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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, 2002

                                       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 whether the Registrant is an accelerated filer (as
defined in Rule 12-b of the Act). 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. [X]

     The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant as of June 28, 2002 was $623,455,855 (based
upon the closing sales price of the Common Stock on The Nasdaq Stock Market on
June 28, 2002 of $8.33 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 90,181,640 shares of the Registrant's Common Stock outstanding
on March 13, 2003. In addition, as of March 13, 2003, the Registrant had agreed
to deliver approximately 3,262,807 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 2003 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.

Introduction

     This report comprises over 85 pages of information. The length and detail
required by applicable disclosure and reporting rules can leave a reader
somewhat overwhelmed. Therefore, this introduction is designed to provide you
with some perspective regarding information contained in this report.

     Our core business is providing services to physicians who treat cancer
patients. Our services are grouped under four main business lines - oncology
pharmaceutical services, cancer center services, cancer research services and
practice management services. We provide these services either individually or,
in our Physician Practice Management ("PPM") business, bundled together as a
comprehensive set of oncology practice management services. The strength of our
ongoing business model is our ability to assemble the optimal mix of these
offerings to design tailored solutions for customers.

     We provide these services through two business models: the physician
practice management model, under which we provide all of the above services
under a single contract with one fee based on overall performance; and the
service line model, under which practices contract with the company to purchase
only certain of the above services, each under a separate contract, with a
separate fee methodology for each service.

     This report is designed to give investors an understanding of our business
and performance, as well as to comply with relevant securities laws. The
following is a brief guide to some of the key sections of this report.

     .    The Business section, beginning on page 3, is intended to give
          investors an overview of our business and operations, as well as
          informing investors of recent strategic developments and initiatives.

     .    In Forward-Looking Statements and Risk Factors, beginning on page 12,
          we outline some of the key risks and uncertainties that could
          materially affect our business and performance or the value of our
          securities. Investors should keep these risks in mind as they review
          this report.

     .    On page 24, we present a table of Selected Financial Data, which
          presents the reader with a one-page snapshot of the performance of our
          business over the past five years. Investors should read this in
          conjunction with the Consolidated Financial Statements and the notes
          thereto.

     .    Management's Discussion and Analysis of Results of Operations and
          Financial Condition, beginning on page 26, is designed to provide the
          reader of the financial statements with a narrative on our financial
          results. In that section we point to material trends in our business
          and explain some of the underlying factors that drive our business
          results.

     .    The Consolidated Financial Statements, beginning on page 49, include
          an overview of our income and cash flow performance and financial
          position.

     .    The Notes to Consolidated Financial Statements follow the financial
          statements. Among other things, the notes contain our accounting
          policies, detailed information on items within the financial
          statements, certain commitments and contingencies, and the performance
          of each of our segments.

     The financial statements presented in this report were prepared in
accordance with generally accepted accounting principles. In this report, we
have discussed both recurring and nonrecurring events and trends that could
increase or decrease earnings. In Management's Discussion and Analysis of
Results of Operations and Financial Condition, we describe many such events and
items, including significant impairment, restructuring and other charges that we
have incurred over the past three years as a result of market developments and
activities related to the repositioning of our business. We have also discussed,
under the heading Forward Looking Statements and Risk Factors, possible events
or trends that typically occur in an unpredictable fashion and uncertainties
relating to our business. In addition to those trends and events discussed in
this report, it is important for investors to understand that our financial
statements rely on estimates, which are also subject to uncertainties, including
those discussed below under the heading in "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Critical Accounting Policies
and Estimates."

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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 services, cancer center services and cancer research services.
Our network of over 875 affiliated physicians provide care to patients in over
440 locations, including 77 outpatient cancer centers and 17 Positron Emission
Tomography (PET) installations, across 28 states. In 2002, we estimate that
those 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 high quality 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. Certain of the selected financial data
included in Item 6 of this report have been retroactively restated to combine
the accounts of US Oncology (formerly known as American Oncology Resources,
Inc.) 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
website address is http://www.usoncology.com, and copies of our filings with the
Securities and Exchange Commission are available on our website under the
heading "Investor Relations."

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 Services. We purchase and manage specialty oncology
pharmaceuticals for physicians. We are one of the largest buyers of oncology
pharmaceuticals within the United States, purchasing more than $800 million in
cancer drugs annually on behalf of our network physicians. In addition, we
manage 39 licensed pharmacies and over 400 admixture sites that are staffed
with 116 pharmacists and 219 pharmacy technicians.

     Cancer Center Services. 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 and 17 PET units.

     Cancer Research 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 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
approximately 500 participating physicians in more than 170 research locations,
signed up more than 3,200 patients during 2002.

     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.

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Physician Practice Management Model

     We provide services to most of the practices in our network through
long-term comprehensive service agreements under the "physician practice
management" or "PPM" model. Under that model, when we entered into each
agreement, we paid consideration (typically consisting of cash, subordinated
notes and an agreement to deliver shares of stock at specified future dates) to
physicians and their practices to purchase the nonmedical assets of their
practices and to enter into service agreements. 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.

     Under the PPM 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 practices to our network in new markets through the PPM
model. Rather, we intend to expand in new markets principally by contracting
with practices to provide our core services on a non-PPM basis, through the
service line structure described below. We will continue to recruit physicians
for our existing PPM practices, and intend to continue growing existing PPM
practices through such recruitment. In certain situations, where market-specific
details warrant and there is appropriate economic return for us, we may enter
into PPM relationships in new markets.

     Our PPM service agreements with practices generally have initial terms of
40 years and cannot be terminated unilaterally without cause. Each agreement
provides for reimbursement to us of all practice costs plus payment to us of a
service fee. 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 (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. At the same time,
under the net revenue model, in situations where we receive no fee, since
practice costs are paid before the practice is paid its fixed portion of
revenue, additional reductions in profitability would impact physician
compensation.

     Beginning in November 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 an environment
of decreasing margins. 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 and 2002,
we have successfully converted seventeen 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. 73.4% of our 2002
fourth quarter revenue was derived from practices that were on the earnings
model or service line model as of March 1, 2003. We intend to continue to
convert practices that were on 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. In some cases we may also disaffiliate entirely
from a group. We have disaffiliated from eight practices, comprising 45
physicians since November 2000.

Service Line Structure

     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," which allows
oncology practices to obtain our services without entering into comprehensive
service agreements that would call for our involvement in all business aspects
of their day-to-day operations. Under the service line structure, we do not pay
consideration to physicians in new markets to acquire the nonmedical assets of
their practices. We believe that the service line structure, when compared to
the PPM model, allows us to expand more rapidly into new markets without
incurring capital investments

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in intangible assets, with a higher return on assets and lower compliance and
reimbursement risks. During 2002, we refined the service line structure
significantly and believe it will appeal to large numbers of oncologists outside
our network, since new physicians may affiliate with us and utilize our core
services while maintaining complete ownership and control of their oncology
practices' assets. During 2002, we executed definitive agreements with four new
practices under the service line structure.

     Our existing affiliated practices will be given a choice of maintaining a
PPM relationship with us or transitioning to a service line relationship.
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. During 2002, three of our PPM practices,
comprising 23 physicians, converted to the service line model. In addition,
another practice, comprising 11 physicians, converted to the service line model
effective February 1, 2003.

The Service Lines

     To implement our service line strategy, we have reorganized management and
operation of our business under four distinct service lines. We began segment
reporting according to those service lines in the first quarter of 2002. For
management and reporting purposes, our existing PPM operations are divided into
the various service line offerings included in the PPM relationship. See Note 12
to Consolidated Financial Statements.

Oncology Pharmaceutical Services

     The oncology pharmaceutical services service line combines all of our core
competencies and service offerings related to oncology drugs into a single,
coordinated business division. The division provides 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. As a result of market feedback, we are offering a variety
of contract options under which practices may contract to purchase only selected
services under this service line, with an option to upgrade to a fully
integrated pharmacy solution. 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 services 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 as well.

Currently, we intend to offer various contractual arrangements to new practices
under the oncology pharmaceutical service line, which involve different levels
of service. These include agreements for different mixes of purchasing and
pharmacy management and consulting services, including a complete purchasing,
pharmacy management and full admixture offering. Each of these offerings
includes a fee structure that involves a payment for pharmaceuticals, as well as
a payment for the pharmacy services we offer. We are also authorized by
practices to receive fees from pharmaceutical companies in our

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capacity as a group purchasing organization. The agreements are typically
short-term agreements, terminable by either side without cause on short notice.

Cancer Center Services

         This division provides 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 therapeutic 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. We currently manage 77 comprehensive
outpatient cancer centers and 17 PET units located in urban, suburban and rural
settings, all under PPM arrangements. We currently do not operate any cancer
centers under the service line structure.

         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.

         The Cancer Center Services 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. Assisting with recruitment of 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, cancer center services 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. 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.

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Cancer Research Services

         This division provides 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 contracts with pharmaceutical
and biotechnology firms and focuses 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, 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 central
Institutional Review Board provides research oversight.

         We currently supervise 102 clinical trials with accruals of more than
3,200 patients during 2002. We have completed more than 200 trials in
conjunction with our network of approximately 500 participating physicians in
more than 170 research locations.

         The Cancer Research Services 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 contract with pharmaceutical companies and
others needing research services, generally on a per trial basis. We pay
physicians for each trial based upon economic considerations unique to each
trial.

Practice Management Services

         Under our physician practice management arrangements, we act as the
exclusive manager and administrator of all day-to-day nonmedical business
functions connected with affiliated practices.

         We provide management services that extend to all business aspects of
an oncology group's operations, as well as all of the services offered under the
other three service lines. We believe our management services free oncologists
to focus on providing high quality medical care.

         Strategic Services. The management agreement with each practice
provides for creation of a policy board composed of our representatives and the
affiliated physician group. The primary function of this board is to develop and
adopt a strategic plan for the group designed to improve the performance of the
practice, including an annual budget. The policy board outlines physician
recruiting goals, identifies services and equipment to be added, identifies
desirable payor relationships, identifies other oncology groups that are
possible affiliation candidates and seeks to facilitate communication with other
affiliated physician groups in our network.

         Financial Services. We seek to improve the operating and financial
performance of the physician group. For each group we develop an annual budget.
We also provide comprehensive financial analysis to the affiliated physician
group in connection with managed care contracting. We provide billing,
collection, reimbursement, tax and accounting services and implement our cash
management system.

         Administrative Services. We provide an array of administrative services
to improve the operations of the group. We manage the facilities used by the
physicians and, in consultation with the physicians, determine the number and
location of practice sites. We implement our integrated management information
system to support practice management, billing functions and patient record
keeping. In addition, we provide the regulatory expertise to assist the group in
complying with increasingly complex laws and regulations applicable to oncology
practices.

         Personnel Management. We employ and manage all nonmedical personnel of
the physician group, including the executive director, controller and
secretarial and other administrative personnel. We evaluate these employees,
make staffing decisions, provide and manage employee benefits and implement
personnel policies and procedures. We also provide administrative services to
the physician group's employees.

         We also provide other key support services, including:

         .   marketing

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

         Texas Oncology, P.A., an affiliated oncology practice with locations
throughout Texas under the earnings model, is our largest customer, accounting
for approximately 24% of our revenues in 2002. No other practice accounts for
more than 10% of our revenue. Medicare and Medicaid are our practices' largest
payors accounting for 43% in 2002. No other payor accounts for more than 10% of
net patient revenue.

Competition

         We operate in highly competitive industries. 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.

         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.

         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 and site
management organizations that may have access to more financial resources than
we do.

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         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 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. 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"), which impact our
affiliated practices' operations with respect to the transfer of data, including
between us and our affiliated practices. 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 and Pharmacy. 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. Comparable state laws prohibit the
practice of pharmacy by entities not licensed as pharmacies.

         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 other federal 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 other federal or 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 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

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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 under our PPM model, 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. However, because of the breadth of the Anti-Kickback
Amendments and the government's active enforcement thereof, there can be no
assurance that future interpretations of such laws will not require modification
of our existing relationships with practices.

         In situations where we operate a licensed pharmacy, we would be a
provider. Although we believe our offerings under that service line comply with
law, there is a risk that our status as provider could bring greater scrutiny to
those arrangements.

         Prohibitions of Certain Referrals. The Omnibus Budget Reconciliation
Act of 1993 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 providers, not to us under the PPM model. 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. 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. Furthermore, because of the size and scope of our network, there is a
risk that we could be subjected to greater scrutiny by government regulators
with regard to antitrust issues.

         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. Different states also impose differing standards for their Medicaid
programs, including utilizing an actual-cost-based system for reimbursement of
pharmaceuticals, instead of average wholesale price based methodologies.
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 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

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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 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, 2002, we directly employed 4,007 people. As of
December 31, 2002, our PPM affiliated practices employed 4,957 people (excluding
the network physicians). Under the terms of the service agreements with the
affiliated practices, we are responsible for the 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 or leased land valued at
approximately $39.0 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, 2002, we operated 79 integrated cancer centers and had
nine cancer centers under development. Of the 79, 50 were leased and 29 owned,
ranging in size from 4,700 square feet to 112,400 square feet. Nineteen of the
centers are leased under a synthetic leasing facility under which the assets are
included on our balance sheet, as a result of an amendment to that facility
effective December 31, 2002. Since December 31, 2002, we have sold two of the 19
cancer centers in the leasing facility in connection with disaffiliations.

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 prescribe pharmaceutical products, they face the risk
of product liability claims. Although we maintain insurance coverage, we do not
currently maintain malpractice coverage for ourselves, and successful
malpractice, regulatory or product liability claims asserted against us or one
of the practices could have a material adverse effect on us.

         We have become aware that we and certain of our subsidiaries and
affiliated practices are the subject of qui tam lawsuits (commonly referred to
as "whistle-blower" suits) that remain under seal, meaning they were filed on a
confidential basis with a U.S. federal court and are not publicly available or
disclosable. The United States has determined not to intervene in any of the qui
tam suits we are aware of and all but one of such suits has been dismissed, but
the individuals who filed the remaining claim of which we are aware may still
pursue the litigation, although none of those individuals has indicated an
intent to do so. Because qui tam actions are filed under seal, there is a

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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. 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 our prospects; (iii) any statements
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "intends," "estimates," "plans," "projects" or similar
expressions; and (iv) all statements concerning expected financial results,
business development activities and all other statements other than statements
of historical fact.

         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, factors that
could cause actual results to differ materially include, but are not limited to,
reimbursement rates for pharmaceutical products, the success of the service line
model, transition or disaffiliation of existing practices, our ability to
attract and retain additional physicians and practices under the service line
model, expansion into new markets, our ability to develop and complete cancer
centers and PET installations, our ability to maintain good relationships with
our affiliated practices, our ability to recover the cost of our investment in
cancer centers, government regulation and enforcement, reimbursement for
healthcare 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 our affiliated practices.

         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 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 from governmental payors 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.

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<PAGE>

         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. The U.S. Department of Health and Human Services
Centers for Medicare and Medicaid Services (CMS) has previously 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. Although
such a change has been postponed indefinitely, the General Accounting Office,
CMS and Congress continue to discuss reforming Medicare reimbursement for
pharmaceuticals. In addition, there has been significant press coverage related
to the way in which pharmaceuticals are reimbursed by governmental programs,
which would influence this discussion.

         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. Any
significant reduction in reimbursement for pharmaceuticals without a
corresponding increase in rates of reimbursement for other practice services
related to infusion of drugs would significantly harm us. It is possible that
changes in reimbursement that are ultimately adopted or implemented could have a
material adverse effect on our operations, financial condition and liquidity.

Continued efforts by commercial payors to reduce reimbursement levels or change
the manner in which pharmaceuticals are reimbursed could adversely affect us.

         Commercial payors continue to seek to negotiate levels of reimbursement
for cancer care services, with a particular focus on reimbursement for
pharmaceuticals. Successful reductions in reimbursement could harm us. In
addition, several payors are trying to implement "brown bagging" or similar
programs under which cancer patients or their oncologists would be required to
obtain pharmaceuticals from a third party. That third party, rather than the
oncologist, would then be reimbursed. We have been, and continue to be
successful in resisting such programs. As in the case of AWP reform, we continue
to promote the idea that any reduction in pharmaceutical reimbursement must be
accompanied by an adjustment in reimbursement for other practice costs. However,
in the event that we do not continue to be successful in resisting these
initiatives, our practices' and our results of operations could be adversely
affected. In addition, any such program to remove control of pharmaceuticals
from oncologists could pose additional risks to our affiliated physicians and
their patients.

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. Many
government payors, including Medicare and Medicaid, and other payors reimburse
oncologists for drugs at the drug's average wholesale price (or AWP) or at a
percentage off AWP. Various federal and state government agencies have been
investigating whether the reported AWP of many drugs, including several used by
oncologists, is an appropriate or accurate measure of the market price of the
drugs. There are also several whistleblower and other lawsuits pending against
various drug manufacturers that have been reported in the business press. These
government investigations and lawsuits involve allegations that manufacturers
reported artificially inflated AWP prices of various drugs to the private
companies responsible for reporting AWP. These lawsuits and investigations have
resulted and could continue to result in settlements which include corporate
integrity agreements with the government, in which pharmaceutical companies
agree to provide average selling prices of their drugs to the government.
Furthermore, possibly in response to such scrutiny as well as significant
adverse coverage in the press, 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.

We derive a substantial portion of our revenue and profitability from the
utilization of pharmaceuticals manufactured and sold by a limited number of
vendors.

         We derive a substantial portion of our revenue and profitability from
the utilization of pharmaceuticals manufactured and sold by a limited number of
manufacturers. During 2002, approximately 40% of net operating revenue was
derived from pharmaceuticals sold exclusively by five vendors. Our agreements
with these vendors are typically for one to two years and cancelable by either
party without cause on 30 days' prior notice. Further, several of the agreements
provide

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favorable pricing that is adjusted quarterly for required volume levels.
Any termination or adverse adjustment to these relationships could have a
material adverse effect on a significant portion of our business, financial
condition and results of operations.

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. 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.

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 earnings model require that the physicians devote significant time and
resources to learning about and assessing the value of our new business models.
In addition, physicians may be anxious about taking part in a new and untested
business model for us. During 2002, we have also experienced some strains in our
relationships with physicians as a result of adjustment to the earnings model,
under which physicians must become accustomed to greater accountability for
expenses, including those related to investments made under the revenue model.
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.

We rely heavily on a single distributor for our pharmaceutical products, and our
business would be harmed by disruptions in that distributor's business or in our
relationship with that distributor.

         Almost all of the pharmaceutical products provided to our affiliated
practices through us come from a single distributor, National Specialty Services
(NSS), a subsidiary of Cardinal Health. Although we believe that we obtain
benefits from this exclusive relationship and that other distributors would be
available to us if necessitated by a deterioration in the performance of NSS or
in our relationship with NSS, such a deterioration in their business or our
relationship with them could result in disruption in our business.

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Our service fee arrangements for our net revenue model practices subject us to
disproportionate economic risk.

         Under a net revenue model service agreement, the practice retains a
fixed portion of net revenue before any service fee (other than practice
operating costs) is paid to us. Under 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 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.

Governmental regulation and changes in such 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 from new drugs, then profit margins on
pharmaceutical products could decrease and clinical research spending on
pharmaceutical products may also decrease, which could limit 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 addition, many states have similar laws with respect to the
practice of pharmacy. We do not believe we practice pharmacy, except where
appropriately licensed. In many jurisdictions, however, the laws restricting the
corporate practice of medicine or pharmacy 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. Federal and state investigations and
enforcement actions continue to focus on the health care industry, scrutinizing
a wide range of items such as joint venture arrangements, referral and billing
practices, product discount arrangements, home health care services,
dissemination of confidential patient information, clinical drug research trials
and gifts for patients. 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.

         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

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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
proposed agreements under the cancer center services 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 at prices below those
generally offered to oncologists 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 and pricing with such suppliers could be
harmed. Our inability to purchase pharmaceuticals from any of our significant
suppliers at prices below those generally available to oncologists 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 decreased or 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. New cancer centers may incur significant operating
losses during their initial operations, which could materially and adversely
affect our operating results, cash flows and financial condition. In addition,
in some cases our cancer centers may not be profitable enough for us to recover
the cost of our investment in the cancer center. In certain situations, we may
be required to recognize losses in connection with closing or selling cancer
centers, either because of underperformance or other market developments.

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

                                       16

<PAGE>

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 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, and there is a nationwide shortage in many specialties,
including oncology nursing and technical radiation staff. 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. 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

                                       17

<PAGE>

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.

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

         The health care industry is characterized by delays that can be as much
as 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 service line, our working capital
is dependent on such collections. Although we currently experience more timely
collections, these potential delays make 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.

Our affiliated practice may be unsuccessful in obtaining favorable contracts
with third-party payors, which could result in lower operating margins.

         We advise on and facilitate negotiation of 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 services 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. There is a risk that other payors
could reduce rates of reimbursement to match any reduction by governmental
payors. 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 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.

                                       18

<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 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 have maintained malpractice insurance in the past, since we
are not a provider of medical services and as a result of rising costs, we no
longer maintain coverage for medical malpractice. There can be no assurance that
any claim asserted against us for professional liability will not be successful.
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. 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 some of our affiliated practices'
former 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 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

                                       19

<PAGE>

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.

The nature of our receivables will change with respect to the oncology
pharmaceutical services business 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 oncology pharmaceutical services business 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, and
certain agreements are easily terminable with minimal notice or 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 do not exist under our oncology pharmaceutical services business line.
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 services sector. Departure of a significant number of physicians or
practices from participation in our service line structure could harm us.

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 FDA, 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.

                                       20

<PAGE>

     Pharmacies and pharmacists must obtain state licenses to operate and
dispense drugs. Pharmacies must also obtain licenses in some states to operate
and provide goods and services to residents of those states. Our entities that
provide nursing for our patients and our nurses must obtain licenses in certain
states to conduct our business. If we are unable to maintain our licenses or if
states place burdensome restrictions or limitations on non-resident pharmacies
or nurses, this could limit or affect our ability to operate in some states
which could adversely impact our business and results of operations.

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:

     . 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

                                       21

<PAGE>

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 2002.

                                       22

<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.

<TABLE>
<CAPTION>
                  Year Ended December 31, 2001                     High           Low
                  -----------------------------------------     ---------      --------
                 <S>                                           <C>            <C>
                  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

<CAPTION>

                  Year Ended December 31, 2002                     High          Low
                  -----------------------------------------     ---------      --------
                 <S>                                           <C>            <C>
                  Fiscal Quarter Ended March 31, 2002           $   9.53       $  7.45

                  Fiscal Quarter Ended June 30, 2002            $  10.00       $  8.33

                  Fiscal Quarter Ended September 30, 2002       $   8.97       $  6.57

                  Fiscal Quarter Ended December 31, 2002        $   9.14       $  7.79
</TABLE>

         As of March 13, 2003, there were approximately 14,681 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 revolving credit facility currently prohibits the
payment of cash dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

                                       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,
                                                                      --------------------------------------------------------------
                                                                          2002         2001          2000         1999         1998
                                                                      -----------   ---------   ---------    ---------     ---------
                                                                                   (in thousands, except per share data)
<S>                                                                   <C>           <C>         <C>          <C>          <C>
  Statement of Operations Data:
  Revenue ..........................................................  $1,651,316   $1,515,895   $1,333,071   $1,099,262   $ 836,596
  Operating expenses:
       Pharmaceuticals and supplies ................................     866,378      780,072      651,214      521,087     357,766
       Field compensation and benefits .............................     340,302      322,473      277,962      215,402     172,298
       Other field costs ...........................................     192,145      179,479      161,510      134,635     107,671
       General and administrative ..................................      63,229       58,859       63,640       45,811      38,325
       Bad debt expense ............................................           -            -       10,198            -           -
       Impairment, restructuring and other charges, net ............     150,060        5,868      201,846       29,014           -
       Depreciation and amortization ...............................      71,859       71,929       75,148       65,072      48,463
                                                                       ---------    ---------    ---------    ---------    --------
                                                                       1,683,973    1,418,680    1,441,518    1,011,021     724,523
  Income (loss) from operations ....................................     (32,657)      97,215     (108,447)      88,241     112,073
  Interest expense .................................................     (23,706)     (22,511)     (26,809)     (22,288)    (15,908)
  Gain on investment in common stock
     (unrealized in 1999) ..........................................           -            -       27,566       14,431           -
                                                                       ---------    ----------   ---------    ---------    --------
  Income (loss) before income taxes and extraordinary loss .........     (56,363)      74,704     (107,690)      80,384      96,165
  Income tax benefit (provision) ...................................      18,886      (28,388)      35,047      (32,229)    (36,184)
                                                                       ---------    ----------   ---------    ---------    --------
  Net income (loss) before extraordinary loss ......................     (37,477)      46,316      (72,643)      48,155      59,981
  Extraordinary loss on early extinguishment of debt, net
  of income taxes of $5,181 ........................................      (8,452)           -            -            -           -
                                                                       ---------    ---------    ---------    ---------    --------
  Net income (loss) ................................................  $  (45,929)  $   46,316   $  (72,643)  $   48,155   $  59,981
                                                                       =========    =========    =========    =========    ========

  Net income (loss) before extraordinary loss per share - basic ....  $    (0.38)  $     0.46   $   (0.72)   $     0.48   $    0.61
  Extraordinary loss per share - basic .............................       (0.09)           -           -             -           -
                                                                       ---------    ---------     --------    ---------    --------
  Net income (loss) per share - basic ..............................  $    (0.47)  $     0.46   $    (0.72)  $     0.48   $    0.61
                                                                       =========    =========     ========    =========    ========
  Shares used in per share computation - basic .....................      97,658      100,063      100,589      100,183      97,647
                                                                       =========    =========     ========    =========    ========
  Net income (loss) before extraordinary loss per share -
    diluted ........................................................  $    (0.38)  $     0.46   $    (0.72)  $     0.47   $    0.60
  Extraordinary loss per share - diluted ...........................       (0.09)           -            -            -           -
                                                                       ---------    ---------    ---------    ---------    --------
  Net income (loss) per share - diluted ............................  $    (0.47   $     0.46   $    (0.72)  $     0.47   $    0.60
                                                                       =========    =========    =========    =========    ========
  Shares used in per share computations - diluted ..................      97,658      100,319      100,589      101,635      99,995
                                                                       =========    =========    =========    =========    ========
</TABLE>

                                       24

<PAGE>

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                    ----------------------------------------------------------------
                                                                        2002        2001          2000         1999          1998
                                                                    -----------  ---------     ---------    ---------      ---------
<S>                                                                 <C>          <C>          <C>           <C>          <C>
Balance Sheet Data:                                                                           (in thousands)
       Working capital ........................................     $  204,554   $  101,881    $  194,484   $  280,793   $  178,262
       Service agreements, net ................................        252,720      379,249       398,397      537,130      467,214
       Total assets ...........................................      1,184,941    1,097,740     1,197,467    1,298,477    1,033,528
       Long-term debt, excluding current maturities ...........        272,042      128,826       300,213      360,191      234,474
       Stockholders' equity ...................................        578,540      676,768       624,338      707,164      629,798

Non-GAAP Data:
       EBITDA .................................................     $  189,262   $  175,012    $  178,745   $  182,327   $  160,536
       Field EBITDA ...........................................        729,836      663,493       636,851      542,691      461,976
</TABLE>


                                       25

<PAGE>

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

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,"
earlier in this report.

General

     We provide comprehensive services to our network of affiliated practices,
made up of more than 875 affiliated physicians in over 440 sites, with the
mission of expanding access to and improving the quality of cancer care in local
communities. The services we offer include:

     .    Oncology Pharmaceutical Services. We purchase and manage specialty
          oncology pharmaceuticals for our affiliated practices. Annually, we
          are responsible for purchasing, delivering and managing more than $800
          million of pharmaceuticals through a network of more than 400
          admixture sites, 39 licensed pharmacies, 116 pharmacists and 219
          pharmacy technicians.

     .    Cancer Center Services. We develop and manage comprehensive,
          community-based cancer centers, which integrate all aspects of
          outpatient cancer care, from laboratory and radiology diagnostic
          capabilities to chemotherapy and radiation therapy. As of March 13,
          2003, we have developed and operate 77 integrated community-based
          cancer centers and manage over one million square feet of medical
          office space. We also have installed and manage 17 Positron Emission
          Tomography (PET).

     .    Cancer Research 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 comprehensive
          range of services relating to clinical trials. We currently supervise
          102 clinical trials, supported by our network of approximately 500
          participating physicians in more than 170 research locations. During
          2002, we enrolled over 3,200 new patients in research studies.

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

     We provide these services through two business models: the physician
practice management model, under which we provide all of the above services
under a single contract with one fee based on overall performance; and the
service line model, under which practices contract with the company to purchase
only certain of the above services, each under a separate contract, with a
separate fee methodology for each service.

     We operate with our affiliated practices under three economic models. In
our physician practice management ("PPM") business, we operate under two models:
the "earnings model," in which management fees are based on practice earnings
before income taxes; and the "net revenue model," in which the management fee
consists of a fixed fee, a percentage fee of the practice's net revenues (in
some states) and, if certain performance criteria are met, a performance fee. In
certain states, our fee is a fixed fee that is subject to annual adjustment.
Under the net revenue model, the practice is entitled to retain a fixed portion
of its net revenue before any service fee is paid, provided that all operating
expenses have been reimbursed. Under the service line structure, each service
has a separate fee and fee methodology.

     In our PPM business, 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 not entered into new net revenue model agreements since 2001 and
have been negotiating with practices under the net revenue model to convert to
the earnings model. Since the beginning of 2001 and through December 31, 2002,
seventeen practices accounting for 25.4% of our net operating revenue in 2002
have converted to the earnings model. 66.1% of net operating revenue in the
fourth quarter of 2002 is attributable to practices on the earnings model as of

                                       26

<PAGE>

December 31, 2002. Currently, 73.4% of the net operating revenue for the fourth
quarter of 2002 is attributable to practices that are either on the earnings
model or the service line model.

     In all but one net revenue model markets where we have not been successful
in transitioning the practice away from a net revenue model agreement, we have
recognized charges for impairments of the service agreement as a result of our
projection of future results under those agreements, given declining performance
trends. In addition, in some markets we have recognized charges for impairments
of cancer centers developed under the net revenue model, including some we have
sold or intend to sell, based on our projection of future cash flow from these
centers.

     In 2001, in connection with our introduction of our service line structure,
we organized the company in four divisions: oncology pharmaceutical services,
cancer center services, cancer research services, and practice management
services, and we manage and operate our business under these divisions. This
report includes segment financial information. In reporting segment information,
we divide results of our PPM operations into the various service line offerings
that comprise the PPM relationship. As we enter into new service line model
agreements, we will report revenue from those agreements in the appropriate
segment.

     We are continuing to operate under the PPM model, but are affording our PPM
practices the opportunity to terminate their existing service agreements,
repurchase certain of their operating assets, and enter into new service line
model agreements. During 2002, three of our PPM practices, comprising 23
physicians, terminated their PPM agreements and entered into service line model
agreements. When a practice makes this transition, we would expect our future
revenues and cash flows from that practice to be lower than under the PPM model.
In addition, we currently expect that the large majority of existing affiliated
practices will remain on the PPM model for the foreseeable future. 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 terminated service agreements with four oncology practices during each
of 2002 and 2001. For purposes of the following discussion and analysis, same
practice revenues exclude the results of these disaffiliated practices, as well
as the results of the service line model agreements entered into in 2002.

     In addition to converting three PPM practices to the service line model, we
had entered into service line model agreements with four practices, comprising
twenty-three physicians, in new markets through December 31, 2002. Since
December 31, 2002, we have converted one additional PPM practice, comprising 11
physicians, to the service line model and entered into service line model
agreements with two additional practices comprising ten physicians in new
markets. We have also converted one practice, comprising six physicians to the
earnings model and disaffiliated with nine other physicians from that practice.

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. These estimates form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. However, 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. Actual results may
differ from those estimates under different assumptions or conditions.

     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 only 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

                                       27

<PAGE>

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 net revenue model practices. The amount
retained by practices is also subject to the foregoing estimates, since it is
based upon our estimates of revenue and earnings of the practice.

     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.

     In the same fashion, when we determine that 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 that 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. Since the fourth
quarter of 2000, we have recorded charges of $251.3 million relating to the
impairment of service

                                       28

<PAGE>

agreements, either as a result of our economic analysis or termination of the
agreement. These charges have reduced net income (or increased net loss) in the
periods in which they were recorded. However, the reduction in value of service
agreements reflected on our balance sheet also has the effect of reducing
amortization expense relating to service agreements going forward.

     Our property and equipment are 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.

     The carrying values of our fixed assets are 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 fixed assets over the remaining useful life is
expected to be less than the recorded amount of the assets, the Company's
carrying value of the asset will be reduced to its estimated fair value using
expected cash flows on a discounted basis. 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. As a result of such
analysis, we recorded a charge of $27.6 million during the fourth quarter of
2002 to reflect our estimation that certain of our cancer center assets had
become impaired.

     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 affiliated practices under the PPM model. For this reason, and to
better inform investors regarding our business and the status of service line
implementation, we commenced 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 change in the amortization period 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 restatements.

     Effective December 31, 2002, we amended our synthetic leasing facility to
provide for a 100% guarantee of the total cost of the properties leased to us
under the lease. As a result, those assets are now reflected as assets on our
balance sheet and the total outstanding lease balance of $72.0 million is
reflected as indebtedness. Prior to such date, we had not reflected either the
assets or indebtedness on our balance sheet, since the synthetic leasing
facility was an operating lease under applicable accounting rules.

Discussion of Non-GAAP Information

     In this report, we use certain measurements of our performance that are not
calculated in accordance with Generally Accepted Accounting Principles ("GAAP").
These non-GAAP measures are derived from relevant items in our GAAP financials.
A reconciliation of the non-GAAP measure to our income statement is included in
this report.

     Management believes that the non-GAAP measures we use are useful to
investors, since they can provide investors with additional information that is
not directly available in a GAAP presentation. In all events, these non-GAAP
measures are not intended to be a substitute for GAAP measures, and investors
are advised to review such non-GAAP measures in conjunction with GAAP
information provided by us. The following is a discussion of these non-GAAP
measures.

     "Net operating revenue" is our revenue, plus amounts retained by our
affiliated physicians. We believe net operating revenue is useful to investors
as an indicator of the overall performance of our network, since it represents
the total revenue of all of our PPM practices, without taking into account what
portion of that is retained as physician compensation. In addition, by comparing
trends in net operating revenue to trends in our revenue, investors are able to
assess the impact of trends in physician compensation on our overall
performance.

                                       29

<PAGE>

     "Net Patient Revenue" is the net revenue of our affiliated practices under
the PPM model for services rendered to patients by those affiliated practices.
Net patient revenue will also include the net revenue relating to radiation of
practices that enter into our cancer center services agreement. Net patient
revenue is the largest component (96.0% in 2002) of net operating revenue. It is
a useful measure because it gives investors a sense of the overall operations of
our PPM network and other business lines in which our revenue is derived from
payments for medical services to patients and in which we are responsible for
billing and collecting such amounts.

     "EBITDA" is earnings before taxes, interest, depreciation and amortization,
impairment, restructuring and other charges and extraordinary loss. We believe
EBITDA is a commonly applied measurement of financial performance. We believe
EBITDA is useful to investors because it gives a measure of operational
performance without taking into account items that we do not believe relate
directly to operations - such as depreciation and amortization, which are
typically based on predetermined asset lives, and thus not indicative of
operational performance, or that are subject to variations that are not caused
by operational performance - such as tax rates or interest rates. EBITDA is a
key tool used by management in assessing our business performance both as a
whole and with respect to individual sites or product lines.

     "Field EBITDA" is EBITDA plus physician compensation and corporate general
and administrative expenses. Like net operating revenue, Field EBITDA provides
an indication of our overall network operational performance, without taking
into account the effect of physician compensation and corporate general and
administrative expense.

     We exclude unusual charges from EBITDA and Field EBITDA because we view
these charges as extraneous to our core operations on a going forward basis. The
unusual charges relate principally to our transitional activity and strategic
repositioning, and are discussed in more detail in this report under the caption
"Restructuring, Impairment and Other Charges."

Results of Operations

     We were affiliated (including under the service line structure) with the
following number of physicians by specialty as of December 31, 2002, 2001 and
2000:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                ---------------------------------
                                                                                   2002         2001        2000
                                                                                ----------  -----------  --------
        <S>                                                                     <C>             <C>        <C>
         Medical oncologists                                                        685          673         659
         Radiation oncologists                                                      120          125         122
         Diagnostic radiologists/other oncologists                                   79           70          88
                                                                                   ----         ----        ----

                                                                                    884          868         869
                                                                                   ====         ====        ====
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                                ---------------------------------
                                                                                   2002        2001        2000
                                                                                ----------  ----------   --------
        <S>                                                                     <C>             <C>        <C>
         Affiliated physicians, beginning of period                                 868          869         806

         Physician practice affiliations                                             23            8          30

         Recruited physicians                                                        73           64          72

         Physician practice separations                                             (23)         (22)          -

         Retiring/Other                                                             (57)         (51)        (39)
                                                                                   ----         ----        ----

         Affiliated physicians, end of period                                       884          868         869
                                                                                   ====         ====       =====
</TABLE>

     In 2002, all new practice affiliations were under the service line.

                                       30

<PAGE>

     The following table sets forth the number of cancer centers and PET units
managed by us as March 13, 2003 and December 31, 2002, 2001 and 2000:

                             March 13,                 December 31,
                           ------------      ----------------------------
                               2003           2002       2001       2000
                           ------------      ----------------------------

   Cancer Centers               77             79         77         72
   PET Units                    17             16         12          4

         The following table sets forth the key operating statistics as a
measure of the volume of services provided by the practices:

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                ------------------------------------------
                                                                   2002            2001            2000
                                                                ------------------------------------------
<S>                                                            <C>              <C>             <C>
      Medical oncology visits                                   2,405,377       2,409,014       2,091,080
      Radiation treatments                                        658,368         642,874         576,337
      PET scans                                                    12,777           6,396           1,767
      New patients enrolled in research studies                     3,202           3,639           3,436
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                              Year Ended December 31,
                                                                                    -----------------------------------------
                                                                                        2002            2001            2000
                                                                                    -----------------------------------------
<S>                                                                                 <C>             <C>             <C>
   Revenue .....................................................................       100.0%          100.0%          100.0%
   Operating expenses:
      Pharmaceuticals and supplies .............................................        52.5            51.5            48.8
      Field compensation and benefits ..........................................        20.6            21.3            20.9
      Other field costs ........................................................        11.6            11.8            12.1
      General and administrative ...............................................         3.8             3.9             4.8
      Bad debt expense .........................................................          --              --             0.8
      Impairment, restructuring and other charges, net .........................         9.1             0.4            15.1
      Depreciation and amortization ............................................         4.4             4.7             5.6
                                                                                    --------        --------        --------
   Income (loss) from operations ...............................................        (2.0)            6.4            (8.1)
   Interest expense ............................................................        (1.4)           (1.5)           (2.0)
   Other income ................................................................          --              --             2.1
                                                                                    --------        --------        --------
   Income (loss) before income taxes and extraordinary loss ....................        (3.4)            4.9            (8.0)
   Income tax benefit (provision) ..............................................         1.1            (1.9)            2.6
                                                                                    --------        --------        --------
   Net income (loss) before extraordinary loss .................................        (2.3)            3.0            (5.4)
   Extraordinary loss, net of income taxes .....................................        (0.5)             --              --
                                                                                    --------        --------        --------
   Net income (loss) ...........................................................        (2.8)%           3.0%           (5.4)%
                                                                                    ========        ========        ========
</TABLE>

2002 Compared to 2001

Net Operating Revenue. Net operating revenue includes two components - net
patient revenue and our other revenue:

..    Net patient revenue. We report net patient revenue for those business lines
     under which our revenue is derived from payments for medical services to
     patients that we are responsible for billing those patients. Currently, net
     patient revenue consists of patient revenue of affiliated practices under
     the PPM model. Net patient revenue also will include revenues of practices
     that enter into agreements under the Cancer Center Services service line.

                                       31

<PAGE>

..    Other revenue. Other revenue is revenue derived from sources other than
     services to patients by affiliated practices. Other revenue includes
     revenue from pharmaceutical research, informational services and activities
     as a group purchasing organization. Other revenue also includes revenues
     from pharmaceutical services rendered by us under our Oncology
     Pharmaceutical Services service line agreements, interest income, and gains
     and losses from asset sales.

     The following table shows the components of our net operating revenue for
the years ended December 31, 2002 and 2001 (in thousands):

                                                Year Ended December 31,
                                        -------------------------------------
                                              2002                  2001
                                        -----------------    ----------------
          Net patient revenue           $     2,042,885      $      1,889,115
          Other revenue                          85,776                56,402
                                        ---------------      ----------------
          Net operating revenue         $     2,128,661      $      1,945,517
                                        ===============      ================

     Net patient revenue 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 operating revenue is reduced by amounts retained
by the practices under our service agreements to arrive at the amount we report
as revenue in our financial statements.

     Net operating revenue increased from $1,945.5 million in 2001 to $2,128.7
million in 2002, an increase of $183.1 million, or 9.4%. Same practice net
operating revenue (which excludes the results of practices with which we
disaffiliated since January 1, 2001 and our service line practices) increased
from $1,849.9 million in 2001 to $2,074.8 million in 2002, an increase of $225.0
million, or 12.2%. Revenue growth was primarily attributable to increased
utilization of more expensive chemotherapy agents and additional supportive care
drugs, rather than increased patient volume. During 2002, medical oncology
visits decreased 0.2% over the prior year. In the Cancer Center Services product
line, revenues declined. In January 2002, Medicare implemented reductions in
reimbursement for radiation therapy that impacted Medicare radiation
reimbursement by approximately 9% and certain commercial payors made similar
reductions, which reductions were not fully offset by volume increases. Also, we
disaffiliated from a radiation oncology facility during the third quarter and
sold technical assets with respect to certain technical radiology revenues
during the second quarter. Revenues related to PET services and diagnostic CT
imaging increased.

     PET scans increased from 6,396 in 2001 to 12,777 in 2002, an increase of
6,381 or 99.8%. The increase in the number of PET scans is attributable to our
opening four PET units since January 1, 2002, as well as growth of 65.2% in the
number of treatments on the twelve PET units that were operational during 2001.
We currently have nine cancer centers and six PET installations in various
stages of development. We expect to open seven cancer centers and add nine PET
sites of service during 2003.

     The following table shows our net operating revenue by segment for the year
ended December 31, 2002 (in thousands). Since this is the first year in which we
have reportable segments, and for which sufficient information is now available
to permit such reporting, no prior year comparable information is available:

                                                            Year Ended
                                                        December 31, 2002
                                                        -----------------

           Oncology pharmaceutical services                $   911,202
           Other practice management services                  850,308
                                                           -----------
           Medical oncology                                  1,761,510
           Cancer center services                              304,516
           Other                                                62,635
                                                           -----------
                                                           $ 2,128,661
                                                           ===========

     Currently 96.4% of our net operating revenue is derived under the PPM
model.

                                       32

<PAGE>


     During 2002, five net revenue model practices accounting for 7.0% of our
net operating revenue for 2002 converted to the earnings model. Since the
beginning of 2001 and through December 31, 2002, seventeen practices accounting
for 25.4% of net operating revenue in 2002 have converted from the net revenue
model to the earnings model. As of December 31, 2002, twenty-five service
agreements were on the earnings model and twelve service agreements were on the
net revenue model. In addition during 2002, we transitioned three PPM practices
from the earnings model to the service line structure and commenced operations
at four new practices under the service line structure. Also, during 2002, we
disaffiliated with four practices consisting of a total of twenty-three
physicians, which had been operating under the net revenue model. These
practices represented 1.9% of our net operating revenue in 2002. In addition,
one practice consisting of eleven physicians converted to the service line
structure as of February 1, 2003.

     Revenue. Our revenue is net operating revenue, less the amount of net
operating revenue retained by our affiliated practices under PPM service
agreements. The following presents the amounts included in the determination of
our revenue (in thousands):

                                                   Year Ended December 31,
                                                -----------------------------

                                                     2002             2001

               Net operating revenue            $  2,128,661     $  1,945,517
               Amounts retained by practices        (477,345)        (429,622)
                                                ------------     ------------
               Revenue                          $  1,651,316     $  1,515,895
                                                ============     ============

     Amounts retained by practices increased from $429.6 million in 2001 to
$477.3 million in 2002, an increase of $47.7 million, or 11.1%. Such increase in
amounts retained by practices is directly attributable to the growth in net
patient revenue combined with the increase in profitability of affiliated
practices. Amounts retained by practices as a percentage of net operating
revenue increased from 22.1% to 22.4% in 2001 and 2002, respectively, as a
result of increased profitability and improved operating margins before
physician compensation and general and administrative expenses.

     Revenue increased from $1,515.9 million in 2001 to $1,651.3 million in
2002, an increase of $135.4 million, or 8.9%. Revenue growth was caused by
increases in revenues attributable to pharmaceuticals.

     The following table shows our revenue by segment for the year ended
December 31, 2002 (in thousands). Since this is the first year in which we have
reportable segments, and for which sufficient information is now available to
permit such reporting, no prior year information is provided (see Note 12 to
Consolidated Financial Statements).

                                                          Year Ended
                                                      December 31, 2002
                                                      -----------------

               Oncology pharmaceutical services          $  910,047
               Other practice management services           475,005
                                                         ----------
               Medical oncology                           1,385,052
               Cancer center services                       208,234
               Other                                         58,030
                                                         ----------
                                                         $1,651,316

                                       33

<PAGE>

     Medicare and Medicaid are the practices' largest payors. During 2002,
approximately 43% of the practices' net patient revenue was derived from
Medicare and Medicaid payments and 40% was so derived in the previous year. This
percentage varies among practices. Medicare and Medicaid generally reimburse at
lower rates than commercial payors, so this percentage increase adversely
affects our margins. No other single payor accounted for more than 10% of our
revenues in 2002 and 2001.

     Pharmaceuticals and Supplies. Pharmaceuticals and supplies expense, which
includes drugs, medications and other supplies used by the practices, increased
from $780.1 million in 2001 to $866.4 million in 2002, an increase of $86.3
million, or 11.1%. As a percentage of revenue, pharmaceuticals and supplies
increased from 51.5% in 2001 to 52.5% in 2002. The increase was attributable to
an increase in the percentage of our revenue attributable to pharmaceuticals as
a result of increased use of supportive care drugs and utilization of more
expensive chemotherapy agents and to a lesser extent the conversion of three
affiliated practices to, and the addition of four practices in new markets
under, the service line structure. Such increases were partially offset by more
favorable drug pricing with respect to some drugs.

     We expect that third-party payors will continue to negotiate or mandate the
reimbursement rates for pharmaceuticals and supplies, with the goal of lowering
reimbursement rates, and that such lower reimbursement rates together with
shifts in revenue mix may continue to adversely impact our margins with respect
to such items. In both regulatory and litigation activity, federal and state
governments are focusing on decreasing the amount governmental programs pay for
drugs. Current governmental focus on average wholesale price (AWP) as a basis
for reimbursement could also lead to a wide-ranging reduction in the
reimbursement for pharmaceuticals by both governmental and commercial payors.
Commercial payors also continue to try to implement both voluntary and mandatory
programs in which the practice must obtain drugs they administer to patients
from a third party and that third party, rather than the practice, receives
payment for the drugs directly from the payor, and to otherwise reduce drug
expenditures. We continue to believe that single-source drugs, possibly
including oral drugs, will continue to be introduced at a rapid pace, thus
further negatively 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 and the effect of reduced levels of reimbursement. Likewise, the
implementation of the service line structure should have a similar effect, since
our revenues and earnings are not directly dependent on pharmaceutical margins
of practices under that model. In addition, we have numerous efforts under way
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 seek to expand 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 of our
business), we believe that our overall margins will continue to be adversely
impacted. In addition, the pharmacy service line is a lower-margin business than
our PPM model. Although we believe it reduces risk in certain respects, since
our compensation is not directly based on physician reimbursement and capital
requirements are lower, to the extent we add additional service line practices
under the pharmacy service line, we would expect our overall margins to be
adversely impacted.

     Field Compensation and Benefits. Field compensation and benefits, which
includes salaries and wages of our field-level employees and the practices'
employees (other than physicians), increased from $322.5 million in 2001 to
$340.3 million in 2002, an increase of $17.8 million or 5.5%. As a percentage of
revenue, field compensation and benefits decreased from 21.3% in 2001 to 20.6%
in 2002. The increase in costs is attributed to increases in employee
compensation rates to address shortages of certain key personnel such as
oncology nurses and radiation and radiology physicists, dosimetrists and
technicians. We continue to experience a severe shortage of qualified radiation
personnel, with a vacancy rate up to 20%. This scarcity of full-time employees
requires us to hire more expensive temporary employees and to incur significant
costs in recruitment efforts. The decrease as a percentage of revenue is
attributable to pharmaceutical revenues increasing at a more rapid rate than
compensation and benefits.

     Other Field Costs. Other field costs, which consist of rent, utilities,
repairs and maintenance, insurance and other direct field costs, increased from
$179.5 million in 2001 to $192.2 million in 2002, an increase of $12.7 million
or 7.1%. As a percentage of revenue, other field costs decreased from 11.8% in
2001 to 11.6% in 2002. The decrease as a percentage of revenue in 2002 is
attributable to pharmaceuticals revenues increasing at a more rapid rate than
other field costs.

     General and Administrative. General and administrative expenses increased
from $58.9 million in 2001 to $63.2 million in 2002, an increase of $4.4
million, or 7.4%. In 2002, several new personnel positions have been created to
help manage and support our introduction of the service line structure combined
with the implementation of our program to provide industry advisory services to
pharmaceutical companies and other vendors. We anticipate incurring additional
general and administrative costs during early 2003, as we add additional
resources in our sales and marketing areas in

                                       34

<PAGE>

connection with the foregoing business lines. As a percentage of revenue,
general and administrative costs decreased from 3.9% in 2001 to 3.8% in 2002.

     Overall, we experienced steady adjusted operating margins from 2001 to
2002, with earnings before taxes, interest, depreciation and amortization,
impairment, restructuring and other charges and extraordinary loss (EBITDA), as
a percentage of revenue, remaining at 11.5% for both 2001 and 2002.

     The following is the EBITDA of our operations by operating segment for the
year ended December 31, 2002 (in thousands). Since this is the first year in
which we have reportable segments, and for which sufficient information is now
available to permit such reporting, no prior year information is provided (see
Note 12 to Consolidated Financial Statements).

                                                       Year Ended
                                                   December 31, 2002
                                                   -----------------
       Oncology pharmaceutical services              $     87,138
       Other practice management services                  94,044
                                                     ------------
       Medical oncology                                   181,182
       Cancer center services                              63,866
       Other                                                7,443
                                                     ------------
                                                          252,491
       General and administrative expenses                (63,229)
                                                     ------------
                                                     $    189,262
                                                     ============

     The following is a reconciliation of EBITDA to consolidated loss from
operations (in thousands):

                                                       Year Ended
                                                   December 31, 2002
                                                   -----------------

       EBITDA                                        $    189,262
       Depreciation and amortization                      (71,859)
       Impairment, restructuring and other
           charges, net                                  (150,060)
                                                     ------------
       Loss from operations                          $    (32,657)
                                                     ============

     Impairment, Restructuring and Other Charges. During 2002, we incurred
impairment and restructuring costs related to transitional activity, including
the following:

     .    termination of service agreements related to the conversion of PPM
          practices to the service line model and in connection with practice
          disaffiliations,

     .    gains and losses related to sales of assets back to practices
          converting to the service line model or in connection with practice
          disaffiliations,

     .    impairment of intangible assets related to net revenue model service
          agreements,

     .    impairment of cancer center fixed assets,

     .    centralization of accounting and financial processes, and

     .    write-off of an affiliate receivable.

     During 2002, we disaffiliated with four practices, terminated a service
agreement in one market with respect to certain radiology sites, and converted
three practices to the service line. Each of these transactions involved a
termination of service agreement and a repurchase of assets by the practice. In
each case, any consideration still owing to the physicians for their initial
affiliation was either accelerated or forfeited, and in some of the transactions
we were paid additional fees for the transaction.

     During 2002, we also recorded charges related to the impairment of certain
net revenue model service agreements. From time to time, we evaluate our
intangible assets for impairment, which involves an analysis comparing the
aggregate expected future cash flows under the agreement to its carrying value
as an intangible asset on our balance sheet. In

                                       35

<PAGE>

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.

         During 2002, we recognized impairment, restructuring and other charges
of $150.1 million, net, and during 2001, we recognized impairment, restructuring
and other charges of $5.9 million, net, as follows (in thousands):

                                                 Year Ended December 31,
                                                 ------------------------
                                                     2002         2001
                                                 -----------   ----------
               Impairment charges                $ 135,147       ($3,376)
               Restructuring charges                 3,825         5,868
               Other charges                        11,088         3,376
                                                 ---------       -------

                           Total                 $ 150,060       $ 5,868
                                                 =========       =======

     The following is a detailed description of the charges during 2002 and 2001
(in thousands):

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                              ---------------------------------
                                                                    2002              2001
                                                              ---------------   ---------------
<S>                                                           <C>               <C>
Impairment charges
    Write-off of service agreements                           $   113,197          $      --
    Impairment of cancer center fixed assets                       27,603                 --
    Gain on sale of practice assets                                (5,653)            (3,376)

Restructuring charges
    Personnel reduction costs                                       2,381               3,113
    Consulting costs for implementing service line                  1,444                 300
    Closure of facilities                                              --               2,455

Other charges
    Write-off of an affiliate receivable                           11,088                  --
    Practice accounts receivable and fixed asset
      write-off                                                        --               1,925
    Other                                                              --               1,451
                                                              -----------          ----------
                                                              $   150,060          $    5,868
                                                              ===========          ==========
</TABLE>

Impairment Charges

     Generally Accepted Accounting Principles require 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

                                       36

<PAGE>

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 addition, we have from time to time recognized charges for impairment of
service agreements we have terminated, either in connection with a conversion to
the service line model or otherwise, or in markets where we have reduced the
scope of services or disaffiliated with physicians.

     During 2002, we recognized (a) a non-cash pretax charge of $5.2 million in
the fourth quarter related to impairment of a service agreement under which we
had significantly reduced the scope of our services during the year, based upon
our analysis of future cash flows under likely future scenarios for that
agreement; (b) a non-cash, pretax charge of $68.3 million during the third
quarter comprising (i) a $13.0 million charge related to a PPM service agreement
that was terminated in connection with conversion to the service line model,
(ii) a $51.0 million charge related to three net revenue model service
agreements that became impaired during the third quarter based upon our analysis
of projected cash flows under those agreements, taking into account developments
in those markets during the third quarter and (iii) a $4.3 million charge
related to a group of physicians under a net revenue model service agreement
with which we disaffiliated during the third quarter; and (c) a non-cash, pretax
charge of $39.7 million during the second quarter comprising (i) a $33.8 million
charge related to a net revenue model service agreement that became impaired
during the second quarter based upon our analysis of projected cash flows under
that agreement, taking into account developments in that market during the
second quarter and (ii) a $5.9 million charge related to two PPM service
agreements that were terminated in connection with conversions to the service
line model.

     During the fourth quarter of 2002, we recognized a charge of $27.6 million
related to impairment of fixed assets. This charge was based on our estimate of
future cash flows from our cancer center assets, taking into account
developments during the fourth quarter. In assessing likely future performance,
we make estimates of the likelihood and impact of possible operational
improvements, as well as looking at existing performance. If we have made a
determination to dispose of a center, our valuation is based upon the value of
that disposition. In making estimates regarding possible improvements in
performance, we take into consideration the economic arrangement with the
practice, as well as certain qualitative considerations regarding the continued
growth prospects of the practice, internal practice management, and our
relationship with the practice.

     As part of the introduction of the service line strategy in late 2001, this
year we began managing our business through our service lines--Oncology
Pharmaceutical Services, Cancer Center Services, Cancer Research Services, and
Physician Practice Management. Prior to 2002, we managed our business on a
practice-by-practice basis, viewing cancer centers as an integrated part of a
long-term PPM relationship. Through our service line initiative, we developed
separate management and systems for our service lines, including our cancer
center operations. As a result, we commenced segment reporting at the beginning
of 2002, and during 2002 assembled management, systems and personnel, both
regionally and at the corporate level, to manage that product line
independently. During the third and fourth quarter of 2002, we began to monitor
the financial performance of each cancer center individually.

     Our improved product line financial reporting, combined with the detailed
financial monitoring of each cancer center, provided us with more detailed
information and effective analysis in estimating future cash flows for each
cancer center. This analysis and information was used in our assessment of the
cancer center fixed assets described above.

     All of the impaired assets were developed for practices managed under the
net revenue model at the outset of their development. The revenue model did not
properly align incentives or encourage cost control and caused several centers
constructed under that model to have higher cost structures than our other
centers. During 2002, as groups that had converted

                                       37

<PAGE>

to the earnings model continued to analyze their cost structures in more detail,
and as management provided financial analyses of individual centers, some
practices voiced concern regarding financial performance of these centers.

     During the fourth quarter of 2002, we determined to close certain centers
and came to an agreement with some of those practices, as to how costs of
certain underperforming centers are borne. We will, from time to time, take
actions or make adjustments to our agreements with practices that result in what
we believe to be short-term adverse impact to us, in order to enhance long-term
value.

     The $27.6 million fixed asset charge during the fourth quarter of 2002 was
based upon our determination as a result of transitional activity during that
quarter, that assets relating to 16 of our 79 cancer centers had become
partially impaired. A summary of the activity involved is as follows:

     .    $8.1 million relates to eight cancer centers that became impaired
          during the fourth quarter based upon our decision to close or dispose
          of such centers, comprising (i) two cancer centers we sold, one we
          leased to a departing physician, one we closed, and two we agreed to
          close and replace for a practice that will in part convert to the
          earnings model and in part disaffiliate in the first quarter of 2003;
          (ii) one cancer center we determined to sell in connection with the
          anticipated departure of radiation oncologists from a group we expect
          to convert to the service line in the first half of 2003; and (iii)
          one cancer center we closed as part of a consolidation of services
          within one market.

     .    $14.1 million relates to five cancer centers used by groups that had
          converted to the earnings model. The centers became impaired as a
          result of our ongoing discussions with physician practices during the
          latter part of 2002 regarding underperforming centers. In some of
          these discussions we have agreed to assume greater liability for
          underperforming assets or for cancer center closures. Three of these
          centers were opened during 2001, and we generally cannot fully assess
          the long-term value of a center until after a "ramp-up" period of 12
          to 18 months.

     .    $5.4 million relates to three cancer centers that became impaired
          during the fourth quarter, comprising (i) one center in which we
          determined that our relationship with the practice, as well as the
          announced departure of several physicians from that practice, meant
          improvement in substandard performance was unlikely and (ii) two
          centers in which management had determined that its remedial actions
          taken since opening had been ineffective and additional remedial
          actions were unlikely to improve performance.

     To implement the closures and sales of cancer centers described above, as
well as future similar activity, we amended our synthetic lease facility to
afford us the flexibility to sell and transfer individual assets within the
leasing facility, which that facility did not previously permit. The amendment
became effective December 31, 2002, and resulted in an increase in the amount we
guaranteed under the leasing facilty, which caused a change in our accounting
for the leasing facility from an operating lease to long-term debt appearing on
our balance sheet. This change is discussed in more detail under the heading
"Liquidity and Capital Resources." Since the impairment related to events during
the fourth quarter of 2002, we had not previously recorded a charge for
impairment of the lease assets or a liability for any residual value guarantee
as such amounts were not probable previously.

     The $5.6 million net gain on sale of practice assets during 2002 consisted
of a $3.6 million net gain on sale of practice assets during the third quarter
comprising (a) net proceeds of $4.9 million paid by converting and
disaffiliating physicians; (b) a $0.3 million net recovery of working capital
assets, partially offset by a $1.1 million net charge arising from our
accelerating consideration that would have been due to physicians in the future
in connection with those transactions; and (c) a $2.0 million net gain on sale
of practice assets during the second quarter. During that quarter, we terminated
a service agreement as it related to certain radiology sites and sold the
related assets, including the right to future revenues attributable to radiology
technical fee revenue at those sites, in exchange for delivery to us of 1.1
million shares of our common stock. In connection with that sale, we also
recognized a write-off of a receivable of $0.6 million due from the physicians
and made a cash payment to the buyer of $0.6 million to reflect purchase price
adjustments during the third quarter. The transaction resulted in a $3.9 million
gain based on the market price of our Common Stock as of the date of the
termination. This gain was partially offset by a $1.9 million net impairment of
working capital assets relating to service line conversions, disaffiliations and
potential disaffiliations.

     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. Included in this net gain is approximately $9.0 million arising from
final settlements with several practices with which we terminated our
relationships during 2000 where the ultimate settlements

                                       38

<PAGE>

were more beneficial to us than we estimated 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 its strategic and operational initiatives. This analysis focused on our
non-core assets and activities we had determined were not consistent with our
strategic direction. As a result of this analysis, during the fourth quarter of
2000, we recorded restructuring charges of $16.1 million comprising (i) $6.5
million related to abandonment of information systems initiatives, including
clinical information systems and e-commerce initiatives, (ii) $6.5 million
impairment of a home health business, (iii) $0.4 million related to contractual
severance of an executive position and (iv) $2.6 million related to abandonment
of leased and owned facilities for remaining lease obligations and the
difference in the net book value of the owned real estate and its expected fair
value. Details of the restructuring charge activity relating to that charge in
2002 are as follows:

<TABLE>
<CAPTION>
                                                           Accrual at                                  Accrual at
                                                       December 31, 2001         Payments          December 31, 2002
                                                       -----------------         --------          -----------------
     <S>                                               <C>                   <C>                   <C>
     Severance of employment agreements .............  $          215        $          (18)       $          197
     Site closures ..................................           1,081                  (293)                  788
                                                       --------------        --------------        --------------
              Total .................................  $        1,296        $         (311)       $          985
                                                       ==============        ==============        ==============
</TABLE>

     During the first quarter of 2001, we announced plans to further reduce
overhead costs and recognized additional pre-tax restructuring charges of $5.9
million, consisting of (i) a $3.1 million charge relating to the elimination of
approximately 50 personnel positions, (ii) a $2.5 million charge for remaining
lease obligations and related improvements at sites we decided to close and
(iii) a $0.3 million charge relating to abandoned software applications. Details
of the restructuring charge activity relating to that charge in 2002 are as
follows:

<TABLE>
<CAPTION>
                                                           Accrual at                                  Accrual at
                                                       December 31, 2001         Payments          December 31, 2002
                                                       -----------------         --------          -----------------
     <S>                                               <C>                   <C>                   <C>
     Costs related to personnel reductions ..........  $          213        $         (213)       $           --
     Closure of facilities ..........................           1,132                  (271)                  861
                                                       --------------        --------------        --------------
              Total .................................  $        1,345        $         (484)       $          861
                                                       ==============        ==============        ==============
</TABLE>

     In connection with our focus on internal operations and cost structure,
management commenced an initiative to further centralize certain accounting and
financial reporting functions at our corporate headquarters in Houston, Texas,
resulting in charges for personnel reduction costs of $2.4 million in 2002, all
of which was paid in 2002.

     During 2002, we also recognized restructuring charges of $1.4 million in
consulting fees related to its introduction of the service line model.

Other Charges

     During the third quarter of 2002, we recognized an $11.1 million write-off
of an $11.1 million receivable due to us from one of our affiliated practices.
In the course of our PPM activities, we advance amounts to physician groups and
retain fees based upon our estimates of practice performance. Subsequent events
and related adjustments may result in the creation of a receivable with respect
to certain amounts advanced. During the third quarter, we made the determination
that such amounts owed by physician practices to us had become uncollectible due
to, among other things the age of the receivable and circumstances relating to
practice operations.

     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)
$0.5 million of consulting costs incurred in connection

                                       39

<PAGE>

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."

     Interest. Net interest expense increased from $22.5 million in 2001 to
$23.7 in 2002, an increase of $1.2 million or 5.3%. As a percentage of revenue,
net interest expense decreased from 1.5% in 2001 to 1.4% in 2002. On February 1,
2002, we refinanced our indebtedness by issuing $175 million in 9.625% Senior
Subordinated Notes due 2012, repaying in full our existing Senior Secured Notes
and terminating our existing credit facility. Our previously existing $100
million senior secured notes bore interest at a fixed rate of 8.42% and would
have required a $20 million repayment of principal in each of the years 2002
through 2006. Higher levels of debt during 2002, as compared to the same period
in 2001, combined with the increased rate of interest contributed to the
increase in interest expense.

     Income Taxes. For 2002, we recognized a tax benefit of $24.1 million, after
extraordinary loss, resulting in an effective tax rate of 34.4%, compared to
38.0% for the same prior year period. The tax benefit is a result of the
impairment and restructuring charges discussed above. The effective tax rate in
2002 reflects management's estimate of the limited extent to which we will be
able to deduct the impairment, restructuring and other charges at the state
level.

     Extraordinary Loss On Early Extinguishment of Debt. During the first
quarter of 2002, we recorded an extraordinary loss of $13.6 million, before
income taxes of $5.2 million, in connection with the early extinguishment of our
$100 million Senior Secured Notes due 2006 and our existing credit facility. The
loss consisted of payment of a prepayment penalty of $11.7 million on the Senior
Secured Notes and a write-off of unamortized deferred financing costs of $1.9
million related to the terminated debt agreements.

     In September 2001, we announced in a press release that our introduction of
the service line structure and transition away from the net revenue model, and
the related realignment of our business would cause us to record unusual charges
for write-offs of service agreements and other assets and other charges. These
charges include the impairment, restructuring and other charges and
extraordinary loss we have recorded during 2002. Through December 31, 2002, we
recorded $10.3 million in unusual cash charges and $153.4 million in unusual
non-cash charges in connection with our transition process.

     In that September 2001 press release, we disclosed that if all of our PPM
model practices converted to the service line we would anticipate incurring
approximately $480 million in such charges. Although that analysis would still
hold true if all practices converted, we do not believe full conversion is
likely and do not believe that we are likely to recognize the full $480 million
amount in connection with our transition. The principal category of such charges
related to the impairment of service agreements. Service agreements were
impaired either because of a termination of the agreement (both in
disaffiliations and conversions to the service line) or because we determined
that the agreement was impaired based on expected future cash flow under the
agreement. The latter category of impairment related exclusively to net revenue
model practices. Currently, our balance sheet reflects $30.1 million in service
agreements under the net revenue model and $222.6 million under the earnings
model. Based upon the potential for continued declining performance, we would
anticipate that the net revenue model agreements, if not converted to the
earnings model, could become impaired in the future. At present, we would not
expect earnings model agreements to become impaired, except in the case of
disaffiliations or service line conversions. Accordingly, management currently
expects that the total amount of charges in connection with our transition is
unlikely to exceed $200 million, absent additional disaffiliations or
conversions.

     Net Income (Net Loss). Net income decreased from $46.3 million, or $0.46
per diluted share, in 2001 to a net loss of $(45.9) million, or $(0.47) per
share after extraordinary loss, in 2002, a decrease of $92.2 million. Net income
as a percentage of revenue changed from 3.1% in 2001 to (2.8)% in 2002. Included
in net income for 2002 are impairment, restructuring and other charges of $150.1
million and an extraordinary loss on early extinguishment of debt of $8.5
million, net of income taxes. Excluding the extraordinary loss and impairment,
restructuring and other charges, net income for 2002 would have been $58.1
million, which represents earnings per share of $0.59. Included in net income
for 2001 were pre-tax restructuring charges of $5.9 million. Excluding the
restructuring charges, net income for 2001 would have been $50.0 million, which
represents earnings per share of $0.50.

2001 Compared to 2000

     In 2001, our revenue increased to $1,515.9 million, 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 13.4% in 2000 to 11.5% in 2001, excluding unusual charges
of $5.9 million and $201.8 million, respectively, included in impairment,
restructuring and

                                       40

<PAGE>

other charges, $10.2 million for bad debt expense in 2000, and $27.6 million for
gain on 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. Our revenue is net operating revenue, less the amount of net
operating revenue retained by our affiliated physician practices under the PPM
service agreements. Revenue increased from $1,333.1 million for 2000 to $1,515.9
million for 2001, an increase of $182.8 million, or 13.7%. The increase in
revenue is attributable to the growth in net operating 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 operating revenue               $   1,945,517  $  1,727,537

                Amounts retained by practices            (429,622)     (394,466)
                                                    -------------  ------------

                Revenue                             $   1,515,895  $  1,333,071
                                                    =============  ============

         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.

         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

                                       41

<PAGE>

model since December 31, 2000. 59.5% of our revenue for 2001 was derived from
practices with earnings model service agreements as of December 31, 2001, and
38.5% was derived from practices with net revenue model service agreements as of
such date, as compared to 41.4% and 55.9%, respectively, in 2000. Amounts
retained by practices decreased from 22.8% of net patient revenue for 2000 to
22.1% 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.

         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 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 48.8% in 2000 to 51.5% 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.

         Field Compensation and Benefits. Field compensation and benefits
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 20.9% in 2000 to 21.3% 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 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 12.1% in 2000 to 11.8%
in 2001 due to economies of scale.

         General and Administrative. General and administrative expenses
decreased from $63.6 million in 2000 to $58.9 million in 2001, a decrease of
$4.8 million, or 7.5%. As a percentage of revenue, general and administrative
costs decreased from 4.8% in 2000 to 3.9% 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.

                                       42

<PAGE>

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

                               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):

<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
                                                                       ----------     ----------

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

         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. We discuss in our comparison
of 2002 to 2001 our process for analysis of our service agreements.

         In the fourth quarter of 2000, our impairment review focused primarily
on net revenue model service agreements. Using then-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. The charge
for impairment of service agreements for 2000 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.

                                       43

<PAGE>

                              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. As a result of this analysis, during
the fourth quarter of 2000, we recorded restructuring charges of $16.1 million
comprising (i) $6.5 million related to abandonment of information systems
initiatives, including clinical information systems and e-commerce initiatives,
(ii) $6.5 million impairment of a home health business, (iii) $0.4 million
related to contractual severance of an executive position and (iv) $2.6 million
related to abandonment of leased and owned facilities for remaining lease
obligations and the difference in the net book value of the owned real estate
and its expected fair value. Details of the restructuring charge activity
relating to that charge in 2001 are as follows:

<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>

         During the first quarter of 2001, we announced plans to further reduce
overhead costs and recognized additional pre-tax restructuring charges of $5.9
million, consisting of (i) a $3.1 million charge relating to the elimination of
approximately 50 personnel positions, (ii) a $2.5 million charge for remaining
lease obligations and related improvements at sites we decided to close and
(iii) a $0.3 million charge relating to abandoned software applications. Details
of the restructuring charge activity relating to that charge in 2001 are as
follows:

<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>

                                  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)
$0.5 million 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."

                                       44

<PAGE>

         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 0.3 million 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.

         During the third quarter and second quarter of 2000, we incurred costs
of $0.2 million 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 paragraph.

Liquidity and Capital Resources

         As of December 31, 2002, we had net working capital of $204.6 million,
including cash and cash equivalents of $105.6 million. We had current
liabilities of $324.0 million, including $15.4 million in current maturities of
long-term debt, and $272.0 million of long-term indebtedness. During 2002, we
generated $160.6 million in net operating cash flow, invested $56.0 million, and
used cash from financing activities in the amount of $19.1 million. As of March
13, 2003, we had cash and cash equivalents of $84.1 million.

Cash Flows From Operating Activities

         During 2002, we generated $160.6 million in cash flows from operating
activities as compared to $216.2 million in 2001. The decrease in cash flow is
attributable to (i) advance purchases of certain pharmaceutical products during
2002 in

                                       45

<PAGE>

order to obtain favorable pricing and qualify for certain rebates, (ii) a
smaller reduction in the number of accounts receivable days outstanding in 2002
as compared to the reduction in 2001, and (iii) timing of certain working
capital payments. Our accounts receivable days outstanding as of December 31,
2002, decreased to 48 days from 50 days as of December 31, 2001 and from 67 days
as of December 31, 2000.

Cash Flows from Investing Activities

         During 2002 and 2001, we expended $59.1 million and $63.7 million in
capital expenditures. During 2002 and 2001, we expended $33.2 million and $27.9
million, respectively, on the development and construction of cancer centers. In
addition, we expended $0.9 million and $2.3 million on installation of PET
centers, respectively, during 2002 and 2001, respectively, was financed through
various equipment operating leases. Expected capital expenditures on cancer
center and PET development are below forecasted amounts due to our focus on
transitional activity. Maintenance capital expenditures were $25.0 million and
$33.5 million in 2002 and 2001, respectively. For all of 2003, we anticipate
expending a total of approximately $30-$35 million on maintenance capital
expenditures and approximately $60-70 million on development of new cancer
centers and PET installations. In addition to these capital expenditures, we
have financed, and will in the future finance, most of our PET center
investments and a portion of our cancer center investments through operating
leases.

Cash Flows from Financing Activities

         During 2002, we used cash from financing activities of $19.1 million as
compared to cash used of $142.0 in 2001. Such increase in cash flow is primarily
attributed to the proceeds from the issuance of our Senior Subordinated Notes
due 2012, net of the cash payments for the retirement of our previously existing
indebtedness, including a prepayment premium paid as a result of early
extinguishment of our Senior Secured Notes due 2006. In addition, we expended
$42.8 million to repurchase 5.0 million shares of our Common Stock during 2002.
Additionally, we received 1.1 million shares of our Common Stock in exchange for
certain technical assets in the second quarter of 2002.

         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. In addition, we
anticipate that from time to time we will make significant purchases of
pharmaceuticals in excess of normal patterns to take advantage of available
volume discounts and rebates. Such purchases, including several planned for the
first quarter of 2003 will require significant cash outlays and will cause us to
maintain higher amounts of inventory, with lower cash balances (or higher
borrowings) for some period of time. Although we expect to fund our capital
needs during 2003 with our available cash and cash generated from operations, in
the future, we may have 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, is
quite limited. As a result, we may be unable to obtain sufficient financing on
terms satisfactory to management or at all.

         Historically, we satisfied our development and transaction needs
through various debt and equity financings and through borrowings under a $175
million syndicated revolving credit facility and a $75 million synthetic leasing
facility.

         On February 1, 2002, we entered into a five-year $100 million
syndicated revolving credit facility and terminated our existing syndicated
revolving credit facility. 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. No amounts have been
borrowed under that facility. Our credit facility bears interest at a variable
rate that floats with a referenced interest rate. Therefore, to the extent we
have amounts outstanding under the credit facility in the future, we would be
exposed to interest rate risk under our credit facility.

         On February 1, 2002, we issued $175 million in 9.625% Senior
Subordinated Notes due 2012 to various institutional investors in a private
offering under Rule 144A under the Securities Act of 1933. The notes were
subsequently exchanged for substantially identical notes in an offering
registered 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 and certain other debt.

         We used the proceeds from the Senior Subordinated Notes to repay in
full our existing $100 million in Senior Secured Notes due 2006, including 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 $4.8 million associated
with issuing those notes and to pay fees and related expenses of $2.7 million in
connection with the new credit facility. During the first quarter of 2002, we
recognized the prepayment penalty of $11.7 million and a write-off

                                       46

<PAGE>

of unamortized deferred financing costs related to the terminated debt
agreements of $1.9 million, which were recorded as an extraordinary item during
the first quarter of 2002.

         Our introduction of the service line structure and transition away from
the net revenue model and the related realignment of our business 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.

         We entered into a synthetic leasing facility in December 1997, under
which a special purpose entity acquired properties and paid for construction of
certain of our cancer centers and leased them to us. It matures in June 2004. As
of December 31, 2002, we had $72.0 million outstanding under the facility and no
further amounts are available under that facility. The annual cost of the lease
is approximately $3.3 million, based on interest rates in effect as of December
31, 2002.

         Effective December 31, 2002, we amended our synthetic lease so that we
now guarantee 100% of the residual value of the properties in the lease. We had
previously guaranteed 85%. As a result, we now include $72.0 million outstanding
under the lease as indebtedness on our financial statements. We also included
assets under the lease as assets on our balance sheet based upon our
determination of fair values of those properties at December 31, 2002 and
recognized an impairment charge of $20.0 million at December 31, 2002 related to
these cancer centers. Prior to December 31, 2002, the lease was appropriately
recorded as an operating lease and, accordingly neither the debt nor the assets
appeared on our financial statements. This change will not impact our periodic
interest payments under the lease. However, we will begin to recognize a
depreciation charge in respect for the assets, currently estimated at $4.0
million annually, starting in 2003. We did not recognize depreciation expense
for those off-balance-sheet assets prior to December 31, 2002.

         We agreed to increase our guaranty in connection with the lease
modification because the lease amendment gives us additional flexibility to
sell, move or transfer the assets in the lease. We believe such flexibility will
aid us in implementing our ongoing strategic plans. For example, we sold two
properties under the lease effective in January 2003 in connection with practice
disaffiliations, and anticipate selling or redeploying other leased properties
during 2003 in connection with our repositioning. We also believe the inclusion
of the synthetic lease assets and liabilities gives investors a more easily
understandable picture of our financial condition.

         The lease is renewable in one-year increments with the consent of the
financial institutions that are parties thereto. If the lease is not renewed at
maturity or otherwise terminates, we must either purchase the properties under
the lease for the total amount outstanding or market the properties to third
parties. Defaults under the lease, which include cross-defaults to other
material debt, could result in such a termination, and require us to purchase or
remarket the properties. If we sell the properties to third parties, we have
guaranteed a residual value of 100% of the total amount outstanding for the
properties. The guarantees are secured by substantially all of our assets. The
amount outstanding under the synthetic lease appears as long-term indebtedness
on our balance sheet.

         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
$0.7 million annually.

         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. Events of default under our credit facility, synthetic leasing
facility and Senior Subordinated Notes include cross-defaults to all material
indebtedness, including each of those financings. Substantially all of our
assets, including certain real property, are pledged as security under the
credit facility and the guarantee obligations of our synthetic leasing facility.

         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 cash flows from our operations to fund working capital and
capital expenditures for our fixed assets.

     The following summarizes our contractual obligations in respect of our
indebtedness and noncancelable leases at December 31, 2002, and the effect such
obligations are expected to have on our liquidity and cash flow in future
periods (based on interest rates in effect as of December 31, 2002):

<TABLE>
<CAPTION>
                                                                                                                          After
        Obligation                         2003            2004           2005             2006            2007            2007
<S>                                   <C>             <C>             <C>             <C>             <C>             <C>
Principal maturities of long-term
indebtedness, including capital
lease obligations                     $15.4 million   $83.2 million   $ 6.4 million   $ 5.1 million   $ 1.9 million   $175.4 million
Non-cancelable operating leases       $51.9 million   $42.9 million   $35.4 million   $24.5 million   $18.6 million   $ 65.8 million
</TABLE>

     In addition, we are obligated to pay $14.9 million under pending
construction contracts, which we would expect to pay during 2003, depending on
the progress of construction projects. For a further discussion of our
commitments and contingencies, see note 13 to our consolidated financial
statements.

                                       47

<PAGE>

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 and
leasing facility contain an element of market risk from changes in interest
rates. We currently have no outstanding borrowings under our credit facility.
Historically, we have managed this risk, in part, through the use of interest
rate swaps; however, no such agreements have been entered into in 2002. 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 2002.

         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.

         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, 2002. The market values that result from these
computations are compared with the market values of these financial instruments
at December 31, 2002. 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 2002 and
2001. 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>
                                              2002 Quarter Ended                                   2001 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>
Revenue ...................  $ 428,815    $ 420,177    $ 410,972    $   391,352    $ 388,893    $ 375,499    $ 383,571   $ 367,932
Income (loss) from
    operations ............     (4,478)     (46,673)      (9,165)        27,659       24,578       26,029       27,155      19,453

Other expense .............     (5,850)      (6,073)      (6,274)        (5,509)      (3,915)      (5,216)      (6,641)     (6,739)
Net income (loss) before
extraordinary loss ........     (5,430)     (36,207)      (9,572)        13,733       12,811       12,904       12,718       7,883
Extraordinary loss on
early extinguishment of
debt, net of income
taxes .....................          -            -            -         (8,452)           -            -            -           -

Net income (loss)/(1)/ ....     (5,430)     (36,207)      (9,572)         5,281       12,811       12,904       12,718       7,883
Net income (loss) per
    share - basic/(1)/ ....  $   (0.06)   $   (0.37)       (0.10)   $      0.14    $    0.13    $    0.13    $    0.13   $    0.08
Extraordinary loss per
    share - basic/(1)/ ....          -            -            -          (0.09)           -            -            -           -
Net income (loss) per
    share - basic/(1)/ ....  $   (0.06)   $   (0.37)       (0.10)   $      0.05    $    0.13    $    0.13    $    0.13   $    0.08
Net income (loss) per
    share - diluted/(1)/ ..  $   (0.06)   $   (0.37)       (0.10)   $      0.14    $    0.13    $    0.13    $    0.13   $    0.08
Extraordinary loss per
    share - diluted/(1)/ ..          -            -            -          (0.09)           -            -            -           -
Net income (loss) per
    share - diluted/(1)/ ..  $   (0.06)   $   (0.37)       (0.10)   $      0.05    $    0.13    $    0.13    $    0.13   $    0.08
</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.

                                       48

<PAGE>

Item 8. Financial Statements

                                US ONCOLOGY, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements as of December 31, 2002 and 2001 and for each
of the three years ended December 31, 2002:

<TABLE>
<CAPTION>
                                                                                 Page
                                                                                 ----
     <S>                                                                         <C>
     Report of Independent Accountants .........................................  50

     Consolidated Balance Sheet ................................................  51

     Consolidated Statement of Operations and Comprehensive Income .............  52

     Consolidated Statement of Stockholders' Equity ............................  53

     Consolidated Statement of Cash Flows ......................................  54

     Notes to Consolidated Financial Statements ................................  56
</TABLE>

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.

                                       49

<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,
2002 and 2001, and the results of their operations and their cash flows for the
three years ended December 31, 2002 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, 2003

                                       50

<PAGE>

                                US ONCOLOGY, INC.
                           CONSOLIDATED BALANCE SHEET
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                     -------------------------------------------
                                    ASSETS
                                    ------                                                    2002                    2001
                                                                                     --------------------     ------------------
<S>                                                                                  <C>                      <C>
  Current assets:
       Cash and equivalents ........................................................   $     105,564            $      20,017
       Accounts receivable .........................................................         281,560                  275,884
       Other receivables ...........................................................          42,363                   16,337
       Prepaid expenses and other current assets ...................................          20,134                   18,997
       Inventories .................................................................          31,371                        -
       Due from affiliates .........................................................          47,583                   53,725
                                                                                       -------------            -------------
                    Total current assets ...........................................         528,575                  384,960
  Property and equipment, net ......................................................         327,558                  286,218
  Service agreements, net of accumulated amortization of  $104,022 and
    $257,893 .......................................................................         252,720                  379,249
  Due from affiliates, long-term ...................................................           7,708                    8,076
  Other assets .....................................................................          25,166                   21,152
  Deferred income taxes ............................................................          43,214                   18,085
                                                                                       -------------            -------------
                                                                                       $   1,184,941            $   1,097,740
                                                                                       =============            =============
                       LIABILITIES AND STOCKHOLDERS' EQUITY
                       ------------------------------------

  Current liabilities:
       Current maturities of long-term indebtedness ................................   $      15,363            $      44,040
       Accounts payable ............................................................         193,544                  135,570
       Due to affiliates ...........................................................          32,877                   18,315
       Accrued compensation cost ...................................................          25,417                   15,455
       Income taxes payable ........................................................          20,441                   22,498
       Other accrued liabilities ...................................................          36,379                   47,201
                                                                                       -------------            -------------
                    Total current liabilities ......................................         324,021                  283,079
  Long-term indebtedness ...........................................................         272,042                  128,826
                                                                                       -------------            -------------
                    Total liabilities ..............................................         596,063                  411,905
  Minority interests ...............................................................          10,338                    9,067
  Commitments and contingencies (Note 13)

  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, 95,301 and
      94,819 issued, 89,553 and 92,510 outstanding .................................             953                      948
  Additional paid in capital .......................................................         479,073                  469,999
  Common Stock to be issued, approximately 3,695 and 7,295 shares ..................          33,644                   56,955
  Treasury Stock, 5,748 and 2,309 shares ...........................................         (49,302)                 (11,235)
  Retained earnings ................................................................         114,172                  160,101
                                                                                       -------------            -------------
                    Total stockholders' equity .....................................         578,540                  676,768
                                                                                       -------------            -------------
                                                                                       $   1,184,941            $   1,097,740
                                                                                       =============            =============
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       51

<PAGE>

                                US ONCOLOGY, INC.
          CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                                   ----------------------------------------
                                                                                      2002           2001           2000
                                                                                      ----           ----           ----
<S>                                                                                <C>           <C>             <C>
Revenue ........................................................................   $1,651,316    $1,515,895      $1,333,071
Operating expenses:
      Pharmaceuticals and supplies .............................................      866,378       780,072         651,214
      Field compensation and benefits ..........................................      340,302       322,473         277,962
      Other field costs ........................................................      192,145       179,479         161,510
      General and administrative ...............................................       63,229        58,859          63,640
      Bad debt expense .........................................................            -             -          10,198
      Impairment, restructuring and other charges, net .........................      150,060         5,868         201,846
      Depreciation and amortization ............................................       71,859        71,929          75,148
                                                                                   ----------    ----------      ----------
                                                                                    1,683,973     1,418,680       1,441,518

Income (loss) from operations ..................................................      (32,657)       97,215        (108,447)

Other income (expense):
      Interest expense .........................................................      (23,706)      (22,511)        (26,809)
      Gain on investment in common stock .......................................            -             -          27,566
                                                                                   ----------    ----------      ----------

Income (loss) before income taxes and extraordinary loss .......................      (56,363)       74,704        (107,690)
Income tax benefit (provision) .................................................       18,886       (28,388)         35,047
                                                                                   ----------    ----------      ----------

Net income (loss) before extraordinary loss ....................................      (37,477)       46,316         (72,643)
Extraordinary loss on early extinguishment of debt, net of income
  taxes of $5,181 ..............................................................       (8,452)            -               -
                                                                                   ----------    ----------      ----------

Net income (loss) and comprehensive income (loss) ..............................   $  (45,929)   $   46,316      $  (72,643)
                                                                                   ==========    ==========      ==========

Net income (loss) before extraordinary loss per share - basic ..................   $    (0.38)   $     0.46      $    (0.72)
Extraordinary loss per share - basic ...........................................        (0.09)            -               -
                                                                                   ----------    ----------      ----------
Net income (loss) per share - basic ............................................   $    (0.47)   $     0.46      $    (0.72)
                                                                                   ==========    ==========      ==========
Shares used in per share computation - basic ...................................       97,658       100,063         100,589
                                                                                   ==========    ==========      ==========

Net income (loss) before extraordinary loss per share - diluted ................   $    (0.38)   $     0.46      $    (0.72)
Extraordinary loss per share - diluted .........................................        (0.09)            -               -
                                                                                   ----------    ----------      ----------
Net income (loss) per share - diluted ..........................................   $    (0.47)   $     0.46      $    (0.72)
                                                                                   ==========    ==========      ==========
Shares used in per share computation - diluted .................................       97,658       100,319         100,589
                                                                                   ==========    ==========      ==========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       52

<PAGE>

                                US ONCOLOGY, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                      Additional    Common    Treasury
                                                     Shares     Par     Paid-In    Stock to     Stock    Retained
                                                     Issued    Value    Capital    Be Issued    Cost     Earnings     Total
                                                     ------    -----    -------    ---------    ----     --------     ------
     <S>                                            <C>       <C>      <C>         <C>          <C>      <C>         <C>
     Balance at January 1, 2000 ................     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 Common Stock 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
     Disaffiliation transactions value
        of Common Stock to be issued ...........          -       -           -      (5,629)         -          -      (5,629)
     Delivery from Treasury of
        Common Stock to be issued ..............          -       -       5,149     (17,682)    12,533          -           -
     Exercise of options to purchase
        Common Stock ...........................        482       5       1,533           -      1,889          -       3,427
     Tax benefit from exercise of
        non-qualified stock options ............          -       -         911           -          -          -         911
     Issuance of Common Stock
        options to affiliates ..................          -       -       1,481           -          -          -       1,481
     Purchases of Treasury Stock ...............          -       -           -           -    (42,754)         -     (42,754)
     Treasury Stock received from
        sale of fixed assets ...................          -       -           -           -     (9,735)         -      (9,735)
     Net loss ..................................          -       -           -           -          -    (45,929)    (45,929)
                                                     ------    ----    --------    --------   --------   --------    --------

     Balance at December 31, 2002 ..............     95,301    $953    $479,073    $ 33,644   $(49,302)  $114,172    $578,540
                                                     ======    ====    ========    ========   ========   ========    ========
</TABLE>

         The accompanying notes are an integral part of this statement.

                                       53

<PAGE>

                                US ONCOLOGY, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                             Year Ended December 31,
                                                                                 -----------------------------------------------
                                                                                     2002             2001            2000
                                                                                     ----             ----            ----
<S>                                                                                <C>             <C>              <C>
Cash flows from operating activities:
Net income (loss) ..............................................................   $ (45,929)      $  46,316        $ (72,643)

Non cash adjustments:
      Depreciation and amortization ............................................      71,859          71,929           75,148
      Gain on investment in common stock                                                   -               -          (27,566)
      Impairment, restructuring and other charges, net .........................     149,437             331          165,800
      Deferred income taxes ....................................................     (25,129)         20,319          (71,628)
      Bad debt expense .........................................................           -               -           10,198
      Non-cash compensation expense ............................................           -           1,887            1,649
      Undistributed earnings (losses) in joint ventures ........................       1,424            (300)          (2,124)
      Extraordinary loss on early extinguishment of debt, net ..................       8,452               -                -
      Tax benefit from exercise of non-qualified stock options .................         911           1,384              255

Cash provided (used) by changes in:
     Accounts receivable .......................................................     (20,470)         52,764          (15,754)
     Prepaids and other current assets .........................................      (6,396)          4,170           (8,907)
     Inventories ...............................................................     (31,371)              -                -
     Accounts payable ..........................................................      60,874         (17,944)          45,109
     Due from/to affiliates ....................................................      (5,122)         18,815           (4,374)
     Income taxes receivable/payable ...........................................       3,785          13,344             (423)
     Other accrued liabilities .................................................      (1,708)          3,200           22,585
                                                                                   ---------       ---------        ---------
Net cash provided by operating activities ......................................     160,617         216,215          117,325
                                                                                   ---------       ---------        ---------
Cash flows from investing activities:
      Acquisition of property and equipment ....................................     (59,146)        (63,660)         (67,000)
      Net payment in affiliation transactions ..................................      (1,146)         (1,005)         (16,124)
      Proceeds from sale of investment in common stock .........................           -               -           54,824
      Proceeds from contract separations .......................................       4,296           7,052                -
                                                                                   ---------       ---------        ---------
           Net cash used by investing activities ...............................     (55,996)        (57,613)         (28,300)
                                                                                   ---------       ---------        ---------
Cash flows from financing activities:
     Proceeds from Credit Facility .............................................      24,500          25,000           66,000
     Proceeds from Senior Subordinated Notes ...................................     175,000               -                -
     Repayment of Credit Facility ..............................................     (24,500)       (150,000)        (115,000)
     Repayment of Senior Secured Notes .........................................    (100,000)              -                -
     Repayment of other indebtedness ...........................................     (32,086)        (20,732)         (24,998)
     Debt financing costs ......................................................      (7,449)              -            1,887
     Net payments in lieu of stock issuance upon contract separations ..........      (3,481)              -                -
     Proceeds from exercise of stock options ...................................       3,427           3,758                -
     Purchase of Treasury Stock ................................................     (42,754)              -          (24,906)
     Premium payment upon early extinguishment of debt .........................     (11,731)              -                -
                                                                                   ---------       ---------        ---------
           Net cash used by financing activities ...............................     (19,074)       (141,974)         (97,017)
                                                                                   ---------       ---------        ---------
Increase (decrease) in cash and equivalents ....................................      85,547          16,628           (7,992)

Cash and equivalents:
     Beginning of period .......................................................      20,017           3,389           11,381
                                                                                   ---------       ---------        ---------
     End of period .............................................................   $ 105,564       $  20,017        $   3,389
                                                                                   =========       =========        =========
</TABLE>

                                       54

<PAGE>

                                US ONCOLOGY, INC.
                CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
                                 (in thousands)
<TABLE>
<CAPTION>
<S>                                                                                  <C>           <C>            <C>
Interest paid ..................................................................     $  15,460     $  24,355      $  26,705
Taxes paid (refunded), net .....................................................         2,211        (6,593)        36,377
Non cash investing and financing transactions:
     Capitalization of synthetic lease assets ..................................        72,018             -              -
     Value of Common Stock to be issued in affiliation transactions ............             -           606          6,103
     Delivery of Common Stock in affiliation transactions ......................        17,682        11,796         27,767
     Debt issued in affiliation transactions ...................................             -         2,679         11,251
     Forfeitures of debt from contract separation ..............................           249         5,350              -
     Forfeitures of Common Stock to be issued from contract separation .........         5,629         1,521              -
     Assets acquired under capital lease .......................................             -             -          1,100
     Treasury Stock received from sale of fixed assets ........................          9,735             -              -
</TABLE>

          The accompanying notes are an integral part of this statement

                                       55

<PAGE>

                                US ONCOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (in thousands, except per share amounts)

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:

     .    Oncology Pharmaceutical Services. We purchase and manage specialty
          oncology pharmaceuticals for our affiliated practices. Annually, we
          are responsible for purchasing, delivering and managing more than $800
          million of pharmaceuticals through a network of more than 400
          admixture sites, 39 licensed pharmacies, 116 pharmacists and 219
          pharmacy technicians.

     .    Cancer Center Services. We develop and manage comprehensive,
          community-based cancer centers, which integrate all aspects of
          outpatient cancer care, from laboratory and radiology diagnostic
          capabilities to chemotherapy and radiation therapy. As of December 31,
          2002, we had developed and operated 79 integrated community-based
          cancer centers and manage over one million square feet of medical
          office space. We also had installed and managed 16 Positron Emission
          Tomography (PET) units.

     .    Cancer Research 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 comprehensive
          range of services relating to clinical trials. We currently manage
          approximately 102 clinical trials, supported by our network of
          approximately 500 participating physicians in more than 170 research
          locations. During 2002, we enrolled over 3,200 new patients in
          research studies.

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

The Company provides these services to oncology practices comprising over 450
sites, with over 4,800 employees and over 875 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 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. The Company has determined that none of its existing service
agreements meets requirements for consolidation under generally accepted
accounting principles.

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 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, expected rates
of business and operational change, sensitivity and volatility associated with
the

                                       56

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

assumptions used in developing estimates, and 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 amounts will differ from
those estimated amounts used in the preparation of the financial statements.

Service fee revenue

The Company recognizes service fees from its service agreements 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.

Approximately 66% of the Company's 2002 net operating revenue has been derived
from practices under the earnings model, as of December 31, 2002. Under the
earnings model service agreements the Company receives 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 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 and taxes
of the affiliated practice. The earnings of an affiliated practice are
determined by subtracting the direct expenses from the professional revenues and
research revenues earned by the affiliated practice.

Approximately 31% of the Company's 2002 net operating revenue has been derived
from practices under the net revenue model, as of December 31, 2002. Under the
net revenue model service agreements the Company receives 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. These
service agreements permit the affiliated practice to retain a specified amount
(typically 23% of the practice's net revenues) for physician salaries of the
affiliated practices. 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 profits 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 Company recognizes revenue from pharmaceutical management service line
agreements based upon the cost of pharmaceuticals purchased by the associated
practice plus a mark-up fee. Such amounts are recorded gross in other revenue
and the related costs are included in pharmaceutical and supplies expense. These
revenues are recognized upon the delivery of goods and services authorized by
the associated practices.

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 revenues from cancer research services when the fees are
earned and deemed realizable based upon the contractually agreed amount of such
fees.

Cash equivalents

                                       57

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

The Company considers all highly liquid debt securities with original maturities
of three months or less to be cash equivalents. As of December 31, 2002 and
2001, the Company held no debt securities.

Accounts receivable

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.

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 judgment of expected
collectibility. Actual results often times vary from estimates, but generally do
not vary materially.

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, 2002.

Other receivables

Other receivables consist of amounts due for services provided under the
Company's pharmaceutical management and cancer research activities and are
stated at their estimated net realizable value.

Prepaids and other current assets

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

Inventories

Inventories consist of pharmaceutical drugs and are stated at the lower cost or
market, with cost determined by the purchase price. Inventory quantities at
December 31, 2002 were determined from physical counts or from the Company's
perpetual inventory records.

Due from and to affiliates

The Company has advanced to certain of its practices amounts needed for working
capital purposes -- primarily to purchase pharmaceuticals, assist with the
development of new markets, to support the addition of physicians, and 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 (4.25% at December 31, 2002). These advances are unsecured
and are repaid in accordance with the terms of the instrument evidencing the
advance. Amounts payable to related parties represent transfers due to
affiliated practices for amounts to be retained by physician groups under
service agreements.

Amounts due from affiliates are reviewed when events or changes in circumstances
indicate their recorded amount may not be recoverable. If the review indicates
that the anticipated recoverable amount is less than the carrying value, the
Company's carrying value of the asset will be reduced accordingly (Note 11).

                                       58

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

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.

The carrying value of the fixed assets 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 fixed assets over the remaining useful life is expected to be less than
the recorded amount of the assets, the Company's carrying value of the asset
will be reduced to its estimated fair value using expected cash flows on a
discounted basis (Note 11). Impairment analysis is 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.

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. The Company recorded amortization expense related to these assets of
$17.1 million, $20.2 million and $28.9 million, for the years ended December 31,
2002, 2001, and 2000, respectively. The future expected amortization expense
related to the Company's service agreements are approximately $10.7 million for
each of the five years ending December 31, 2007. 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 in conjunction with review of practice financial performance. 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.

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. Fair values are
calculated using the Company's expected cash flows on a discounted basis (Note
11). Impairment analysis is 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.

                                       59

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

Other assets

Other assets consist of costs associated with obtaining debt financing, costs
associated with entering into non-compete agreements with affiliated physicians,
goodwill, and investments in joint ventures. The debt financing costs are
capitalized and amortized over the terms of the related debt agreements. The
Company recorded amortization expense related to these assets of $1.8 million,
$1.2 million and $1.4 million for the years ended December 31, 2002, 2001 and
2000, respectively. The amounts recorded for non-compete agreements are being
amortized on a straight-line basis over the term of the respective contract.
Prior to 2002, goodwill was amortized on a straight-line basis over 20 years.
Upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (FAS 142), in January 2002, the Company ceased
amortization of these assets. For further discussion, see "New Accounting
Pronouncements." Investments in joint ventures for which the Company does not
have control would be accounted for under the equity method of accounting. For
2002, 2001 and 2000, operational activity relating to 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

At December 31, 2002, the Company has eight stock-based employee compensation
plans, which are described more fully in Note 10. The Company accounts for those
plans under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, " Accounting for Stock Issued to Employees," and related
Interpretations. Stock based employee compensation costs for options granted
under those plans with exercise prices less than the market value of the
underlying Common Stock on the date of the grant are insignificant for the three
years ended December 31, 2002, 2001 and 2000.

The Company also provides a benefit plan to non-employee affiliates which is
accounted for using fair value based accounting with compensation expense being
recognized over the respective vesting period. The Company recognized $1.4
million, $2.0 million and $1.6 million in compensation cost during the years
ended December 31, 2002, 2001 and 2000, respectively.

The following table illustrates the effect on net income(loss) and
earnings(loss) per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation:

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                             ------------------------------------
                                                                               2002          2001          2000
                                                                             --------      --------     ---------
  <S>                                                                        <C>           <C>          <C>
  Net income(loss), as reported .........................................    $(45,929)     $ 46,316     $ (72,643)
  Less: total stock-based employee compensation expense
  determined under fair value based method for all awards, net of
  related income taxes ..................................................      (7,430)       (9,600)       (7,017)
                                                                             --------      --------     ---------
  Pro forma net income(loss) ............................................    $(53,359)     $ 36,716     $ (79,660)
                                                                             ========      ========     =========
  Earnings(loss) per share:
  Basic, as reported ....................................................    $  (0.47)     $   0.46     $   (0.72)
                                                                             ========      ========     =========
  Basic, pro forma                                                           $  (0.55)     $   0.37     $   (0.79)
                                                                             ========      ========     =========

  Diluted, as reported ..................................................    $  (0.47)     $   0.37     $   (0.72)
                                                                             ========      ========     =========
  Diluted, pro forma ....................................................    $  (0.55)     $   0.37     $   (0.79)
                                                                             ========      ========     =========

Fair value of financial instruments
</TABLE>

                                       60

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

The Company's receivables, payables, prepaids and accrued liabilities are
current and on normal terms and, accordingly, the recorded values 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
Common Stock to be issued shares outstanding during the periods as well as
dilutive stock options calculated under the treasury stock method.

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

<TABLE>
<CAPTION>
                                                                              2002       2001        2000
                                                                           --------   --------    --------
 <S>                                                                       <C>        <C>         <C>
 Outstanding at end of period:
      Common Stock ....................................................      95,301     94,819      93,837
      Common Stock to be issued .......................................       3,695      7,295      10,370
                                                                           --------   --------    --------
                                                                             98,996    102,114     104,207
 Effect of weighting and Treasury Stock ...............................      (1,338)    (2,051)     (3,618)
                                                                           --------   --------    --------
 Shares used in per share calculations-basic ..........................      97,658    100,063     100,589
 Effect of weighting and assumed for grants of stock options at
 less than average market price .......................................           -        256           -
                                                                           --------   --------    --------
 Shares used in per share calculations-diluted ........................      97,658    100,319     100,589
                                                                           ========   ========    ========
 Anti-dilutive stock options (options where exercise price is
      greater than the average market price) not included above .......      16,296      7,009      12,245
                                                                           ========   ========    ========
</TABLE>

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. There
were no items of other comprehensive income during the three years ended
December 31, 2002.

Reclassifications

Certain previously reported financial information has been reclassified to
conform to the 2002 presentation. Such reclassifications did not materially
affect the Company's financial condition, net income (loss) or cash flows.

New Accounting Pronouncements

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 and
2000 was $0.5 million and $0.7 million, respectively. The Company implemented
FAS 142 in 2002 and ceased

                                       61

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

amortization of goodwill from acquisitions of businesses under the purchase
method of accounting. Implementation of FAS 142 does not result in the
elimination of amortization for the Company's service agreement intangible
assets because such assets are excluded from 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. Implementation of this
new standard did not impact the Company.

In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Impairment or Disposal of Long-Lived Assets" (FAS 144), which was
effective for fiscal years beginning after December 15, 2001 and was implemented
by the Company on January 1, 2002. The provisions of FAS 144 provide accounting
models for impairment of long-lived assets and discontinued operations. The
Company's adoption of FAS 144 has not had a material effect on the Company's
financial position or operating results.

In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections" (FAS 145). SFAS 145 rescinds SFAS 4,
"Reporting Gains and Losses from Extinguishment of Debt". By rescinding FASB
Statement No. 4, gains or losses from extinguishment of debt that do not meet
the criteria of APB No. 30 should no longer be reported as an extraordinary item
and should be reclassified to income from continuing operations in all periods
presented. APB No. 30 states that extraordinary items are events and
transactions that are distinguished by their unusual nature and by the
infrequency of their occurrence. FAS 145 is effective for all fiscal years
beginning after May 15, 2002, including all prior year presentations. The
Company expects to implement FAS 145 in the first quarter of 2003, at which time
income from operations will be restated to classify the extraordinary loss on
the early extinguishment of debt to be included within income (loss) from
continuing operations.

In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS
146). This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and rescinds Emerging Issues Task
Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" by requiring that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF Issue 94-3, a liability for an exit cost as defined in EITF
Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002. Management does not expect the
adoption of SFAS 146 to have a material impact on its financial conditions or
results of operations.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." The interpretation requires disclosure
about the nature and terms of obligations under certain guarantees that the
Company has issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing a guarantee. The initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements in this interpretation are effective immediately. The Company does
not expect to be impacted by the issuance of FIN 45.

In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
and Disclosure - an amendment of FASB Statement No. 123" (FAS 148). This
statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to provide alternative transition methods for a voluntary change
to fair value accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of FAS 123 to require more
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Management does not expect to adopt fair value
accounting for stock-based employee compensation.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, An interpretation of Accounting Bulletin No. 51" (FIN 46). The primary
objectives of FIN 46 are to provide guidance on how to

                                       62

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

identify variable interest entities "VIE" for which control is achieved through
means other than through voting rights and how to determine when and which
business enterprise should consolidate the VIE. This new model for consolidation
applies to an entity in which either (1) the equity investors do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. The Company does not expect
to be impacted by the adoption of FIN 46.

 In March 2003, the Financial Accounting Standards Board issued Statement of
 Financial Accounting Standards No. 149, "Accounting for Certain Financial
 Instruments with Characteristics of Liabilities and Equity" (FAS 149). This
 statement establishes standards for classification of certain financial
 instruments that have characteristics of both liabilities and equity in the
 statement of financial position. This Statement will be effective upon issuance
 for all contracts created or modified after the date the Statement is issued
 and otherwise effective at the beginning of the first interim period beginning
 after June 15, 2003. Management does not expect the adoption of SFAS 149 to
 have a material impact on its financial conditions or results of operations.

NOTE 2 - REVENUE

 The Company provides the following services to physician practices: oncology
 pharmaceutical services, cancer center services, cancer research services, and
 other practice management services. The Company currently earns revenue from
 physician practices under two models, the physician practice management (PPM)
 model, and the service line model. Under the PPM model, the Company enters into
 long term agreements with affiliated practices to provide comprehensive
 services, including all those described above, and the practices pay the
 Company a service fee and reimburse all expenses. Under the service line model,
 the first three services described above are offered by the Company under
 separate agreements for each service line.

 Net operating revenue includes two components - net patient revenue and the
 Company's other revenue.

         .  Net patient revenue. The Company reports net patient revenue for
            those business lines under which the Company's revenue is derived
            from payments for medical services to patients and the Company is
            responsible for billing those patients. Currently, net patient
            revenue consists of patient revenue of affiliated practices under
            the PPM model. Net patient revenue also will include revenues of
            practices that enter into agreements under the cancer center
            services service line.

         .  Other revenue. Other revenue is revenue derived from sources other
            than services provided to patients by affiliated practices. Other
            revenue includes revenue from pharmaceutical research, informational
            services and activities as a group purchasing organization. Other
            revenue also includes revenues from pharmaceutical services rendered
            by the Company under its oncology pharmaceutical management service
            line agreements.

 Net patient revenue is recorded when services are rendered to patients 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.

 Under the Company's PPM service agreements, amounts retained by the affiliated
 physician groups for physician compensation are primarily derived under two
 models. Under the first model (the net revenue model), amounts retained by
 physician groups are based upon a specified amount (typically 23% of net
 revenue) and, if certain financial criteria are satisfied, an incremental
 performance-based amount. Under the second model (the earnings model), amounts
 retained by practices are based upon a percentage (typically 65% - 75%) of the
 difference between net patient revenues less direct expenses, excluding
 interest expense and taxes.

 The Company's revenue is equal to net operating revenue minus amounts retained
 by the practices under the Company's PPM service agreements.

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

                                       63

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                         ---------------------------------------------
                                                               2002             2001           2000
                                                               ----             ----           ----
        <S>                                              <C>              <C>              <C>
       Net operating revenue .........................   $   2,128,661    $   1,945,517    $ 1,727,537
       Amounts retained by affiliated practices ......        (477,345)        (429,622)      (394,466)
                                                         -------------    -------------    -----------
       Revenue .......................................   $   1,651,316    $   1,515,895    $ 1,333,071
                                                         =============    =============    ===========
</TABLE>

 For the years ended December 31, 2002, 2001 and 2000, the affiliated practices
 derived approximately 43%, 40% and 37%, 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 2002,
 2001 and 2000. 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 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%, 23% and 24% of the Company's total revenues the years ended
 December 31, 2002, 2001 and 2000, respectively. Set forth below is selected,
 unaudited financial and statistical information concerning TOPA.

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                         ---------------------------------------------
                                                               2002             2001           2000
                                                               ----             ----           ----
             <S>                                         <C>              <C>              <C>
             Net patient revenues ....................   $     489,989    $     440,646    $   401,503
                                                         -------------    -------------    -----------
             Service fees paid to the Company: .......
                  Reimbursement of expense ...........         340,978          311,433        273,861
                  Earnings component .................          48,513           43,209         44,667
                                                         -------------    -------------    -----------
             Net operating revenue ...................         389,491          354,642        318,528
                                                         -------------    -------------    -----------
             Amounts retained by TOPA ................   $     100,498    $      86,004    $    82,975
                                                         =============    =============    ===========

             Physicians employed by TOPA .............             194              172            185
             Cancer centers utilized by TOPA .........              32               32             32
</TABLE>

 The Company's operating margin for the TOPA service agreement was 12.5%, 12.2%
 and 14.0% for the years ended December 31, 2002, 2001 and 2000, respectively.
 Operating margin is computed by dividing the earnings component of the service
 fee by the total service fee.

NOTE 3 - AFFILIATION AND DISAFFILIATION TRANSACTIONS

 The consideration paid for 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 in 2001 and 2000. No
 affiliation transactions occurred in 2002. 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:

                                       64

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                          -------------------------------------
                                                             2002         2001            2000
                                                             ----         ----            ----
 <S>                                                      <C>          <C>            <C>
 Cash and transaction costs ...................           $      -     $  1,005       $  16,124
 Short-term and Subordinated Notes ............                  -        1,787          11,251
 Common Stock to be issued ....................                  -          606           6,103
 Liabilities assumed ..........................                  -          118             903
                                                          --------     --------       ---------
 Total costs ..................................           $      -     $  3,516       $  34,381
                                                          ========     ========       =========

 Number of practice affiliations ..............                  4            5              14
                                                          ========     ========       =========
</TABLE>

 During 2002, the Company entered into four pharmaceutical services agreements
 under the service line model. The Company paid no consideration to enter into
 these agreements.

 During 2001, the Company affiliated with five oncology practices for total
 consideration of $3.5 million, including 87 shares of Common Stock to be issued
 with a value of $0.6 million. No 2001 affiliations were individually
 significant.

 During 2000, the Company affiliated with fourteen oncology practices for total
 consideration of $34.4 million, including 1,721 shares of Common Stock to be
 issued with a value of $6.1 million. No 2000 affiliations were individually
 significant.

 During 2002, the Company terminated service agreements and disaffiliated with
 four oncology practices. Under the terms of the disaffiliations, the Company
 recognized a net gain on separation of $5.7 million which is included in
 impairment, restructuring, and other charges in the accompanying consolidated
 statement of operations and comprehensive income. For further discussion, see
 Note 11. None of the 2002 disaffiliations 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 $3.4 million 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.

 The Company did not terminate any service agreements in 2000.

NOTE 4 - SALE OF INVESTMENT

 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 1,255 shares of its common
 stock. The Company sold the investment in a private sale transaction in March
 2000 and realized net proceeds of $54.8 million, which resulted in the
 recognition of a gain of $27.6 million in the consolidated statement of
 operations and comprehensive income for the period ended December 31, 2000.

                                       65

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

NOTE 5 - PROPERTY AND EQUIPMENT

 As of December 31, 2002 and 2001, respectively, the Company's property and
 equipment consisted of the following:

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                  ---------------------------------
                                                                       2002                 2001
                                                                       ----                 ----
  <S>                                                             <C>                 <C>
  Land ......................................................     $      39,022       $      21,031
  Furniture and equipment ...................................           339,716             317,831
  Building and leasehold improvements .......................           196,014             158,175
  Construction in progress ..................................             6,292               8,797
                                                                  -------------       -------------
                                                                        581,044             505,834
  Less accumulated depreciation and amortization ............          (253,486)           (219,616)
                                                                  -------------       -------------
                                                                  $     327,558       $     286,218
                                                                  =============       =============
</TABLE>

 The Company leases nineteen cancer centers from third parties under its
 synthetic lease facility. The related properties were constructed for
 approximately $72.0 million and prior to December 31, 2002, were not included
 in the Company's financial statements. Effective December 31, 2002, the Company
 amended the synthetic lease facility and began accounting for underlying
 properties as a capital lease. See Note 13 for a description of the related
 lease agreement.

 During the fourth quarter of 2002, the Company recorded an impairment of $27.6
 million related to cancer center assets. See Note 11 for further discussion of
 this impairment. At December 31, 2002, property and equipment include $52.0
 million in assets leased under its synthetic leasing facility.

 Amounts recorded in construction in progress at December 31, 2002 and 2001
 primarily relate to construction costs incurred in the development of cancer
 centers and PET facilities for the Company's affiliated practices.

                                       66

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

NOTE 6 - INDEBTEDNESS

 As of December 31, 2002 and 2001, respectively, the Company's long-term
 indebtedness consisted of the following:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                               ------------------------------------
                                                                    2002                  2001
                                                               -------------         --------------
      <S>                                                      <C>                   <C>
      Credit facility                                          $          --         $           --
      9.625% Senior Subordinated Notes due 2012 .........            175,000                     --
      8.42% Senior Secured Notes due 2006 ...............                 --                100,000
      Synthetic lease facility ..........................             72,018                     --
      Notes payable .....................................                818                  2,733
      Subordinated notes ................................             38,869                 67,438
      Capital lease obligations and other ...............                700                  2,695
                                                               -------------         --------------
                                                                     287,405                172,866
          Less: current maturities ......................            (15,363)               (44,040)
                                                               -------------         --------------
                                                               $     272,042         $      128,826
                                                               =============         ==============
</TABLE>

 Credit Facility

 From June 1999 until February 2002, the Company utilized a $175 million
 syndicated revolving credit facility for working capital and other corporate
 purposes expiring in June 2004.

 On February 1, 2002, the Company terminated its $175 million revolving facility
 and entered into a new $100 million five-year revolving credit facility (New
 Credit Facility), which expires in February 2007. Proceeds from loans under the
 New Credit Facility may be used to finance development of cancer centers and
 new positron emission tomography (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 were expensed during
 the first quarter of 2002 and recorded as an extraordinary loss in the
 Company's condensed consolidated statement of operations and comprehensive
 income. Costs incurred in connection with establishing the New Credit Facility
 are being capitalized and amortized over the term of the New 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 the London Interbank Offered Rate (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%. No amounts were borrowed or outstanding under the New Credit
 Facility during 2002 and 2001.

 Senior Secured Notes

 In November 1999, the Company issued $100 million in senior secured notes
 (Senior Secured Notes) to a group of institutional investors. The notes bore
 interest at 8.42%, matured in equal annual installments of $20 million from
 2002 through 2006 and ranked equally in right of payment with all current and
 future senior indebtedness of the Company. The Senior Secured Notes contained
 restrictive financial and operational covenants and were secured by the same
 collateral as the Company's previous credit facility.

 The Senior Secured Notes were repaid in full on February 1, 2002 with the
 proceeds of the Company's Senior Subordinated Notes.

 Senior Subordinated Notes

 On February 1, 2002, the Company issued $175 million in 9.625% senior
 subordinated notes (Senior Subordinated Notes) to various institutional
 investors in a private offering pursuant to Rule 144A. The notes were
 subsequently exchanged for substantially identical notes in an offering
 registered under the Securities Act of 1933. The notes are

                                       67

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

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 and other "Senior
Indebtedness," as defined in the indenture governing the Senior Subordinated
Notes.

Proceeds from the Senior Subordinated Notes were used to pay off the $100
million in borrowings under the existing Senior Secured Notes, an $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 $4.8 million and $2.7 million,
respectively. Costs incurred in connection with extinguishment of the Company's
previous Senior Secured Notes, including the prepayment penalty were expensed in
the first quarter of 2002 and reflected as an extraordinary loss in the
Company's condensed consolidated statement of operations and comprehensive
income. Costs incurred in connection with establishing the Senior Subordinated
Notes, including facility fees, were capitalized, and are being amortized over
the term of those notes.

Leasing Facility

The Company entered into a synthetic leasing facility in December 1997, under
which a special purpose entity has constructed and owns certain of the Company's
cancer centers and leases them to the Company. The facility was funded by a
syndicate of financial institutions and is secured by the property to which it
relates and matures in June 2004.

As of December 31, 2002, 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 $3.3
million, based on interest rates in effect as of December 31, 2002. At December
31, 2002, the lessor under the synthetic lease held real estate assets (based on
original acquisition and construction costs) of approximately $55.4 million and
equipment of approximately $16.6 million (based on original acquisition cost) at
nineteen locations.

The lease is renewable in one-year increments, but only with the 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. Effective December 31,
2002, the Company amended the synthetic lease agreement whereby the Company
guarantees 100% of the residual value of the properties in the lease.
Previously, the Company had guaranteed 85% of the residual value. The Company
increased its guaranty to provide greater ability to sell, move or transfer the
assets in the lease. In January 2003, the Company sold two properties under the
lease in connection with practice disaffiliations.

As a result of this amendment, the Company recorded $72.0 million outstanding
under the lease as indebtedness in its consolidated balance sheet. The Company
also included assets under the lease as assets in its consolidated balance sheet
based upon the Company's determination of fair values of those properties at
December 31, 2002, and recognized an impairment charge of $20.0 million in the
fourth quarter of 2002 related to these cancer centers. Prior to December 31,
2002, and increase to the Company's guarantee, the lease was recorded as an
operating lease and, accordingly neither the debt nor the assets were recorded
on its consolidated balance sheet.

     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. Events of default under the credit facility, synthetic leasing
facility and Senior Subordinated Notes included cross-defaults to all material
indebtedness, including each of those financings. Substantially all of the
Company's assets, including certain real property, are pledged as security under
the credit facility and the guarantee obligations of the synthetic leasing
facility.

Notes payable

The notes payable bear interest, which is payable annually, at rates ranging
from 5.3% to 10% and mature between 2003 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,
2002 and 2001 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

                                       68

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

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, 2002 and 2001, the gross amount of assets recorded under
the capital leases was $4.2 million and $4.7 million, respectively, and the
related accumulated amortization was $4.1 million and $4.2 million,
respectively. Amortization expense is included with depreciation in the
accompanying consolidated statement of operations and comprehensive income.
Other indebtedness consists principally of installment notes and bank debt, with
varying interest rates, assumed in affiliation transactions. See Note 13 for
operating lease commitments.

Maturities

As of December 31, 2002, future principal maturities of long-term indebtedness,
including capital lease obligations, were approximately $15.4 million in 2003,
$83.2 million in 2004, $6.4 million in 2005, $5.1 million in 2006, $1.9 million
in 2007 and $175.4 million thereafter.

NOTE 7 - INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                             -------------------------------------------------------------
                                                    2002                   2001                    2000
                                                    ----                   ----                    ----
<S>                                          <C>                    <C>                     <C>
Federal:
    Current ............................     $          689         $        7,547          $       33,638
    Deferred ...........................            (24,791)                18,713                 (72,037)
State:
    Current ............................                373                    522                   2,943
    Deferred ...........................               (338)                 1,606                     409
                                             --------------         --------------          --------------
                                             $      (24,067)        $       28,388          $      (35,047)
                                             ==============         ==============          ==============
</TABLE>

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,
                                                                           ------------------------------------
                                                                              2002         2001           2000
                                                                              ----         ----           ----
    <S>                                                                    <C>           <C>           <C>
    Provision (benefit) for income taxes at U.S. statutory rates .......      (35.0)%       35.0%         (35.0)%
    State income taxes, net of federal benefit .........................        0.3           2.5           2.2
    Other ..............................................................        0.3           0.5           0.3
                                                                           --------      --------      --------
                                                                              (34.4)%        38.0%        (32.5)%
                                                                           ========      ========      ========
</TABLE>

At December 31, 2002 and 2001, income taxes payable includes a tax liability of
$19.1 million and $21.2 million 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.

                                       69

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

Deferred income taxes are comprised of the following:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                             --------------------------------------
                                                                   2002                   2001
                                                                   ----                   ----
<S>                                                          <C>                     <C>
Deferred tax assets:
    Accrued expenses ..................................      $         9,342         $       10,797
    Service agreements and other intangibles ..........               37,393                 22,193
    Allowance for bad debt ............................                2,770                  3,569
    Other .............................................                  948                    769
                                                             ---------------         --------------
                                                                      50,453                 37,328
                                                             ---------------         --------------
Deferred tax liabilities:
    Depreciation ......................................               (7,208)               (18,700)
    Prepaid expenses ..................................                  (31)                  (543)
                                                             ---------------         --------------
                                                                      (7,239)               (19,243)
                                                             ---------------         --------------

Net deferred tax asset ................................      $        43,214         $       18,085
                                                             ===============         ==============
</TABLE>

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 2002 and 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 two years
ended December 31, 2002 and 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 $1.6 million and $1.4 million for the years
ended December 31, 2002, and 2001, respectively. For the year ended December 31,
2000, no employer contributions were made.

NOTE 9 - STOCKHOLDERS' EQUITY

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-K filed with the Securities and Exchange Commission on
June 2, 1997.

In March 2002, the Board of Directors of the Company authorized the repurchase
of up to $35.0 million in shares of the Company's Common Stock in public or
private transactions and authorized the Company to accept up to $15.0 million in
shares of its Common Stock in connection with terminating service agreements
with physician practices. In connection with this authorization, the Company
repurchased 4,117 shares of its Common Stock for $35.0 million, at an average
price of $8.50 per share.

In November 2002, the Board of Directors of the Company authorized the
repurchase of up to an additional $50.0 million in shares of its Common Stock in
public or private transactions. Through December 31, 2002, the Company had
repurchased 884 shares of its Common Stock for $7.8 million, at an average price
of $8.77 per share.

                                       70

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

The table below sets forth the Company's Treasury Stock activity for the years
ended December 31, 2002 and 2001 (shares in thousands):

<TABLE>
<CAPTION>
                                                                                          2002         2001
                                                                                          ----         ----
<S>                                                                                   <C>          <C>
Treasury Stock shares as of January 1, .............................................      2,309        4,538
Treasury Stock purchases ...........................................................      5,001            -
Treasury Stock received in connection with the sale of certain assets ..............      1,100            -
Treasury Stock issued in connection with affiliation transactions and exercise of
   employee stock options ..........................................................     (2,662)      (2,229)
                                                                                      ---------    ---------
Treasury Stock shares as of December 31, ...........................................      5,748        2,309
                                                                                      =========    =========
</TABLE>

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 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, 2002, the scheduled issuance of
the shares of Common Stock that the Company is committed to deliver over the
passage of time are approximately 1,392 in 2003, 1,391 in 2004, 894 in 2005, 18
in 2006, and none 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. At December 31, 2002, 8,538 Common Stock options with a
weighted average exercise price of $7.55 per share were outstanding, of which
4,785 shares were exercisable under the terms of the plan.

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 $2.5 million non-cash charge for
compensation expense during the fourth quarter of 2000, reflecting the
difference between the exercise prices of the options and

                                       71

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

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, 2002, 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, 2002, 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, 2002, 350 options with a weighted average exercise price of $8.63 per share
were outstanding and exercisable under the terms of the plan.

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 three to five years. Of the outstanding
options to purchase shares of Common Stock granted under this plan, 1,740 were
granted to physician employees of the affiliated practices and 26 were granted
to other employees of the affiliated practices. In 2002, 2001 and 2000 the
average fair value of the options granted to non-employees was $5.52, $5.34 and
$3.44 per share, respectively, as determined using the Black-Scholes Valuation
Model. Compensation expense will be recognized over the respective vesting
periods. Expense of $1.4 million, $2.0 million and $1.6 million was recognized
in 2002, 2001 and 2000, respectively, related to these options.

The 2002 Key Executive Performance Stock Option Plan provides for the grant of
up to 5,000 nonqualified stock options to key executive officers (including
officers who may be members of the Board of Directors) of US Oncology and its
subsidiaries. Persons receiving awards, vesting periods and terms and conditions
of individual options granted under the plan are determined by the compensation
committee of the board of directors, provided that (i) Options under the plan
may not be granted with an exercise prices less than 100% of the fair market
value per share of common stock at the date of grant and (ii) a minimum of 3,750
of the shares available under the plan were required to be granted in initial
grants, which contained the following provisions: (a) a requirement that the
option holder shall not receive any additional grants of stock options or other
equity interests (including, without limitation, restricted stock grants, stock
appreciation rights and phantom stock rights), whether pursuant to the plan or
any other plan, prior to the second anniversary of the holder's initial grant
under the plan; (b) a provision that vesting of the stock options granted would
not occur until seven years following the date of such grant, unless such
vesting is accelerated pursuant to the next provision below; and (c) a vesting
schedule setting forth certain internal return on invested capital (commonly
referred to as "ROIC") targets for US Oncology beginning with the fiscal year
ending December 31, 2002, which targets, if met, will result in some or all of
the stock options granted becoming vested and exercisable. Options to purchase
3,850 shares were granted during 2002 pursuant to such initial grants. In
addition, the Plan includes a requirement that the exercise price of any stock
options granted thereunder may not be decreased or otherwise "repriced", whether
through amendment, cancellation or replacement grants.

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 Represented      Weighted Average
                                                                By Options            Exercise Price
                                                                ----------            --------------
     <S>                                                    <C>                     <C>
     Balance January 1, 2000 .............................        14,608            $       8.16
        Granted ..........................................         3,599                    4.70
        Exercised ........................................        (2,171)                   3.50
</TABLE>

                                       72

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

      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
      Granted ......................................         4,655          7.22
      Exercised ....................................          (724)         4.85
      Canceled .....................................          (650)        10.32
                                                       -----------
   Balance December 31, 2002 .......................        16,296          7.50
                                                       ===========

The weighted average exercise price and weighted average fair value of options
granted in 2002, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                      2002                          2001                          2000
                                          ----------------------------  ----------------------------  ----------------------------
                                           Weighted Avg.  Weighted Avg.  Weighted Avg.  Weighted Avg.  Weighted Avg.  Weighted Avg.
                                          Exercise Price   Fair Value   Exercise Price   Fair Value   Exercise Price   Fair Value
                                          --------------   ----------   --------------   ----------   --------------   ----------
<S>                                       <C>             <C>           <C>             <C>           <C>             <C>
Option price equals fair market
value ..................................  $         7.22  $       7.34  $         7.12  $       7.69  $         4.70  $       3.42

Option price less than fair market
value ..................................               -             -            4.12          5.27               -             -
</TABLE>

The following table summarizes information about the Company's stock options
outstanding at December 31, 2002:

<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            12/31/02      Contractual Life        Price           12/31/02       Exercise Price
     -----            --------      ----------------        -----           --------       --------------
<S>                <C>              <C>                <C>                <C>              <C>
   $1 to $3               153              6.6              $ 2.97              120            $ 3.29
    4 to 9             12,783              7.6                6.28            4,993              7.01
   10 to 14             2,655              5.6               11.40            2,041             11.22
   15 to 24               705              4.8               16.05              668             16.55
                       ------                                                 -----
    1 to 24            16,296              7.1                7.50            7,822              8.25
                       ======                                                 =====
</TABLE>

Options granted in 2002, 2001 and 2000 had weighted-average fair values of
$5.28, $5.04, and $3.42 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,
                                      -----------------------------------------
                                           2002          2001         2000
                                           ----          ----         ----

     Expected life (years) ..........         5             5            5
     Risk-free interest rate ........       1.6%          3.5%         6.1%
     Expected volatility ............        80%           81%          80%
     Expected dividend yield ........         0%            0%           0%

                                       73

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

NOTE 11 - IMPAIRMENT, RESTRUCTURING, AND OTHER CHARGES, NET

During 2002, 2001 and 2000, the Company recognized net impairment, restructuring
and other charges of $150.1 million, $5.9 million and $201.8 million,
respectively. The charges are summarized in the following table and discussed in
more detail below:

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                      ------------------------------------------------
                                           2002             2001              2000
                                           ----             ----              ----
     <S>                                <C>               <C>              <C>
     Impairment charges (gains) ....    $ 135,147         $ (3,376)        $ 170,130
     Restructuring charges .........        3,825            5,868            16,122
     Other charges .................       11,088            3,376            15,594
                                        ---------         --------         ---------
                                        $ 150,060         $  5,868         $ 201,846
                                        =========         ========         =========
</TABLE>

                               Impairment Charges

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                           -------------------------------------------------
                                                                 2002             2001             2000
                                                                 ----             ----             ----
     <S>                                                      <C>              <C>              <C>
     Impairment of service agreements ..................      $ 113,197        $       -        $ 138,128
     Impairment of cancer center assets ................         27,603                -                -
     Impairment of assets (gain on separation) related
       to termination of service agreements ............         (5,653)          (3,376)          32,002
                                                              ---------        ---------        ---------
                                                              $ 135,147        $  (3,376)       $ 170,130
                                                              =========        =========        =========
</TABLE>

Generally accepted accounting principles require 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 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.

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

                                       74

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

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 $145.0 million as of
December 31, 2000 prior to the impairment charge. 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 $138.1 million related to
thirteen service agreements, primarily for arrangements under the net 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 $32.0 million 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 $3.4 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 the Company terminated its
relationships where the ultimate settlements were more beneficial to the Company
than the Company estimated during 2000. The net gain included the forgiveness of
$1.5 million in notes payable by the Company to physicians, the waiver by the
physicians of their rights to receive $1.2 million 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 $6.3 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 the Company expected
to realize from those assets.

The 2002 charges relating to impairment of service agreements include (a) a
non-cash, pretax charge during the third quarter of $68.3 million comprising (i)
a $13.0 million charge related to a PPM service agreement that was terminated in
connection with conversion to the service line model, (ii) a $51.0 million
charge related to three net revenue model service agreements that became
impaired during the third quarter based upon the Company's analysis of projected
cash flows under those agreements, taking into account developments in those
markets during the third quarter and (iii) a $4.3 million charge related to a
group of physicians under a net revenue model service agreement with which the
Company disaffiliated during the third quarter, (b) a non-cash, pretax charge of
$39.7 million during the second quarter comprising (i) a $33.8 million charge
related to a net revenue model service agreement that became impaired during the
second quarter based upon the Company's analysis of projected cash flows under
that agreement, taking into account developments in that market during the
second quarter and (ii) a $5.9 million charge related to two PPM service
agreements that were terminated in connection with conversions to the service
line model and (c) a non-cash pretax charge during the fourth quarter of $5.2
million related to impairment of a service agreement under which the Company
significantly reduced the scope of services provided during the year.

                                       75

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

The $5.6 million net gain on sale of practice assets during 2002 consisted of
(i) a $3.6 million net gain on sale of practice assets during the third quarter
comprising net proceeds of $4.9 million paid by converting and disaffiliating
physicians, partially offset by a $0.3 million net loss on working capital
assets, and a $1.1 million net charge arising from accelerating consideration
that would have been due to physicians in the future in connection with those
transactions; and (ii) a $2.0 million net gain on sale of practice assets during
the second quarter. During the second quarter of 2002, the Company terminated a
service agreement as it related to certain radiology sites and sold the related
assets, including the right to future revenues attributable to radiology
technical fee revenue at those sites, in exchange for delivery of 1.1 million
shares of the Company's Common Stock. In connection with that sale, the Company
also recognized a write-off of a receivable of $0.5 million due from the
physicians and agreed to make a cash payment to the buyer of $0.6 million to
reflect purchase price adjustments during the third quarter of 2002. The
transaction resulted in a $3.9 million gain based on the market price of the
Company's Common Stock as of the date of the termination. This gain was
partially offset by a $1.9 million net impairment of working capital assets
relating to service line conversions, disaffiliations and potential
disaffiliations.

The $27.6 million fixed asset charge during the fourth quarter of 2002 was based
upon the Company's determination as a result of transitional activity during the
quarter, that assets relating to 16 of its 79 cancer centers had become
impaired. A summary of the activity involved is as follows:

     .    $8.1 million relates to eight cancer centers that became impaired
          during the fourth quarter based upon the Company's decision to close
          or dispose of such centers, comprising (i) two cancer centers that
          were sold, one that was leased to a departing physician, one that was
          closed, and two the Company agreed to close and replace for a practice
          that will in part convert to the earnings model and in part
          disaffiliate in the first quarter of 2003; (ii) one cancer center the
          Company determined to sell in connection with the anticipated
          departure of radiation oncologists from a group management expects to
          convert to the service line in the first half of 2003; and (iii) one
          cancer center the Company closed as part of a consolidation of
          services within one market.

     .    $14.1 million relates to five cancer centers used by groups that had
          converted to the earnings model. The centers became impaired as a
          result of the Company's ongoing discussions with physician practices
          during the latter part of 2002 regarding underperforming centers. In
          some of these discussions, the Company has agreed to assume greater
          liability for underperforming assets or for cancer center closures.
          Three of these centers were opened during 2001, and management
          generally cannot fully assess the long-term value of a center until
          after a "ramp-up" period of 12 to 18 months.

     .    $5.4 million relates to three cancer centers that became impaired
          during the fourth quarter, comprising (i) one center in which the
          Company determined that its relationship with the practice, as well as
          the announced departure of several physicians from that practice,
          meant improvement in substandard performance was unlikely and (ii) two
          centers in which management had determined that its remedial actions
          taken since opening had been ineffective and additional remedial
          actions were unlikely to improve performance.

                              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. As a result of this analysis,
during the fourth quarter of 2000, the Company recorded restructuring charges of
$16.1 million comprising (i) $6.5 million related to abandonment of information
systems initiatives, including clinical information systems and e-commerce
initiatives, (ii) $6.5 million impairment of a home health business, (iii) $0.4
million related to contractual severance of an executive position and (iv) $2.6
million related to abandonment of leased and owned facilities for remaining
lease obligations and the difference in the net book value of the owned real
estate and its expected fair value. Details of the restructuring charge activity
relating to that charge in 2002 are as follows:

                                       76

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                         Accrual at                         Accrual at
                                                     December 31, 2001     Payments     December 31, 2002
                                                     -----------------     --------     -----------------
     <S>                                             <C>                 <C>            <C>
     Severance of employment agreements ............    $       215      $       (18)      $       197
     Site closures .................................          1,081             (293)              788
                                                        -----------      -----------       -----------
               Total ...............................    $     1,296      $      (311)      $       985
                                                        ===========      ===========       ===========
</TABLE>

                                       77

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

During the first quarter of 2001, the Company announced plans to further reduce
overhead costs and recognized additional pre-tax restructuring charges of $5.9
million, consisting of (i) a $3.1 million charge relating to the elimination of
approximately 50 personnel positions, (ii) a $2.5 million charge for remaining
lease obligations and related improvements at sites the Company decide to close
and (iii) a $0.3 million charge relating to abandoned software applications.
Details of the restructuring charge activity relating to that charge in 2002 are
as follows:

<TABLE>
<CAPTION>
                                                        Accrual at                         Accrual at
                                                    December 31, 2001     Payments     December 31, 2002
                                                    -----------------     --------     -----------------
     <S>                                            <C>                 <C>            <C>
     Costs related to personnel reductions ........    $       213      $      (213)      $         -
     Closure of facilities ........................          1,132             (271)              861
                                                       -----------      -----------       -----------
               Total ..............................    $     1,345      $      (484)      $       861
                                                       ===========      ===========       ===========
</TABLE>

In connection with the Company's focus on internal operations and cost
structure, management commenced an initiative to further centralize certain
accounting and financial reporting functions at its corporate headquarters in
Houston, Texas, resulting in charges for personnel reduction costs of $2.4
million in 2002, all of which was paid in 2002.

During 2002, the Company also recognized restructuring charges of $1.4 million
in consulting fees related to its introduction of the service line model, all of
which was paid in 2002.

                                      Other

During 2002, 2001 and 2000, the Company recorded other charges, as follows:

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                    ----------------------------------
                                                                        2002       2001       2000
                                                                        ----       ----       ----
        <S>                                                           <C>        <C>        <C>
        Affiliate receivable write-off ............................   $ 11,088   $      -   $      -
        Cashless stock option exercise costs ......................          -          -      2,462
        Investigation and contract separation costs ...............          -          -      3,372
        Practice accounts receivables .............................          -      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 .....................................................   $ 11,088   $  3,376   $ 15,594
                                                                      ========   ========   ========
</TABLE>

During the third quarter of 2002, the Company recognized an $11.1 million
write-off related to an $11.1 million receivable due to the Company from one of
its affiliated practices. In the course of our PPM activities, we advance
amounts to physician groups and retains fees based upon management's estimates
of practice performance. Subsequent events and related adjustments may result in
the creation of a receivable with respect to certain amounts advanced. During
the third quarter 2002, the Company made the determination that a portion of
such amounts owed by physician practices to the Company have become
uncollectible due to, among other things, the age of the receivable and
circumstances relating to practice operations.

In the fourth quarter of 2001, the Company 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 its estimated exposure to losses under an
insurance policy where the insurer has become insolvent (Note 12), and (iii)
$0.4 million of consulting costs incurred in connection with development of its
service line structure.

                                       78

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

In the fourth quarter of 2000, the Company recognized a pre-tax $2.5 million
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. 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 $1.0 million 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 $0.2 million and approximately $1.7 million, respectively, in connection with
qui tam lawsuits, consisting primarily of professional and legal fees and
related expenses. In addition, the Company 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 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
$9.8 million in 2000. These charges consist of (i) $5.1 million of receivables
from affiliated practices which 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 the
Company's vacation policy.

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

NOTE 12 - SEGMENT FINANCIAL INFORMATION

The Company has adopted the provisions of FASB Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information" (FAS 131). FAS 131 requires the utilization of a "management
approach" to define and report the financial results of operating segments. The
management approach defines operating segments along the lines used by
management to assess performance and make operating and resource allocation
decisions.

Beginning in the first quarter of 2002, the Company has determined that its
reportable segments are those that are based on the Company's method of internal
reporting, which disaggregates its business by service line, and that sufficient
information is now available to permit such reporting. The Company's reportable
segments are oncology pharmaceutical services, other practice management
services, cancer center services, and cancer research services. The oncology
pharmaceutical services segment purchases and manages specialty oncology
pharmaceuticals for the Company's affiliated practices. Management of the
administrative aspects of affiliated medical oncology practices is included in
the other practice management services segment. The cancer center services
segment develops and manages comprehensive, community-based cancer centers,
which integrate all aspects of outpatient cancer care, from laboratory and
radiology diagnostic capabilities to chemotherapy and radiation therapy. The
cancer research services segment contracts with pharmaceutical and biotechnology
firms to provide a comprehensive range of services relating to clinical trials.
The operating results of this segment are reflected in the "other" category. The
Company's business is conducted entirely in the United States.

The financial results of the Company's segments are presented on the accrual
basis. For 2002, 99.3% of the Company's oncology pharmaceutical services revenue
and cancer center services revenue was derived from the PPM model with the
remainder derived under service line model agreements providing oncology
pharmaceutical services. To determine results of the oncology pharmaceutical
services segment with respect to practices managed under the Company's PPM
model, management has assumed that the pharmaceuticals purchased and pharmacy
management services under this segment are provided at rates consistent with the
rates at which the Company is currently offering those services outside of the
PPM model. Therefore, the financial results of that segment include
inter-segment revenues while other practice management services reflects PPM
results after the effect of removing the oncology pharmaceutical services
results and cancer center services results (which are actual results of that
service line within the PPM model) disclosed below. As such, the combined
operating results of the oncology

                                       79

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

pharmaceutical services segment and other practice management segments for the
year ended December 31, 2002 represent the operating results under the Company's
PPM activities relative to the management of the non-medical aspects of
affiliated medical oncology practices plus the results under oncology
pharmaceutical services for practices under service line model agreements.

The Company has not disclosed prior year's segment data on a comparative basis
because management could not obtain comparative data for prior years due to
financial systems limitations. Asset information by reportable segment is not
reported since the Company does not produce such information internally.

The table below presents information about reported segments for the year ended
December 31, 2002:

<TABLE>
<CAPTION>
                                                               Other
                                            Oncology         Practice          Cancer
                                         Pharmaceutical     Management         Center
                                            Services         Services         Services        Other         Total
                                            --------         --------         --------        -----         -----
<S>                                      <C>                <C>              <C>           <C>           <C>
Net operating revenue                      $  911,202       $  850,308       $  304,516    $   62,635    $ 2,128,661
Amounts retained by affiliated practices       (1,155)        (375,303)         (96,282)       (4,605)      (477,345)
                                           ----------       ----------       ----------    ----------    -----------
Revenue                                       910,047          475,005          208,234        58,030      1,651,316
Operating expenses                           (823,099)        (380,961)        (164,256)     (315,657)    (1,683,973)
                                           ----------       ----------       ----------    ----------    -----------
Income (loss) from operations              $   86,948       $   94,044       $   43,978    $ (257,627)   $   (32,657)
                                           ==========       ==========       ==========    ==========    ===========
</TABLE>

The Company evaluates the performance of its segments based on, among other
things, earnings before interest, taxes, depreciation, amortization, impairment,
restructuring and other charges and extraordinary loss (EBITDA).

The following is a reconciliation of consolidated income (loss) from operations
to EBITDA for the year ended December 31, 2002:

<TABLE>
<CAPTION>
                                                               Other
                                            Oncology         Practice          Cancer
                                         Pharmaceutical     Management         Center
                                            Services         Services         Services        Other         Total
                                            --------         --------         --------        -----         -----
<S>                                      <C>                <C>              <C>           <C>           <C>
Income (loss) from operations              $   86,948       $   94,044       $   43,978    $ (257,627)   $   (32,657)
Impairment, restructuring and other
charges, net                                        -                -                -       150,060        150,060
Depreciation and amortization                     190                -           19,888        51,781         71,859
                                           ----------       ----------       ----------    ----------    -----------
EBITDA                                     $   87,138       $   94,044       $   63,866    $  (55,786)   $   189,262
                                           ==========       ==========       ==========    ==========    ===========
</TABLE>

NOTE 13 - 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 $51.9 million in 2003, $42.9 million in 2004, $35.4 million
in 2005, $24.5 million in 2006, $18.6 million in 2007, and $65.8 million
thereafter. Rental expense was approximately $67.4 million in 2002, $61.1
million in 2001 and $57.7 million in 2000.

The Company enters into commitments with various construction companies and
equipment vendors in connection with the development of cancer centers. As of
December 31, 2002, the Company's commitments were approximately $14.9 million.

                                       80

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

Synthetic Lease Facility

Effective December 31, 2002, the Company amended the synthetic lease agreement
whereby the Company guarantees 100% of the residual value of the properties in
the lease. Previously, the Company had guaranteed 85% of the residual value. The
Company increased its guaranty in connection with the lease amendment in order
to provide the ability to sell, move or transfer the assets in the lease. In
January 2003, the Company sold two properties under the lease in connection with
practice disaffiliations.

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.

                                       81

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

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 $0.1 million - $0.3 million 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 $1.0 million to estimate potential costs it may incur
either directly or indirectly during this process.

Guarantees

Beginning January 1, 1997, the Company has guaranteed that the amounts retained
by the Company's affiliated practice in Minnesota will be at least $5.2 million
annually under the terms of the related service agreement provided that certain
targets are met. The Company has not been required to make payments under this
guarantee to that practice for any of the three years ended December 31, 2002.

Litigation

The Company has previously disclosed that it and certain of its affiliated
practices are the subject of certain qui tam complaints, commonly referred to as
"whistle-blower" lawsuits, filed under seal. The U.S. Department of Justice has
determined that it will not intervene in any of those qui tam suits of which the
Company is aware. In one such 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 other qui tam
suits of which we are aware have been dismissed. Furthermore, the Company may
from time to time in the future become aware of additional qui tam lawsuits. The
United States has determined not to intervene in any such suit against the
Company of which the Company is aware. 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.

                                       82

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

NOTE 14 - 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 $2.0 million in 2002, $3.3
million in 2001 and $3.2 million in 2000, respectively, and total future
commitments are $6.5 million as of December 31, 2002.

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 $3.8 million in 2002, $5.6
million in 2001, and $7.3 million in 2000, respectively.

Two of the Company's directors as of December 31, 2002, one director who served
through February 2002, and one director who served through June 2001, are
practicing physicians with practices affiliated with the Company. In 2002, the
practices in which these directors participate generated a total net patient
revenue of $658.9 million of which $141.2 million was retained by the practices
and $517.7 million was included in the Company's revenue. In 2001, the practices
in which these directors participate generated a total net patient revenue of
$590.5 million of which $119.4 million was retained by the practices and $471.1
million was included in the Company's revenue. In 2000, the practices in which
these directors participate generated a total net patient revenue of $545.4
million of which $112.8 million was retained by the practices and $432.6 million
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, and
provision for uncollectible accounts, salaries, and benefits of non-physician
employees, medical supply expense, and pharmaceuticals. In 2002, 2001 and 2000,
TOPA paid the Company an aggregate of approximately $389.5 million, $354.6
million and $318.5 million, 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 1.5% of the Company's
outstanding Common Stock. At December 31, 2002 and 2001, TOPA was indebted to
the Company in the aggregate amount of approximately $6.3 million and $6.8
million, 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 (4.25% at December 31, 2002). 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 2002, 2001 and 2000, payments by the Company to BUMC totaled an
aggregate of approximately $3.0 million, $3.2 million, and $3.3 million,
respectively, for these services.

                                       83

<PAGE>

                                US ONCOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                    (in thousands, except per share amounts)

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 $0.5 million to MOHPA through July 1, 2000. During
2000, the Company paid MOHPA $0.9 million 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 and 2000, the Company issued 134 and 176 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 2002, 2001, and 2000, the
Company had agreements with twenty, thirteen, and eleven medical directors under
which the Company paid $1.8 million, $1.1 million, and $0.7 million,
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
$8.0 million from a group of individuals, including certain physicians to whom
the Company provides services. The Company recognized a loss of $6.5 million in
2000 to reflect the net realizable value of this business.

NOTE 15 - QUARTERLY FINANCIAL DATA

The following table presents unaudited quarterly information:

<TABLE>
<CAPTION>
                                              2002 Quarter Ended                                   2001 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>
Revenue ...................  $ 428,815    $ 420,177    $ 410,972    $   391,352    $ 388,893    $ 375,499    $ 383,571   $ 367,932
Income (loss) from
    operations ............     (4,478)     (46,673)      (9,165)        27,659       24,578       26,029       27,155      19,453

Other expense .............     (5,850)      (6,073)      (6,274)        (5,509)      (3,915)      (5,216)      (6,641)     (6,739)
Net income (loss) before
extraordinary loss ........     (5,430)     (36,207)      (9,572)        13,733       12,811       12,904       12,718       7,883
Extraordinary loss on
early extinguishment of
debt, net of income
taxes .....................          -            -            -         (8,452)           -            -            -           -

Net income (loss)/(1)/ ....     (5,430)     (36,207)      (9,572)         5,281       12,811       12,904       12,718       7,883
Net income (loss) per
    share - basic/(1)/ ....  $   (0.06)   $   (0.37)       (0.10)   $      0.14    $    0.13    $    0.13    $    0.13   $    0.08
Extraordinary loss per
    share - basic/(1)/ ....          -            -            -          (0.09)           -            -            -           -
Net income (loss) per
    share - basic/(1)/ ....  $   (0.06)   $   (0.37)       (0.10)   $      0.05    $    0.13    $    0.13    $    0.13   $    0.08
Net income (loss) per
    share - diluted/(1)/ ..  $   (0.06)   $   (0.37)       (0.10)   $      0.14    $    0.13    $    0.13    $    0.13   $    0.08
Extraordinary loss per
    share - diluted/(1)/ ..          -            -            -          (0.09)           -            -            -           -
Net income (loss) per
    share - diluted/(1)/ ..  $   (0.06)   $   (0.37)       (0.10)   $      0.05    $    0.13    $    0.13    $    0.13   $    0.08
</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.

                                       84

<PAGE>

PART III

Item 10.  Directors and Executive Officers Of The Registrant

         The Proxy Statement issued in connection with the 2003 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 2003 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 2003 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 2003 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.

Item 14.  Controls and Procedures

         Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in our periodic SEC filings.

         The CEO and CFO note that, since the date of the evaluation to the date
of this report, there have been no significant changes in internal controls or
in other factors that could significantly affect internal controls, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

         While the disclosure controls and procedures have been effective in
providing material information, we continue to seek to strengthen such
disclosure controls and procedures. During the fourth quarter of 2002, we
continued the centralization of our financial reporting controls and procedures
at our corporate offices in Houston. This process change will result in the
elimination of certain functions that were previously performed on a regional
and local basis. We believe that this change will result in enhanced reliability
and timeliness of disclosure and believe that centralization will eliminate
certain of the risks with respect to financial reporting that are inherent in a
broad decentralized system.

                                       85

<PAGE>

PART IV

Item 15.  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: None.
         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 Company's 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 Company's Form 8-K/A filed June 17, 1999).

         3.2      Amended and Restated By-Laws of the Company.

         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).

         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 (filed as Exhibit 10.1 to the
                  Company's Form 10-K for the year ended December 31, 2001).

         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 (filed as Exhibit 10.2 to the Company's
                  Form 10-K for the year ended December 31, 2001).

         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 (filed
                  as Exhibit 10.3 to the Company's Form 10-K for the year ended
                  December 31, 2001).

         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).

                                       86

<PAGE>

         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 Company's 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 Company's Form
                  10-K for the year ended December 31, 2000 and incorporated
                  herein by reference).

         10.15*   US Oncology, Inc. 2002 Key Executive Performance Stock Option
                  Plan (filed as Exhibit ____ to the Company's Form 10-Q filed
                  for the quarter ended June 30, 2002 and incorporated herein by
                  reference).

         10.16.   First Amendment to Certain Operative Agreements by and among
                  AOR Synthetic Real Estate, Inc.; the Company; Wells Fargo Bank
                  Northwest, National Association (as successor to First
                  Security Bank, National Association); Wachovia Bank, National
                  Association (as successor-in-interest to First Union National
                  Bank); and the other parties named therein, dated October 18,
                  2002 and effective December 31, 2002.

         10.17    First Amendment dated October 25, 2002 to Credit Agreement
                  dated as of February 1, 2002 among the Company, Wachovia Bank,
                  as administrative agent; VBS Warburg LLC, as syndication
                  agent; GE Capital Healthcare Financial Services, as
                  documentation agent; and other Lenders named therein

         21.1     Subsidiaries of the Registrant.

         23.1     Consent of PricewaterhouseCoopers LLP.

         99.1     Certification of CEO.

         99.2     Certification of CFO.

 (b)     Reports on Form 8-K.

         None

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

                                       87

<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 20th day of March,
2003.


                                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, Chief                   March 20, 2003
  ------------------------------------------     Executive Officer and Director
         R. Dale Ross                            (Principal Executive Officer)

         /s/ Bruce D. Broussard                  Chief Financial Officer and Treasurer          March 20, 2003
  ------------------------------------------     (Principal Financial and Accounting
         Bruce D. Broussard                      Officer)


         /s/ Russell L. Carson                   Director                                       March 20, 2003
  ------------------------------------------
         Russell L. Carson

         /s/ J. Taylor Crandall                  Director                                       March 20, 2003
  ------------------------------------------
         J.  Taylor Crandall

         /s/ James E. Dalton                     Director                                       March 20, 2003
  ------------------------------------------
         James E. Dalton

         /s/ Lloyd K. Everson, M.D.              Director                                       March 20, 2003
  ------------------------------------------
         Lloyd K. Everson, M.D.

         /s/ Stephen E. Jones, M.D.              Director                                       March 20, 2003
  ------------------------------------------
         Stephen E. Jones, M.D.

         /s/ Richard B. Mayor                    Director                                       March 20, 2003
  ------------------------------------------
         Richard B. Mayor

         /s/ Robert A. Ortenzio                  Director                                       March 20, 2003
  ------------------------------------------
         Robert A. Ortenzio

         /s/ Boone Powell, Jr.                   Director                                       March 20, 2003
  ------------------------------------------
         Boone Powell, Jr.

         /s/ Burton S. Schwartz, M.D.            Director                                       March 20, 2003
  ------------------------------------------
         Burton S. Schwartz, M.D.
</TABLE>

                                       88

<PAGE>

                                  CERTIFICATION

I, R. Dale Ross, Chief Executive Officer of US Oncology, Inc., certify that:

     1. I have reviewed this annual report on Form 10-K of US Oncology, Inc.;

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

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

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

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

          b) evaluated the effectiveness of the registrant's disclosure controls
             and procedures as of a date within 90 days prior to the filing date
             of this annual report (the "Evaluation Date"); and

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

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

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

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

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

Date: March 20, 2003

                                   /s/ R. Dale Ross
                                   ---------------------------------------------
                                   R. Dale Ross
                                   Chief Executive Officer of US Oncology, Inc.

                                       89

<PAGE>

                                  CERTIFICATION

I, Bruce D. Broussard, Chief Financial Officer of US Oncology, Inc., certify
that:

     1. I have reviewed this Annual Report on Form 10-K of US Oncology, Inc.;

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

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

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

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

          b) evaluated the effectiveness of the registrant's disclosure controls
             and procedures as of a date within 90 days prior to the filing date
             of this annual report (the "Evaluation Date"); and

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

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

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

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

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

Date: March 20, 2003

                                   /s/ Bruce D. Broussard
                                   ---------------------------------------------
                                   Bruce D. Broussard
                                   Chief Financial Officer of US Oncology, Inc.

                                       90