553)
                                             -----------            -----------
Revenue ..........................           $ 1,324,154            $ 1,092,941
                                             ===========            ===========

      Net patient revenue for services to patients by the affiliated practices
is recorded when services are rendered based on established or negotiated
charges reduced by contractual adjustments and allowances for accounts that may
be uncollectible. Differences between estimated contractual adjustments and
final settlements are reported in the period when final settlements are
determined. Net patient revenue of the practices is reduced by amounts retained
by the practices under our service agreements to arrive at our service fee
revenue.

      Net patient revenue growth was attributable to increases in: (i) medical
oncology services, (ii) anticancer pharmaceuticals and (iii) radiation and
diagnostic revenue. The increase in medical oncology services was attributable
to an increase in medical oncology visits of existing practices, combined with
net growth in network size of 63 physicians during 2000. The increase in
anticancer pharmaceuticals revenue was attributable to the growth in medical
oncology services, coupled with a continued increase in utilization of more
expensive, lower-margin drugs, principally single-source drugs. The increase in
radiation and diagnostic revenue was attributable to the opening of twelve
additional cancer centers during 2000 and growth in revenue of 60 cancer centers
opened prior to 2000.

      Amounts retained by practices increased from $314.6 million for 1999 to
$394.5 million for 2000, an increase of $79.9 million, or 25.4%. Such increase
in amounts retained by practices is directly attributable to the growth in net
patient revenue, combined with the increase in profitability of practices.


                                       37
<PAGE>

      The following is our revenue attributed to the two principal service fee
models--the earnings model and the net revenue model (in thousands):

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                         2000                                  1999
                                         ----                                  ----
                             Revenue                   %           Revenue                   %
                           ----------               ------       ----------               ------
<S>                        <C>                       <C>         <C>                       <C>
Net revenue model          $  745,843                 56.3%      $  602,610                 55.1%
Earnings model ..             551,532                 41.7%         459,975                 42.1%
Other ...........              26,779                  2.0%          30,356                  2.8%
                           ----------               ------       ----------               ------
                           $1,324,154                100.0%      $1,092,941                100.0%
                           ==========               ======       ==========               ======
</TABLE>

      56.3% of our revenue for 2000 was derived from net revenue model service
agreements, and 41.7% was derived from earnings model service agreements, as
compared to 55.1% and 42.1%, respectively, in 1999. Amounts retained by
practices increased from 22.3% of net patient revenue for 1999 to 23.0% for
2000, mainly attributable to practices' compensation under the net revenue model
not being proportionately impacted by increasing operating costs. Due to this
trend, we announced in November 2000 our initiative to convert all net revenue
model agreements to earnings model agreements. We believe the earnings model
properly aligns practice priorities with proper cost control, with us and the
practice sharing proportionately in revenue, operating costs and profitability.

      Medicare and Medicaid are the practices' largest payors. During 2000,
approximately 37% of the practices' net patient revenue was derived from
Medicare and Medicaid payments and 35% was so derived in 1999. This percentage
varies among practices. No other single payor accounted for more than 10% of our
revenues in 2000 or 1999.

      Pharmaceuticals and Supplies. Pharmaceuticals and supplies expense, which
includes drugs, medications and other supplies used by the practices, increased
from $521.1 million in 1999 to $651.2 million in 2000, an increase of $130.1
million, or 25.0%. As a percentage of revenue, pharmaceuticals and supplies
increased from 47.7% in 1999 to 49.2% in 2000. This increase was primarily due
to: (i) a shift in the revenue mix to a higher percentage of revenue from drugs,
(ii) increases in acquisition prices of drugs, (iii) a shift to lower-margin
drugs and (iv) with respect to practices operating under the net revenue model,
our disproportionately bearing the impact of increasing operating costs.
Management expects that third-party payors, particularly government payors, will
continue to negotiate or mandate the reimbursement rate for pharmaceuticals and
supplies with the goal of lowering reimbursement rates, and that such lower
reimbursement rates as well as shifts in revenue mix may continue to adversely
impact our margins with respect to such items. In response to this decline in
margin relating to certain pharmaceutical agents, we have adopted several
strategies. Most importantly, the successful conversion of net revenue model
practices to the earnings model will help reduce the impact of the increasing
cost of pharmaceuticals and supplies. In addition, we have numerous efforts
underway to reduce the cost of pharmaceuticals by negotiating discounts for
volume purchases and by streamlining processes for efficient ordering and
inventory control. We also continue to expand our business into areas that are
less affected by lower pharmaceutical margins, such as radiation oncology and
diagnostic radiology.

      Field Compensation and Benefits. Field compensation and benefits, which
include salaries and wages of the operating units' employees, increased from
$215.4 million in 1999 to $278.0 million in 2000, an increase of $62.6 million
or 29.1%. As a percentage of revenue, field compensation and benefits increased
from 19.7% in 1999 to 21.0% in 2000. The increase is attributed to increasing
complexity of our business operations and increases in employee compensation
rates to be more competitive with market rates.

      Other Field Costs. Other field costs, which consist of rent, utilities,
repairs and maintenance, insurance and other direct field costs, increased from
$134.6 million in 1999 to $161.5 million in 2000, an increase of $26.9 million
or 20.0%. This increase in other field costs is due to increased facilities and
activity levels. As a percentage of revenue, other field costs decreased from
12.3% in 1999 to 12.2% in 2000 due to economies of scale.


                                       38
<PAGE>

      General and Administrative. General and administrative expenses increased
from $39.5 million in 1999 to $54.7 million in 2000, an increase of $15.2
million, or 38.6%. As a percentage of revenue, general and administrative costs
increased from 3.6% in 1999 to 4.1% for 2000. This increase was primarily
attributable to additional resources necessary to integrate operations from the
AOR/PRN merger, to expand information systems and to develop and analyze new
business opportunities.

      Bad Debt Expense. In late 1999, we installed a patient billing system in
thirteen practices with approximately $336 million in annual net patient
revenues. During 2000, we experienced limitations in this system that caused
significant delays and errors in patient billing and collection processes.
Although the vendor assisted in correcting some deficiencies in the billing
system, collecting some patient accounts became impractical. In the fourth
quarter of 2000, we determined that the system problems required a $10.2 million
charge for bad debt expense. Because of the numerous distractions borne by the
practices in the system conversion, we elected not to include this amount in the
computation of practice results. In connection with a settlement with the vendor
of that system, that vendor has agreed to provide us with a replacement system
at significantly reduced rates.

      Impairment, Restructuring and Other Charges. During the second, third and
fourth quarters of 2000, we recognized impairment, restructuring and other
charges of approximately $201.8 million, and during 1999, we recognized merger
and integration costs of $29.0 million. The charges are summarized in the
following table and discussed in more detail below (in thousands):

                                                     Year Ended December 31,
                                                    2000                  1999
                                                    ----                  ----
Impairment charges                                $170,130               $    --
Restructuring charges                               16,122                    --
Other charges                                       15,594                29,014
                                                  --------               -------
Total                                             $201,846               $29,014
                                                  ========               =======

                               Impairment Charges
                               ------------------

      In the fourth quarter of 2000, we recorded a pre-tax, non-cash charge of
$170.1 million related to the impairment of certain service agreements and other
assets, as follows (in thousands):

Impairment of service agreements                                        $138,128
Impairment of other assets and estimated loss related to
    termination of service agreements                                     32,002
                                                                        --------
                  Total                                                 $170,130
                                                                        ========

      FAS 121 requires that companies periodically assess their long-lived
assets for potential impairment. In accordance with this requirement, from time
to time we evaluate our intangible assets for impairment. For each of our
service agreements, this analysis involves comparing the aggregate expected
future cash flows under the agreement to its carrying value as an intangible
asset on our balance sheet. In estimating future cash flows, we consider past
performance as well as known trends that are likely to affect future
performance. In some cases we also take into account our current activities with
respect to that agreement that may be aimed at altering performance or reversing
trends. All of these factors used in our estimates are subject to error and
uncertainty.

      In 1999, we noted a significant increase in operating costs, most notably
the cost of pharmaceuticals, which increased by 5% as a percentage of revenue
from 1998 to 1999. We believed that some of this increase was attributable
either to inefficiencies arising directly from the AOR/PRN merger and the
integration of the formerly separate companies, or from delays in implementation
of cost containment strategies during the first half of 1999 pending
consummation of the merger. In addition, we continued to believe that we had
developed effective strategies to diversify revenues away from medical oncology
and to curtail the increase in drug prices and otherwise contain costs. As the
remaining lives of our service agreements were substantially longer than their
estimated recovery periods, and because we believed that we would be able to
reverse or slow many of the negative cost trends, we did not believe any
impairment provisions were necessary at that time.

      During 2000, we continued to experience adverse trends in operating
margins. Although our strategies to lower pharmaceutical costs slowed the rate
of increase, pharmaceutical costs continued to rise, reducing operating margins
during 2000. Single-source drug use continued to grow, and treatment protocols
involving a greater


                                       39
<PAGE>

number of different expensive drugs for each patient were also becoming more
common. Based upon the significant increase in the number of oncological
pharmaceuticals (which would upon approval be new single-source drugs) in
development, we believed the trend towards increased use of lower-margin
pharmaceuticals would continue. We also experienced increased pressure on
reimbursement from payors, including significant initiatives with respect to
government programs, to reduce oncology reimbursements, particularly for
pharmaceuticals. Moreover, we became increasingly aware of growing complexity in
the administrative aspects of the practices and rising personnel costs in the
health care sector, neither of which were being effectively slowed or stopped by
anticipated economies of scale and other efficiencies arising from the merger.
Even though the practices' profitability continued to increase significantly
during this period, because practices that operate under the net revenue model
do not share in increasing operating costs, we shared disproportionately in the
decline in operating margins. Based upon these trends our management determined
during the latter part of 2000 that the cost of operating in the oncology sector
was continuing to increase and that this trend was likely to continue,
regardless of our action, in the next several years. For this reason, we
determined that rising costs, and our disproportionately sharing in these costs
under the net revenue model, would be an integral part of its forecast of future
cash flows in an impairment analysis with respect to our service agreements.

      In our impairment analysis for the fourth quarter of 2000, we incorporated
additional assumptions regarding rising cost trends. With respect to service
agreements under the net revenue model, we have greater exposure in an
environment of rising costs because practices retain a portion of revenues
before any fees are paid. Therefore, our impairment review focused primarily on
net revenue model service agreements. Using current assumptions, many of our net
revenue model service agreements would contribute decreasing cash flows in the
immediate future and then begin contributing negative cash flows. Although
management commenced during the fourth quarter of 2000 an initiative to convert
net revenue model agreements to earnings model agreements, there can be no
assurance as to the number of conversions that will be achieved. Substantial
differences between the estimates used in the impairment analysis and actual
trends occurring in the future could result in future additional impairment
charges, or in certain practices experiencing better than expected future cash
flows, than those currently forecast. The charge for impairment of service
agreements related to thirteen practices with total net book value of $145
million as of December 31, 2000 prior to the impairment charge. Certain of the
projected cash flows related to our service agreements may result in negative
cash flows if cost increases continue. No provision has been made for potential
losses under these contracts as such amounts are not yet probable or reasonably
estimable.

      In addition, we commenced negotiating with seven practices to terminate
their service agreements, and we had impaired assets of approximately $32.0
million during 2000 for the difference between the carrying value of the assets
related to those practices and the consideration expected to be received from
the practices upon termination of our service agreements with those practices.
Service fees from these practices were less than 6% of our service fee revenues
for 2000.

                              Restructuring Charges
                              ---------------------

      In the fourth quarter of 2000, we comprehensively analyzed our operations
and cost structure, with a view to repositioning ourselves to effectively
execute our strategic and operational initiatives. This analysis focused on
noncore assets and activities to determine whether they were still consistent
with our strategic direction. As a result of this analysis, during the fourth
quarter, we recorded the following charges (in thousands):

<TABLE>
<CAPTION>
                              Restructuring                    Asset         Accrual at                      Accrual at
                             Expense in 2000   Payments     Write-downs   December 31, 2000   Payments    December 31, 2001
<S>                              <C>                          <C>
Abandonment of IT
  systems                        $ 6,557           --         $ (6,557)            --             --              --
Impairment of home health
  business                         6,463           --           (6,463)            --             --              --
Severance of employment
  agreement                          466        $ (36)              --         $  430          $(215)         $  215
Site closures                      2,636         (562)            (655)         1,419           (338)          1,081
                                 -------        -----         --------         ------          -----          ------
Total                            $16,122        $(598)        $(13,675)        $1,849          $(553)         $1,296
                                 =======        =====         ========         ======          =====          ======
</TABLE>


                                       40
<PAGE>

      As indicated above, during the fourth quarter of 2000, we decided to
abandon our efforts to pursue some of our information systems initiatives,
including the clinical information systems and e-commerce initiatives, and
recognized a charge of $6.6 million. In one market where we had agreed to manage
the oncology operations of a hospital system, we decided to abandon and sell a
home health business that was no longer consistent with our strategy in that
market. As a result, we recorded a charge of $6.5 million during the fourth
quarter of 2000. As part of the restructuring, we terminated the duties of an
executive, with contractual severance payments totaling approximately $430,000
over the next two years. We also determined that we will close several sites,
abandoning leased and owned facilities, and recognized a charge of $2.6 million
for remaining lease obligations and the difference in the net book value of the
owned real estate and our expected fair value.

                                  Other Charges
                                  -------------

      During 2000 and 1999, we recorded other charges as follows (in thousands):

                                                         Year Ended December 31,
                                                          2000            1999
                                                          ----            ----
Merger, restructuring and integration costs                  --         $29,014
Cashless stock option exercise costs                    $ 2,462              --
Investigation and contract separation costs               3,372              --
Practice receivable write-off                             5,110              --
Credit Facility and note amendment fees                   2,375              --
Management recruiting and relocation costs                1,275              --
Vacation pay accrual-change in policy                     1,000              --
                                                        -------         -------
                          Total                         $15,594         $29,014
                                                        =======         =======

      In the fourth quarter of 2000, we recognized a pre-tax $2.5 million
non-cash charge related to the cashless exercise of 1.6 million stock options by
our Chairman and Chief Executive Officer (the "optionee") due to the termination
of the stock option plan under which the options were granted, in accordance
with Financial Accounting Standards Board (FASB) Interpretation No. 44. To
consummate the exercise, the optionee surrendered approximately 1.3 million
shares having an average strike price of $3.44 to satisfy exercise price and tax
liability with respect to all options. As a result of this transaction, the
optionee received approximately 300,000 shares of common stock. We also realized
an offsetting $1.0 million reduction in our federal income tax obligations as a
result of this transaction.

      During the third quarter and second quarter of 2000, we incurred costs of
$206,000 and $1.7 million, respectively, in connection with the qui tam lawsuits
described in Part I, Item 3, of this report, consisting primarily of auditing
and legal fees and related expenses. In addition, we incurred $1.5 million of
costs in the second quarter of 2000 consisting of intangible asset and
receivable write-downs as a result of terminating our affiliation with a sole
practitioner and with the practice named in the qui tam lawsuits.

      We also recognized other charges totaling approximately $9.8 million in
2000. These charges consisted of: (i) $5.1 million of receivables from
affiliated practices that are not considered to be recoverable; (ii) $2.4
million for bank and noteholder fees associated with amending the credit
facilities to accommodate debt covenant compliance related to unusual charges;
(iii) $1.3 million related to expenses to recruit and relocate certain members
of the current management team; and (iv) $1.0 million for a change in our
vacation policy.

      In connection with the AOR/PRN merger, we incurred total costs of $29.0
million to consummate the merger, restructure operating activities and integrate
the two organizations. These costs were expensed during 1999. Costs directly
related to the consummation of the AOR/PRN merger totaled $14.6 million.
Restructuring costs relating to severance and relocation of employees and asset
impairments totaled $7.2 million. Incremental costs incurred to assist in
integrating the AOR's and PRN's operations totaled $7.2 million.

      We have recognized a deferred income tax benefit for substantially all of
these charges in 2000 as many of the items will be deductible for income tax
purposes in future periods. An income tax benefit has also been recognized for
the 1999 charges, with the exception of certain non-deductible merger costs.


                                       41
<PAGE>

      Interest. Net interest expense increased from $22.3 million in 1999 to
$26.8 million in 2000, an increase of $4.5 million or 20.3%, due to increased
interest rates in 2000 on our variable rate indebtedness.

      Other Income. Other income of $27.6 million in 2000 represents the
recognition of the remaining gain on shares of common stock of ILEX Oncology,
Inc. owned by us. A previous gain of $14.4 million was recognized during the
fourth quarter of 1999 as a result of our reclassification of the ILEX stock as
a trading security. The stock was sold during the first quarter of 2000.

      Income Taxes. In 2000, we recognized a tax benefit of $35.0 million
resulting in an effective tax rate of (32.5%), down from 40.1% in 1999. The
decrease in the effective rate was due to certain non-deductible merger related
costs in 1999 and no state tax benefit being recognized in 2000 for intangible
write-offs in certain states.

      Net Income/Loss. Net income (loss) decreased from $48.2 million of net
income in 1999 to a net loss of $72.6 million in 2000, a decrease of $120.8
million. Excluding charges for impairments, restructurings and other costs,
costs related to bad debt expense and the gain on investment in common stock for
both years, net income for 1999 would have been $59.4 million, or $0.58 per
share, in 1999 as compared to $47.6 million or $0.47 per share, in 2000, a
decrease of $11.4 million. The charges were attributable to the factors
described in the preceding paragraphs.

Liquidity and Capital Resources

      As of December 31, 2001, we had net working capital of $110.7 million,
including cash and cash equivalents of $20.0 million. We had current liabilities
of $278.3 million, including $44.0 million in current maturities of long-term
debt, and $128.8 million of long-term indebtedness. During 2001, we generated
$216.2 million in net operating cash flow, invested $57.6 million and used cash
in financing activities in the amount of $142.0 million.

Cash Flows from Operating Activities

      Cash from operating activities increased from $117.3 million in 2000 to
$216.2 million in 2001. The increase was attributed to accounts receivable days
decreasing from 67 to 50 as a result of increased efficiencies in patient
billing and cash collection processes. In addition, federal and state income tax
payments were $36.4 million in 2000 as compared to federal and state income tax
refunds received, net of payments, of $6.6 million in 2001 as a result of the
net loss recognized in 2000.

Cash Flows from Investing Activities

      During 2001, we expended $63.7 million in capital expenditures and
financed an additional $24.1 million through various leasing facilities. We
expended $39.1 million on the development and construction of cancer centers, of
which $11.2 million was financed through our synthetic leasing facility during
2001. In addition, we spent $15.1 million on installation of PET centers, of
which $12.8 million was financed through an equipment operating lease facility.
Maintenance capital expenditures were $39.9 million in 2001 and $33.3 in 2000.
In addition, in connection with affiliating with certain practices, we paid
total consideration of $3.4 million in 2001 and $33.5 million in 2000, which
included cash consideration and transaction costs of $1.0 million and $16.1
million, in 2001 and 2000, respectively.

      During 2001, we received $7.1 million in connection with certain contract
separations. Cash consideration consisted of payment for working capital and
fixed assets and fees related to contract terminations.

      In March 2000, we sold our equity investment in ILEX Oncology, Inc. in a
private sale transaction and realized proceeds of $54.8 million, or $38.8
million net of tax. These proceeds were used to reduce outstanding borrowings
under the credit facility.

Cash Flows from Financing Activities

      In March 2000, the board of directors authorized the repurchase of up to
10.0 million shares of our common stock in public or private transactions. We
subsequently acquired 6.4 million shares (including 1.3 million


                                       42
<PAGE>

shares received in connection with the cashless exercise of stock options by our
chief executive officer) of common stock at an average price of $4.73 per share.
During 2001 and 2000, we issued 2.2 million and 1.9 million shares,
respectively, from treasury stock to affiliated physicians in satisfaction of
our obligation in connection with medical practice transactions.

      As of December 31, 2001 and 2000, respectively, our debt was as follows
(in thousands):

                                                              December 31,
                                                        2001              2000
                                                        ----              ----

Credit facility ............................          $     --          $125,000
Senior secured notes .......................           100,000           100,000
Notes payable ..............................             2,733             5,868
Subordinated notes .........................            67,438            90,578
Capital lease obligations and other ........             2,695             2,677
                                                      --------          --------
                                                       172,866           324,123
Less -- current maturities .................            44,040            23,910
                                                      --------          --------
                                                      $128,826          $300,213
                                                      ========          ========

      During 2001, we repaid $125 million, net of borrowings, of our long-term
debt as a result of increased cash flows from operations. In addition, we repaid
$20.7 million of other indebtedness, substantially all of which was attributed
to payment on subordinated notes related to previous affiliation transactions.
During 2001 and previously, we satisfied our development and transaction needs
through debt and equity financings and borrowings under a $175 million
syndicated revolving credit facility with First Union National Bank ("First
Union"), as a lender and as an agent for various other lenders. We also used a
$75 million synthetic leasing facility in connection with developing integrated
cancer centers. Availability of new advances under the leasing facility
terminated in June 2001. We discuss this in more detail below.

      On February 1, 2002, we entered into a five-year revolving credit facility
with availability at closing of $88.0 million and maximum availability of $100
million. Proceeds under that credit facility may be used to finance the
development of cancer centers and new PET facilities, to provide working capital
or for other general business purposes.

      In November 1999, we sold an aggregate of $100 million of Senior Secured
Notes to a group of institutional investors, the proceeds of which were used to
repay amounts outstanding under our credit facility. The Senior Secured Notes
ranked equally in right of payment with the credit facility. The notes bore
interest at 8.42% per annum with a final maturity in 2006 and an average life of
five years.

      On February 1, 2002, we issued $175 million in 9 5/8% Senior Subordinated
Notes due 2012 to various institutional investors in a private offering under
Rule 144A under the Securities Act of 1933. The notes are unsecured, bear
interest at 9.625% annually and mature in February 2012. Payments under those
notes are subordinated in substantially all respects to payments under our new
credit facility.

      We used the proceeds from the Senior Subordinated Notes to repay in full
our existing $100 million in Senior Secured Notes due 2006, including payment of
a prepayment penalty of $11.7 million due as a result of our repayment of the
notes before their scheduled maturity. We also used proceeds from the Senior
Subordinated Notes to pay fees and related expenses of $5.4 million associated
with issuing those notes and to pay fees and related expenses of $2.8 million in
connection with the new credit facility. During the first quarter of 2002, we
expect to recognize the prepayment penalty of $11.7 million and a write-off of
financing costs related to the terminated debt agreements of $1.9 million.

      Our introduction of the service line structure, in particular our offering
existing affiliated practices the opportunity to terminate service agreements,
repurchase their assets and enter into service line agreements, required an
amendment or refinancing of our existing facilities. The new credit facility and
Senior Subordinated Notes give us flexibility in this regard. In addition, we
believe that the longer maturity of the Senior Subordinated Notes adds stability
to our capital structure.


                                       43
<PAGE>

      We have entered into an operating lease arrangement that involves a
special purpose entity that has acquired title to properties, paid for the
construction costs and leased to us the real estate and equipment at some of our
cancer centers. This kind of leveraged financing structure is commonly referred
to as a "synthetic lease." The synthetic lease was used to finance the
acquisition, construction and development of cancer centers. The facility was
funded by a syndicate of financial institutions and is secured by the property
to which it relates. A synthetic lease is preferable to a conventional real
estate lease since the lessee benefits from attractive interest rates, the
ability to claim depreciation under tax laws and the ability to participate in
the development process.

      The synthetic lease was entered into in December 1997 and matures in June
2004. As of December 31, 2001, we had $72.0 million outstanding under the
synthetic lease facility, and no further amounts are available under that
facility. The annual lease cost of the synthetic lease is approximately $3.1
million, based on interest rates in effect as of December 31, 2001. At December
31, 2001, the lessor under the synthetic lease held real estate assets (based on
original acquisition and construction costs) of approximately $59.2 million and
equipment of approximately $12.8 million (based on original acquisition cost) at
nineteen locations. On February 1, 2002, we amended and restated our synthetic
lease agreement primarily to replace certain lenders.

      The lease is renewable in one-year increments, but only with consent of
the financial institutions that are parties thereto. In the event the lease is
not renewed at maturity, or is earlier terminated for various reasons, we must
either purchase the properties under the lease for the total amount outstanding
or market the properties to third parties. If we sell the properties to third
parties, we have guaranteed a residual value of at least 85% of the total amount
outstanding for the properties. If the properties were sold to a third party at
a price such that we were required to make a residual value guarantee payment,
such amount would be recognized as an expense in our statement of operations.

      A synthetic lease is a form of lease financing that qualifies for
operating lease accounting treatment and under accounting principles generally
accepted in the United States ("GAAP") is not reflected on our balance sheet.
Thus, the obligations are not recorded as debt and the underlying properties and
equipment are not recorded as assets on our balance sheet. Our rental payments
(which approximate interest amounts under the synthetic lease financing) are
treated as operating rent commitments, and are excluded from our aggregate debt
maturities.

      On February 27, 2002, the Financial Standards Accounting Board determined
that synthetic lease properties meeting certain criteria would be required to be
recognized as assets with a corresponding liability effective January 1, 2003.
Our synthetic lease meets these criteria. The determination is not final and is
subject to additional rule-making procedures, but assuming the determination
becomes a formal accounting pronouncement and assuming we do not alter our
arrangement to maintain off-balance-sheet treatment under the new rules, we
would expect to recognize $72.0 million in additional property and equipment
with a corresponding liability on our balance sheet as of January 1, 2003.

      If we were to purchase all of the properties currently covered by the
lease or if changes in accounting rules or treatment of the lease were to
require us to reflect the properties on our balance sheet and income statement,
the impact to the consolidated financial statements would be as follows.

      .     Property and equipment would increase by $72.0 million (the purchase
            price for the assets subject to the lease);

      .     Assuming the purchase of the properties were financed through
            borrowing, or in the event the existing arrangement were required to
            be characterized as debt, indebtedness would increase by $72.0
            million; and

      .     Depreciation would increase by approximately $3.6 million per year
            as a result of the assets being owned by us.

      Acquiring the properties would require us to borrow additional funds and
would likely reduce the amount we could borrow for other purposes.


                                       44
<PAGE>

      There are additional risks associated with the synthetic lease
arrangement. A deterioration in our financial condition that would cause an
event of default under the synthetic lease facility, including a default on
material indebtedness, would give the parties under the synthetic lease the
right to terminate that lease, and we would be obligated to purchase or remarket
the properties. In such an event, we may not be able to obtain sufficient
financing to purchase the properties. In addition, changes in future operating
decisions or changes in the fair market values of underlying leased properties
or the associated rentals could result in significant charges or acceleration of
charges in our statement of operations for leasehold abandonments or residual
value guarantees. Because the synthetic lease payment floats with a referenced
interest rate, we are also exposed to interest rate risk under the synthetic
lease. A 1% increase in the referenced rate would result in an increase in lease
payments of $720,000 annually.

      We are currently in compliance with covenants under our synthetic leasing
facility, revolving credit facility and Senior Subordinated Notes, with no
borrowings currently outstanding under the revolving credit facility. We have
relied primarily on profitability from our operations to fund working capital.

      Borrowings under the revolving credit facility and advances under the
synthetic leasing facility bear interest at a rate equal to a rate based on
prime rate or the London Interbank Offered Rate, based on a defined formula. The
credit facility, synthetic leasing facility and Senior Subordinated Notes
contain affirmative and negative covenants, including the maintenance of certain
financial ratios, restrictions on sales, leases or other dispositions of
property, restrictions on other indebtedness and prohibitions on the payment of
dividends. Substantially all of our assets, including certain real property, are
pledged as security under the credit facility and synthetic leasing facility.

      We entered into certain operating lease agreements in 2001 and 2000
related to PET equipment used by our affiliated practices. The agreements
qualify for operating lease accounting treatment under SFAS 13, "Accounting for
Leases," and, as such, the equipment is not recorded on our balance sheet. If we
were to default under those leases, we could be required to purchase the
equipment from the lessor at its cost in order to continue using it. If we
elected to purchase that PET equipment rather than lease it, we would record
$15.5 million in equipment on our balance sheet, with an annual depreciation
charge of approximately $1.4 million. We also entered into numerous other
equipment leases, which are not reflected on our balance sheet and thus do not
increase our assets or our debt; although lease payments do appear on our income
statements as operating expenses. If we purchased any of this equipment instead
of leasing it, it would increase our need for financing and we would incur
depreciation expenses related to the ownership of that equipment.

      We currently expect that our principal use of funds in the near future
will be in connection with the purchase of medical equipment, investment in
information systems and the acquisition or lease of real estate for the
development of integrated cancer centers and PET centers, as well as
implementation of the service line structure, with less emphasis than in past
years on transactions with medical oncology practices. It is likely that our
capital needs in the next several years will exceed the cash generated from
operations. Thus, we may incur additional debt or issue additional debt or
equity securities from time to time. Capital available for health care
companies, whether raised through the issuance of debt or equity securities, is
quite limited. As a result, we may be unable to obtain sufficient financing on
terms satisfactory to management or at all.

Item 7a. Quantitative and Qualitative Discussion about Market Risks

      In the normal course of business, our financial position is routinely
subjected to a variety of risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of these and other potential exposures.

      Among these risks is the market risk associated with interest rate
movements on outstanding debt. Our borrowings under the credit facility contain
an element of market risk from changes in interest rates. Historically, we have
managed this risk, in part, through the use of interest rate swaps; however, no
such agreements have been entered into in 2001. We do not enter into interest
rate swaps or hold other derivative financial instruments for speculative
purposes. We were not obligated under any interest rate swap agreements during
2001.

      For purposes of specific risk analysis, we use sensitivity analysis to
determine the impact that market risk exposures may have on us. The financial
instruments included in the sensitivity analysis consist of all of our cash and
equivalents, long-term and short-term debt and all derivative financial
instruments.


                                       45
<PAGE>

      To perform sensitivity analysis, we assess the risk of loss in fair values
from the impact of hypothetical changes in interest rates on market sensitive
instruments. The market values for interest rate risk are computed based on the
present value of future cash flows as impacted by the changes in the rates
attributable to the market risk being measured. The discount rates used for the
present value computations were selected based on market interest rates in
effect at December 31, 2001. The market values that result from these
computations are compared with the market values of these financial instruments
at December 31, 2001. The differences in this comparison are the hypothetical
gains or losses associated with each type of risk. A one percent increase or
decrease in the levels of interest rates on variable rate debt with all other
variables held constant would not result in a material change to our results of
operations or financial position or the fair value of our financial instruments.

Summary of Operations by Quarter

      The following table represents unaudited quarterly results for 2001 and
2000. We believe that all necessary adjustments have been included in the
amounts stated below to present fairly the quarterly results when read in
conjunction with the consolidated financial statements and that all adjustments
are of a normal recurring nature. Results of operations for any particular
quarter are not necessarily indicative of operations for a full year or
predictive of future periods.

<TABLE>
<CAPTION>
                                            2001 Quarter Ended,                        2000 Quarter Ended,
                                            -------------------                        -------------------

                                  Dec 31     Sep 30     Jun 30     Mar 31     Dec 31      Sep 30     Jun 30     Mar 31
                                  ------     ------     ------     ------     ------      ------     ------     ------
<S>                             <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>
Net revenue...................  $385,803   $372,742   $380,828   $365,651    $355,836    $337,310   $326,506   $304,502
Income (loss) from operations     24,578     26,029     27,155     19,453    (183,168)     26,126     22,078     26,517
Other income..................        --         --         --         --          --                     --     27,566
Net income (loss)/1/..........    12,811     12,904     12,718      7,883    (123,342)     11,608      9,976     29.115
Net income (loss) per share
basic/1/......................     $0.13      $0.13      $0.13      $0.08      $(1.25)      $0.12      $0.10      $0.29
Net income (loss) per share
diluted/1/....................     $0.13      $0.13      $0.13      $0.08      $(l.25)      $0.12      $0.10      $0.29
</TABLE>

/1/   Earnings per share are computed independently for each of the quarters
      presented. Therefore, the sum of the quarterly earnings per share may not
      equal the total computed for the year.


                                       46
<PAGE>

                                US ONCOLOGY, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements as of December 31, 2001 and 2000 and for each
of the three years ended December 31, 2001:

                                                                            Page
                                                                            ----
Report of Independent Accountants.................................           48
Consolidated Balance Sheet........................................           49
Consolidated Statement of Operations and Comprehensive Income.....           50
Consolidated Statement of Stockholders' Equity....................           51
Consolidated Statement of Cash Flows..............................           52
Notes to Consolidated Financial Statements........................           53

Financial statement schedules have been omitted because they are not applicable
or the required information is shown in the consolidated financial statements or
notes thereto.


                                       47
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of US Oncology, Inc.

      In our opinion, the consolidated balance sheet and the related
consolidated statements of operations and comprehensive income, of stockholders'
equity and of cash flows present fairly, in all material respects, the
consolidated financial position of US Oncology, Inc. and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for the three years ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.


PRICEWATERHOUSECOOPERS LLP
Houston, Texas
February 27, 2002


                                       48
<PAGE>

                                US ONCOLOGY, INC.

                           CONSOLIDATED BALANCE SHEET
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                              2001                2000
                                                                                              ----                ----
<S>                                                                                       <C>                 <C>
ASSETS
------

Current assets:
     Cash and equivalents ........................................................        $    20,017         $     3,389
     Accounts receivable .........................................................            275,884             337,360
     Prepaids and other current assets ...........................................             35,334              44,904
     Due from affiliates .........................................................             57,807              72,380
                                                                                          -----------         -----------
             Total current assets ................................................            389,042             458,033

Property and equipment, net ......................................................            286,218             280,032
Service agreements, net of accumulated amortization of $257,893 and $231,233 .....            379,249             398,397
Other assets .....................................................................             20,368              22,601
Deferred income taxes ............................................................             18,085              38,404
                                                                                          -----------         -----------
                                                                                          $ 1,092,962         $ 1,197,467
                                                                                          ===========         ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
     Current maturities of long-term indebtedness ................................        $    44,040         $    23,910
     Accounts payable ............................................................            135,570             153,980
     Due to affiliates ...........................................................             13,537               8,044
     Accrued compensation costs ..................................................             15,455               8,643
     Income taxes payable ........................................................             22,498               9,154
     Other accrued liabilities ...................................................             47,201              59,818
                                                                                          -----------         -----------
             Total current liabilities ...........................................            278,301             263,549
Long-term indebtedness ...........................................................            128,826             300,213
                                                                                          -----------         -----------
             Total liabilities ...................................................            407,127             563,762

Minority interest ................................................................              9,067               9,367
Commitments and contingencies

Stockholders' equity:
     Preferred Stock, $.01 par value, 1,500 shares authorized, none issued and
     outstanding .................................................................                 --                  --
     Series A Preferred Stock, $.01 par value, 500 shares authorized and reserved,
     none issued and outstanding .................................................                 --                  --
     Common Stock, $.01 par value, 250,000 shares authorized, 94,819 and 93,837
     shares issued, 92,510 and 89,299 shares outstanding .........................                948                 939
     Additional paid-in capital ..................................................            469,999             461,364
     Common Stock to be issued, approximately 7,295 and 10,330 shares ............             56,955              69,666
     Treasury Stock, 2,309 and 4,538 shares ......................................            (11,235)            (21,416)
     Retained earnings ...........................................................            160,101             113,785
                                                                                          -----------         -----------
             Total stockholders' equity ..........................................            676,768             624,338
                                                                                          -----------         -----------
                                                                                          $ 1,092,962         $ 1,197,467
                                                                                          ===========         ===========
</TABLE>

         The accompanying notes are an integral part of this statement.


                                       49
<PAGE>

                                US ONCOLOGY, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS
                            AND COMPREHENSIVE INCOME
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                         2001                2000                1999
                                                                         ----                ----                ----
<S>                                                                   <C>                 <C>                 <C>
Revenue ......................................................        $ 1,505,024         $ 1,324,154         $ 1,092,941

Operating expenses:
       Pharmaceuticals and supplies ..........................            780,072             651,214             521,087
       Field compensation and benefits .......................            322,473             277,962             215,402
       Other field costs .....................................            179,479             161,510             134,635
       General and administrative ............................             47,988              54,723              39,490
       Bad debt expense ......................................                 --              10,198                  --
       Impairment, restructuring and other charges ...........              5,868             201,846              29,014
       Depreciation and amortization .........................             71,929              75,148              65,072
                                                                      -----------         -----------         -----------
                                                                        1,407,809           1,432,601           1,004,700
                                                                      -----------         -----------         -----------
Income (loss) from operations ................................             97,215            (108,447)             88,241

Other income (expense):
       Interest, net .........................................            (22,511)            (26,809)            (22,288)
       Gain on investment in common stock (unrealized in 1999)                 --              27,566              14,431
                                                                      -----------         -----------         -----------
Income (loss) before income taxes ............................             74,704            (107,690)             80,384
Income tax provision (benefit) ...............................             28,388             (35,047)             32,229
                                                                      -----------         -----------         -----------

Net income (loss) ............................................             46,316             (72,643)             48,155

Other comprehensive income (loss), net of tax ................                 --                  --                (269)
                                                                      -----------         -----------         -----------
Comprehensive income (loss) ..................................        $    46,316         $   (72,643)        $    47,886
                                                                      ===========         ===========         ===========

Net income (loss) per share -- basic .........................        $      0.46         $     (0.72)        $      0.48
                                                                      ===========         ===========         ===========

Shares used in per share calculations -- basic ...............            100,063             100,589             100,183
                                                                      ===========         ===========         ===========

Net income (loss) per share -- diluted .......................        $      0.46         $     (0.72)        $      0.47
                                                                      ===========         ===========         ===========

Shares used in per share calculations -- diluted .............            100,319             100,589             101,635
                                                                      ===========         ===========         ===========
</TABLE>

         The accompanying notes are an integral part of this statement.


                                       50
<PAGE>

                                US ONCOLOGY, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                                  Common Stock                                                  Accumulated
                               -------------------   Additional       Common         Treasury      Other
                                 Shares      Par       Paid-In       Stock to         Stock    Comprehensive   Retained
                                 Issued     Value      Capital       Be Issued         Cost        Income      Earnings    Total
                               ----------------------------------------------------------------------------------------------------
<S>                              <C>         <C>      <C>             <C>            <C>           <C>        <C>         <C>
Balance at January 1, 1999 .     81,205      $812     $ 405,635       $ 89,142       $ (3,696)     $ 269      $ 138,522   $ 630,684
Affiliation transactions
   value of shares to
   be issued ...............         --        --            --         24,637             --         --             --      24,637
Purchase of Treasury Stock .         --        --        (1,810)        (1,637)         3,696         --           (249)         --
Delivery from Treasury of
   Common Stock to be issued      5,696        57        20,755        (20,812)            --         --             --          --
Issuance of Common Stock ...         --        --            --             --             --         --             --          --
Exercise of options to
   purchase Common Stock ...        352         4         4,665             --             --         --             --       4,669
Tax benefit from exercise
   of non-qualified stock
   options .................         --        --           174             --             --         --             --         174
Valuation adjustment
   investment in Common
   Stock ...................         --        --            --             --             --       (269)            --        (269)
Issuance of Common Stock
   options to affiliates ...         --        --         1,481             --             --         --             --       1,481
   Net income ..............         --        --            --             --             --         --         48,155      48,155
                                 ------      ----     ---------       --------       --------      -----      ---------   ---------
Balance at December 31, 1999     87,253       873       430,900         91,330             --         --        186,428     709,531
Affiliation transactions
   value of shares to be
   issued ..................         --        --            --          6,103             --         --             --       6,103
Purchase of Treasury Stock .         --        --            --             --        (24,906)        --             --     (24,906)
Delivery from Treasury of
   Common Stock to be issued         --        --         4,530        (13,692)         9,162         --             --          --
Issuance of Common Stock ...      4,413        44        14,031        (14,075)            --         --             --          --
Exercise of options to
   purchase Common Stock ...      2,171        22         9,999             --         (5,672)        --             --       4,349
Tax benefit from exercise
   of non-qualified stock
   options .................         --        --           255             --             --         --             --         255
Issuance of Common Stock
   options to affiliates ...         --        --         1,649             --             --         --             --       1,649
Net loss ...................         --        --            --             --             --         --        (72,643)    (72,643)
                                 ------      ----     ---------       --------       --------      -----      ---------   ---------
Balance at December 31, 2000     93,837       939       461,364         69,666        (21,416)        --        113,785     624,338

Affiliation transactions
   value of shares to be
   issued ..................         --        --            --            606             --         --             --         606
Disaffiliation transactions
   value of shares to be
   issued ..................         --        --            --         (1,521)            --         --             --      (1,521)
Delivery from Treasury of
   Common Stock to be issued         --        --           972        (11,153)        10,181         --             --          --
Issuance of Common Stock ...         75        --           643           (643)            --         --             --          --
Exercise of options to
   purchase Common Stock ...        907         9         3,749             --             --         --             --       3,758
Tax benefit from exercise
   of non-qualified stock
   options .................         --        --         1,384             --             --         --             --       1,384
Issuance of Common Stock
   options to affiliates ...         --        --         1,887             --             --         --             --       1,887
Net income .................         --        --            --             --             --         --         46,316      46,316
                                 ------      ----     ---------       --------       --------      -----      ---------   ---------

Balance at December 31, 2001     94,819      $948     $ 469,999       $ 56,955       $(11,235)     $          $ 160,101   $ 676,768
                                 ======      ====     =========       ========       ========      =====      =========   =========
</TABLE>

         The accompanying notes are an integral part of this statement.


                                       51
<PAGE>

                                US oncology, inc.

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                                    2001            2000            1999
                                                                                    ----            ----            ----
<S>                                                                              <C>             <C>             <C>
Cash flows from operating activities:
     Net income (loss) ....................................................      $  46,316       $ (72,643)      $  48,155
     Noncash adjustments:
          Depreciation and amortization ...................................         71,929          75,148          65,072
          Gain on investment in common stock (unrealized in 1999) .........             --         (27,566)        (14,431)
          Impairment, restructuring and other charges .....................            331         165,800          16,887
          Deferred income taxes ...........................................         20,319         (71,628)          9,687
          Bad debt expense ................................................             --          10,198              --
          Non-cash compensation expense ...................................          1,887           1,649           1,481
          Earnings on joint ventures ......................................           (300)         (2,124)           (634)
          Revenue from investment in common stock .........................             --              --          (6,019)
     Cash provided (used) by changes in:
          Accounts receivable .............................................         52,764         (15,754)        (80,940)
          Prepaids and other current assets ...............................          4,170          (8,907)        (33,906)
          Accounts payable ................................................        (17,944)         45,109          23,032
          Due from/to affiliates ..........................................         18,815          (4,374)        (18,682)
          Income taxes receivable/payable .................................         14,728            (168)          5,591
          Other accrued liabilities .......................................          3,200          22,585          16,247
                                                                                 ---------       ---------       ---------
              Net cash provided by operating activities ...................        216,215         117,325          31,540
                                                                                 ---------       ---------       ---------
     Cash flows from investing activities:
          Acquisition of property and equipment ...........................        (63,660)        (67,000)        (74,320)
          Net payments in affiliation transactions ........................         (1,005)        (16,124)        (43,513)
          Merger transaction costs ........................................             --              --         (14,587)
          Investments .....................................................             --              --          (3,000)
          Proceeds from sale of investment in common stock ................             --          54,824              --
          Proceeds from contract separation ...............................          7,052              --              --
          Other ...........................................................             --              --           1,905
                                                                                 ---------       ---------       ---------
              Net cash used by investing activities .......................        (57,613)        (28,300)       (133,515)
                                                                                 ---------       ---------       ---------
     Cash flows from financing activities:
          Proceeds from Credit Facility ...................................         25,000          66,000         154,000
          Proceeds from Senior Secured Notes ..............................                                        100,000
          Repayment of Credit Facility ....................................       (150,000)       (115,000)       (136,000)
          Repayment of other indebtedness .................................        (20,732)        (24,998)        (20,394)
          Debt financing costs ............................................             --           1,887          (2,610)
          Proceeds from exercise of stock options .........................          3,758              --           4,669
          Purchase of Treasury Stock ......................................             --         (24,906)             --
                                                                                 ---------       ---------       ---------
              Net cash provided (used) by financing activities ............       (141,974)        (97,017)         99,665
                                                                                 ---------       ---------       ---------
     Increase (decrease) in cash and equivalents ..........................         16,628          (7,992)         (2,310)
     Cash and equivalents:
          Beginning of period .............................................          3,389          11,381          13,691
                                                                                 ---------       ---------       ---------
          End of period ...................................................      $  20,017       $   3,389       $  11,381
                                                                                 =========       =========       =========

     Interest paid ........................................................      $  24,355       $  26,705       $  24,192
     Taxes (refunded) paid, net ...........................................         (6,593)         36,377          17,331
     Noncash investing and financing transactions:
          Value of Common Stock to be issued in affiliation transactions ..            606           6,103          24,637
          Delivery of Common Stock in affiliation transactions ............         11,796          27,767          24,508
          Debt issued in affiliation transactions .........................          2,679          11,251          27,378
          Debt issued in investment transactions ..........................             --              --           5,000
          Forfeitures of debt from contract separation ....................          5,350              --              --
          Forfeitures of common stock to be issued from contract separation          1,521              --              --
          Assets acquired under capital lease .............................             --           1,100              --
          Tax benefit from exercise of non-qualified stock options ........          1,384             255             174
</TABLE>

         The accompanying notes are an integral part of this statement.


                                       52
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      US Oncology, Inc. (together with its subsidiaries, "US Oncology" or the
"Company") provides comprehensive services in the oncology field, with the
mission of expanding access to and improving the quality of cancer care in local
communities and advancing the delivery of care. The Company offers the following
services:

      .     Purchase and manage the inventory of cancer related drugs for
            affiliated practices. Annually, the Company is responsible for
            purchasing, delivering and managing more than $700 million of
            pharmaceuticals through a network of more than 400 admixture sites,
            31 licensed pharmacies, 51 pharmacists and 180 pharmacy technicians.

      .     Construct and manage free standing cancer centers that provide
            treatment areas and equipment for medical oncology, radiation
            therapy and diagnostic radiology. The Company operates 77 integrated
            community-based cancer centers and manages over one million square
            feet of medical office space.

      .     Expand diagnostic capabilities of practices through installation and
            management of PET technology, typically in a cancer center setting.
            The Company has installed and continues to manage 12 PET units, as
            well as 59 Computerized Axial Tomography (CT) units.

      .     Coordinate and manage cancer drug research trials for pharmaceutical
            and biotechnology companies. The Company currently manages 98
            clinical trials, with accruals of more than 3,500 patients during
            2001, supported by its network of over 650 participating physicians
            in more than 330 research locations.

      The Company provides these services to oncology practices comprising over
450 sites, with over 8,000 employees and 868 physicians. The Company is not a
provider of medical services but provides comprehensive services to oncology
practices, including management and capital resources, data management,
accounting, compliance and other administrative services. The affiliated
practices offer comprehensive and coordinated medical services to cancer
patients, integrating the specialties of medical and gynecologic oncology,
hematology, radiation oncology, diagnostic radiology, and blood and marrow stem
cell transplantation.

      The consolidated financial statements of the Company have been prepared to
give retroactive effect to the merger with Physician Reliance Network, Inc.
(PRN) on June 15, 1999 (the "AOR/PRN merger"). This transaction was accounted
for as a pooling of interests, and, accordingly, the historical financial
statements give effect to the combination of the historical balances and amounts
of AOR and PRN for all periods presented. As a result of the AOR/PRN merger, PRN
became a wholly owned subsidiary of the Company, and each holder of PRN stock
received 0.94 shares of the Company's Common Stock for each PRN share held.

      The following is a summary of the Company's significant accounting
policies:

Principles of consolidation

      The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany transactions and balances
have been eliminated. Certain amounts, including amounts attributable to PRN
prior to the AOR/PRN merger, have been reclassified to conform with the current
period financial statement presentation. The Company has determined that none of
the existing service agreements meets EITF 97-2 requirements for consolidation.

Use of estimates

      The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as disclosures of
contingent assets and


                                       53
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

liabilities. Management considers many factors in selecting appropriate
operational and financial accounting policies and controls, and in developing
the estimates and assumptions that are used in the preparation of these
financial statements. Management must apply significant judgment in this
process. Among the factors, but not fully inclusive of all factors, that may be
considered by management in these processes are: the range of accounting
policies permitted by U.S. generally accepted accounting principles;
management's understanding of the Company's business - both historical results
and expected future results; the extent to which operational controls exist that
provide high degrees of assurance that all desired information to assist in the
estimation is available and reliable or whether there is greater uncertainty in
the information that is available upon which to base the estimate; expected
rates of change, sensitivity and volatility associated with the assumptions used
in developing estimates; whether historical trends are expected to be
representative of future trends. The estimation process often may yield a range
of potentially reasonable estimates of the ultimate future outcomes and
management must select an amount that lies within that range of reasonable
estimates - which may result in the selection of estimates which could be viewed
as conservative or aggressive - based upon the quantity, quality and risks
associated with the variability that might be expected from the future outcome
and the factors considered in developing the estimate. Because of inherent
uncertainties in this process, actual future results could differ from those
expected at the reporting date.

Service fee revenue

      Approximately 60% of the Company's 2001 service fee revenue has been
derived from practices, which as of December 31, 2001, had service agreements
that provide for payment to the Company of a service fee that includes an amount
equal to the direct expenses associated with operating the practice plus an
amount which is calculated based on the service agreement for each of the
practices (the earnings model). The direct expenses include rent, depreciation,
amortization, provision for uncollectible accounts, pharmaceutical expenses,
medical supply expenses, salaries and benefits of non-physician employees who
support the practices and interest. The direct expenses do not include salaries
and benefits of physicians. The non-expense-reimbursement related portion of the
service fee is a percentage, ranging from 25% to 35%, of the earnings before
interest and taxes of the affiliated practice. The earnings of an affiliated
practice is determined by subtracting the direct expenses from the professional
revenues and research revenues earned by the affiliated practice.

      Approximately 39% of the Company's 2001 service fee revenue has been
derived from practices, which as of December 31, 2001, had service agreements
that provide for payment to the Company of a service fee, which typically
includes all practice costs (other than amounts retained by the physicians), a
fixed fee, a percentage fee (in most states) and, if certain financial and
performance criteria are satisfied, a performance fee (the net revenue model).
These service agreements permit the affiliated practice to retain a specified
amount (typically 23% of the practice's net revenues) for physician salaries,
and payment of such salaries is given priority over payment of the service fee.
The amount of the fixed fee is related to the size of the affiliation
transaction and, as a result, varies significantly among the service agreements.
The percentage fee, where permitted by applicable law, is generally seven
percent of the affiliated practice net revenue. Performance fees are paid after
payment of all practice expenses, amounts retained by practices and the other
service fees and, where permitted by state law, are approximately 50% of the
residual profitability of the practice. Service fees are not subject to
adjustment, with the exception that the fixed fee may be adjusted from time to
time after the fifth year of the service agreement to reflect inflationary
trends. The affiliated practice is also entitled to retain all profits of the
practice after payment of the service fee to the Company.

      The remaining service agreements provide for a fee that is a percentage of
revenue or of earnings of the affiliated practice or is a predetermined, fixed
amount. Each affiliated practice is responsible for paying the salaries and
benefits of its physician employees from the amount retained by the affiliated
practice after payment of the Company's service fee.

      The Company recognizes the service fees as revenue when the fees are
earned and are deemed realizable based upon the contractually-agreed amount of
such fees, after taking into consideration the payment priority of amounts
retained by practices.


                                       54
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

      The Company announced in November 2000 its strategic initiative to
negotiate amendments to service agreements with practices under the net revenue
model to convert those economic arrangements to the earnings model. Management
believes the earnings model properly aligns practice priorities with respect to
appropriate business operations and cost control, with the Company and the
practice sharing proportionately in revenue, operating costs and cost structure
changes. Since the beginning of 2001 and through March 11, 2002, fourteen
practices accounting for 21.7% of the affiliated practices' total net patient
revenue in 2001 have converted to the earnings model.

      On October 1, 2001, the Company commenced a strategy to focus its
operations on three core service lines: oncology pharmaceutical management,
outpatient cancer center operations, and cancer research and development
services. The Company has begun marketing these core services outside its
network through a non-PPM (physician practice management) model. All affiliated
practices are being afforded the opportunity to terminate their existing service
agreements and enter into new arrangements under the service line structure. The
Company cannot assure you as to how many practices will take this opportunity,
and it currently expects that a large percentage of existing affiliated
practices will remain on the PPM model for the foreseeable future. As practices
transition to this service line structure, the Company expects the financial
impact to be a reduction in debt, restructuring and reorganization costs, mostly
non-cash related and a reduction in earnings as it relates to those practices.
The Company does not believe that all of its practices will transition to the
service line structure in the near future, but is unable to accurately predict
which practices will transition or when they will do so. Thus, the Company is
unable to more accurately predict the financial impact of this transition until
practices agree to change structures. For those practices that remain on the PPM
model, the Company will continue to negotiate with "net revenue model" practices
to move to the "earnings model," and otherwise to manage those practices
pursuant to existing agreements.

Cash equivalents and investments

      The Company considers all highly liquid debt securities with original
maturities of three months or less to be cash equivalents.

Accounts receivable

      The process of estimating the ultimate collectibility of accounts
receivable arising from the provision of medical services to patients by
affiliated practices is highly subjective and requires the application of
judgment by management. Management considers many factors, including contractual
reimbursement rates, changing reimbursement rules, the nature of payors, scope
of services, age of receivables, historical cash collection experience, billing
practices and other factors to form their best judgement of expected
collectibility. Actual results often times vary from estimates, but in total
generally do not vary materially.

      To the extent permitted by applicable law, the Company purchases the
accounts receivable generated by affiliated practices from patient services
rendered pursuant to the service agreements. The accounts receivable are
purchased at their net collectible value, after adjustment for contractual
allowances and allowances for doubtful accounts. The Company is reimbursed by
the practices for purchased receivables that are deemed uncollectible following
the Company's purchase. If any purchased accounts receivable are subsequently
deemed uncollectible, then the practice responsible for the receivables would
reduce its revenue during the period in which the uncollectible amount is
determined. Because the Company's service fee is based in part on the practice
revenue, the reduction in revenue caused by the uncollectible accounts
receivable would reduce the Company's future service fee. The impact of such
adjustments is typically not significant. However, laws and regulations
governing Medicare and Medicaid programs are complex and subject to
interpretation, which along with other third party payor actions, could impact
the collection of accounts receivable in the future.

      In late 1999, the Company installed a patient billing system in thirteen
practices with approximately $336,000 in annual net patient revenues. During
2000, the Company experienced limitations in this system that caused significant
delays and errors in patient billing and collection processes. Although the
vendor assisted in correcting some deficiencies in the billing system,
collecting some patient accounts became impractical. In the fourth quarter of
2000, the Company determined that the system problems required a $10,200 charge
for bad debt


                                       55
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

expense. Because of the numerous distractions borne by the practices in the
system conversion, the Company elected not to include this amount in the
computation of practice results. In connection with a settlement with the vendor
of that system, that vendor agreed to provide us with a replacement system at
significantly reduced rates.

Due from and to affiliates

      The Company has advanced to certain of its practices amounts needed for
working capital purposes -- primarily to purchase pharmaceuticals, to assist
with the development of new markets, to support the addition of physicians, and
to support the development of new services. Certain advances bear interest at a
market rate negotiated by the Company and the affiliated practices, which
approximates the prime lending rate (4.75% at December 31, 2001). These advances
are unsecured and are repaid in accordance with the terms of the instrument
evidencing the advance. Amounts payable to related parties represent current
payments to affiliated practices for services rendered under service agreements.

Prepaids and other current assets

      Prepaids and other current assets consist of prepayments, insurance and
other receivables.

Property and equipment

      Property and equipment is stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of three to ten years for computers and software, equipment, and furniture
and fixtures, the lesser of ten years or the remaining lease term for leasehold
improvements and twenty-five years for buildings. Interest costs incurred during
the construction of major capital additions, primarily cancer centers, are
capitalized. These lives reflect management's best estimate of the respective
assets' useful lives and subsequent changes in operating plans or technology
could result in future impairment charges to these assets.

Service agreements

      Service agreements consist of the costs of purchasing the rights to manage
practices. Under the initial 40-year terms of the agreements, the affiliated
practices have agreed to provide medical services on an exclusive basis only
through facilities managed by the Company. The agreements are noncancelable
except for performance defaults. The Company amortizes these costs over 25
years. Should these agreements be terminated prior to their full amortization,
the Company may experience a charge to its operating results for the unamortized
portion of the asset.

      Under the service agreements, the Company is the exclusive provider of
certain services to its affiliated practices, providing facilities, management
information systems, clinical research services, personnel management and
strategic, financial and administrative services. Specifically, the Company,
among other things, (i) develops, constructs and manages free standing cancer
centers which provide for treatment areas and equipment for medical oncology,
radiation therapy and diagnostic radiology, (ii) expands diagnostic capabilities
of practices through installation and management of PET technology, (iii)
coordinates and manages cancer drug research for pharmaceutical and
biotechnology companies, (iv) purchases and manages the inventory for cancer
related drugs for affiliated practices, and (v) provides management and capital
resources to affiliated practices including data management, accounting,
compliance and other administrative services.

      Each service agreement provides for the formation of a policy board. The
policy board meets periodically, approves those items having a significant
impact on the affiliated practice and develops the practice's strategic
initiatives. The two most significant items reviewed and approved by the policy
board are the annual budget for the practice and the addition of facilities,
services or physicians. Each service agreement provides a mechanism to adjust
the Company's service fee if a change in law modifies the underlying financial
arrangement between the Company and the affiliated practice.


                                       56
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

      The carrying value of the service agreements is reviewed for impairment
when events or changes in circumstances indicate their recorded cost may not be
recoverable. If the review indicates that the undiscounted cash flows from
operations of the related service agreement over the remaining contractual
period is expected to be less than the recorded amount of the service agreement
intangible asset, the Company's carrying value of the service agreement
intangible asset will be reduced to its estimated fair value using expected cash
flows on a discounted basis (Note 11). Impairment analysis is highly subjective
and assumptions regarding future growth rates and operating expense levels as a
percentage of revenue can have significant effects on the expected future cash
flows and ultimate impairment analysis.

Other assets

      Other assets consist of costs associated with obtaining debt financing,
the excess of purchase price over the fair value of net assets acquired, and
investments in joint ventures. The debt financing costs are capitalized and
amortized over the terms of the related debt agreements using the straight line
method, which approximates the interest method. The Company recorded
amortization expenses related to these assets of $1,185, $1,368 and $927 for the
years ended December 31, 2001, 2000 and 1999, respectively. The amounts recorded
for excess of purchase price over the fair value of net assets acquired are
being amortized on a straight-line basis over 20 years. Effective January 2002,
upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (FAS 142), amortization of these assets will not be
recorded prospectively. For further discussion, see "New Accounting
Pronouncements." The investments in joint ventures for which the Company does
not have control are accounted for under the equity method of accounting. For
2001, 2000 and 1999, operational activity relating to the joint ventures was not
material to the operations of the Company.

Income taxes

      Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities using the enacted tax rates in effect in the years in
which the differences are expected to reverse. In estimating future tax
consequences, all expected future events are considered other than enactments of
changes in the tax law or rates.

Stock-based compensation

      The intrinsic value method used by the Company generally results in no
compensation expense being recorded related to stock option grants made by the
Company because those grants are typically made with option exercise prices
equal to fair market value at the date of option grant, and is used by the vast
majority of public reporting companies. Application of the fair market value
method under FAS 123, which estimates the fair value of the option awarded to
the employee, results in compensation expense being recognized over the period
of time that the employee's rights in the option vest. Application of FAS 123
would result in including additional compensation expense and lower net income
levels in its consolidated statement of operations.

Fair value of financial instruments

      The Company's receivables, payables, prepaids and accrued liabilities are
current and on normal terms and, accordingly, are believed by management to
approximate fair value. Management also believes that subordinated notes issued
to affiliated physicians approximate fair value when current interest rates for
similar debt securities are applied. Management estimates the fair value of its
bank indebtedness approximates its book value.

Earnings per share

      The Company discloses "basic" and "diluted" earnings per share (EPS). The
computation of basic earnings per share is based on a weighted average number of
Common Stock and Common Stock to be issued shares outstanding during these
periods. The Company includes Common Stock to be issued in both basic and
diluted EPS as there are no foreseeable circumstances which would relieve the
Company of its obligation to issue these shares. The computation of diluted
earnings per share is based on the weighted average number of Common Stock and


                                       57
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

Common Stock to be issued shares outstanding during the periods as well as
dilutive potential Common Stock calculated under the treasury stock method.

      The following table summarizes the determination of shares used in per
share calculations:

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                                 2001           2000           1999
                                                                                 ----           ----           ----
<S>                                                                             <C>            <C>            <C>
Outstanding at end of period:
           Common Stock .................................................        94,819         93,837         87,253
           Common Stock to be issued ....................................         7,295         10,370         13,982
                                                                               --------       --------       --------
                                                                                102,114        104,207        101,235

Effect of weighting and Treasury Stock ..................................        (2,051)        (3,618)        (1,052)
                                                                               --------       --------       --------
           Shares used in per share calculation - basic .................       100,063        100,589        100,183

Effect of weighting and assumed share equivalents for grants of
     stock options at less than the average market price ................           256             --          1,452
                                                                               --------       --------       --------
           Shares used in per share calculation - diluted ...............       100,319        100,589        101,635
                                                                               ========       ========       ========

Anti-dilutive stock options (options where exercise price is greater than
     the average market price) not included above .......................         7,009         12,245          6,903
                                                                               ========       ========       ========
</TABLE>

Operating segments

      The Company's business has historically been providing comprehensive
services, facilities and equipment, administrative and technical support and
ancillary services necessary for physicians to establish and maintain a fully
integrated network of outpatient cancer care located throughout the country and
the Company believes it has operated in a single segment, providing
comprehensive cancer management services. The Company, therefore, has reported a
single segment herein.

      In connection with its introduction of the service line structure in 2001,
the Company has announced the repositioning of its management structure to
operate under distinct service lines. Financial and operations management and
reporting will be conducted prospectively according to the separate service
lines, even for existing affiliated practices under the PPM model. For this
reason, and to better inform investors regarding the Company's business and the
status of service line implementation, the Company intends to commence segment
reporting according to service lines in the first quarter of 2002.

Comprehensive income

      In addition to net income, comprehensive income is comprised of "other
comprehensive income" which includes all charges and credits to equity that are
not the result of transactions with owners of the Company's Common Stock. The
required disclosure is included in the accompanying consolidated statements of
operations. Accumulated other comprehensive income consists of the unrealized
gain or loss (net of tax) relating to investments in common stock available for
sale.

Reclassifications

      Certain previously reported financial information has been reclassified to
conform to the 2001 presentation. Such reclassifications did not materially
affect the Company's financial condition, net income (loss) or cash flows.

New Accounting Pronouncements

      In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), and in June 2000,


                                       58
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

issued Statement of Financial Accounting Standards No. 138 (FAS 138), an
amendment of FAS 133. The statements require the recognition of derivative
financial instruments on the balance sheet as assets or liabilities, at fair
value. Gains or losses resulting from changes in the value of derivatives are
accounted for depending on the intended use of the derivative and whether it
qualifies for hedge accounting. The Company has historically not engaged in
significant derivative instrument activity. The Company's adoption of FAS 133
effective January 1, 2001 has not had a material effect on the Company's
financial position or operating results.

      In September 2000, FASB issued Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (FAS 140). FAS 140 is effective for fiscal years
ending after December 15, 2000. The statement replaces FASB Statement No. 125
and revises the standards for accounting and disclosure for securitizations and
other transfers of financial assets and collateral. The statement carries over
most of FASB Statement No. 125's provisions without reconsideration and, as
such, the adoption of this standard has not had a material effect on its
consolidated financial position or results of operations.

      In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (FAS 141), which requires that all business
combinations be accounted for using the purchase method. In addition, FAS 141
requires that intangible assets be recognized as assets apart from goodwill if
certain criteria are met. The Company's adoption of FAS 141 has not had a
material effect on the Company's financial position or operating results.

      In June 2001, the FASB issued FAS 142, which established standards for
reporting acquired goodwill and other intangible assets. FAS 142 accounts for
goodwill based on the reporting units of the combined entity into which an
acquired entity is integrated. In accordance with the statement, goodwill and
indefinite lived intangible assets will not be amortized, goodwill will be
tested for impairment at least annually at the reporting unit level, intangible
assets deemed to have an indefinite life will be tested for impairment at least
annually, and the amortization period of intangible assets with finite lives
will not be limited to forty years. Goodwill amortization expense for 2001, 2000
and 1999 was $525, $668 and $653, respectively. Implementation of FAS 142 by the
Company would result in elimination of amortization of goodwill from
acquisitions of businesses under the purchase method of accounting.
Implementation of FAS 142 would not result in the elimination of amortization
for the Company's service agreement intangible assets because such assets are
excluded under the scope of this statement.

      In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" (FAS 143), which
addresses accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS 143 is effective for fiscal years beginning after June 15, 2002. The
Company is currently assessing the impact of this new standard.

      In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Impairment or Disposal of Long-Lived Assets" (FAS 144), which is
effective for fiscal years beginning after December 15, 2001. The provisions of
FAS 144 provide a single accounting model for impairment of long-lived assets.
The Company is currently assessing the impact of this new standard.

NOTE 2 - REVENUE

      Net patient revenue for services to patients by the practices affiliated
with the Company is recorded when services are rendered based on established or
negotiated charges reduced by contractual adjustments and allowances for
doubtful accounts. Differences between estimated contractual adjustments and
final settlements are reported in the period when final settlements are
determined. Net patient revenue of the practices is reduced by amounts retained
by the practices under the Company's service agreements to arrive at the
Company's service fee revenue. Since December 31, 2000, the Company has amended
fourteen of its service agreements to convert them from the revenue model to the
earnings model (Note 1).


                                       59
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

The following presents the amounts included in the determination of the
Company's revenues:

<TABLE>
<CAPTION>
                                                          Year ended December 31,
                                                  2001              2000              1999
                                                  ----              ----              ----
<S>                                           <C>               <C>               <C>
Net patient revenue                           $ 1,934,646       $ 1,718,620       $ 1,407,494
Amounts retained by affiliated practices         (429,622)         (394,466)         (314,553)
                                              -----------       -----------       -----------
Revenue                                       $ 1,505,024       $ 1,324,154       $ 1,092,941
                                              ===========       ===========       ===========
</TABLE>

      For the years ended December 31, 2001, 2000 and 1999, the affiliated
practices derived approximately 40%, 37% and 35%, respectively, of their net
patient revenue from services provided under the Medicare and state Medicaid
programs. Capitation revenues were less than 1% of total net patient revenue in
2001, 2000 and 1999. Changes in the payor reimbursement rates, particularly
Medicare and Medicaid due to its concentration, or affiliated practices' payor
mix can materially and adversely affect the Company's revenues.

      The Company's accounts receivable are a function of net patient revenue of
the affiliated practices rather than the Company's revenue. Receivables from the
Medicare and state Medicaid programs are considered to have minimal credit risk,
and no other payor comprised more than 10% of accounts receivable at December
31, 2001.

      The Company's most significant and only service agreement to provide more
than 10% of revenues is with Texas Oncology, P.A. (TOPA). TOPA accounted for
approximately 24%, 24% and 25% of the Company's total revenues for the years
ended December 31, 2001, 2000, and 1999, respectively. Set forth below is
selected, unaudited financial and statistical information concerning TOPA.

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                              2001          2000          1999
                                              ----          ----          ----
<S>                                         <C>           <C>           <C>
Net patient revenues .................      $440,646      $401,503      $341,939
                                            --------      --------      --------
Service fees paid to the Company:
     Reimbursement of expense ........       311,433       273,861       232,255
     Earnings component ..............        43,209        44,667        37,726
                                            --------      --------      --------
Total service fee ....................       354,642       318,528       269,981
                                            --------      --------      --------
Amounts retained by TOPA .............      $ 86,004      $ 82,975      $ 71,958
                                            ========      ========      ========
Physicians employed by TOPA ..........           172           185           195
Cancer centers utilized by TOPA ......            32            32            29
</TABLE>

      The Company's operating margin for the TOPA service agreement was 12.2%,
14.0% and 14.0% for the years ended December 31, 2001, 2000 and 1999,
respectively. Operating margin is computed by dividing the earnings component of
the service fee by the total service fee. The decrease in operating margin in
2001 is due to the utilization of more expensive pharmaceutical agents that have
lower margins than those previously used and due to the modification, effective
January 1, 2001, of the Company's service agreement with TOPA to, among other
things, reduce the percentage amount of the Company's management fee. The
Company believes that trends towards lower-margin pharmaceutical use will
continue in the future.


                                       60
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

NOTE 3 - AFFILIATION AND DISAFFILIATION TRANSACTIONS

      The consideration paid for the practices to enter into long-term service
agreements and for the nonmedical assets of the practices, primarily receivables
and fixed assets, has been accounted for as asset purchases. Total consideration
includes the assumption by the Company of specified liabilities, the estimated
value of nonforfeitable commitments by the Company to issue Common Stock at
specified future dates for no additional consideration, short-term and
subordinated notes, cash payments and related transaction costs as follows:

                                                   Year Ended December 31,
                                              2001          2000          1999
                                              ----          ----          ----

Cash and transaction costs ...........       $1,005       $16,124       $ 43,513
Short-term and subordinated notes ....        1,787        11,251         27,292
Common Stock to be issued ............          606         6,103         24,637
Liabilities assumed ..................          118           903          4,882
                                             ------       -------       --------

Total costs ..........................       $3,516       $34,381       $100,324
                                             ======       =======       ========

Number of practice affiliations ......            5            14             20

      During 2001, the Company affiliated with 5 oncology practices for total
consideration of $3,398, including 87 shares of Common Stock to be issued with a
value of $606. No 2001 affiliations were individually significant.

      During 2001, the Company terminated service agreements with four oncology
practices. Under the terms of these disaffiliations, the Company recognized a
net gain on separation of $3,376 included in impairment, restructuring and other
charges in the accompanying consolidated statement of operations and
comprehensive income. For further discussion, see Note 11. No 2001
disaffiliations were individually significant.

      During 2000, the Company affiliated with 14 oncology practices for total
consideration of $33,478, including 1,721 shares of Common Stock to be issued
with a value of $6,103. No 2000 affiliations were individually significant.

      During 1999, the Company affiliated with 20 oncology practices on the
effective dates indicated as follows: January 1, Oncology & Hematology of
Southwest Virginia of Roanoke, Virginia, total consideration of $27,156
including 820 shares of Common Stock to be issued with a value of $9,840;
January 1, Hematology Associates Ltd. of Phoenix, Arizona, total consideration
of $10,772 including 284 shares of Common Stock to be issued with a value of
$3,415; June 4, Birmingham Hematology Oncology Associates, P.C. of Birmingham,
Alabama, total consideration of $12,625 including 402 shares of Common Stock to
be issued with a value of $3,505; 17 other practices, total consideration of
$44,889 including 1,126 shares of Common Stock to be issued with a value of
$7,877.

NOTE 4 - RESEARCH CONTRACTS

      On June 30, 1997, one of the Company's subsidiaries, PRN Research, Inc.,
entered into a comprehensive clinical development alliance with ILEX Oncology,
Inc. ("ILEX"), a drug development company focused exclusively on cancer. As part
of the agreement, ILEX issued to the Company 314 shares, 314 shares, and 312
shares of ILEX common stock in 1999, 1998, and 1997, respectively. The Company
has recognized $2,867 as revenue in 1999, representing the fair value of the
ILEX stock received on June 30 of that year, recognized over the following year
as the Company was obligated to perform clinical research activities during that
period. Effective June 30, 1999, the Company amended its agreement with ILEX.
Under the amended agreement, ILEX accelerated the issuance of 315 shares of its
common stock valued at $3,152 and the parties agreed to terminate the Company's
obligations to provide research services to ILEX under the agreement. ILEX' s
obligation to issue additional shares to the Company contingent upon volume of
activity was cancelled at this time.


                                       61
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

      Through the third quarter of 1999, the Company recognized subsequent
changes in the value of ILEX stock received as a component of other
comprehensive income in shareholders' equity in accordance with its intentions
and classification of the investment as "available for sale" under the guidance
of Statement of Financial Accounting Standards No. 115. The valuation allowance
was shown as a component of stockholders' equity, net of applicable income
taxes. During the fourth quarter of 1999, the Company changed its intentions and
reclassified the investment as a trading security. In connection with this
decision, the Company has recognized an unrealized gain of $14,431 in the
accompanying consolidated statement of operations and comprehensive income to
reflect the fair value of the investment at December 31, 1999. The Company sold
the investment in a private sale transaction in March 2000 and realized net
proceeds of $54,798, which resulted in the recognition of an additional gain of
$27,540 in the consolidated statement of operations and comprehensive income for
the period ended December 31, 2000.

NOTE 5 - PROPERTY AND EQUIPMENT

      Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                             December 31,
                                                          2001            2000
                                                          ----            ----
<S>                                                    <C>             <C>
Land ............................................      $  21,031       $  19,706
Furniture and equipment .........................        317,831         280,843
Buildings and leasehold improvements ............        158,175         145,962
Construction in progress ........................          8,797          14,373
                                                       ---------       ---------
                                                         505,834         460,884
Less -- accumulated depreciation and amortization       (219,616)       (180,852)
                                                       ---------       ---------
                                                       $ 286,218       $ 280,032
                                                       =========       =========
</TABLE>

      The Company leases nineteen cancer centers from third parties under its
synthetic lease facility. The related properties were constructed for
approximately $72 million and are not included in the Company's property and
equipment. See Note 12 for a description of the related lease agreements.

NOTE 6 - INDEBTEDNESS

      As of December 31, 2001 and 2000, respectively, the Company's long-term
indebtedness consisted of the following:

<TABLE>
<CAPTION>
                                                             December 31,
                                                         2001             2000
                                                         ----             ----
<S>                                                    <C>              <C>
Credit facility ..............................         $     --         $125,000
Senior secured notes .........................          100,000          100,000
Notes payable ................................            2,733            5,868
Subordinated notes ...........................           67,438           90,578
Capital lease obligations and other ..........            2,695            2,677
                                                       --------         --------
                                                        172,866          324,123
Less -- current maturities ...................           44,040           23,910
                                                       --------         --------
                                                       $128,826         $300,213
                                                       ========         ========
</TABLE>

Credit Facility

      The Company has a loan agreement and revolving credit/term facility
(Credit Facility) that was amended effective as of June 15, 1999 in connection
with the AOR/PRN merger to improve certain terms, covenants and capacity. Under
the terms of the agreement, the amounts available for borrowing until June 15,
2000 were $275,000 through 2004. The borrowing limit was $150,000 prior to the
amendment. The Credit Facility previously included a $100,000 component that was
renewable at the option of the lenders under that agreement at one year
intervals from the original date of the agreement. On June 15, 2000, the Company
elected not to renew the $100,000


                                       62
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

component of the Credit Facility, leaving availability of $175,000. The maximum
borrowings outstanding under the Credit Facility during 2001 and 2000 were
$125,000 and $179,000, respectively. Proceeds of loans may be used to finance
development of cancer centers and installations of PET, to finance practice
affiliations, to provide working capital or for other general corporate uses.

      Borrowings under the Credit Facility are secured by capital stock of the
Company's subsidiaries and accounts receivable and service agreements. At the
Company's option, funds may be borrowed at the Base interest rate or the London
Interbank Offered Rate (LIBOR) up to LIBOR plus an amount determined under a
defined formula. The Base rate is selected by First Union National Bank (First
Union) and is defined as its prime rate or Federal Funds Rate plus 1/2%.
Interest on amounts outstanding under Base rate loans is due quarterly while
interest on LIBOR related loans is due at the end of each applicable interest
period or quarterly, if earlier. As of December 31, 2000 and 2001, the weighted
average interest rate on all outstanding draws was 8.9% and 8.2%, respectively.
The Company had no outstanding borrowings under the Credit Facility as of
December 31, 2001.

      The Company is subject to restrictive covenants under the Credit Facility,
including the maintenance of certain financial ratios. The agreement also limits
certain activities such as incurrence of additional indebtedness, sales of
assets, investments, capital expenditures, mergers and consolidations and the
payment of dividends. Under certain circumstances, additional medical practice
transactions may require First Union and the other lenders' consent.

      As a result of the Company's net loss in 2000, the Company would have been
in violation of certain financial covenants of the Credit Facility agreements,
including the current period debt to cash flow (as defined) covenant. The
Company secured an amendment to these covenants and paid amendment fees totaling
$1,875, which has been included in the statement of operations and comprehensive
income for the year ended December 31, 2000 in impairment, restructuring and
other charges, since the amendments were necessitated by those charges.

      On February 1, 2002, the Company entered into a $100,000 five-year
Revolving Credit Facility (New Credit Facility). Proceeds from loans under the
New Credit Facility may be used to finance development of cancer centers and new
PET facilities, to provide working capital or for other general business uses.
Costs incurred in connection with the extinguishment of the Company's previous
Credit Facility will be expensed in the first quarter of 2002. Costs incurred in
connection with establishing the New Credit Facility are being capitalized and
amortized over the term of the Credit Facility.

      Borrowings under the New Credit Facility are secured by substantially all
of the Company's assets. At the Company's option, funds may be borrowed at the
Base interest rate or LIBOR plus an amount determined under a defined formula.
The Base rate is selected by First Union and is defined as its prime rate or
Federal Funds Rate plus 1/2%.

Senior Secured Notes

      In November 1999, the Company issued $100,000 in senior secured notes
(Senior Secured Notes) to a group of institutional investors. The notes bear
interest at 8.42%, mature in installments from 2002 through 2006 and rank equal
in right of payment with all current and future senior indebtedness of the
Company. The Senior Secured Notes contain restrictive financial and operational
covenants and are secured by the same collateral as the Credit Facility.

      As a result of the Company's net loss in 2000, the Company would have been
in violation of certain financial covenants of its Senior Secured Note
agreements, including the current period debt to cash flow (as defined)
covenant. The Company secured amendments to these covenants and paid amendment
fees totaling $500, which has been included in the statement of operations and
comprehensive income for the year ended December 31, 2000 in impairment,
restructuring and other charges, since the amendments were necessitated by those
charges.

      The Senior Secured Notes were repaid in full on February 1, 2002.


                                       63
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

Senior Subordinated Notes

      On February 1, 2002, the Company issued $175,000 in 9 5/8% senior
subordinated notes (Senior Subordinated Notes) to various institutional
investors in a private offering pursuant to Rule 144A. The notes are unsecured,
bear interest at 9.625% annually and mature in February 2012. Payments under the
Senior Subordinated Notes are subordinated, in substantially all respects, to
the Company's New Credit Facility providing working capital financing.

      Proceeds from the Senior Subordinated Notes were used to simultaneously
pay off the $100,000 in borrowings under the existing Senior Secured Notes,
$11.7 million prepayment penalty on the early termination of the Senior Secured
Notes and facility fees and related expenses associated with establishing the
Senior Subordinated Notes and New Credit Facility of $5.4 million and $2.8
million, respectively. Costs incurred in connection with extinguishment of the
Company's previous Senior Secured Notes, including the prepayment penalty will
be expensed in the first quarter of 2002. Costs incurred in connection with
establishing the Senior Subordinated Notes, including facility fees and related
expenses are being capitalized and amortized over the term of the notes.

Notes payable

      The notes payable bear interest, which is payable annually, at rates
ranging from 5.3% to 10% and mature between 2002 to 2005. The notes are payable
to physicians with whom the Company entered into long-term service agreements
and relate to affiliation transactions. The notes payable are unsecured.

Subordinated notes

      The subordinated notes are issued in substantially the same form in
different series and are payable to the physicians with whom the Company entered
into service agreements. Substantially all of the notes outstanding at December
31, 2001 and 2000 bear interest at 7%, are due in installments through 2007 and
are subordinated to senior bank and certain other debt. If the Company fails to
make payments under any of the notes, the respective practice can terminate the
related service agreement

Capital lease obligations and other indebtedness

      Leases for medical and office equipment are capitalized using effective
interest rates between 6.5% and 11.5% with original lease terms between two and
seven years. At December 31, 2001 and 2000, the gross amount of assets recorded
under the capital leases was $4,712 and $6,400, respectively, and the related
accumulated amortization was $4,200 and $3,000, respectively. Amortization
expense is included with depreciation in the accompanying consolidated statement
of operations and comprehensive income. Total future capital lease payments are
$1,336. Other indebtedness consists principally of installment notes and bank
debt, with varying interest rates, assumed in affiliation transactions.

Maturities

      As of December 31, 2001, future principal maturities of long-term
indebtedness, including capital lease obligations, were approximately $44,040 in
2002, $39,169 in 2003, $32,927 in 2004, $27,745 in 2005, $26,265 in 2006 and
$2,720 thereafter. On February 1, 2002, the Company issued $175,000 in Senior
Subordinated Notes and prepaid its Senior Secured Notes. The effect of those
transactions on future maturities was to decrease principal maturities of
long-term indebtedness in each of 2002 through 2006 by $20,000 and increase
principal maturities of long-term indebtedness by $175,000 in 2012.

      See Note 12 for operating lease commitments and a discussion of the
Company's synthetic lease facility.


                                       64
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

NOTE 7 - INCOME TAXES

      The Company's income tax provision (benefit) consists of the following:

                                                Year Ended December 31,
                                     2001               2000              1999
                                     ----               ----              ----
Federal:
     Current ............          $  7,547           $ 33,638           $21,661
     Deferred ...........            18,713            (72,037)            8,171
State:
     Current ............               522              2,943             1,129
     Deferred ...........             1,606                409             1,268
                                   --------           --------           -------

                                   $ 28,388           $(35,047)          $32,229
                                   ========           ========           =======

      The difference between the effective income tax rate and the amount that
would be determined by applying the statutory U.S. income tax rate before income
taxes is as follows:

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                           2001          2000          1999
                                                           ----          ----          ----
<S>                                                        <C>          <C>            <C>
Provision for income taxes at U.S. statutory rates         35.0%        (35.0)%        35.0%
State income taxes, net of federal benefit ........         2.5           2.2           2.5
Non-deductible portion of merger related costs ....          --            --           2.1
Other .............................................         0.5           0.3           0.5
                                                         ------        ------        ------
                                                           38.0%        (32.5)%        40.1%
                                                         ======        ======        ======
</TABLE>

      At December 31, 2001 and 2000, net deferred tax asset and income taxes
payable includes a tax liability of $21,200 and $15,612, respectively. The
liability has been established related to the Company's tax position and the
possible disallowance of certain deductions taken in connection with the
Company's service agreements. The impact of disallowance would be immaterial to
the Company's financial condition and results of operations, except that any
additional payments that would be required would require cash expenditures by
the Company.

      Deferred income taxes are comprised of the following (in thousands):

                                                             December 31,
                                                         2001            2000
                                                         ----            ----

Deferred tax assets:
    Accrued expenses ...........................       $ 10,797        $ 12,078
    Service Agreements and other intangibles ...         22,193          34,831
    Allowance for bad debts ....................          3,569           3,569
    Other ......................................            769           2,860
                                                       --------        --------
                                                       $ 37,328        $ 53,338
                                                       ========        ========
Deferred tax liabilities:
    Depreciation ...............................        (18,700)        (14,673)
    Prepaid expenses ...........................           (543)           (261)
                                                       --------        --------
                                                        (19,243)        (14,934)
                                                       --------        --------
    Net deferred tax asset .....................       $ 18,085        $ 38,404
                                                       ========        ========


                                       65
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

Realization of the net deferred tax asset is dependent upon the Company's
ability to generate future income. Management believes, after considering all
available information regarding historical and expected future earnings of the
Company, that sufficient future income will be recognized to facilitate the
realization of the net deferred asset.

NOTE 8 - 401(k) PLAN

      During 2001, employees of the Company were allowed to participate in the
US Oncology, Inc. 401(k) plan (the Plan). Participants of the Plan are eligible
to participate after 6 months of employment and reaching the age of 21.
Participants vest in the employer contribution portion of their account, if any,
at the rate of 20% for each year that they meet the plan's service requirements.

      The Plan allows for a discretionary employer contribution. For the year
ended December 31, 2001, the Company elected to match 50% of employee
contributions, the total match not to exceed 3% of the participant's salary,
subject to the salary ceiling rules imposed by the Internal Revenue Service. The
Company's contribution amounted to $1,352 for the year ended December 31, 2001.
For the two years ended December 31, 2000 and 1999, no employer contributions
were made.

      Prior to the AOR/PRN merger in June of 1999, former employees of PRN
participated in the PRN 401(k) Profit Sharing and Savings Plan (PRN Plan). The
former PRN plan allowed for an employer match of contributions made by plan
participants. For the year ended December 31, 1999, PRN elected to match 50% of
employee contributions, the total match not to exceed 3% of the participant's
salary subject to the salary ceiling rules imposed by the Internal Revenue
Service. Effective June 15, 1999, the Company elected to cease the employer
match under the PRN plan. The Company's contribution amounted to approximately
$1,000 for the year ended December 31, 1999. Effective August 31, 1999, the PRN
Plan was frozen with all future employee contributions being allocated to the US
Oncology, Inc. 401(k) Plan. The Company transferred all assets of the PRN Plan
to the US Oncology, Inc. Plan during the first quarter of 2001.

NOTE 9 - STOCKHOLDERS' EQUITY

      In conjunction with the AOR/PRN merger, the Company's stockholders
approved an increase in the number of shares of Common Stock authorized to
250,000 shares.

      Effective May 16, 1997, the board of directors of the Company adopted a
shareholders' rights plan and in connection therewith, declared a dividend of
one Series A Preferred Share Purchase Right for each outstanding share of Common
Stock. For a more detailed description of the shareholders' rights plan, refer
to the Company's Form 8-A filed with the Securities and Exchange Commission on
June 2, 1997.

      On March 21, 2000, the Board of Directors of the Company authorized the
purchase of up to 10 million shares of the Company's Common Stock in public or
private transactions. In 2000, the Company acquired 6.4 million shares,
including 1.3 million shares received in connection with the cashless exercise
of stock options by the Company's chief executive officer (See Notes 10 and 11),
at an aggregate cost of $30.6 million. In 2001 and 2000, the Company utilized
2.2 million and 1.9 million of these treasury shares, respectively, to satisfy
commitments for delivery of the Company's Common Stock for affiliation
transactions.

      As part of entering into long-term service agreements with practices as
described in Note 3, the Company has made nonforfeitable commitments to issue
shares of Common Stock at specified future dates for no further consideration.
Holders of the rights to receive such shares have no dispositive, voting or cash
dividend rights with respect to such shares until the shares have been
delivered. Common Stock to be issued is shown as a separate component in
stockholders' equity. The amounts, upon issuance of the shares, are reclassified
to other equity accounts as appropriate.

      The shares of Common Stock to be issued at specified future dates were
valued at the transaction date at a discount from the quoted market price of a
delivered share after considering all relevant factors, including normal
discounts for marketability due to the time delay in delivery of the shares. The
discount for shares of Common


                                       66
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

Stock to be issued at specified future dates is 10% for shares to be delivered
prior to the fifth anniversary of the transaction and is 20% for shares to be
delivered thereafter. The Common Stock in the transactions is to be delivered
under the terms of the respective agreements for periods up to seven years after
the initial transaction date. The recorded value represents management's best
estimate of the fair value of the shares of Common Stock to be delivered in the
future as of the transaction date. A portion of the Common Stock to be issued
commitment is based upon obligations to deliver a specified dollar value of
Common Stock shares. The value of these shares is not discounted and the number
of shares to be issued would change with change in the market value of the
Company's Common Stock.

      For transactions completed through December 31, 2001, the scheduled
issuance of the shares of Common Stock that the Company is committed to deliver
over the passage of time are approximately 2,604 in 2002, 1,642 in 2003, 1,902
in 2004, 1,010 in 2005, 44 in 2006 and 93 thereafter.

NOTE 10- STOCK OPTIONS

      The Company's 1993 Key Employee Stock Option Plan, as amended, provides
that employees may be granted options to purchase Common Stock. Total shares
available for grant are limited to 12% of the outstanding common shares plus the
shares to be issued to practices at specified future dates. Individual option
vesting and related terms are determined by the Compensation Committee of the
board of directors. However, the stock option plan provides that the options
granted may be incentive options at an exercise price no less than fair value at
the grant date or 85% of fair value in the case of nonqualified options. Option
terms may not exceed ten years. Individual option grants vest ratably over time,
generally five years. In connection with the AOR/PRN merger, all outstanding
options of PRN became fully vested and exercisable at the merger date and were
assumed by the Company. Outstanding PRN options became options to purchase 0.94
shares of the Company's Common Stock with an exercise price equal to the
original exercise price divided by 0.94.

      Under the terms of the Company's Chief Executive Officer Stock Option Plan
and Agreement and the Everson Stock Option Plan and Agreement, two executives
were granted 3,694 non-qualified options to purchase Common Stock with an
exercise price effectively equal to the fair market value at the date of grant.
The options vested on the date of the Company's initial public offering and
expire between 2000 and 2003. The Company's ability to grant further options
under these plans ceased on the date of the Company's initial public stock
offering. In December 2000, an officer exercised his remaining 1,640 options
outstanding in a cashless option exercise facilitated by the Company. This
cashless exercise resulted in the Company recognizing a $2,462 non-cash charge
for compensation expense during the fourth quarter of 2000, reflecting the
difference between the exercise prices of the options and the fair market value
of the related Common Stock. The executive received a net of 296 shares of
Common Stock, and the Company acquired 1,344 shares of treasury stock as a
result of this option exercise. At December 31, 2001, 220 Common Stock options
with a weighted-average exercise price of $4.77 per share were outstanding and
exercisable under the terms of these plans.

      Effective December 14, 2000, the Company executed a Chief Executive
Officer Stock Option Plan and Agreement and granted 1,000 non-qualified options
to purchase Treasury Stock. The options were issued with an exercise price of
$4.96 which equaled the fair market value of the Company's Common Stock at the
date of the grant. The options vest six months from the grant date and have an
option term not to exceed 10 years. At December 31, 2001, there are no options
available for future grants under this plan.

      The Company's 1993 Non-Employee Director Stock Option Plan provides that
up to 600 options to purchase Common Stock can be granted. The options vest in 4
months or ratably over 4 years, have a term of 10 years and exercise prices
effectively equal to the fair market value at the date of grant. As of December
31, 2001, 351 options were outstanding, all of which were vested and
exercisable.

      The Company's 1993 Affiliate Stock Option Plan, as amended, provides that
options to purchase up to 3,000 shares of Common Stock can be granted. Options
under the plan have a term of 10 years. All individual option grants vest
ratably over the vesting periods of 3 to 5 years. Of the outstanding options to
purchase shares of Common Stock granted under this plan, 1,435 were granted to
physician employees of the affiliated practices and 25


                                       67
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

were granted to other employees of the affiliated practices. In 2001, 2000, and
1999 the fair value of the options granted to non-employees was $5.34, $3.44 and
$5.89 per share, respectively, as determined using the Black-Scholes Valuation
Model. Compensation expense will be recognized over the respective vesting
periods. Expense of $1,900, $1,600 and $1,500 was recognized in 2001, 2000 and
1999, respectively.

      All of the Company's Common Stock options vest automatically upon those
events constituting a change in control of the Company, as set forth in such
stock option plans.

      The following summarizes the activity for all option plans:

<TABLE>
<CAPTION>
                                                                     Shares               Weighted
                                                                  Represented              Average
                                                                   by Options          Exercise Price
                                                                   ----------          --------------
<S>                                                                 <C>                     <C>
Balance, January 1, 1999.................................            9,584                  $ 9.28

Granted..................................................            6,660                    6.63
Exercised................................................             (352)                   8.77
Canceled.................................................           (1,284)                   9.73
                                                                    ------

Balance, December 31, 1999                                          14,608                    8.16

Granted..................................................            3,599                    4.70
Exercised................................................           (2,171)                   3.50
Canceled.................................................           (3,791)                   9.49
                                                                    ------

Balance, December 31, 2000...............................           12,245                    7.58

Granted..................................................            2,704                    6.91
Exercised................................................             (907)                   4.29
Canceled.................................................           (1,027)                   8.44
                                                                    ------

Balance, December 31, 2001...............................           13,015                    7.60
                                                                    ======
</TABLE>

      The following table summarizes information about the Company's stock
options outstanding at December 31, 2001:

<TABLE>
<CAPTION>
                      Options Outstanding                                       Options Exercisable
                      -------------------                                       -------------------
                                              Weighted
      Range of             Number             Average            Weighted             Number            Weighted
  Average Exercise     Outstanding at        Remaining       Average Exercise     Exercisable at         Average
       Price              12/31/01        Contractual Life         Price             12/31/01        Exercise Price
       -----              --------        ----------------         -----             --------        --------------
<S>                        <C>                   <C>               <C>                 <C>                <C>
     $1 to $3                 171                7.4               $2.91                 127              $3.23
      4 to 9                9,081                8.1                5.70               4,024               6.66
     10 to 14               2,942                6.6               11.35               1,884              11.22
     15 to 24                 821                5.8               16.14                 641              16.69
                           ------                                                      -----
      1 to 24              13,015                7.5                7.60               6,676               8.29
                           ======                                                      =====
</TABLE>


                                       68
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

      The Company has adopted the disclosure-only provisions of FASB Statement
No. 123, "Accounting for Stock-Based Compensation" for stock options granted to
employees and directors. Accordingly, no compensation cost has been recognized
for fixed options granted to Company employees and directors. For purposes of
pro forma unaudited disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's unaudited
pro forma information for 2001, 2000 and 1999 are as follows and includes
pre-tax compensation expense of approximately $14,600, $10,400 and $12,600
respectively:

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                             2001            2000           1999
                                                                             ----            ----           ----
<S>                                                                        <C>            <C>              <C>
Pro forma net income (loss)                                                $36,716        $(79,660)        $35,555
Pro forma net income (loss) per share - basic and diluted                    $0.37          $(0.79)          $0.35
</TABLE>

      Options granted in 2001, 2000, and 1999 had weighted-average fair values
of $5.04, $3.42 and $5.42 per share, respectively. The fair value of each Common
Stock option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants from all plans:

                                                  Year Ended December 31,
                                            2001           2000            1999
                                            ----           ----            ----
Expected life (years)                          5              5               5
Risk-free interest rate                      3.5%           6.1%            5.0%
Expected volatility                           81%            80%             77%
Expected dividend yield                        0%             0%              0%

NOTE 11 - IMPAIRMENT, RESTRUCTURING, AND OTHER CHARGES

      During 2001, the Company recognized impairment, restructuring and other
charges of $5,868, net. During 2000, the Company recognized impairment,
restructuring and other charges of approximately $201,846, and during 1999, the
Company recognized merger, restructuring and integration costs of $29,014. The
charges are summarized in the following table and discussed in more detail
below:

                                                Year Ended December 31,
                                        2001              2000            1999
                                        ----              ----            ----
Impairment charges                   $  (3,376)         $170,130              --
Restructuring charges                $   5,868            16,122              --
Other charges                        $   3,376            15,594         $29,014
                                     ---------          --------         -------
                                     $   5,868          $201,846         $29,014
                                     =========          ========         =======

                               Impairment Charges
                               ------------------

<TABLE>
<CAPTION>
                                                             2001           2000
                                                             ----           ----
<S>                                                       <C>             <C>
Impairment of service agreements                                 --       $138,128
Impairment of assets (gain on separation) related to
  termination of service agreements                       $  (3,376)        32,002
                                                          ---------       --------

                                                          $  (3,376)      $170,130
                                                          =========       ========
</TABLE>

      Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(FAS 121), requires that companies periodically assess their long-lived assets
for potential impairment. In accordance with this requirement, from time to time
the Company evaluates its intangible assets for impairment. For each of the
Company's service agreements, this analysis involves comparing the aggregate
expected future cash flows under the agreement to its carrying value as an
intangible asset


                                       69
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

on the Company's balance sheet. In estimating future cash flows, the Company
considers past performance as well as known trends that are likely to affect
future performance. In some cases the Company also takes into account its
current activities with respect to that agreement that may be aimed at altering
performance or reversing trends. All of these factors used in the Company's
estimates are subject to error and uncertainty.

      In 1999, the Company noted a significant increase in operating costs, most
notably the cost of pharmaceuticals, which increased by 5% as a percentage of
revenue from 1998 to 1999. The Company believed that some of this increase was
attributable either to inefficiencies arising directly from the AOR/PRN merger
and the integration of the formerly separate companies, or from delays in
implementation of cost containment strategies during the first half of 1999
pending consummation of the merger. In addition, the Company continued to
believe that it had developed effective strategies to diversify revenues away
from medical oncology and to curtail the increase in drug prices and otherwise
contain costs. As the remaining lives of its service agreements were
substantially longer than their estimated recovery periods, and because the
Company believed that it would be able to reverse or slow many of the negative
cost trends, the Company did not believe any impairment provisions were
necessary at that time.

      During 2000, the Company continued to experience adverse trends in
operating margins. Although the Company's strategies to lower pharmaceutical
costs slowed the rate of increase, pharmaceutical costs continued to rise,
reducing operating margins during 2000. Single-source drug use continued to
grow, and treatment protocols involving a greater number of different, expensive
drugs for each patient were also becoming more common. Based upon the
significant increase in the number of oncological pharmaceuticals (which would
upon approval be new single-source drugs) in development, the Company believed
the trend towards increased use of lower-margin pharmaceuticals would continue.
The Company also experienced increased pressure on reimbursement from payors,
including significant initiatives with respect to government programs, to reduce
oncology reimbursements, particularly for pharmaceuticals. Moreover, the Company
became increasingly aware of growing complexity in the administrative aspects of
the practices and rising personnel costs in the health care sector, neither of
which were being effectively slowed or stopped by anticipated economies of scale
and other efficiencies arising from the merger. Even though the practices'
profitability continued to increase significantly during this period, because
practices that operate under the net revenue model do not share in increasing
operating costs, the Company shared disproportionately in the decline in
operating margins. Based upon these trends the Company's management determined
during the latter part of 2000 that the cost of operating in the oncology sector
was continuing to increase and that this trend was likely to continue,
regardless of Company action, in the next several years. For this reason, the
Company determined that rising costs, and the Company's disproportionately
sharing in these costs under the net revenue model, would be an integral part of
its forecast of future cash flows in an impairment analysis with respect to its
service agreements.

      In its impairment analysis for the fourth quarter of 2000, the Company
incorporated additional assumptions regarding rising cost trends. With respect
to service agreements under the net revenue model, the Company has greater
exposure in an environment of rising costs because practices retain a portion of
revenues before any fees are paid. Therefore, the Company's impairment review
focused primarily on net revenue model service agreements. Using current
assumptions, many of the Company's net revenue model service agreements would
contribute decreasing positive cash flows in the immediate future and then begin
contributing negative cash flows. Although management commenced during the
fourth quarter of 2000 an initiative to convert net revenue model agreements to
earnings model agreements, there can be no assurance as to the number of
conversions that will be achieved. Substantial differences between the estimates
used in the impairment analysis and actual trends occurring in the future could
result in future additional impairment charges, or in certain practices
experiencing better than expected future cash flows, than those currently
forecast. The charge for impairment of service agreements related to thirteen
practices with total net book value of approximately $145,000 as of December 31,
2000 prior to the impairment charge. Certain of the projected cash flows related
to services agreements may result in negative cash flows if cost increases
continue. No provision has been made for potential losses under these contracts
as such amounts are not yet probable and reasonably estimable.

      Based upon this analysis, in the fourth quarter of 2000, the Company
recorded a non-cash pretax charge to earnings of approximately $138,128 related
to thirteen service agreements, primarily for arrangements under the net


                                       70
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

revenue model, for which the projected cash flows, based upon management's
analysis and evaluations of each market, including the continuation of
historical trends, would be insufficient to recover the net book value of the
intangible assets. In projecting the estimated cash flows from the service
agreements, the Company assumed net practice revenues would increase at rates of
5% to 8% annually, and that practice costs, including pharmaceutical costs,
would increase as a percentage of Company revenues by 1% to 2% annually for the
next five years. Assumptions were also made with respect to the level of minimal
capital expenditures necessary to maintain projected operations and overhead
allocations.

      The Company had impaired assets of approximately $32,000 during 2000 for
the difference between the carrying value of the assets related to certain
practices with which it anticipated terminating its agreements and the
consideration expected to be received upon termination of service agreements
with those practices. In the fourth quarter of 2001, the Company recognized a
net gain on separation of approximately $3,376 relating to service agreement
terminations. Included in this net gain is approximately $9,003 arising from
final settlements with several practices with which the Company terminated its
relationships where the ultimate settlements were more beneficial to the Company
than the Company estimated during 2000 and resulted in its recognizing in the
fourth quarter of 2001 the forgiveness of $1,533 in notes payable by the Company
to physicians, the waiver by the physicians of their rights to receive $1,165 of
the Company's common stock previously recognized by the Company as an obligation
when the Company affiliated with the physicians, and additional consideration
received by the Company in connection with the terminations of $6,305 in excess
of the carrying value of the net assets of the terminated practices, less a
charge of $5,627 recognized during the fourth quarter of 2001 for the difference
between the carrying value of certain assets and the amount the Company expects
to realize upon those assets, as determined in the fourth quarter of 2001.

                              Restructuring Charges
                              ---------------------

      In the fourth quarter of 2000, the Company comprehensively analyzed its
operations and cost structure, with a view to repositioning itself to
effectively execute its strategic and operational initiatives. This analysis
focused on the Company's non-core assets and activities it had determined were
not consistent with its strategic direction. The Company has recognized and
accounted for these costs in accordance with the provisions of Emerging Issues
Task Force Consensus No. 94-3, "Accounting for Restructuring Costs." As a result
of this analysis, during the fourth quarter of 2000, the Company recorded the
following charges (in thousands):

<TABLE>
<CAPTION>
                                Restructuring                          Asset         Accrual at                      Accrual at
                               Expense in 2000      Payments        Write-downs   December 31, 2000    Payments   December 31, 2001
                               ---------------      --------        -----------   -----------------    --------   -----------------
<S>                                <C>              <C>               <C>                <C>             <C>             <C>
Abandonment of IT systems          $ 6,557               --           $ (6,557)              --             --               --
Impairment of home health
  business                           6,463               --             (6,463)              --             --               --
Severance of employment
  agreement                            466          $   (36)                --           $  430          $(215)          $  215
Site closures                        2,636             (562)              (655)           1,419           (338)           1,081
                                   -------          -------           --------           ------          -----           ------
Total                              $16,122          $  (598)          $(13,675)          $1,849          $(553)          $1,296
                                   =======          =======           ========           ======          =====           ======
</TABLE>

      As indicated above, during the fourth quarter of 2000, the Company decided
to abandon its efforts to pursue some of its information systems initiatives,
including the clinical information systems and e-commerce initiatives, and
recognized a charge of $6,557. In one market where the Company agreed to manage
the oncology operations of a hospital system, the Company decided to abandon and
sell a home health business that is no longer consistent with its strategy in
that market. As a result, the Company recorded a charge of $6,463 during the
fourth quarter of 2000. As part of the restructuring, the Company terminated the
duties of an executive, with contractual severance payments totaling
approximately $430 over the next two years. The Company also determined that it
will close several sites, abandoning leased and owned facilities, and recognized
a charge of $2,636 for remaining lease obligations and the difference in the net
book value of the owned real estate and its expected fair value.

                                       71
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

      In the first quarter of 2001, the Company announced plans to further
reduce overhead costs through reducing corporate staff, consolidating
administrative offices, closing additional facilities and abandoning certain
software applications. The Company has recognized and accounted for these costs
in accordance with the provisions of Emerging Issues Task Force Consensus No.
94-3, "Accounting for Restructuring Costs." As a result, the Company recorded
the following pre-tax charges during the first quarter of 2001 (in thousands):

<TABLE>
<CAPTION>
                                Restructuring                          Asset          Accrual at
                                   Expenses         Payments        Write-downs    December 31, 2001
                                   --------         --------        -----------    -----------------
<S>                                 <C>             <C>               <C>               <C>
Costs related to personnel
   reductions                       $3,113          $(2,900)               --          $   213

Closure of facilities                2,455           (1,323)               --            1,132

Abandonment of software
   applications                        300               --           $  (300)              --
                                    ------          -------           -------           ------

Total                               $5,868          $(4,223)          $  (300)          $1,345
                                    ======          =======           =======           ======
</TABLE>

      As indicated above, during the first quarter of 2001, the Company
announced plans to reduce corporate overhead and eliminated approximately 50
positions. As a result, the Company recorded a charge of $3.1 million. The
Company also determined that it will close several sites, abandoning leased
facilities, and recognized a charge of $2.5 million for remaining lease
obligations and related improvements. In addition, the Company decided to
abandon certain software applications and recorded a charge of $300.

                                      Other
                                      -----

      During 2001, 2000 and 1999, the Company recorded other charges, as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                 2001             2000             1999
                                                                 ----             ----             ----
<S>                                                             <C>             <C>              <C>
Merger, restructuring and integration costs                         --               --          $29,014
Cashless stock option exercise costs                                --          $ 2,462               --
Investigation and contract separation costs                         --            3,372               --
Practice accounts receivable and fixed asset write-off          $1,925            5,110               --
Credit facility and note amendment fees                             --            2,375               --
Management recruiting and relocation costs                          --            1,275               --
Vacation pay accrual-change in policy                               --            1,000               --
Other                                                            1,451               --               --
                                                                ------          -------          -------
                          Total                                 $3,376          $15,594          $29,014
                                                                ======          =======          =======
</TABLE>

      In the fourth quarter of 2001, the Company recognized unusual charges
including: (i) $1,925 of practice accounts receivable and fixed asset write-off,
(ii) a $1,000 million charge related to its estimated exposure to losses under
an insurance policy where the insurer has become insolvent (Note 12), and (iii)
$451 of consulting costs incurred in connection with development of its service
line structure. The negative impact of these charges was wholly offset by the
net gain on separation of $3,376 the Company recognized during the fourth
quarter of 2001, which is discussed above in "Impairment Charges."

      In the fourth quarter of 2000, the Company recognized a pre-tax $2,462
non-cash charge related to the cashless exercise of 1,600 stock options by the
Company's Chairman and Chief Executive Officer (the "optionee"), due to the
termination of the stock option plan under which the options were granted, in
accordance with Financial


                                       72
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

Accounting Standards Board (FASB) Interpretation No. 44. To consummate the
exercise, the optionee surrendered approximately 1,300 shares having an average
strike price of $3.44 to satisfy exercise price and tax liability with respect
to all options. As a result of this transaction, the optionee received
approximately 300 shares of Common Stock. The Company also realized an
offsetting $1,000 reduction in its federal income tax obligation as a result of
this transaction.

      During the third quarter and second quarter of 2000, the Company incurred
costs of $206 and approximately $1,700 respectively, in connection with qui tam
lawsuits, consisting primarily of auditing and legal fees and related expenses.
In addition, the Company incurred $1,466 of costs in the second quarter of 2000
consisting of intangible asset and receivable write-downs as a result of
terminating its affiliation with a sole practitioner and with the physician
practice named in the qui tam lawsuits.

      The Company also recognized impairment and other charges totaling
approximately $9,800 in 2000. These charges consist of (i) $5,110 of receivables
from affiliated practices which are not considered to be recoverable; (ii)
$2,375 for bank and noteholder fees associated with amending the Credit
Facilities to accommodate debt covenant compliance related to unusual charges;
(iii) $1,275 related to expenses to recruit and relocate certain members of the
current management team; and (iv) $1,000 for a change in the Company vacation
policy.

      In connection with the AOR/PRN merger, the Company incurred total costs of
$29,014 to consummate the merger, restructure operating activities and integrate
the two organizations. These costs were expensed during 1999.

      The Company's merger costs totaled $14,587 and included professional fees
and expenses incurred in connection with the due diligence, negotiation and
solicitation of shareholder approval for the transaction, as well as incremental
travel costs and contractual change of control payments of approximately $5,000
to the executive management of PRN.

      In 1999, the Company's management made certain decisions to restructure
its operations to reduce overlapping personnel and duplicative facilities. The
costs of personnel reductions include severance pay for terminated employees and
payments attributable to stay bonuses paid before December 31, 1999 for
employees providing transition assistance services. The Company also determined
that certain furniture, fixtures, leasehold improvements, computer equipment and
software was impaired as a result of personnel terminations, facility closings
and decisions to harmonize certain information systems. The Company has
recognized and accounted for these costs in accordance with the provisions of
Emerging Issues Task Force Consensus No. 94-3 "Accounting for Restructuring
Costs". The Company's restructuring costs recognized in the year ended December
31, 1999 totaled $7,193 and are summarized as follows:

<TABLE>
<CAPTION>
                                                                                        Accrued                        Accrued
                                                                                       Liability                      Liability
                                  Restructuring                         Asset              at                             at
                                     Expense         Payments        Dispositions       12/31/99        Payments       12/31/00
<S>                                  <C>             <C>               <C>               <C>             <C>           <C>
Employee severance and stay
     bonuses                         $ 2,097         $(2,097)               --                --              --       $    --
Lease terminations                     2,796            (320)               --           $ 2,476         $(2,476)           --
Asset impairments                      2,300              --           $(2,300)               --              --            --
                                     -------         -------           -------           -------         -------       -------

      Total                          $ 7,193         $(2,417)          $(2,300)          $ 2,476         $(2,476)      $    --
                                     =======         =======           =======           =======         =======       =======
</TABLE>

      The Company also incurred specifically identified costs related to its
efforts to integrate the two companies totaling $7,234 during the year ended
December 31, 1999. These integration costs include costs for a physician
conference to address combined Company operating strategies, employee
orientation meetings, consulting fees related to integration activities and
adoption of common employee benefit programs. These costs have been recognized
as incurred and do not include costs related to inefficiencies incurred as the
Company has attempted to integrate the operating activities of AOR and PRN.


                                       73
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

      The Company has recognized a deferred income tax benefit for substantially
all of these charges as many of the items will be deductible for income tax
purposes in future periods. An income tax benefit has also been recognized for
the 1999 charges, with the exception of certain non-deductible merger costs.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Leases

      The Company leases office space, integrated cancer centers and certain
equipment under noncancelable operating lease agreements. Total future minimum
lease payments, including escalation provisions and leases with entities
affiliated with practices, are $52,802 in 2002, $44,759 in 2003, $39,803 in
2004, $33,366 in 2005, $22,205 in 2006, and $70,463 thereafter. Rental expense
under noncancelable operating leases was approximately $61,074 in 2001, $57,676
in 2000 and $46,632 in 1999.

      The Company enters into commitments with various construction companies
and equipment vendors in connection with the development of cancer centers. As
of December 31, 2001, the Company's commitments were approximately $4,200.

      The Company has entered into an operating lease arrangement that involves
a special purpose entity that has acquired title to properties, paid for the
construction costs and leased to the Company the real estate and equipment at
some of the Company's cancer centers. This kind of leveraged financing structure
is commonly referred to as a "synthetic lease." The synthetic lease was used to
finance the acquisition, construction and development of cancer centers. The
facility was funded by a syndicate of financial institutions and is secured by
the property to which it relates.

      The synthetic lease was entered into in December 1997 and matures in June
2004. As of December 31, 2001, the Company had $72.0 million outstanding under
the synthetic lease facility, and no further amounts are available under that
facility. The annual lease cost of the synthetic lease is approximately $3.1
million, based on interest rates in effect as of December 31, 2001. At December
31, 2001, the lessor under the synthetic lease held real estate assets (based on
original acquisition and construction costs) of approximately $59.2 million and
equipment of approximately $12.8 million (based on original acquisition cost) at
nineteen locations. On February 1, 2002, the Company amended and restated the
synthetic lease agreement primarily to replace certain lenders.

      The lease is renewable in one-year increments, but only with consent of
the financial institutions that are parties thereto. In the event the lease is
not renewed at maturity, or is earlier terminated for various reasons, the
Company must either purchase the properties under the lease for the total amount
outstanding or market the properties to third parties. If the Company sells the
properties to third parties, it has guaranteed a residual value of at least 85%
of the total amount outstanding for the properties. If the properties were sold
to a third party at a price such that the Company would be required to make a
residual value guarantee payment, such amount would be recognized as an expense
in the Company's statement of operations.

      A synthetic lease is a form of lease financing that qualifies for
operating lease accounting treatment and under generally accepted accounting
principles ("GAAP") is not reflected on the Company's balance sheet. Thus, the
obligations are not recorded as debt and the underlying properties and equipment
are not recorded as assets on the Company's balance sheet. The Company's rental
payments (which approximate interest amounts under the synthetic lease
financing) are treated as operating rent commitments, and are excluded from the
Company's aggregate debt maturities.

      On February 27, 2002, the Financial Accounting Standards Board determined
that synthetic lease properties meeting certain criteria would be required to be
recognized as assets with a corresponding liability effective January 1, 2003.
The Company's synthetic lease meets these criteria. The determination is not
final and is subject to additional rule-making procedures, but assuming the
determination becomes a formal accounting pronouncement and assuming the Company
does not alter the arrangement to maintain off-balance-sheet-treatment under the
new


                                       74
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

rules, the Company would expect to recognize $72.0 million in additional
property and equipment with a corresponding liability on the Company's balance
sheet as of January 1, 2003.

      If the Company were to purchase all of the properties currently covered by
the lease or if changes in accounting rules or treatment of the lease were to
require the Company to reflect the properties on the Company's balance sheet and
income statement, the impact to the consolidated financial statements would be
as follows.

      .     Property and equipment would increase by $72.0 million (the purchase
            price for the assets subject to the lease);

      .     Assuming the purchase of the properties were financed through
            borrowing, or in the event the existing arrangement were required to
            be characterized as debt, indebtedness would increase by $72.0
            million; and

      .     Depreciation would increase by approximately $3.6 million per year
            as a result of the assets being owned by the Company.

      Acquiring the properties would require the Company to borrow additional
funds and would likely reduce the amount the Company could borrow for other
purposes.

      There are additional risks associated with the synthetic lease
arrangement. A deterioration in the Company's financial condition that would
cause an event of default under the synthetic lease facility, including a
default on material indebtedness, would give the parties under the synthetic
lease the right to terminate that lease, and the Company would be obligated to
purchase or remarket the properties. In such an event, the Company may not be
able to obtain sufficient financing to purchase the properties. In addition,
changes in future operating decisions or changes in the fair market values of
underlying leased properties or the associated rentals could result in
significant charges or acceleration of charges in the Company's statement of
operations for leasehold abandonments or residual value guarantees. Because the
synthetic lease payment floats with a referenced interest rate, the Company is
also exposed to interest rate risk under the synthetic lease.

Insurance

      The Company and its affiliated practices maintain insurance with respect
to medical malpractice risks on a claims-made basis in amounts believed to be
customary and adequate. Management is not aware of any outstanding claims or
unasserted claims that are likely to be asserted against it or its affiliated
practices which would have a material impact on the Company's financial position
or results of operations.

      In February 2002, PHICO Insurance Company ("PHICO"), at the request of the
Pennsylvania Insurance Department, was placed in liquidation by an Order of the
Commonwealth Court of Pennsylvania ("Liquidation Order"). From November 1997
through December 2001, the Company had placed its primary malpractice insurance
coverage through PHICO. These policies have not been replaced with policies from
other insurers. Currently the Company has two unsettled claims from the policy
years covered by PHICO issued policies and there are other claims against its
affiliated practices. The Liquidation Order refers these claims to various state
guaranty associations. These state guaranty association statutes generally
provide for coverage between $100-$300 per insured claim, depending upon the
state. Some states also have catastrophic loss funds to cover settlements in
excess of the available state guaranty funds. Most state insurance guaranty
statues provide for net worth and residency limitations that, if applicable, may
limit or prevent the Company or its affiliated practices from recovering
sufficiently from these state guaranty association funds. At this time, the
Company believes that the Company will meet the requirements for coverage under
the applicable state guaranty association statutes, and that the resolution of
these claims will not have a material adverse effect on the Company's financial
position, cash flow and results of operations. However, because the rules
related to state guaranty association funds are subject to interpretation, and
because these claims are still in the process of resolution, the Company has
reserved $1,000 to estimate potential costs it may incur either directly or
indirectly during this process.


                                       75
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

Guarantees

      Beginning January 1, 1997, the Company has guaranteed that the amounts
retained by the practice will be at least $5,195 annually under the terms of the
service agreement with the Company's affiliated practice in Minnesota, provided
that certain targets are met. Under this agreement, the Company has not reduced
its service fees from that practice for any of the three years ended December
31, 2001.

Litigation

      The Company has previously disclosed that it and a formerly affiliated
practice are the subject of allegations that their billing practices may violate
the Federal False Claims Act. These allegations are contained in two qui tam
complaints, commonly referred to as "whistle-blower" lawsuits, filed under seal
prior to the AOR/PRN merger. The U.S. Department of Justice has determined that
it will not intervene in one of those qui tam suits. In that suit, the
individual who filed the complaint may choose to continue to pursue litigation
in the absence of government intervention, but has not yet indicated an intent
to do so. The Department continues to investigate the other suit, but has not
made a decision regarding intervention.

      The Company has become aware that it and certain of its subsidiaries and
affiliated practices are the subject of additional qui tam lawsuits that remain
under seal, meaning that they were filed on a confidential basis with a United
States federal court and are not publicly available or disclosable. Furthermore,
the Company may from time to time in the future become aware of additional qui
tam lawsuits. To date, the United States has not intervened in any such suit
against the Company. Because the complaints are under seal, and because the
Department of Justice and the Company are in the process of investigating the
claims, the Company is unable to fully assess at this time the materiality of
these lawsuits. Because qui tam actions are filed under seal, there is a
possibility that the Company could be the subject of other qui tam actions of
which it is unaware.

      Assessing the Company's financial and operational exposure on litigation
matters requires the application of substantial subjective judgments and
estimates based upon facts and circumstances, resulting in estimates that could
change as more information becomes available.

NOTE 13 - RELATED PARTIES

      The Company receives a contractual service fee for providing services to
its practices. The Company also advances to its affiliated practices amounts
needed for the purchase of pharmaceuticals and medical supplies necessary in the
treatment of cancer. The advances are reflected on the Company's balance sheet
as due from/to affiliated practices and are reimbursed to the Company as part of
the service fee payable under its service agreements with its affiliated
practices.

      The Company leases a portion of its medical office space and equipment
from entities affiliated with certain of the stockholders of practices
affiliated with the Company. Payments under these leases were $3,300 in 2001,
$3,200 in 2000, and $3,300 in 1999 and total future commitments are $13,508 as
of December 31, 2001.

      The subordinated notes are payable to persons or entities that are also
stockholders or holders of rights to receive Common Stock at specified future
dates. Total interest expense to these parties was $5,606 in 2001, $7,271 in
2000 and $6,300 in 1999.

      A director and stockholder is of counsel and previously was a partner of a
law firm utilized by the Company. The Company paid $881, $1,176, and $816 for
legal services provided by the firm in 2001, 2000 and 1999, respectively.

      Three of the Company's directors as of December 31, 2001, and three
directors holding positions through June 15, 1999 are practicing physicians with
practices affiliated with the Company. In 2001, the practices in which these
directors participate generated a total net patient revenue of $590,460 of which
$119,395 was retained by the practices and $471,065 was included in the
Company's revenue. In 2000, the practices in which these directors


                                       76
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

participate generated a total net patient revenue of $545,368 of which $112,769
was retained by the practices and $432,599 was included in the Company's
revenue. In 1999, the practices in which these directors participate generated
total net patient revenues of $516,000, of which $110,300 was retained by the
practices and $405,700 was included in the Company's revenue.

      The Company and TOPA are parties to a service agreement pursuant to which
the Company provides TOPA with facilities, equipment, non-physician personnel,
and administrative, management and non-medical advisory services, as well as
services relating to the purchasing and administering of supplies. The service
fee under the TOPA service agreement is equal to 33.5% of the earnings
(professional and research revenues earned by the affiliated practice less
direct expenses) of that practice before interest and taxes ("Earnings") plus
direct expenses of the related practice locations, subject to adjustments set
forth therein. Direct expenses include rent, depreciation, amortization,
provision for uncollectible accounts, salaries and benefits of non-physician
employees, medical supply expense and pharmaceuticals. In 2001, 2000, and 1999,
TOPA paid the Company an aggregate of approximately $335,000, $319,000, and
$270,000, respectively, pursuant to the TOPA service agreement. A director of
the Company and an executive of the Company are employed by TOPA. TOPA
beneficially owns approximately 2.4% of the Company's outstanding Common Stock.
At December 31, 2001 and 2000, TOPA was indebted to the Company in the aggregate
amount of approximately $6,777, and $7,791, respectively. This indebtedness was
incurred when the Company advanced working capital to TOPA for various uses,
including the development of new markets and physician salaries and bonuses.
This indebtedness bears interest at a rate negotiated by the Company and TOPA
that approximates the prime lending rate (4.75% at December 31, 2001). Effective
January 1, 2001, the Company and TOPA entered into a Third Amended and Restated
Service Agreement. The significant changes in the service agreement effected by
the Third Amended and Restated Service Agreement are (i) a reduction in the
Company's service fee from 35% to 33.5% of TOPA's Earnings; (ii) the
implementation of certain fee adjustments based upon performance in excess of
predetermined thresholds and (iii) incentives to achieve returns on invested
capital in excess of certain thresholds.

      The Company leases facilities from affiliates of Baylor University Medical
Center ("BUMC"). Additionally, affiliates of BUMC provide the Company various
services, including telecommunications and maintenance services. A director of
the Company is Chairman of Baylor Health Care System, of which BUMC is a
component. In 2001, 2000 and 1999, payments by the Company to BUMC totaled an
aggregate of approximately $3,175, $3,300, and $2,400, respectively, for these
services.

      As part of the consideration for Minnesota Oncology Hematology, P.A.
("MOHPA") entering into its service agreement with the Company, the Company was
required to make quarterly payments of $464 to MOHPA through July 1, 2000.
During 2000 and 1999, the Company paid MOHPA $928 and $1,856 respectively,
pursuant to such quarterly payments. In addition, the Company was required to
issue a prescribed number of shares of the Company's Common Stock to MOHPA on
July 1 of each year through July 1, 2001. During 2001, 2000 and 1999, the
Company issued 134, 176 and 104 shares of Common Stock to MOHPA pursuant to such
yearly issuances. A shareholder of MOHPA is currently a director of the Company.

      The Company enters into medical director agreements with certain of its
affiliated physicians. Under a typical medical director agreement, the Company
retains an affiliated physician to advise the Company on a specific initiative
or matter, such as blood and marrow stem cell transplantation or clinical
research, and, in return, the Company pays to the affiliated physician a medical
director fee, typically $25 to $250 annually. During 2001, 2000, and 1999, the
Company had agreements with thirteen, eleven and fourteen medical directors
under which the Company paid $1,070, $660, and $1,050, respectively. In
addition, the Company has agreements with other affiliated physicians providing
for per diem payments for medical director services. Payments under these
arrangements were not significant.

      In December 1999, the Company purchased a home health company for
approximately $8,000 from a group of individuals, including certain physicians
to whom the Company provides services. The Company has realigned its business
operations in that market and intends to sell the home health business and has
recognized a loss of $6,463 in 2000 to reflect the net realizable value upon
sale.

                                       77
<PAGE>

                                US ONCOLOGY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (dollars and shares in thousands except per share data)

NOTE 14 - QUARTERLY FINANCIAL DATA

The following table presents unaudited quarterly information:

<TABLE>
<CAPTION>
                                             2001 Quarter Ended                                 2000 Quarter Ended
                                  ------------------------------------------       -------------------------------------------
                                  Dec 31      Sep 30      Jun 30      Mar 31       Dec 31       Sep 30      Jun 30      Mar 31
                                  ------      ------      ------      ------       ------       ------      ------      ------
<S>                              <C>         <C>         <C>         <C>          <C>          <C>         <C>         <C>
Net revenue ...................  $385,803    $372,742    $380,828    $365,651     $355,836     $337,310    $326,506    $304,502
Income (loss) from operations .    24,578      26,029      27,155      19,453     (183,168)      26,126      22,078      26,517
Other income ..................        --          --          --                                                        27,566
Net income(loss)/1/ ...........    12,811      12,904      12,718       7,883     (123,342)      11,608       9,976      29,115
Net income(loss)per
share-basic/1/ ................     $0.13       $0.13       $0.13       $0.08       $(l.25)       $0.12       $0.10       $0.29
Net income(loss)per
share-diluted/1/ ..............     $0.13       $0.13       $0.13       $0.08      $(l.25)        $0.12       $0.10       $0.29
</TABLE>

/1/   Earnings per share are computed independently for each of the quarters
      presented. Therefore, the sum of the quarterly earnings per share may not
      equal the total computed for the year.


                                       78
<PAGE>

PART III

Item 10. Directors and Executive Officers Of The Registrant

      The Proxy Statement issued in connection with the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Rule 14a-6(c), contains under the captions, "Election of Directors" and
"Executive Officers" information required by Item 10 of Form 10-K as to
directors and executive officers of the Company and is incorporated herein by
reference.

Item 11. Executive Compensation

      The Proxy Statement issued in connection with the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Rule 14a-6(c), contains under the caption, "Compensation of Executive Officers"
information required by Item 11 of Form 10-K as to directors and certain
executive officers of the Company and is incorporated herein by reference.

Item 12. Security Ownership Of Certain Beneficial Owners And Management

      The Proxy Statement issued in connection with the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Rule 14a-6(c), contains under the caption, "Beneficial Ownership of US Oncology,
Inc. Common Stock" information required by Item 12 of Form 10-K as to directors,
certain executive officers and certain beneficial owners of the Company and is
incorporated herein by reference.

Item 13. Certain Relationships And Related Transactions

      The Proxy Statement issued in connection with the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Rule 14a-6(c), contains under the caption, "Certain Relationships and Related
Transactions" information required by Item 13 of Form 10-K as to directors,
certain executive officers and certain beneficial owners of the Company and is
incorporated herein by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)   The following documents are files as a part of this report

      1.    Financial Statements: See Item 8 of this report

      2.    Financial Statement Schedules: See Item 8 of this report

      3.    Exhibit Index

      Exhibit
      -------
      No.                              Description
      ---                              -----------

      2.1       Agreement and Plan of Merger by American Oncology Resources,
                Inc., Diagnostic Acquisition, Inc. and Physician Reliance
                Network, Inc. (filed as Exhibit 2.1 to the Form 8-K filed with
                the Securities and Exchange Commission on December 15, 1998).

      3.1       Amended and Restated Certificate of Incorporation of the Company
                (filed as Exhibit 3.1 to, and incorporated by reference from,
                the Form 8-K/A filed June 17, 1999).

      3.2       Amended and Restated By-Laws of the Company, with Amendment
                effective March 22, 2001 (filed as Exhibit 3.2 to, and
                incorporated by reference from, the Form 10-K filed March 28,
                2001).

      4.1       Rights Agreement between the Company and American Stock Transfer
                & Trust Company (incorporated by reference from the Form 8-A
                filed June 2, 1997).

      4.2       Indenture dated February 1, 2002 among US Oncology, Inc., the
                Guarantors named therein and JP Morgan Chase Bank as Trustee
                (filed as Exhibit 3 to, and incorporated by reference from, the
                Form 8-K filed February 5, 2002).


                                       79
<PAGE>

      4.3       Registration Rights Agreement dated as of February 1, 2002 by
                and among US Oncology, Inc., the Guarantors named therein and
                UBS Warburg LLC, Deutsche Banc Alex. Brown Inc. and First Union
                Securities, Inc. as Initial Purchasers (filed as Exhibit 4 to,
                and incorporated by reference from, the Form 8-K filed February
                5, 2002).

      10.1      Credit Agreement dated as of February 1, 2002 among the Company
                and First Union National Bank, as administrative agent, UBS
                Warburg LLC, as syndication agent, GE Capital Healthcare
                Financial Services, as documentation agent and the various
                Lenders named therein.

      10.2      Amended and Restated Participation Agreement dated as of
                February 1, 2002 among AOR Synthetic Real Estate, Inc., the
                Company, First Union National Bank and the other parties
                identified therein.

      10.3      Amended and Restated Credit Agreement dated as of February 1,
                2002 among the Company, First Security Bank, First Union
                National Bank and the other parties identified therein.

      10.6*     Chief Executive Officer Stock Option Plan and Agreement (filed
                as an exhibit to the Registration Statement on Form S-1
                (Registration No. 33-90634) and incorporated herein by
                reference).

      10.7*     Everson Stock Option Plan and Agreement (filed as an exhibit to
                the Registration Statement on Form S-1 (Registration No.
                33-90634) and incorporated herein by reference).

      10.8      1993 Non-Employee Director Stock Option Plan, as amended (filed
                as Exhibit 4.4 to the Registration Statement on Form S-8 (Reg.
                No. 333-85855) and incorporated herein by reference).

      10.9      Key Employee Stock Option Plan, as amended (filed as Exhibit 4.4
                to the Registration Statement on Form S-8 (Registration No.
                333-85853) and incorporated herein by reference).

      10.10     1993 Affiliate Stock Option Plan, as amended (filed as Exhibit
                4.4 to the Registration Statement on Form S-8 (Registration No.
                333-85859) and incorporated herein by reference).

      10.11     Physician Reliance Network, Inc. 1994 Stock Option Plan for
                outside directors (filed as Exhibit 4.3 to the Registration
                Statement on Form S-8 (Registration No. 333-81069) and
                incorporated herein by reference).

      10.12     Physician Reliance Network, Inc. 1993 Stock Option Plan (filed
                as Exhibit 4.3 to the Registration Statement on the Form S-8
                (Registration No. 333-80977) and incorporated herein by
                reference).

      10.13*    Form of Executive Employment Agreement (Filed as Exhibit 10.13
                to the Form 10-K for the year ended December 31, 1999 and
                incorporated herein by reference.)

      10.14*    US Oncology, Inc. Chief Executive Officer Stock Option Plan and
                Agreement (filed as Exhibit 10.18 to the Form 10-K for the year
                ended December 31, 2000 and incorporated herein by reference).

      21.1      Subsidiaries of the Registrant.

      23.1      Consent of PricewaterhouseCoopers LLP.

(b)   Reports on Form 8-K.

The Company filed a Form 8-K disclosing other events (Item 5) and making
Regulation FD disclosure (Item 9) on October 1, 2001.

----------
*     Indicates agreement related to executive compensation


                                       80
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 28th day of
March, 2002.

                                     US ONCOLOGY, INC.


                                     By: /s/Bruce D.  Broussard
                                         --------------------------------------
                                         Bruce D.  Broussard
                                         Chief Financial Officer and Treasurer

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

<TABLE>
<CAPTION>
         Signatures                              Title                                 Date
<S>                                <C>                                            <C>
/s/ R. Dale Ross                   Chairman of the Board,                         March 28, 2002
----------------------------       Chief Executive Officer and Director
R. Dale Ross                       (Principal Executive Officer)

/s/ Bruce D. Broussard             Chief Financial Officer                        March 28, 2002
----------------------------       and Treasurer (Principal Financial
Bruce D. Broussard                 and Accounting Officer)

/s/ Russell L. Carson              Director                                       March 28, 2002
----------------------------
Russell L. Carson

/s/ J. Taylor Crandall             Director                                       March 28, 2002
----------------------------
J.  Taylor Crandall

/s/ James E. Dalton                Director                                       March 28, 2002
----------------------------
James E. Dalton

/s/ Lloyd K. Everson, M.D.         Director                                       March 28, 2002
----------------------------
Lloyd K. Everson, M.D.

/s/ Stephen E. Jones, M.D.         Director                                       March 28, 2002
----------------------------
Stephen E. Jones, M.D.

/s/ Richard B. Mayor               Director                                       March 28, 2002
----------------------------
Richard B. Mayor

/s/ Robert A. Ortenzio             Director                                       March 28, 2002
----------------------------
Robert A. Ortenzio

/s/ Boone Powell, Jr.              Director                                       March 28, 2002
----------------------------
Boone Powell, Jr.

/s/ Burton S. Schwartz, M.D.       Director                                       March 28, 2002
----------------------------
Burton S. Schwartz, M.D.
</TABLE>

                                       81