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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



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



For the quarterly period ended September 30, 2003



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 incorporation or organization) |  | (I.R.S. Employer I.D. Number)



16825 Northchase
Drive, Suite 1300

Houston, Texas 77060

(Address of principal executive officers)



(832) 601-8766

(Registrants telephone number, including area code)



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



Indicate by check mark whether the Registrant (1) is an accelerated filer (as defined in Rule 12(b)-2 of the Securities Exchange Act of 1934. Yes x No ̈



As of November 3, 2003, 84,179,849 shares of the Registrants Common Stock were outstanding. In addition, as of November 3, 2003, the Registrant had agreed to
deliver 2,257,174 shares of its Common Stock on certain future dates for no additional consideration.



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##### Table of Contents

US ONCOLOGY, INC.

FORM 10-Q

September 30, 2003



TABLE OF CONTENTS



|         |  |                                                                                      
|-------- |  | -------------------------------------------------------------------------------------
|PART I.  |  | FINANCIAL INFORMATION                                                                
|         |  |                                                                                      
|ITEM 1.  |  | Condensed Consolidated Financial Statements                                          
|         |  |                                                                                      
|         |  | Condensed Consolidated Balance Sheet                                                 
|         |  |                                                                                      
|         |  | Condensed Consolidated Statement of Operations and Comprehensive Income              
|         |  |                                                                                      
|         |  | Condensed Consolidated Statement of Cash Flows                                       
|         |  |                                                                                      
|         |  | Notes to Condensed Consolidated Financial Statements                                 
|         |  |                                                                                      
|ITEM 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|         |  |                                                                                      
|ITEM 3.  |  | Quantitative and Qualitative Disclosures about Market Risks                          
|         |  |                                                                                      
|ITEM 4.  |  | Controls and Procedures                                                              
|         |  |                                                                                      
|PART II. |  | OTHER INFORMATION                                                                    
|         |  |                                                                                      
|ITEM 1.  |  | Legal Proceedings                                                                    
|         |  |                                                                                      
|ITEM 6.  |  | Exhibits and Reports on Form 8-K                                                     
|         |  |                                                                                      
|         |  | SIGNATURES                                                                           
|         |  |                                                                                      
|         |  | CERTIFICATIONS                                                                       



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##### Table of Contents

PART I  FINANCIAL INFORMATION



|ITEM 1. |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|------- |  | -------------------------------------------



US ONCOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands, except par value)

(unaudited)



|                                                                                                                 |  | September 30,2003 |           |   | December 31,2002 |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | -
|ASSETS                                                                                                           |  |                   |           |   |                  |  
|Current assets:                                                                                                  |  |                   |           |   |                  |  
|Cash and equivalents                                                                                             |  | $                 | 125,422   |   |                  | $
|Accounts receivable                                                                                              |  |                   | 287,253   |   |                  |  
|Other receivables, net                                                                                           |  |                   | 41,095    |   |                  |  
|Prepaid expenses and other current assets                                                                        |  |                   | 22,835    |   |                  |  
|Inventories                                                                                                      |  |                   | 4,840     |   |                  |  
|Due from affiliates                                                                                              |  |                   | 40,972    |   |                  |  
|                                                                                                                 |  |                   |           |   |                  |  
|Total current assets                                                                                             |  |                   | 522,417   |   |                  |  
|Property and equipment, net                                                                                      |  |                   | 344,695   |   |                  |  
|Service agreements, net                                                                                          |  |                   | 242,438   |   |                  |  
|Due from affiliates, long-term                                                                                   |  |                   |          |   |                  |  
|Deferred income taxes                                                                                            |  |                   | 13,292    |   |                  |  
|Other assets                                                                                                     |  |                   | 24,268    |   |                  |  
|                                                                                                                 |  |                   |           |   |                  |  
|                                                                                                                 |  | $                 | 1,147,110 |   |                  | $
|                                                                                                                 |  |                   |           |   |                  |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                             |  |                   |           |   |                  |  
|Current liabilities:                                                                                             |  |                   |           |   |                  |  
|Current maturities of long-term indebtedness                                                                     |  | $                 | 80,800    |   |                  | $
|Accounts payable                                                                                                 |  |                   | 152,432   |   |                  |  
|Due to affiliates                                                                                                |  |                   | 63,108    |   |                  |  
|Accrued compensation cost                                                                                        |  |                   | 23,322    |   |                  |  
|Income taxes payable                                                                                             |  |                   | 10,711    |   |                  |  
|Other accrued liabilities                                                                                        |  |                   | 42,418    |   |                  |  
|                                                                                                                 |  |                   |           |   |                  |  
|Total current liabilities                                                                                        |  |                   | 372,791   |   |                  |  
|Long-term indebtedness                                                                                           |  |                   | 190,308   |   |                  |  
|                                                                                                                 |  |                   |           |   |                  |  
|Total liabilities                                                                                                |  |                   | 563,099   |   |                  |  
|Minority interest                                                                                                |  |                   | 9,553     |   |                  |  
|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 95,301 issued, 84,371 and 89,553 outstanding |  |                   | 953       |   |                  |  
|Additional paid in capital                                                                                       |  |                   | 475,338   |   |                  |  
|Common Stock to be issued, approximately 2,366 and 3,695 shares                                                  |  |                   | 22,637    |   |                  |  
|Treasury Stock, 10,930 and 5,748 shares                                                                          |  |                   | (90,409   | ) |                  |  
|Retained earnings                                                                                                |  |                   | 165,939   |   |                  |  
|                                                                                                                 |  |                   |           |   |                  |  
|Total stockholders equity                                                                                       |  |                   | 574,458   |   |                  |  
|                                                                                                                 |  |                   |           |   |                  |  
|                                                                                                                 |  | $                 | 1,147,110 |   |                  | $
|                                                                                                                 |  |                   |           |   |                  |  



The accompanying notes
are an integral part of this statement.



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US ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE

INCOME

(in thousands, except per share data)

(unaudited)



|                                                  |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | -
|                                                  |  | 2003                            |         |   | 2002                           |  
|Revenue                                           |  | $                               | 509,100 |   |                                | $
|Operating expenses:                               |  |                                 |         |   |                                |  
|Pharmaceuticals and supplies                      |  |                                 | 297,544 |   |                                |  
|Field compensation and benefits                   |  |                                 | 90,062  |   |                                |  
|Other field costs                                 |  |                                 | 49,382  |   |                                |  
|General and administration                        |  |                                 | 19,222  |   |                                |  
|Depreciation and amortization                     |  |                                 | 17,187  |   |                                |  
|Impairment, restructuring and other charges       |  |                                 | 1,752   |   |                                |  
|                                                  |  |                                 |         |   |                                |  
|                                                  |  |                                 | 475,149 |   |                                |  
|                                                  |  |                                 |         |   |                                |  
|Income (loss) from operations                     |  |                                 | 33,951  |   |                                |  
|Other income (expense):                           |  |                                 |         |   |                                |  
|Interest expense, net                             |  |                                 | (4,667  | ) |                                |  
|Loss on early extinguishment of debt              |  |                                 |        |   |                                |  
|                                                  |  |                                 |         |   |                                |  
|Income (loss) before income taxes                 |  |                                 | 29,284  |   |                                |  
|Income tax benefit (provision)                    |  |                                 | (11,421 | ) |                                |  
|                                                  |  |                                 |         |   |                                |  
|Net income (loss) and comprehensive income (loss) |  | $                               | 17,863  |   |                                | $
|                                                  |  |                                 |         |   |                                |  
|Net income (loss) per share - basic               |  | $                               | 0.20    |   |                                | $
|                                                  |  |                                 |         |   |                                |  
|Shares used in per share calculations - basic     |  |                                 | 88,472  |   |                                |  
|                                                  |  |                                 |         |   |                                |  
|Net income (loss) per share - diluted             |  | $                               | 0.20    |   |                                | $
|                                                  |  |                                 |         |   |                                |  
|Shares used in per share calculations - diluted   |  |                                 | 89,986  |   |                                |  
|                                                  |  |                                 |         |   |                                |  



The accompanying notes
are an integral part of this statement.



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US ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                       |  | Nine Months EndedSeptember 30, |        
|---------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                       |  | 2003                           |        
|Cash flows from operating activities:                                  |  |                                |        
|Net income (loss)                                                      |  | $                              | 51,767 
|Non cash adjustments:                                                  |  |                                |        
|Depreciation and amortization                                          |  |                                | 54,966 
|Impairment, restructuring and other charges                            |  |                                |       
|Loss on early extinguishment of debt, net of income taxes              |  |                                |       
|Loss (gain) on sale of assets                                          |  |                                | 1,752  
|Deferred income taxes                                                  |  |                                | 29,922 
|Undistributed earnings in joint ventures                               |  |                                | (785   
|Non cash compensation expense                                          |  |                                | 233    
|Changes in operating assets and liabilities                            |  |                                | 47,915 
|                                                                       |  |                                |        
|Net cash provided by operating activities                              |  |                                | 185,770
|                                                                       |  |                                |        
|Cash flows from investing activities:                                  |  |                                |        
|Acquisition of property and equipment                                  |  |                                | (63,059
|Net proceeds in separation transactions                                |  |                                |       
|Net proceeds from sale of assets                                       |  |                                | 1,581  
|                                                                       |  |                                |        
|Net cash used by investing activities                                  |  |                                | (61,478
|                                                                       |  |                                |        
|Cash flows from financing activities:                                  |  |                                |        
|Proceeds from Credit Facility                                          |  |                                |       
|Repayment of Credit Facility                                           |  |                                |       
|Proceeds from Senior Subordinated Notes                                |  |                                |       
|Repayment of other Senior Secured Notes                                |  |                                |       
|Repayment of other indebtedness                                        |  |                                | (16,039
|Deferred financing costs                                               |  |                                |       
|Cash payment in lieu of stock issuance                                 |  |                                | (845   
|Proceeds from exercise of options                                      |  |                                | 4,185  
|Purchase of Treasury Stock                                             |  |                                | (61,200
|Payment of premium upon early extinguishment of debt                   |  |                                |       
|                                                                       |  |                                |        
|Net cash (used) provided by financing activities                       |  |                                | (73,899
|                                                                       |  |                                |        
|Increase in cash and equivalents                                       |  |                                | 50,393 
|Cash and equivalents:                                                  |  |                                |        
|Beginning of period                                                    |  |                                | 75,029 
|                                                                       |  |                                |        
|End of period                                                          |  | $                              | 125,422
|                                                                       |  |                                |        
|Interest paid                                                          |  | $                              | 19,389 
|Taxes paid                                                             |  |                                | 11,412 
|Non cash transactions:                                                 |  |                                |        
|Delivery of Common Stock in affiliation transactions                   |  |                                | 7,659  
|Value of Common Stock, received in exchange for assets                 |  |                                |       
|Value of forfeited Common Stock to be issued from contract separations |  |                                | 1,235  
|Debt forfeited from contract separations                               |  |                                |       
|Tax benefit from exercise of non-qualified stock options               |  |                                | 1,118  



The accompanying notes
are an integral part of this statement.





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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -Continued



NOTE 1  BASIS OF PRESENTATION



The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial reporting and in accordance with Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contained in this report reflect all adjustments that are normal and recurring in nature and
considered necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The preparation of the Companys financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as disclosures on contingent assets and liabilities. Because of inherent uncertainties in this
process, actual future results could differ from those expected at the reporting date. These unaudited condensed consolidated financial statements, footnote disclosures and other information should be read in conjunction with the financial
statements and the notes thereto included in US Oncology, Inc.s Form 10-K filed with the Securities and Exchange Commission on March 21, 2003.



Certain reclassifications have been made to the prior year amounts in order to conform to the current year presentation.



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, oncology
pharmaceutical services, cancer center services and cancer research services are each offered by the Company under separate agreements for each service line.



Net operating revenue includes three components  net patient revenue, service line 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
service line agreements for cancer center services.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Service line revenue. Revenues from pharmaceutical services rendered by the Company under its oncology pharmaceutical management service line agreements.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other revenue. Other revenue includes revenue from pharmaceutical research, informational services and activities as a group purchasing organization.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -Continued



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. Service line revenue is recorded when services are rendered to practices based on established or negotiated charges.



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 most prevalent 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, subject to a reduction in the Companys fee for exceeding return on capital thresholds. Under 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. In certain states the Companys fee is a
fixed fee.



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 revenue (in thousands):



|                              |  | Three Months EndedSeptember 30, |          |   | Nine Months EndedSeptember 30, |  
|----------------------------- |  | ------------------------------- | -------- | - | ------------------------------ | -
|                              |  | 2003                            |          |   | 2002                           |  
|Net operating revenue         |  | $                               | 641,774  |   |                                | $
|Amounts retained by practices |  |                                 | (132,674 | ) |                                |  
|                              |  |                                 |          |   |                                |  
|Revenue                       |  | $                               | 509,100  |   |                                | $
|                              |  |                                 |          |   |                                |  



The Companys most significant
service agreement, which is the only service agreement that represents more than 10% of revenues to the Company, is with Texas Oncology, P.A. (TOPA), which is managed under the earnings model. TOPA accounted for approximately 24% and 23%,
respectively, of the Companys total revenue for the third quarter of 2003 and 2002, and 24% and 23% of the Companys total revenue for the nine months ended September 30, 2003 and 2002, respectively.



NOTE 3  STOCK-BASED COMPENSATION



At December 31, 2002, the Company had seven stock-based employee compensation plans. 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 and nine months ended September 30, 2003 and 2002. Only two of the
plans currently permit future stock option grants.



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -Continued



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 compensation cost of $0.4 million and $0.1 million during the three months ended September 30, 2003 and 2002, and $1.2 million and $0.8
million during the nine months ended September 30, 2003 and 2002, respectively. No shares will be available for new option grants under that plan after December 15, 2003.



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 to stock-based compensation (in thousands):



|                                                                                                                                           |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                                                                                                                           |  | 2003                             |        |   | 2002                            |  
|Net income (loss), as reported                                                                                                             |  | $                                | 17,863 |   |                                 | $
|Total stock-based compensation expense included in reported net income, net of related tax effects                                         |  |                                  | 263    |   |                                 |  
|Less: total stock-based employee compensation expense determined under fair value based method for all awards, net of related
income taxes |  |                                  | (1,848 | ) |                                 |  
|                                                                                                                                           |  |                                  |        |   |                                 |  
|Pro forma net income (loss)                                                                                                                |  | $                                | 16,278 |   |                                 | $
|                                                                                                                                           |  |                                  |        |   |                                 |  
|Earnings (loss) per share:                                                                                                                 |  |                                  |        |   |                                 |  
|Basic, as reported                                                                                                                         |  | $                                | 0.20   |   |                                 | $
|                                                                                                                                           |  |                                  |        |   |                                 |  
|Basic, pro forma                                                                                                                           |  | $                                | 0.18   |   |                                 | $
|                                                                                                                                           |  |                                  |        |   |                                 |  
|Diluted, as reported                                                                                                                       |  | $                                | 0.20   |   |                                 | $
|                                                                                                                                           |  |                                  |        |   |                                 |  
|Diluted, pro forma                                                                                                                         |  | $                                | 0.18   |   |                                 | $
|                                                                                                                                           |  |                                  |        |   |                                 |  



NOTE 4  IMPAIRMENT,
RESTRUCTURING AND OTHER CHARGES



The Company did not recognize any
impairment or restructuring charges during the first nine months of 2003. During the third quarter of 2003, the Company recognized a loss of $1.8 million on the sale of a cancer center facility.



During the three months and nine months ended September 30, 2002, the Company recognized the
following impairment, restructuring and other charges (in thousands):



|                                               |  | Three Months Ended September 30, 2002 |        |   | Nine Months Ended September 30, 2002 |  
|---------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------ | -
|Write-off of service agreements                |  | $                                     | 68,314 |   |                                      | $
|Gain on sale of practice assets                |  |                                       | (3,415 | ) |                                      |  
|Personnel reduction costs                      |  |                                       | 882    |   |                                      |  
|Allowance on an affiliate receivable           |  |                                       | 11,050 |   |                                      |  
|Consulting costs for implementing service line |  |                                       |       |   |                                      |  
|                                               |  |                                       |        |   |                                      |  
|                                               |  | $                                     | 76,831 |   |                                      | $
|                                               |  |                                       |        |   |                                      |  



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -Continued



The following is a detailed summary of the charges recognized in the third quarter of 2002 (in thousands):



|                                     |  | Conversion to Service Line |        |   | Practice Disaffiliations |   |        | Impairment of Net Revenue Model Service Agreement |  | Processing Centralization |        | Affiliate Receivable Allowance |   | Total | 
|------------------------------------ |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ------------------------------------------------- |  | ------------------------- | ------ | ------------------------------ | - | ----- | 
|Write-off of service agreements      |  | $                          | 13,054 |   |                          | $ | 4,253  |                                                   |  | $                         | 51,007 |                                | $ |      | 
|Gain on sale of practice assets      |  |                            | (1,063 | ) |                          |   | (2,352 | )                                                 |  |                           |       |                                |   |      | 
|Personnel reduction costs            |  |                            |       |   |                          |   |       |                                                   |  |                           |       |                                |   | 882   | 
|Allowance on an affiliate receivable |  |                            |       |   |                          |   |       |                                                   |  |                           |       |                                |   |      | 
|                                     |  |                            |        |   |                          |   |        |                                                   |  |                           |        |                                |   |       | 
|                                     |  | $                          | 11,991 |   |                          | $ | 1,901  |                                                   |  | $                         | 51,007 |                                | $ | 882   | 
|                                     |  |                            |        |   |                          |   |        |                                                   |  |                           |        |                                |   |       | 



During the first nine months of 2002,
the Company transitioned three of its PPM practices with an aggregate of 23 physicians to the service line model, including one such transition in the third quarter of 2002. In each transaction, the existing PPM service agreement was terminated, the
practice repurchased its assets, and future consideration owed to physicians for their initial affiliation with the Company was either accelerated or forfeited.



The Company also disaffiliated with physicians in four net revenue markets during the third quarter of 2002 and terminated a service agreement in one market with
respect to certain radiology sites during the second quarter of 2002. In these transactions, future consideration due to the physicians (if any) from the Company with respect to their original PPM affiliation transaction was accelerated.



The impairment of service agreements during the third quarter of 2002 was a non-cash,
pretax charge 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 of 2002 based upon our analysis of projected cash flows under those agreements, taking into account developments in those markets during the third quarter of 2002 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 of 2002. The remainder of the charge relating to impairment of service agreements for the first nine
months of 2002 were non-cash, pretax charges of $39.7 million comprising (i) a $33.8 million charge related to a net revenue model service agreement that became impaired during the second quarter of 2002 based upon our analysis of projected cash
flows under that agreement, taking into account developments in that market during the second quarter of 2002 and (ii) a $5.9 million charge related to two PPM service agreements that terminated in conjunction with conversion to the service line.



The $3.4 million net gain on sale of practice assets during the third quarter
of 2002 comprised (a) net proceeds of $4.3 million paid by converting and disaffiliating physicians and (b) a $0.2 million net recovery of working capital assets, partially offset by a $1.1 million net charge arising from the Company accelerating
consideration that would have been due to physicians in the future in connection with those transactions.



During the second quarter of 2002, the Company recognized a $2.0 million net gain on sale of practice assets. During that quarter, 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



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -Continued



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.



During the third quarter of 2002, in connection with the Companys transition, management commenced an initiative to further centralize certain accounting and
financial reporting functions at its headquarters in Houston, resulting in a $0.9 million charge for personnel reduction costs. During the first and second quarters of 2002, the Company recognized $0.6 million and $0.3 million, respectively, for
personnel reduction costs.



During the third quarter of 2002, the Company
recognized an $11.1 million allowance related to an $11.1 million receivable due from one of its affiliated practices. In the course of its PPM activities, the Company advances amounts to physician groups and retains fees based upon its 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 of 2002, the Company made the determination that a portion of such amounts
owed by physician practices may have become uncollectible due to, among other things the age of the receivable and circumstances relating to practice operations.



During the second quarter of 2002, the Company recognized $1.0 million of professional fees for consulting on the implementation of the
service line. During the first quarter of 2002, the Company also recognized charges of $0.4 million in consulting fees related to its introduction of the service line model.



As discussed above, during the first nine months of 2002, the Company recorded charges related to the impairment of certain net revenue
model service agreements. From time to time, management evaluates its long-lived assets for impairment, by comparing the aggregate expected future cash flows under the agreement to its carrying value on its balance sheet. In estimating future cash
flows, management considers past performance as well as known trends that are likely to affect future performance. In some cases management also takes into account current activities with respect to that agreement that may be aimed at altering
performance or reversing trends. All of these factors used in managements estimates are subject to error and uncertainty.



NOTE 5  RECLASSIFICATION OF EXTRAORDINARY LOSS TO OTHER INCOME (EXPENSE)



During the first quarter of 2002, the Company recorded an extraordinary loss of $13.6 million, before income taxes of $5.2 million, in
connection with the early extinguishment of the $100 million Senior Secured Notes due 2006 and its previously existing credit facility. The loss consisted of a 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 April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This
statement provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. The provisions of this statement related to the rescission of FASB Statement No. 4
were effective for the Company beginning on January 1, 2003. In accordance with the transition provisions, the first



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -Continued



quarter 2002 extraordinary item has been reclassified in the statement of operations to other income (expense), net beginning in the quarter ended March 31,
2003.



NOTE 6  INDEBTEDNESS



As of September 30, 2003 and December 31, 2002, respectively, the Companys long-term
indebtedness consisted of the following (in thousands):



|                                         |  | September 30, 2003 |         |   | December 31, 2002 |  
|---------------------------------------- |  | ------------------ | ------- | - | ----------------- | -
|Credit facility                          |  | $                  |        |   |                   | $
|9625% Senior Subordinated Notes due 2012 |  |                    | 175,000 |   |                   |  
|Synthetic lease facility                 |  |                    | 70,206  |   |                   |  
|Notes payable                            |  |                    |        |   |                   |  
|Subordinated notes                       |  |                    | 25,377  |   |                   |  
|Capital lease obligations and other      |  |                    | 525     |   |                   |  
|                                         |  |                    |         |   |                   |  
|                                         |  |                    | 271,108 |   |                   |  
|Less: current maturities                 |  |                    | (80,800 | ) |                   |  
|                                         |  |                    |         |   |                   |  
|                                         |  | $                  | 190,308 |   |                   | $
|                                         |  |                    |         |   |                   |  



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 (Credit Facility), which expires in February 2007. Proceeds from loans under the 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 other expense in the Companys condensed consolidated statement of operations and comprehensive income. Costs incurred in connection with
establishing the Credit Facility were capitalized and are being amortized over the term of the Credit Facility.



Borrowings under the Credit Facility are collateralized 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 Credit Facility during 2002 or during the first nine months of 2003.



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 unsecured, bear interest at 9.625% annually and mature in February
2012. Payments under the Senior Subordinated Notes are



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -Continued



subordinated, in substantially all respects, to the Companys 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 Companys previously 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 Credit Facility of $4.8 million and $2.7 million, respectively. Costs incurred in connection with extinguishment of the Companys previous existing senior secured notes,
including the prepayment penalty, were expensed in the first quarter of 2002 and reflected as other expenses 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 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 collateralized by the property to which it relates and matures in June 2004.



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 increased
its residual value guarantee from 85% to 100% of the amounts advanced under the lease, and as a result of this guarantee the Company reflects amounts advanced under the leasing facility of $70.2 million as indebtedness on its 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. Prior to December 31, 2002, and the 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. Since the lease matures in June 2004, it is classified as a current maturity of
long-term indebtedness.



As of September 30, 2003, the Company had $70.2
million outstanding under the leasing facility and no further amounts are available under that facility. The lease rate is interest-only on the amount outstanding and based on interest rates in effect as of September 30, 2003, the annual lease rate
is approximately $3.0 million. The lease amount is included in interest expense in the Companys Condensed Consolidated Statement of Operations and Comprehensive Income. At September 30, 2003, the lessor under the leasing facility held real
estate assets (based on original acquisition and construction costs) of approximately $53.5 million and equipment of approximately $16.7 million (based on original acquisition cost) at 17 locations.



Notes Payable



The notes payable bear interest, which is payable annually, at rates ranging from 5.3% to 10% and were paid off at maturity in the first
quarter of 2003. The notes were payable to physicians with whom the Company entered into long-term service agreements and related to affiliation transactions. The notes payable were unsecured.



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued



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 September 30, 2003 bear interest at 7%, are due in installments through 2007 and are subordinated to senior bank and certain other debt. If the Company fails to make payments under any of the
notes, the respective practice can terminate the related service agreement.



Capital lease obligations and other indebtedness



Leases for
medical and office equipment are capitalized using effective interest rates between 6.5% and 11.5% with original lease terms between two and seven years. Other indebtedness consists principally of installment notes and bank debt, with varying
interest rates, assumed in affiliation transactions.



NOTE 7 
CAPITALIZATION



In November 2002, the Board of Directors of the Company
authorized the repurchase of up to $50 million in shares of Common Stock in public or private transactions. In July 2003, the Company completed its authorization and in August 2003, the Board of Directors authorized the repurchase of up to an
additional $50 million in shares of the Companys Common Stock. During the first nine months of 2003, the Company purchased 7.5 million shares of Common Stock at a total cost of $61.2 million, or an average price of $8.16 per share under these
authorizations.



The table below sets forth the Companys Treasury Stock
activity for the nine months ended September 30, 2003 (in thousands):



|                                                                                                         |  | Shares |  
|-------------------------------------------------------------------------------------------------------- |  | ------ | -
|Treasury Stock shares as of January 1, 2003                                                              |  | 5,748  |  
|Treasury Stock purchases                                                                                 |  | 7,497  |  
|Treasury Stock issued in connection with affiliation transactions and exercise of employee stock options |  | (2,315 | )
|                                                                                                         |  |        |  
|Treasury Stock shares as of September 30, 2003                                                           |  | 10,930 |  
|                                                                                                         |  |        |  



NOTE 8  Earnings Per Share



The Company computes earnings per share and discloses basic and diluted
earnings per share (EPS). The computation of basic EPS is based on a weighted average number of outstanding shares of Common Stock and Common Stock to be issued during the periods. The Company includes Common Stock to be issued in both basic and
diluted EPS as there are no foreseeable circumstances that would relieve the Company of its obligation to issue these shares. The computation of diluted EPS is based on a weighted average number of outstanding shares of Common Stock and Common Stock
to be issued during the periods as well as all potentially dilutive potential Common Stock calculated under the treasury stock method.



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued



The table below summarizes the determination of shares used in per share calculations (in thousands):



|                                                                                                                              |  | Three MonthsSeptember 30, |  | Nine MonthsSeptember 30,
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------------------------
|                                                                                                                              |  | 2003                      |  | 2002                    
|Outstanding end of period:                                                                                                    |  |                           |  |                         
|Common Stock                                                                                                                  |  | 84,371                    |  | 90,515                  
|Common Stock to be issued                                                                                                     |  | 2,366                     |  | 5,385                   
|                                                                                                                              |  |                           |  |                         
|                                                                                                                              |  | 86,737                    |  | 95,900                  
|Effect of weighting and Treasury Stock                                                                                        |  | 1,735                     |  | 1,248                   
|                                                                                                                              |  |                           |  |                         
|Shares used in per share calculations-basic                                                                                   |  | 88,472                    |  | 97,148                  
|Effect of weighting and assumed share equivalents for outstanding stock options at less than the weighted average stock
price |  | 1,514                     |  |                        
|                                                                                                                              |  |                           |  |                         
|Shares used in per share calculations-diluted                                                                                 |  | 89,986                    |  | 97,148                  
|                                                                                                                              |  |                           |  |                         
|Anti-dilutive stock options not included above                                                                                |  | 5,746                     |  | 16,005                  
|                                                                                                                              |  |                           |  |                         



NOTE 9  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.



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 available to permit such reporting. The Companys reportable segments are oncology pharmaceutical services, other practice management services, cancer center
services and other 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.



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued



The financial results of the Companys segments are presented on the accrual basis. For the first nine months of
2003, 93.9% of the Companys oncology pharmaceutical services net operating revenue and cancer center services net operating 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 the rates at which the Company offered to provide those services to PPM practices that converted to the service line 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 pharmaceutical services segment and other practice management segments for the three and nine months ended September 30, 2003 and 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. All of those
revenues relate to medical oncology.



Asset information by reportable segment
is not reported since the Company does not produce such information internally.



The Company evaluates the performance of its segments based on, among other things, earnings before interest, taxes, depreciation, amortization and loss on early extinguishment of debt (EBITDA).



The table below presents information about reported segments for the nine months ended
September 30, 2003 (in thousands):



|                                         |  | OncologyPharmaceutical Services |          |   | OtherPracticeManagementServices |   |          | CancerCenter Services |  |   | Other    |   |  | Unallocated General andAdministrativeExpenses andCharges |         |   | Total |  
|---------------------------------------- |  | ------------------------------- | -------- | - | ------------------------------- | - | -------- | --------------------- |  | - | -------- | - |  | -------------------------------------------------------- | ------- | - | ----- | -
|Net operating revenue                    |  | $                               | 877,561  |   |                                 | $ | 679,266  |                       |  | $ | 242,007  |   |  | $                                                        | 43,773  |   |       | $
|Amounts retained by affiliated practices |  |                                 | (866     | ) |                                 |   | (319,641 | )                     |  |   | (72,772  | ) |  |                                                          | (1,606  | ) |       |  
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |          |   |  |                                                          |         |   |       |  
|Revenue                                  |  |                                 | 876,695  |   |                                 |   | 359,625  |                       |  |   | 169,235  |   |  |                                                          | 42,167  |   |       |  
|Operating expenses                       |  |                                 | (793,545 | ) |                                 |   | (295,443 | )                     |  |   | (136,466 | ) |  |                                                          | (70,635 | ) |       |  
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |          |   |  |                                                          |         |   |       |  
|Income (loss) from operations            |  |                                 | 83,150   |   |                                 |   | 64,182   |                       |  |   | 32,769   |   |  |                                                          | (28,468 | ) |       |  
|Depreciation and amortization            |  |                                 | 106      |   |                                 |   |         |                       |  |   | 21,791   |   |  |                                                          | 33,069  |   |       |  
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |          |   |  |                                                          |         |   |       |  
|EBITDA                                   |  | $                               | 83,256   |   |                                 | $ | 64,182   |                       |  | $ | 54,560   |   |  | $                                                        | 4,601   |   |       | $
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |          |   |  |                                                          |         |   |       |  



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued



The table below presents information about reported segments for the nine months ended September 30,
2002 (in thousands):



|                                         |  | OncologyPharmaceutical Services |          |   | OtherPracticeManagementServices |   |          | CancerCenter Services |  |   | Other    |   |  | Unallocated General andAdministrative Expenses andCharges |         |   | Total |  
|---------------------------------------- |  | ------------------------------- | -------- | - | ------------------------------- | - | -------- | --------------------- |  | - | -------- | - |  | --------------------------------------------------------- | ------- | - | ----- | -
|Net operating revenue                    |  | $                               | 665,219  |   |                                 | $ | 628,037  |                       |  | $ | 230,192  |   |  | $                                                         | 48,841  |   |       | $
|Amounts retained by affiliated practices |  |                                 | (681     | ) |                                 |   | (274,870 | )                     |  |   | (73,106  | ) |  |                                                           | (3,235  | ) |       |  
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |          |   |  |                                                           |         |   |       |  
|Revenue                                  |  |                                 | 664,538  |   |                                 |   | 353,167  |                       |  |   | 157,086  |   |  |                                                           | 45,606  |   |       |  
|Operating expenses                       |  |                                 | (602,562 | ) |                                 |   | (285,742 | )                     |  |   | (122,764 | ) |  |                                                           | (76,915 | ) |       |  
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |          |   |  |                                                           |         |   |       |  
|Income (loss) from operations            |  |                                 | 61,976   |   |                                 |   | 67,425   |                       |  |   | 34,322   |   |  |                                                           | (31,309 | ) |       |  
|Depreciation and amortization            |  |                                 | 173      |   |                                 |   |         |                       |  |   | 14,754   |   |  |                                                           | 38,403  |   |       |  
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |          |   |  |                                                           |         |   |       |  
|EBITDA                                   |  | $                               | 62,149   |   |                                 | $ | 67,425   |                       |  | $ | 49,076   |   |  | $                                                         | 7,094   |   |       | $
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |          |   |  |                                                           |         |   |       |  



The table below
presents information about reported segments for the three months ended September 30, 2003 (in thousands):



|                                         |  | OncologyPharmaceutical Services |          |   | OtherPracticeManagementServices |   |          | CancerCenter Services |  |   | Other   |   |  | Unallocated General andAdministrative Expenses andCharges |         |   | Total |  
|---------------------------------------- |  | ------------------------------- | -------- | - | ------------------------------- | - | -------- | --------------------- |  | - | ------- | - |  | --------------------------------------------------------- | ------- | - | ----- | -
|Net operating revenue                    |  | $                               | 319,021  |   |                                 | $ | 229,835  |                       |  | $ | 79,551  |   |  | $                                                         | 13,367  |   |       | $
|Amounts retained by affiliated practices |  |                                 | (429     | ) |                                 |   | (109,628 | )                     |  |   | (22,575 | ) |  |                                                           | (42     | ) |       |  
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |         |   |  |                                                           |         |   |       |  
|Revenue                                  |  |                                 | 318,592  |   |                                 |   | 120,207  |                       |  |   | 56,976  |   |  |                                                           | 13,325  |   |       |  
|Operating expenses                       |  |                                 | (286,993 | ) |                                 |   | (96,498  | )                     |  |   | (47,625 | ) |  |                                                           | (23,059 | ) |       |  
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |         |   |  |                                                           |         |   |       |  
|Income (loss) from operations            |  |                                 | 31,599   |   |                                 |   | 23,709   |                       |  |   | 9,351   |   |  |                                                           | (9,734  | ) |       |  
|Depreciation and amortization            |  |                                 | 57       |   |                                 |   |         |                       |  |   | 7,205   |   |  |                                                           | 9,925   |   |       |  
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |         |   |  |                                                           |         |   |       |  
|EBITDA                                   |  | $                               | 31,656   |   |                                 | $ | 23,709   |                       |  | $ | 16,556  |   |  | $                                                         | 191     |   |       | $
|                                         |  |                                 |          |   |                                 |   |          |                       |  |   |         |   |  |                                                           |         |   |       |  



The table below
presents information about reported segments for the three months ended September 30, 2002 (in thousands):



|                                         |  | OncologyPharmaceutical Services |          |   | OtherPracticeManagementServices |   |         | CancerCenter Services |  |   | Other   |   |  | Unallocated General andAdministrative Expenses andCharges |         |   | Total |  
|---------------------------------------- |  | ------------------------------- | -------- | - | ------------------------------- | - | ------- | --------------------- |  | - | ------- | - |  | --------------------------------------------------------- | ------- | - | ----- | -
|Net operating revenue                    |  | $                               | 234,635  |   |                                 | $ | 213,621 |                       |  | $ | 73,948  |   |  | $                                                         | 17,561  |   |       | $
|Amounts retained by affiliated practices |  |                                 | (1,789   | ) |                                 |   | (94,985 | )                     |  |   | (23,996 | ) |  |                                                           | (702    | ) |       |  
|                                         |  |                                 |          |   |                                 |   |         |                       |  |   |         |   |  |                                                           |         |   |       |  
|Revenue                                  |  |                                 | 232,846  |   |                                 |   | 118,636 |                       |  |   | 49,952  |   |  |                                                           | 16,859  |   |       |  
|Operating expenses                       |  |                                 | (209,563 | ) |                                 |   | (98,091 | )                     |  |   | (39,586 | ) |  |                                                           | (26,156 | ) |       |  
|                                         |  |                                 |          |   |                                 |   |         |                       |  |   |         |   |  |                                                           |         |   |       |  
|Income (loss) from operations            |  |                                 | 23,283   |   |                                 |   | 20,545  |                       |  |   | 10,366  |   |  |                                                           | (9,297  | ) |       |  
|Depreciation and amortization            |  |                                 | (169     | ) |                                 |   |        |                       |  |   | 4,789   |   |  |                                                           | 12,492  |   |       |  
|                                         |  |                                 |          |   |                                 |   |         |                       |  |   |         |   |  |                                                           |         |   |       |  
|EBITDA                                   |  | $                               | 23,114   |   |                                 | $ | 20,545  |                       |  | $ | 15,155  |   |  | $                                                         | 3,195   |   |       | $
|                                         |  |                                 |          |   |                                 |   |         |                       |  |   |         |   |  |                                                           |         |   |       |  



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -Continued



NOTE 10  COMMITMENTS AND CONTINGENCIES



As disclosed in Part II, Item 1, under the heading Legal Proceedings, the Company is aware that it and certain of its
subsidiaries and affiliated practices have in the past been the subject of qui tam lawsuits filed under seal alleging healthcare law violations. Although the suits of which the Company is aware have been dismissed, 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.



NOTE 11  RECENT PRONOUNCEMENTS



In May 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities
(FAS 149). FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities. FAS 149 is effective in relation to certain issues for fiscal quarters that began prior to June 15, 2003 and for certain contracts entered into after September 30,
2003. The adoption of FAS 149 had no initial impact on the Companys financial position, results of operations or cash flows as of and for the three and nine months ended September 30, 2003.



In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (FAS 150). This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. FAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. These effective dates are not applicable to the provisions of paragraphs 9 and 10
of FAS 150 as they apply to mandatorily redeemable non-controlling interests, as the FASB has delayed these provisions indefinitely. The adoption of FAS 150 had no initial impact on the Companys financial position, results of operations or
cash flows as of and for the three and nine months ended September 30, 2003.



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|ITEM  2. |  | 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 included in our Annual Report on Form 10-K for 2002 and subsequent filings with the Securities and Exchange Commission (SEC). Our SEC filings are available on our website at
www.usoncology.com.



General



We provide comprehensive services to our network of affiliated practices, made up of more
than 875 affiliated physicians in over 450 sites, with the mission of expanding access to and improving the quality of cancer care in local communities and advancing the delivery of care. The services we offer include:



| |  | Medical Oncology Services. We provide oncology pharmaceutical services and other practice management services to medical oncologists.
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Oncology Pharmaceutical Services. We purchase and manage specialty oncology pharmaceuticals for our affiliated practices. We are responsible for purchasing, delivering and
managing approximately $1.1 billion of pharmaceuticals annually through a network of 45 licensed pharmacies, 140 pharmacists and 265 pharmacy technicians.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 medical oncology 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Cancer Center Services. We develop and manage comprehensive, community-based cancer centers that integrate a broad array of outpatient cancer care services, from laboratory
and diagnostic radiology capabilities to chemotherapy and radiation therapy. We have developed and operate 76 integrated community-based cancer centers and manage over one million square feet of medical office space. We have installed and manage 21
positron emission tomography (PET) units and 102 linear accelerators, including 23 units with intensity modulated radiation therapy (IMRT) capability as well as 50 computerized axial tomography (CT) 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 74 clinical trials, supported by our network of over 400 participating physicians in 169 research locations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We offer these services through two business models, the Physician Practice Management
PPM model, under which we provide all of the above services under a single contract with a single fee based on overall practice performance, and the service line model, under which practices contract



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



with us to purchase certain of the above services, each under a separate contract, with a separate fee methodology for each service.



Under the PPM model, we are reimbursed for all expenses and receive a fee generally based on
one of two models. Under some agreements, the fees are based on practice earnings before taxes  known as the earnings model, subject to reductions in our fees for exceeding return on capital thresholds. In others, the fee consists
of a fixed fee, a percentage of the practices revenues (in most states) and, if certain performance criteria are met, a performance fee  known as the net revenue model. 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. In certain states our fee is a fixed fee.



Our service line model, which we are offering to practices outside of our existing PPM network, 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. Instead, physician practices are able to purchase only some of our services (such
as pharmacy services), as their needs warrant. Under this service line structure, we do not acquire the non-medical assets of physicians practices.



We have organized the company in three divisions, and manage and operate our business under distinct service lines. This report includes segment financial information
that reflects a division of our existing PPM operations into the various service line offerings in the PPM relationship. As we enter into new service line model agreements, we will report revenue from those agreements in the appropriate segment.



Under the service line model, we are offering physician groups service lines,
each with a separate agreement, including the following:



| |  | 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. We offer 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. We also act as
a group purchasing organization and receive a fee from pharmaceutical manufacturers for this service, as well as for providing data and informational services to pharmaceutical companies.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Cancer Research Services. We contract with pharmaceutical companies and others needing research services on a per trial basis. Our contracts with physician groups outline the
terms of access to clinical trials and provide for research related services. We pay physicians for each trial based on economic considerations relating to that trial.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Forward-looking Statements and Risk Factors



The following statements are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) certain
statements, including possible or assumed future results of operations contained in Managements Discussion and Analysis of



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



Financial Condition and Results of Operations, (ii) any statements contained herein regarding the prospects for any of our business or services and our
development activities relating to the service line model, cancer centers and PET installations; (iii) any statements preceded by, followed by or that include the words believes, expects, anticipates,
intends, estimates, plans or similar expressions; and (iv) other statements contained herein regarding matters that are not historical facts.



US Oncologys business and results of operations are subject to risks and uncertainties, many of which are beyond the Companys
ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements, and investors are cautioned not to place undue reliance on such
statements, which speak only as of the date thereof. 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 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 (and the related impact of qui tam suits), reimbursement for healthcare services,
particularly reimbursement for pharmaceuticals, 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 the Companys affiliated physician groups. Please refer to the Companys Annual Report on Form 10-K for the year ended December 31, 2002 and subsequent filings with the SEC, particularly the section entitled
Risk Factors, for a more detailed discussion of certain of these risks and uncertainties.



The cautionary statements contained or referred to herein should be considered in connection with any written or oral forward-looking statements that may be issued by US Oncology or persons acting on its behalf. US
Oncology does 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 thereof or to reflect the occurrence of unanticipated events.



In addition to the Risk Factors discussed and referenced above, investors should consider
the following additional risks.



Legislation pending in the United States
Congress could have a material adverse effect on our business.



On
June 27, 2003, both the United States Senate and House of Representatives passed bills providing for a broad prescription drug benefit under Medicare. Each of those bills would also change the way in which oncologists are reimbursed for oncology
pharmaceuticals under Medicare and lead to significant reductions in that reimbursement. The bills are now before a conference committee of the House and Senate, which must agree on a single, negotiated bill in order for legislation to be enacted.



Currently, drugs used by oncologists are among the few drugs covered by
Medicare for outpatients. Providers are reimbursed for 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 or market surveys. Cancer
care providers are reimbursed by Medicare for pharmaceuticals themselves and the costs of administration, with the bulk of reimbursement being for the drugs



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



themselves. Typically, providers acquire drugs at prices that are less than AWP. Accordingly, the reimbursement received from Medicare by providers for
dispensing many pharmaceuticals exceeds the cost of the pharmaceuticals themselves. However, there are many other costs of administration, such as supplies, nursing time, storage and preparation of drugs, financial counseling, bad debt,
psychological and social services, capital costs, occupancy costs and other costs, that are not covered or not adequately reimbursed by Medicare reimbursement for drug administration. Providers rely on drug reimbursement to be able to fund these
other aspects of care for which Medicare reimbursements are substantially less than actual expenses and to support the outpatient cancer care delivery system.



During the first nine months of 2003, approximately $1.2 billion in net operating revenue, out of a total of $1.8 billion, was attributable to amounts paid by all
payors to US Oncologys affiliated physicians for pharmaceuticals. Approximately 41% of net patient revenue of our PPM practices is derived from Medicare, those practices largest payor.



Under the House bill, physicians would be required either to accept substantially reduced
reimbursement from Medicare for oncology drugs or allow drugs to be purchased from third-party vendors, with physicians neither paying for, nor receiving any reimbursement for, oncology drugs under Medicare. The Senate bill mandates a significant
reduction in government reimbursement by initially paying at AWP minus 15%, with further reductions to reimbursement based on an approximation of acquisition cost rather than AWP. Each of these bills would result in a significant reduction in the
amount that Medicare reimburses cancer care providers for chemotherapy drugs. Although both bills contemplate an assessment by the Centers for Medicare and Medicaid Services (CMS) of what increases in other oncology reimbursement would be required
to preserve the oncology delivery system, it is unclear whether these assessments will yield adequate adjustments.



Additionally, the CMS has announced its intention to adopt new rules that would reduce Medicare reimbursement for cancer drugs. Various reform options have been published
by CMS for comment and include reducing Medicare reimbursement to AWP minus 15%, matching Medicare reimbursement to private reimbursements or reimbursing for pharmaceuticals based on government survey measuring prices generally available to
providers or requiring drugs to be purchased through third-party vendors. The comment period for the proposals has expired, but we cannot predict when CMS will act to finalize rules, if at all.



We believe that any significant reduction in reimbursement for pharmaceuticals without a
sufficient increase in rates of reimbursement for other oncology services could significantly compromise the ability of cancer care providers to continue to administer drugs in an outpatient setting. To the extent cancer care providers are able to
continue to provide full range medical oncology services in the outpatient setting, such a change could nevertheless have a material adverse effect on the financial results of cancer care providers, which in turn would adversely affect our results
of operations, financial condition and prospects.



US Oncology, along with the
entire cancer care community, remains engaged in the ongoing debate on cancer reimbursement in Washington. In particular, we have expended considerable resources in trying to educate members of Congress and officials at CMS regarding appropriate
analysis of the costs of providing cancer care and the need for balanced reform, as well as the potential impact of the current proposals. We remain committed to providing key decision-makers with the information they need in this regard. Our
efforts have included face-to-face meetings, formal comments to CMS proposals and more general public relations and advertising efforts. Although we cannot be certain of their impact, we do believe that these efforts have been successful in
communicating our concerns to policymakers.



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



It is impossible to determine at this time what legislation, if any, will ultimately be adopted. The proposed cancer
reimbursement changes are part of much larger bills, with numerous factors impacting their likelihood of passage. Several of the fundamental aspects of the bills, such as how third-party vendors will be selected and priced, how average sales price
will be determined, or how other reimbursement will increase, also remain largely undefined. These issues apply equally to the CMS proposal. It is also our experience that changes in Medicare reimbursement often lead to corresponding changes in
reimbursement from other payors, although it is not possible for us to assess the likelihood and extent of such impact on other, non-governmental payors. Most of our managed care agreements can be terminated by either party with little notice and
many refer to AWP-based reimbursement, increasing the likelihood that they will be renegotiated if there is material change in governmental reimbursement. Finally, many of our management services agreements with PPM practices include a clause
requiring renegotiation of their terms upon certain materially adverse changes in governmental reimbursement or regulation. In the event such clauses were triggered by any reimbursement change, our network and results of operations would be subject
to even greater uncertainty.



For these reasons, we cannot at this time assess
the likely impact of the pending legislation. However, unless and until legislation or are rules adopted, continued uncertainty surrounding Medicare reimbursement could have an adverse impact on our business operations and markets for our
securities. Furthermore, as we have previously stated, there is a possibility that changes that are ultimately adopted could have a material adverse effect on outpatient cancer care in this country and on our financial condition, results of
operations and business prospects. Adverse effects could include an inability to maintain or expand our network, additional impairments of service agreements and other long-term assets, inability to access capital, significantly reduced earnings and
a significantly depressed share price.



A pending Congressional inquiry
could harm our business.



We have been asked to furnish certain
information regarding pharmaceutical purchasing and usage by our network in connection with the House of Representatives Energy and Commerce Committees investigation into reimbursement of oncology pharmaceuticals under the Medicaid
program. We have furnished certain information and continue to assist the committee.



The committees inquiry does not constitute an allegation of illegality by us. We understand that the inquiry is part of a broader inquiry of pharmaceutical practices under Medicaid generally and that requests for information have been
sent to numerous pharmaceutical companies, oncology-based group purchasing organizations, distributors and state governors, as well as US Oncology. The investigation deals with Medicaid reimbursements, which constitute less than 3% of our
networks net patient revenue. However, we cannot assure investors as to what course the investigation may ultimately take, or whether its scope will be expanded or its focus narrowed.



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



New rules regarding electronic submissions of claims could adversely impact the timeliness of collections in
the near-term.



On October 16, 2003, new rules under the Health
Insurance Portability and Accountability Act of 1996 (HIPAA) went into effect mandating national standards for electronic data submissions and code sets relating to certain health care transactions. Although we believe that our systems
are compliant with the new rules, other covered entities such as claims clearinghouses and payers could experience delays relating to systems implementation and conversion, which could, in turn, adversely affect the timeliness of payments for
practices submitted claims. It is not possible to assess the magnitude of any such delays or disruptions, but we would expect them to be temporary.



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, cancer centers, reimbursement, pharmaceutical rebates,
income taxes, 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.



Actual results may differ from those estimates under different assumptions or conditions. In addition, as circumstances change, we may revise the basis of our estimates accordingly. For example, in the past we have
recorded charges to reflect revisions in our valuations of accounts receivable as a result of actual collections patterns or a sale of accounts receivable. We maintain decentralized billing systems and continue to upgrade and modify those systems.
We take this into account as we continue to evaluate receivables and record appropriate reserves, based upon the risks of collection inherent in such a structure. In the event subsequent collections are higher or lower than our estimates, results of
operations in subsequent periods could be either positively or negatively impacted as a result of such prior estimates.



Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated condensed
financial statements. These critical accounting policies include our policy of non-consolidation of the results of affiliated practices, revenue recognition (including calculation of physician compensation), general estimates of accruals, including
accruals relating to accounts receivable, and intangible asset amortization and impairment. Please refer to the Critical Accounting Policies section of our Annual Report on Form 10-K for the year ended December 31, 2002 for a more
detailed discussion of such policies.



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 measures to our income statement is
included in this report.



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



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 under the PPM model. 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.



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 is the largest component (92.7% in the first nine months of 2003) 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 and loss on early extinguishment of debt. 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.



Results of Operations



The Company was affiliated (including under the service line model) with the following number of physicians, by specialty, as of September 30, 2003 and 2002:



|                        |  | September 30,
|----------------------- |  | -------------
|                        |  | 2003         
|Medical oncologists     |  | 729          
|Radiation oncologists   |  | 115          
|Other oncologists       |  | 38           
|                        |  |              
|Total oncologists       |  | 882          
|Diagnostic radiologists |  |             
|                        |  |              
|Total physicians        |  | 882          
|                        |  |              



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



The Company was affiliated with the following number of physicians by model:



|             |  | September 30,
|------------ |  | -------------
|             |  | 2003         
|PPM          |  | 792          
|Service line |  | 90           
|             |  |              
|             |  | 882          
|             |  |              



Subsequent to September 30, 2003, we
have affiliated with two additional practices under the service line model, consisting of fourteen oncologists.



The following table sets forth the change in the number of physicians affiliated with the Company:



|                                           |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|------------------------------------------ |  | ------------------------------- | - |  | ------------------------------ | -
|                                           |  | 2003                            |   |  | 2002                           |  
|Affiliated physicians, beginning of period |  | 836                             |   |  | 871                            |  
|Physician practice affiliations            |  | 14                              |   |  |                               |  
|Recruited physicians                       |  | 45                              |   |  | 32                             |  
|Physician practice separations             |  |                                |   |  | (23                            | )
|Retiring/Other                             |  | (13                             | ) |  | (10                            | )
|                                           |  |                                 |   |  |                                |  
|Affiliated physicians, end of period       |  | 882                             |   |  | 870                            |  
|                                           |  |                                 |   |  |                                |  



The following table sets forth the
number of cancer centers and PET units managed by the Company:



|               |  | September 30,
|-------------- |  | -------------
|               |  | 2003         
|Cancer centers |  | 76           
|PET units      |  | 21           



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



|                             |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|---------------------------- |  | -------------------------------- |  | -------------------------------
|                             |  | 2003                             |  | 2002                           
|Medical oncology visits      |  | 605,966                          |  | 595,484                        
|Radiation treatments         |  | 159,826                          |  | 160,645                        
|Radiation treatments per day |  | 2,497                            |  | 2,510                          
|PET scans                    |  | 5,453                            |  | 3,084                          
|CT scans                     |  | 19,247                           |  | 15,879                         



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



Net Operating Revenue. Net operating revenue includes three components  net patient revenue, service
line 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 and we are
responsible for billing those patients. Currently, net patient revenue consists of patient revenue of affiliated practices under the PPM model.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Service line revenue. Service line revenues are derived from pharmaceutical services rendered by us under our oncology pharmaceutical services service line agreements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other revenue. Other revenue includes revenue from pharmaceutical research, informational services and activities as a group purchasing organization.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



The following table shows the components of our net operating
revenue for the three and nine months ended September 30, 2003 and 2002 (in thousands):



|                      |  | Three Months Ended September 30, |         | Nine Months Ended September 30,
|--------------------- |  | -------------------------------- | ------- | -------------------------------
|                      |  | 2003                             |         | 2002                           
|Net patient revenue   |  | $                                | 589,695 |                                
|Service line revenue  |  |                                  | 39,076  |                                
|Other revenue         |  |                                  | 13,003  |                                
|                      |  |                                  |         |                                
|Net operating revenue |  | $                                | 641,774 |                                
|                      |  |                                  |         |                                



Net patient revenue is recorded when
services are rendered based on established or negotiated charges reduced by contractual adjustments and allowances for doubtful accounts and other risks of collection. Differences between estimated contractual adjustments and final settlements are
reported in the period when final settlements are determined and may result in either increases or decreases in revenues. Net operating revenue is reduced by amounts retained by the practices under our PPM service agreements to arrive at the amount
we report as revenue in our financial statements.



The following table shows
our net operating revenue by segment for the three and nine months ended September 30, 2003 and 2002 (in thousands):



|                                   |  | Three Months Ended September 30, |         | Nine Months Ended September 30,
|---------------------------------- |  | -------------------------------- | ------- | -------------------------------
|                                   |  | 2003                             |         | 2002                           
|Oncology pharmaceutical services   |  | $                                | 319,021 |                                
|Other practice management services |  |                                  | 229,835 |                                
|                                   |  |                                  |         |                                
|Medical oncology                   |  |                                  | 548,856 |                                
|Cancer center services             |  |                                  | 79,551  |                                
|Other segment revenue              |  |                                  | 13,367  |                                
|                                   |  |                                  |         |                                
|                                   |  | $                                | 641,774 |                                
|                                   |  |                                  |         |                                



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



Our medical oncology net operating revenue comprises (i) our oncology pharmaceutical services revenue, which
represents the revenue attributable to our providing drugs to medical oncologists under either the PPM model or the service line model, plus (ii) our other practice management services revenue, since our practice management services revenue is
derived from providing services to medical oncologists. When we announced the introduction of our service line model in the fall of 2001, we offered all of our currently affiliated PPM practices the opportunity to terminate their PPM agreements and
instead obtain our services under the service line model. To calculate the amount of oncology pharmaceutical services revenue we derive from practices under the PPM model, we assume that those practices purchase pharmaceuticals through us on the
terms offered to such practices in connection with such conversion.



Our other
practice management services revenue is derived solely from medical oncologists, so a portion of that revenue is attributable to revenues derived from pharmaceuticals, since our PPM agreements include management fees based on overall practice
performance. Any change in reimbursement that adversely impacts medical oncologists financial results would adversely impact our other practice management services revenue, particularly under the net revenue model, and may impact our oncology
pharmaceutical services revenue under the service line model. During the first nine months of 2003, approximately $1.2 billion in net operating revenue, out of a total of $1.8 billion, was attributable to amounts paid by payors to physicians for
pharmaceuticals.



Revenue attributable to services provided in connection with
radiation oncology and diagnostic radiology under either the PPM model or the service line model appears as cancer center services revenue.



Medical oncology net operating revenue increased from $1,293.3 million in the first nine months of 2002 to $1,556.8 million in the first nine months of 2003, an increase
of $263.6 million or 20.4%. Medical oncology net operating revenue increased from $448.3 million in the third quarter of 2002 to $548.9 million for the third quarter of 2003, an increase of $100.6 million or 22.4%. The growth in medical oncology
revenue is primarily attributable to the use of a small number of new pharmaceutical products and additional supportive care drugs, in addition to increased patient volume. During the third quarter of 2003, PPM medical oncology visits increased by
1.8% compared to the same prior year period. Same practice PPM medical oncology visits for the third quarter of 2003 increased 6.8% over the same prior year period, which excludes the impact of disaffiliations and service line conversions. Also
contributing to the increase in medical oncology revenue for the third quarter of 2003 is an increase in service line revenue of $33.0 million and increased group purchasing organization revenues of $2.1 million as compared to the comparable prior
year quarter. In addition to conversions, since September 30, 2002 and through September 30, 2003, we have entered into service line agreements with nine medical oncology practices, representing 43 physicians.



Cancer center services net operating revenue increased from $230.2 million in the first nine
months of 2002 to $242.0 million in the first nine months of 2003, an increase of $11.8 million, or 5.1%. Cancer center services net operating revenue increased from $73.9 million in the third quarter of 2002 to $79.6 million for the third quarter
of 2003, an increase of $5.6 million, or 7.6%. Such increases are attributable to increased radiology revenue from diagnostic services and to an increase in radiation oncology revenue. PET scans increased from 3,084 in the third quarter of 2002 to
5,453 in the third quarter of 2003, an increase of 76.8%. The increase in the number of PET scans is attributable to our opening seven PET units since September 30, 2002, as well as growth of 29.5% in the number of scans on the fourteen PET units
that were operational during the third quarter of 2002. Also contributing to the increase in diagnostic revenue is an increase in CT scans, which increased 21.2% from 15,879 in the third quarter of 2002 to 19,247 in the third quarter of



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##### Table of Contents

US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



2003. Radiation treatments decreased from 160,645 in the third quarter of 2002 to 159,826 in the third quarter of 2003, a decrease of 0.5% as a result of our
disaffiliation with two radiation oncology practices with operations in three cancer centers since September 30, 2003. In addition, we have opened four cancer centers and closed one center since the third quarter of 2002. Same practice radiation
treatments increased from 151,517 in the third quarter of 2002 to 154,126 in the third quarter of 2003, an increase of 1.7%. We currently have eight cancer centers and five PET installations in various stages of development. Partially offsetting the
increases in PET and radiation oncology is a decrease in diagnostic revenue resulting from our sale of technical radiology assets during the third quarter of 2002 and our disaffiliation with a radiology practice consisting of 39 physicians in the
second quarter of 2003.



Other segment net operating revenue decreased from
$48.8 million in the first nine months of 2002 to $43.8 million in the first nine months of 2003, a decrease of $5.1 million, or 10.4%. Other segment net operating revenue decreased from $17.6 million in the third quarter of 2002 to $13.4 million
for the third quarter of 2003, a decrease of $4.2 million, or 23.9%. The decrease is primarily attributable to an 18.0% decline in new patients enrolled in research studies in the third quarter as compared to the third quarter of 2002 due to the
completion of two large trials during the second quarter of 2003.



During the
third quarter of 2003, 92.0% of our net operating revenue was derived from practices under the PPM model as of September 30, 2003. The following table shows the amount of operating revenue we derived under each type of service agreement at the end
of the respective period for the three and nine months ended September 30, 2003 and 2002 (in thousands):



|                   |  | Three Months Ended September 30, 2003 |         | Three Months Ended September 30, 2002 |       | Nine Months Ended September 30, 2003 |   | Nine Months Ended September 30, 2002
|------------------ |  | ------------------------------------- | ------- | ------------------------------------- | ----- | ------------------------------------ | - | ------------------------------------
|                   |  | Revenue                               |         | %                                     |       | Revenue                              |   | %                                   
|Earnings model     |  | $                                     | 439,991 |                                       | 68.5  |                                      | $ | 359,889                             
|Net revenue model  |  |                                       | 150,679 |                                       | 23.5  |                                      |   | 165,242                             
|Service line model |  |                                       | 39,076  |                                       | 6.1   |                                      |   | 6,020                               
|Other              |  |                                       | 12,028  |                                       | 1.9   |                                      |   | 8,614                               
|                   |  |                                       |         |                                       |       |                                      |   |                                     
|                   |  | $                                     | 641,774 |                                       | 100.0 |                                      | $ | 539,765                             
|                   |  |                                       |         |                                       |       |                                      |   |                                     



Since the beginning of 2001 and
through September 30, 2003, eighteen practices accounting for 27.0% of net operating revenue in 2002 have converted from the net revenue model to the earnings model.



The following table indicates the number of practices on each model as of September 30, 2003 and as of December 31, 2002:



|                   |  | September 30,2003 |  | December 31,2002
|------------------ |  | ----------------- |  | ----------------
|Earnings model     |  | 26                |  | 25              
|Net revenue model  |  | 11                |  | 12              
|Service line model |  | 14                |  | 7               



During the first quarter of 2003, we
transitioned one net revenue model practice to the service line model and one net revenue model practice to the earnings model, and disaffiliated from ten physicians who had practiced at the group that converted to the earnings model. We also



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



commenced operations at two new practices under the service line model, comprising of 14 physicians.



During the second quarter of 2003, we commenced operations at one new service line practice
and disaffiliated with a radiology group consisting of 39 physicians accounting for $11.4 million of our net operating revenue for the first six months of 2003.



During the third quarter of 2003, we converted the medical oncology portion of a net revenue model practice, which accounted for $22.0 million of our net operating
revenue for the first nine months of 2003 to the service line model. That practices six radiation oncology physicians disaffiliated during the second quarter. We also disaffiliated with one practice consisting of 39 radiologists and commenced
operations at three new practices under the service line model.



Subsequent to
September 30, 2003, we have affiliated with two additional practices under the service line, consisting of fourteen physicians.



Revenue. Our revenue is net operating revenue, less the amount retained by our affiliated physician practices under PPM service agreements.



The following presents the amounts included in determination of our revenue for the three and
nine months ended September 30, 2003 and 2002 (in thousands):



|                              |  | Three Months Ended September 30, |          |   | Nine Months Ended September 30, |  
|----------------------------- |  | -------------------------------- | -------- | - | ------------------------------- | -
|                              |  | 2003                             |          |   | 2002                            |  
|Net operating revenue         |  | $                                | 641,774  |   |                                 | $
|Amounts retained by practices |  |                                  | (132,674 | ) |                                 |  
|                              |  |                                  |          |   |                                 |  
|Revenue                       |  | $                                | 509,100  |   |                                 | $
|                              |  |                                  |          |   |                                 |  



Amounts retained by practices
increased from $351.9 million in the first nine months of 2002 to $394.9 million in the first nine months of 2003, an increase of $43.0 million, or 12.2%. Amounts retained by practices increased from $121.5 million in the third quarter of 2002 to
$132.7 million in the third quarter of 2003, an increase of $11.2 million, or 9.2%. 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 decreased from 22.4% to 21.4% for the first nine months of 2002 and 2003, respectively, and from 22.5% to 20.7% for the third quarters of 2002 and 2003,
respectively. The decrease in amounts retained by practices as a percentage of net operating revenue is attributable to increased revenues under the service line model, reduction in operating margins of our affiliated practices and the conversion of
practices to the earnings model.



Revenue increased from $1,220.4 million for
the first nine months of 2002 to $1,447.8 million for the first nine months of 2003, an increase of $227.3 million, or 18.6%. Revenue increased from $418.3 million for the third quarter of 2002 to $509.1 million for the third quarter of 2003, an
increase of $90.8 million, or 21.7%. Revenue growth was caused by increases in revenues attributable to pharmaceuticals and new service line revenues, and to a lesser extent, an increase in diagnostic and radiation revenues.



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



The following table shows our revenue by segment for the three and nine months ended September 30, 2003 and 2002 (in
thousands):



|                                   |  | Three Months Ended September 30, |         | Nine Months Ended September 30,
|---------------------------------- |  | -------------------------------- | ------- | -------------------------------
|                                   |  | 2003                             |         | 2002                           
|Oncology pharmaceutical services   |  | $                                | 318,592 |                                
|Other practice management services |  |                                  | 120,207 |                                
|                                   |  |                                  |         |                                
|Medical oncology                   |  |                                  | 438,799 |                                
|Cancer center services             |  |                                  | 56,976  |                                
|Other segment revenue              |  |                                  | 13,325  |                                
|                                   |  |                                  |         |                                
|                                   |  | $                                | 509,100 |                                
|                                   |  |                                  |         |                                



Trends in our revenue by segment are
caused by the same factors affecting net operating revenue segments and are discussed above.



Medicare is the practices largest payor. During the first nine months of 2003 and 2002 approximately 41% of the PPM practices net patient revenue was derived from Medicare payments. This percentage varies
among practices. No other single payor accounted for more than 10% of our revenues in the first nine months of 2003 or 2002. However, certain of our individual affiliated practices may have contracts with payors accounting for more than 10% of their
revenues.



The following table sets forth the percentages of revenue
represented by certain items reflected in the Companys Condensed Consolidated Statement of Operations and Comprehensive Income.



|                                            |  | Three Months Ended September 30, |   |  | Nine Months Ended September 30, |   
|------------------------------------------- |  | -------------------------------- | - |  | ------------------------------- | --
|                                            |  | 2003                             |   |  | 2002                            |   
|Revenue                                     |  | 100.0                            | % |  | 100.0                           | % 
|Operating expenses:                         |  |                                  |   |  |                                 |   
|Pharmaceuticals and supplies                |  | 58.4                             |   |  | 53.3                            |   
|Field compensation and benefits             |  | 17.7                             |   |  | 20.1                            |   
|Other field costs                           |  | 9.7                              |   |  | 11.7                            |   
|General and administration                  |  | 3.8                              |   |  | 4.0                             |   
|Depreciation and amortization               |  | 3.4                              |   |  | 4.1                             |   
|Impairment, restructuring and other charges |  | 0.3                              |   |  | 18.4                            |   
|                                            |  |                                  |   |  |                                 |   
|Income (loss) from operations               |  | 6.7                              |   |  | (11.6                           | ) 
|Interest expense, net                       |  | (0.9                             | ) |  | (1.0                            | ) 
|Loss on early extinguishment of debt        |  |                                 |   |  |                                |   
|                                            |  |                                  |   |  |                                 |   
|Income (loss) before income taxes           |  | 5.8                              |   |  | (12.6                           | ) 
|Income tax benefit (provision)              |  | (2.3                             | ) |  | 4.0                             |   
|                                            |  |                                  |   |  |                                 |   
|Net income (loss)                           |  | 3.5                              | % |  | (8.6                            | )%
|                                            |  |                                  |   |  |                                 |   



Pharmaceuticals and Supplies.
Pharmaceuticals and supplies expense, which includes drugs, medications and other supplies used by the practices, increased from $635.0 million in the first nine months of 2002 to $825.5 million in the same period of 2003, an increase of $190.5
million, or 30.0%. Pharmaceuticals and supplies expense increased from $223.1 million in the third quarter of



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



2002 to $297.5 million in the third quarter of 2003, an increase of $74.4 million, or 33.3%. As a percentage of revenue, pharmaceuticals and supplies
increased from 52.0% in the first nine months of 2002 to 57.0% in the same period in 2003 and from 53.3% in the third quarter of 2002 to 58.4% in the third quarter of 2003. The increase was attributable to a larger portion of our operating revenue
being derived from pharmaceuticals, more expensive drugs and to a lesser extent the conversion of two affiliated practices to, and the addition of seven practices in new markets under, the service line model since the third quarter of 2002.



As noted above, Congress and CMS are both currently considering significant
reductions in Medicare reimbursement for pharmaceuticals. These reductions could increase pharmaceutical costs as a percentage of revenue by reducing revenues without corresponding reduction in the amount pharmaceutical companies charge for the
products. Any change in reimbursement methodology could also otherwise adversely affect our ability to control costs or change the way in which pharmaceutical companies price their products.



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 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 and governmental 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. 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 developed and are implementing a number of drug management programs which are designed to provide affiliated practices with practical tools for process improvement, cost reduction
and decision support in relation to pharmaceuticals. The successful conversion of net revenue model practices to the earnings model and implementation of the service line structure should both also help reduce the impact of the increasing cost of
pharmaceuticals and supplies and the effect of reduced levels of reimbursement. 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 treatment patterns (rather than growth of our business), we believe that our overall margins could 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, and requires less capital investment than the PPM model, to the extent we add additional service
line practices under the pharmacy service line, we would expect our overall margin percentages 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 $256.4 million in the first nine months of 2002 to $267.5 million in the first nine months of 2003, an increase of $11.1 million, or 4.3%. Field compensation and benefits increased from $84.1 million in the
third quarter of 2002 to $90.1 million in the third quarter of 2003, an increase of $6.0 million or



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



7.1%. As a percentage of revenue, field compensation and benefits decreased from 21.0% in the first nine months of 2002 to 18.5% in the first nine months of
2003, and from 20.1% in the third quarter of 2002 to 17.7% in the third quarter of 2003. The decrease as a percentage of revenue is attributable to increases in pharmaceutical revenues and the incremental service line revenue in 2003.



Other Field Costs. Other field costs, which consist of rent, utilities, repairs and
maintenance, insurance and other direct field costs, increased from $143.3 million in the first nine months of 2002 to $148.1 million in the first nine months of 2003, an increase of $4.8 million, or 3.3%. Other field costs increased from $49.0
million in the third quarter of 2002 to $49.4 million in the third quarter of 2003, an increase of $0.4 million, or 0.8%. The increase in other field costs is partially attributable to $0.9 million recognized in the second quarter of 2003 in
connection with the disaffiliation of a radiology practice consisting of 39 physicians effective June 30, 2003. As a percentage of revenue, other field costs decreased from 11.7% in the first nine months of 2002 to 10.3% in the first nine months of
2003, and from 11.7% in the third quarter of 2002 to 9.7% in the third quarter of 2003. The decrease as a percentage of revenue is attributable to increases in pharmaceutical revenues and the incremental service line revenue in 2003.



General and Administrative. General and administrative expenses increased from $45.9
million in the first nine months of 2002 to $51.2 million in the first nine months of 2003, an increase of $5.3 million, or 11.5%. General and administrative expenses increased from $16.6 million in the third quarter of 2002 to $19.2 million in the
third quarter of 2003, an increase of $2.6 million, or 15.6%. Such increases are attributable to additional personnel and operating expenses incurred in order to support our development efforts since 2002 combined with our initiative to provide
support for the service line operations. As a percentage of revenue, general and administrative costs decreased from 3.8% in the first nine months of 2002 to 3.5% in the first nine months of 2003, and from 4.0% in the third quarter of 2002 to 3.8%
in the third quarter of 2003. Included in our results for the first nine months of 2003 are fees of $2.1 million in the first quarter of 2003, $1.0 million in the second quarter of 2003, and $1.5 million in the third quarter of 2003 for outside
consultants providing strategic planning and other services that we would not expect to incur in future periods.



Overall, we experienced an increase in operating margins with earnings before taxes, interest, depreciation, amortization, and loss on early extinguishment of debt
(EBITDA), as a percentage of revenue (EBITDA margin), increasing from 1.9% in the first nine months of 2002 to 10.6% in the first nine months of 2003, and from (7.5)% in the third quarter of 2002 to 10.0% in the third quarter of 2003. The increase
in operating margins is attributable to the impairment, restructuring and other charges recognized in 2002, partially offset by the increase in pharmaceutical costs and, to a lesser extent, the increase in service line model agreements, which
typically have lower margins.



The table below presents information about
reported segments for the nine months ended September 30, 2003 (in thousands):



|                                         |  | Oncology Pharmaceutical Services |          |   | Other Practice ManagementServices |   |          | Cancer Center Services |  |   | Other    |   |  | Unallocated General and Administrative Expenses andCharges |         |   | Total |  
|---------------------------------------- |  | -------------------------------- | -------- | - | --------------------------------- | - | -------- | ---------------------- |  | - | -------- | - |  | ---------------------------------------------------------- | ------- | - | ----- | -
|Net operating revenue                    |  | $                                | 877,561  |   |                                   | $ | 679,266  |                        |  | $ | 242,007  |   |  | $                                                          | 43,773  |   |       | $
|Amounts retained by affiliated practices |  |                                  | (866     | ) |                                   |   | (319,641 | )                      |  |   | (72,772  | ) |  |                                                            | (1,606  | ) |       |  
|                                         |  |                                  |          |   |                                   |   |          |                        |  |   |          |   |  |                                                            |         |   |       |  
|Revenue                                  |  |                                  | 876,695  |   |                                   |   | 359,625  |                        |  |   | 169,235  |   |  |                                                            | 42,167  |   |       |  
|Operating expenses                       |  |                                  | (793,545 | ) |                                   |   | (295,443 | )                      |  |   | (136,466 | ) |  |                                                            | (70,635 | ) |       |  
|                                         |  |                                  |          |   |                                   |   |          |                        |  |   |          |   |  |                                                            |         |   |       |  
|Income (loss) from operations            |  |                                  | 83,150   |   |                                   |   | 64,182   |                        |  |   | 32,769   |   |  |                                                            | (28,468 | ) |       |  
|Depreciation and amortization            |  |                                  | 106      |   |                                   |   |         |                        |  |   | 21,791   |   |  |                                                            | 33,069  |   |       |  
|                                         |  |                                  |          |   |                                   |   |          |                        |  |   |          |   |  |                                                            |         |   |       |  
|EBITDA                                   |  | $                                | 83,256   |   |                                   | $ | 64,182   |                        |  | $ | 54,560   |   |  | $                                                          | 4,601   |   |       | $
|                                         |  |                                  |          |   |                                   |   |          |                        |  |   |          |   |  |                                                            |         |   |       |  



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



The table below presents information about reported segments for the nine months ended September 30, 2002 (in
thousands):



|                                         |  | Oncology Pharmaceutical Services |          |   | Other Practice ManagementServices |   |          | Cancer Center Services |  |   | Other    |   |  | Unallocated General and Administrative Expenses and Charges |         |   | Total |  
|---------------------------------------- |  | -------------------------------- | -------- | - | --------------------------------- | - | -------- | ---------------------- |  | - | -------- | - |  | ----------------------------------------------------------- | ------- | - | ----- | -
|Net operating revenue                    |  | $                                | 665,219  |   |                                   | $ | 628,037  |                        |  | $ | 230,192  |   |  | $                                                           | 48,841  |   |       | $
|Amounts retained by affiliated practices |  |                                  | (681     | ) |                                   |   | (274,870 | )                      |  |   | (73,106  | ) |  |                                                             | (3,235  | ) |       |  
|                                         |  |                                  |          |   |                                   |   |          |                        |  |   |          |   |  |                                                             |         |   |       |  
|Revenue                                  |  |                                  | 664,538  |   |                                   |   | 353,167  |                        |  |   | 157,086  |   |  |                                                             | 45,606  |   |       |  
|Operating expenses                       |  |                                  | (602,562 | ) |                                   |   | (285,742 | )                      |  |   | (122,764 | ) |  |                                                             | (76,915 | ) |       |  
|                                         |  |                                  |          |   |                                   |   |          |                        |  |   |          |   |  |                                                             |         |   |       |  
|Income (loss) from operations            |  |                                  | 61,976   |   |                                   |   | 67,425   |                        |  |   | 34,322   |   |  |                                                             | (31,309 | ) |       |  
|Depreciation and amortization            |  |                                  | 173      |   |                                   |   |         |                        |  |   | 14,754   |   |  |                                                             | 38,403  |   |       |  
|                                         |  |                                  |          |   |                                   |   |          |                        |  |   |          |   |  |                                                             |         |   |       |  
|EBITDA                                   |  | $                                | 62,149   |   |                                   | $ | 67,425   |                        |  | $ | 49,076   |   |  | $                                                           | 7,094   |   |       | $
|                                         |  |                                  |          |   |                                   |   |          |                        |  |   |          |   |  |                                                             |         |   |       |  



The table below presents information
about reported segments for the three months ended September 30, 2003 (in thousands):



|                                         |  | Oncology Pharmaceutical Services |          |   | Other Practice Management Services |   |          | Cancer Center Services |  |   | Other   |   |  | Unallocated General and Administrative Expenses and Charges |         |   | Total |  
|---------------------------------------- |  | -------------------------------- | -------- | - | ---------------------------------- | - | -------- | ---------------------- |  | - | ------- | - |  | ----------------------------------------------------------- | ------- | - | ----- | -
|Net operating revenue                    |  | $                                | 319,021  |   |                                    | $ | 229,835  |                        |  | $ | 79,551  |   |  | $                                                           | 13,367  |   |       | $
|Amounts retained by affiliated practices |  |                                  | (429     | ) |                                    |   | (109,628 | )                      |  |   | (22,575 | ) |  |                                                             | (42     | ) |       |  
|                                         |  |                                  |          |   |                                    |   |          |                        |  |   |         |   |  |                                                             |         |   |       |  
|Revenue                                  |  |                                  | 318,592  |   |                                    |   | 120,207  |                        |  |   | 56,976  |   |  |                                                             | 13,325  |   |       |  
|Operating expenses                       |  |                                  | (286,993 | ) |                                    |   | (96,498  | )                      |  |   | (47,625 | ) |  |                                                             | (23,059 | ) |       |  
|                                         |  |                                  |          |   |                                    |   |          |                        |  |   |         |   |  |                                                             |         |   |       |  
|Income (loss) from operations            |  |                                  | 31,599   |   |                                    |   | 23,709   |                        |  |   | 9,351   |   |  |                                                             | (9,734  | ) |       |  
|Depreciation and amortization            |  |                                  | 57       |   |                                    |   |         |                        |  |   | 7,205   |   |  |                                                             | 9,925   |   |       |  
|                                         |  |                                  |          |   |                                    |   |          |                        |  |   |         |   |  |                                                             |         |   |       |  
|EBITDA                                   |  | $                                | 31,656   |   |                                    | $ | 23,709   |                        |  | $ | 16,556  |   |  | $                                                           | 191     |   |       | $
|                                         |  |                                  |          |   |                                    |   |          |                        |  |   |         |   |  |                                                             |         |   |       |  



The table below presents information
about reported segments for the three months ended September 30, 2002 (in thousands):



|                                         |  | Oncology Pharmaceutical Services |          |   | Other Practice Management Services |   |         | Cancer Center Services |  |   | Other   |   |  | Unallocated General and Administrative Expenses and Charges |         |   | Total |  
|---------------------------------------- |  | -------------------------------- | -------- | - | ---------------------------------- | - | ------- | ---------------------- |  | - | ------- | - |  | ----------------------------------------------------------- | ------- | - | ----- | -
|Net operating revenue                    |  | $                                | 234,635  |   |                                    | $ | 213,621 |                        |  | $ | 73,948  |   |  | $                                                           | 17,561  |   |       | $
|Amounts retained by affiliated practices |  |                                  | (1,789   | ) |                                    |   | (94,985 | )                      |  |   | (23,996 | ) |  |                                                             | (702    | ) |       |  
|                                         |  |                                  |          |   |                                    |   |         |                        |  |   |         |   |  |                                                             |         |   |       |  
|Revenue                                  |  |                                  | 232,846  |   |                                    |   | 118,636 |                        |  |   | 49,952  |   |  |                                                             | 16,859  |   |       |  
|Operating expenses                       |  |                                  | (209,563 | ) |                                    |   | (98,091 | )                      |  |   | (39,586 | ) |  |                                                             | (26,156 | ) |       |  
|                                         |  |                                  |          |   |                                    |   |         |                        |  |   |         |   |  |                                                             |         |   |       |  
|Income (loss) from operations            |  |                                  | 23,283   |   |                                    |   | 20,545  |                        |  |   | 10,366  |   |  |                                                             | (9,297  | ) |       |  
|Depreciation and amortization            |  |                                  | (169     | ) |                                    |   |        |                        |  |   | 4,789   |   |  |                                                             | 12,492  |   |       |  
|                                         |  |                                  |          |   |                                    |   |         |                        |  |   |         |   |  |                                                             |         |   |       |  
|EBITDA                                   |  | $                                | 23,114   |   |                                    | $ | 20,545  |                        |  | $ | 15,155  |   |  | $                                                           | 3,195   |   |       | $
|                                         |  |                                  |          |   |                                    |   |         |                        |  |   |         |   |  |                                                             |         |   |       |  



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



The decrease in EBITDA for the other practice management services for the first nine months ended September 30, 2003
as compared to the same prior year period is primarily attributable to our disaffiliation with two medical oncology practices representing 12 physicians since September 30, 2002.



Medical oncology EBITDA margin decreased from 12.7% in the first nine months of 2002 to 11.9% in the first nine months of 2003. This
decrease is attributable to an increase in lower margin pharmaceuticals.



Cancer center services EBITDA margin increased from 31.2% in the first nine months of 2002 to 32.2% in the first nine months of 2003. This increase is attributable to exiting from unprofitable sites, investment in technology such as
intensity modulated radiation therapy (IMRT), combined with growth in same practice radiation treatments and PET scans. Cancer Center Services EBITDA for the three and nine months ended September 30, 2003 includes costs of $0.9 million incurred in
connection with our disaffiliation with a radiology group effective June 30, 2003.



Depreciation and Amortization. Depreciation and amortization expense increased from $53.3 million in the first nine months of 2002 to $55.0 million in the first nine months of 2003, an increase of $1.6 million or 3.1%. Depreciation
and amortization expense increased from $17.1 million in the third quarter of 2002 to $17.2 million in the third quarter of 2003, an increase of $0.1 million or 0.4%. The increase in depreciation and amortization expense is attributable to increased
investment in radiation and PET technologies, partially offset by impairments of management service agreements and cancer center assets in 2002. As a percentage of revenue, depreciation and amortization expense decreased from 4.4% in the first nine
months of 2002 to 3.8% in the first nine months of 2003, and from 4.1% in the third quarter of 2002 to 3.4% in the third quarter of 2003. The decline in depreciation and amortization expense as a percentage of revenue reflects the impairment charges
on intangible assets and cancer center assets totaling $140.8 million recognized in 2002.



Impairment, Restructuring and Other Charges. We have recorded no impairment or restructuring charges during the first nine months of 2003. During the third quarter of 2003, we recognized a $1.8 million loss on
the sale of a cancer center.



During the first nine months of 2002, we have
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.
| | - | --------------------------------------------------------------------------------



| |  | Centralization of accounting and financial processes.
| | - | -----------------------------------------------------



| |  | Allowance on an affiliate receivable.
| | - | -------------------------------------



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



In that context, we recognized the following impairment, restructuring and other charges during the three months and
nine months ending September 30, 2002 (in thousands):



|                                               |  | Three Months Ended September 30, 2002 |        |   | Nine Months Ended September 30, 2002 |  
|---------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------ | -
|Write-off of service agreements                |  | $                                     | 68,314 |   |                                      | $
|Gain on sale of practice assets                |  |                                       | (3,415 | ) |                                      |  
|Personnel reduction costs                      |  |                                       | 882    |   |                                      |  
|Allowance on an affiliate receivable           |  |                                       | 11,050 |   |                                      |  
|Consulting costs for implementing service line |  |                                       |       |   |                                      |  
|                                               |  |                                       |        |   |                                      |  
|                                               |  | $                                     | 76,831 |   |                                      | $
|                                               |  |                                       |        |   |                                      |  



The following is a detailed summary of
the third quarter of 2002 charges (in thousands):



|                                     |  | Conversion to Service Line |        |   | Practice Disaffiliations |   |        | Impairment of Net Revenue Model Service Agreement |  | Processing Centralization |        | Affiliate Receivable Allowance |   | Total | 
|------------------------------------ |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ------------------------------------------------- |  | ------------------------- | ------ | ------------------------------ | - | ----- | 
|Write-off of service agreements      |  | $                          | 13,054 |   |                          | $ | 4,253  |                                                   |  | $                         | 51,007 |                                | $ |      | 
|Gain on sale of practice assets      |  |                            | (1,063 | ) |                          |   | (2,352 | )                                                 |  |                           |       |                                |   |      | 
|Personnel reduction costs            |  |                            |       |   |                          |   |       |                                                   |  |                           |       |                                |   | 882   | 
|Allowance on an affiliate receivable |  |                            |       |   |                          |   |       |                                                   |  |                           |       |                                |   |      | 
|                                     |  |                            |        |   |                          |   |        |                                                   |  |                           |        |                                |   |       | 
|                                     |  | $                          | 11,991 |   |                          | $ | 1,901  |                                                   |  | $                         | 51,007 |                                | $ | 882   | 
|                                     |  |                            |        |   |                          |   |        |                                                   |  |                           |        |                                |   |       | 



During the first nine months of 2002,
we transitioned three of our PPM practices with an aggregate of 23 physicians to the service line model, including one such transition in the third quarter of 2002. In each transaction, the existing PPM service agreement was terminated, the practice
repurchased its assets, and future consideration owing to physicians for their initial affiliation with the Company was either accelerated or forfeited.



We also disaffiliated with physicians in four net revenue markets during the third quarter of 2002 and terminated a service agreement in one market with respect to
certain radiology sites during the second quarter of 2002. In these terminations, practice assets were repurchased and fees were paid in connection with the termination. Remaining consideration owed to the physicians (if any) by us with respect to
their original PPM affiliation transaction was accelerated.



The impairment of
service agreements during the third quarter of 2002 was a non-cash, pretax charge 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 of 2002 based upon our analysis of projected cash flows under those agreements, taking into account developments in those
markets during the third quarter of 2002 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 of 2002. The remainder of the charge relating
to impairment of service agreements for the first nine months of 2002 were non-cash, pretax charges of $39.7 million comprising (i) a $33.8 million charge related to a net revenue model service agreement that became impaired during the second
quarter of 2002 based upon our analysis of projected cash flows under that agreement, taking into account developments in that market during the second quarter of 2002



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



and (ii) a $5.9 million charge related to two PPM service agreements that terminated in conjunction with conversion to the service line.



The $3.4 million net gain on sale of practice assets during the third quarter of 2002
comprised (a) net proceeds of $4.3 million paid by converting and disaffiliating physicians and (b) a $0.2 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.



During the second quarter of 2002 we recognized a $2.0 million net gain on sale of practice assets. 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 $0.5
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 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.



During the third quarter of 2002, in connection with our transition, we commenced an
initiative to further centralize certain of our accounting and financial reporting functions at our headquarters in Houston, resulting in a $0.9 million charge for personnel reduction costs. During the first and second quarters of 2002, we
recognized $0.3 million and $0.6 million, respectively, for personnel reduction costs.



During the third quarter of 2002, we recognized an $11.1 million allowance related to 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 of 2002, we made the
determination that a portion of such amounts owed by physician practices to us may have become uncollectible due to, among other things the age of the receivable and circumstances relating to practice operations.



During the second quarter of 2002 we recognized $1.0 million of professional fees for
consultants advising us on the implementation of the service line. During the first quarter of 2002, we also recognized charges of $0.4 million in consulting fees related to our introduction of the service line model.



As discussed above, during the first nine months of 2002, we have 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 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 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



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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



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 loss on early extinguishment of debt we have recorded during 2002. Throughout 2002, we had recorded $10.3 million in unusual cash charges and $153.4 million in unusual non-cash charges in connection
with our transition process. We have not recognized any unusual charges in the first nine months of 2003.



The principal category of those prior 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 $22.8 million in service agreements under the net revenue model and $219.6 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. Material changes in reimbursement could result in additional charges, including additional impairments of service agreements and other long-term assets.



Interest. Net interest expense decreased from $15.8 million in the first nine months
of 2002 to $14.8 million in the first nine months of 2003, a decrease of $1.0 million, or 6.4%. Net interest expense increased from $4.2 million in the third quarter of 2002 to $4.7 million in the third quarter of 2003, an increase of $0.5 million,
or 11.4%. As a percentage of revenue, net interest expense decreased from 1.3% for the first nine months of 2002 to 1.0% for the first nine months of 2003, and from 1.0% in the third quarter of 2002 to 0.9% in the third quarter of 2003. Such
decreases are due to payment of physician debt, lower borrowing levels during the first nine months of 2003, reduced interest rates on our leasing facility and, to a lesser extent, an increase in interest income resulting from improved operating
cash flows since September 30, 2002. On February 1, 2002, we refinanced our indebtedness by issuing $175 million in 9.625% Senior Subordinated Notes due 2012 and repaid in full our existing senior secured notes and terminated our existing credit
facility. Our previously existing $100 million senior secured notes bore interest at a fixed rate of 8.42% and would have matured as to $20 million in each of 2002-2006. Lower levels of debt during the first nine months of 2003, as compared to the
same period in 2002, partially offset by the increased rate of interest contributed to the decrease of interest expense.



Loss on Early Extinguishment of Debt. During the first quarter of 2002, we recorded a 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.



The Company adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS 145) effective January 1, 2003. Among
other matters, SFAS 145 rescinds Statement of Financial Accounting Standards No. 4, Reporting Gains and Losses from Extinguishment of Debt, which required all gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of the related income tax effect. In connection with its adoption, gains and losses from extinguishments of debt are no longer classified as extraordinary items in the Companys statement of
operations. In addition, prior period financial statements were reclassified to reflect the new standard. As such, the Company reclassified the $13.6 extraordinary loss on early extinguishment of debt recorded in the three months ended March 31,
2002 as a component of interest expense, net, in its condensed consolidated statement of operations.



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US Oncology, Inc.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



Income Taxes. We recognized an effective tax rate of 38.3% and (32.1)% for the first nine months of 2003 and
2002, respectively. The lower effective tax rate in 2002 reflects the lack of state tax benefit related to certain of the impairment, restructuring and other charges recognized in the prior year.



Net Income. Net income increased from a loss of $40.5 million, or ($0.41) per share,
in the first nine months of 2002 to net income of $51.8 million, or $0.56 per diluted share, in the first nine months 2003, an increase of $92.3 million. Earnings per share has been positively impacted by our repurchase of 9.6 million shares since
September 30, 2002 through the third quarter of 2003. Net income increased from a loss of $36.2 million in the third quarter of 2002 to net income of $17.9 million in the third quarter of 2003. Included in net income for the first nine months of
2002 are impairment, restructuring and other charges of $116.8 million and a loss on early extinguishment of debt of $13.6 million. Excluding these charges, net income for the first nine months of 2002 would have been $43.9 million, which represents
earnings per share of $0.44.



Liquidity and Capital Resources



As of September 30, 2003, we had net working capital of $149.6 million,
including cash and cash equivalents of $125.4 million. We had current liabilities of $372.8 million, including $80.8 million in current maturities of long-term debt, and $190.3 million of long-term indebtedness. During the first nine months of 2003,
we provided $185.8 million in net operating cash flow, invested $61.5 million, and used cash from financing activities in the amount of $73.9 million. As of October 27, 2003, we had cash and cash equivalents of $146.9 million.



Cash Flows from Operating Activities



During the first nine months of 2003, we provided $185.8 million in cash flows from
operating activities as compared to $134.4 million in the comparable prior year period. The increase in cash flow is primarily attributable to improved cash collections during the first nine months of 2003, offset by federal income tax payments of
$11.4 million in the nine months ended September 30, 2003. Our accounts receivable days outstanding has improved from 48 days at December 31, 2002 to 44 at September 30, 2003.



Cash Flows from Investing Activities



During the first nine months of 2003 and 2002, we expended $63.1 million and $45.1 million in capital expenditures, including $42.1 million and $24.6 million on the
development and construction of cancer centers, respectively. Maintenance capital expenditures were $21.0 million and $20.5 million in the first nine months of 2003 and 2002, respectively. For all of 2003, we anticipate expending a total of
approximately $30-$35 million on maintenance capital expenditures and approximately $50-$55 million on development of new cancer centers and PET installations. Over the next two to three years, we expect to expend $20-$30 million for upgrades to
existing cancer centers, including introduction of IMRT and high dose radiotherapy (HDR) equipment.



Cash Flows from Financing Activities



During the first nine months of 2003, we used cash from financing activities of $73.9 million as compared to cash provided of $5.5 million in the nine months of 2002. Such decrease in cash flow is primarily attributed to the proceeds in
2002 from the issuance of our Senior Subordinated Notes due 2012, net of the cash payments for the retirement of our previously existing indebtedness,



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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



including a prepayment premium paid as a result of early extinguishment of our Senior Secured Notes due 2006. In addition, we expended $61.2 million to
repurchase 7.5 million shares of our Common Stock during the first nine months of 2003.



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 credit facility and certain other debt.



We entered into a leasing facility in December 1997, under which a lessor 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 September 30, 2003, we had $70.2 million outstanding under the facility and no further amounts are available under that facility. The annual rent, which is classified as
interest expense, under the lease is approximately $3.0 million, based on interest rates in effect as of September 30, 2003.



Since December 31, 2002, we guarantee 100% of the residual value of the properties in the lease and therefore include the $70.2 million outstanding under the lease as
indebtedness on our financial statements. We also include assets under the lease as assets on our balance sheet based upon our determination of fair values of those properties at December 31, 2002. During the first nine months of 2003 we began to
recognize a depreciation charge in respect of the assets in the leasing facility amounting to $2.8 million. We did not recognize depreciation expense for those off-balance-sheet assets prior to December 31, 2002.



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 collateralized by substantially all of our assets. We have not yet determined whether we will seek to renew the lease. Accordingly, in June 2004, assuming we retain all of the properties, we
will be required to repay $70.2 million. Therefore, the amount outstanding has been classified as a current maturity of long-term indebtedness.



Because the lease payment floats with a referenced interest rate, we are also exposed to interest rate risk under the leasing facility. 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 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



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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS
OF OPERATIONS -Continued



formula. The credit facility, 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, 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 collateral under the credit facility and the guarantee obligations of our
leasing facility.



We are in compliance with covenants under our 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.



We currently expect that our principal use
of funds in the near future will be in connection with the purchase of medical equipment, including upgrades and additional equipment such as IMRT and HDR, investment in information systems and the acquisition or lease of real estate for the
development of integrated cancer centers and PET centers, and implementation of the service line structure, as well as possible repurchases of our Common Stock. It is likely that our capital needs in the next several years will exceed the cash
generated from operations. Thus, we may incur additional debt or issue additional debt or equity securities from time to time. Capital available for health care companies, whether raised through the issuance of debt or equity securities, is quite
limited. As a result, we may be unable to obtain sufficient financing on terms satisfactory to management or at all. Continued uncertainty regarding reimbursement or an adverse change in reimbursement could continue to adversely impact our ability
to access capital markets, including our ability to extend or refinance our leasing facility.



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US Oncology, Inc.



|ITEM  3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 during the first
nine months of 2003. 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 the first nine months of 2003.



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 September 30, 2003. The market values that result from these computations are compared with the market values of
these financial instruments at September 30, 2003. 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.



|ITEM  4. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------



As of the end of the period covered by 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.



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US Oncology, Inc.



PART II  OTHER INFORMATION



|ITEM  1. |  | 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, although we do employ pharmacists and operate licensed pharmacies in our pharmaceutical service line. In addition, because the practices purchase and prescribe pharmaceutical
products, they face the risk of product liability claims. Although we and our practices maintain insurance coverage, successful malpractice, regulatory or product liability claims asserted against us or one of the practices in excess of insurance
coverage 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. Although all of the qui tam suits against us of which we are aware have been dismissed, because qui tam actions are filed under seal, there is a possibility that we could be
the subject of other qui tam actions of which we are unaware. We intend to continue to investigate and vigorously defend ourselves against any and all such claims, and we continue to believe that we conduct our operations in compliance with
law.



Qui tam suits are brought by private individuals, and there is no
minimum evidentiary or legal threshold for bringing such a suit. 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.



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US Oncology, Inc.



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



|(a) | Exhibits
|--- | --------



|Exhibit No. |  | Description                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            | 
|3.1         |  | Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Companys Form 8-K/A filed June 17, 1999 and incorporated herein by
reference).                                                                         
|            | 
|3.2         |  | Amended and Restated By-Laws (filed as Exhibit 3.2 to the Companys Form 10-K filed March 21, 2003 and incorporated herein by reference).                                                                                              
|            | 
|4.1         |  | Rights Agreement between the Company and American Stock Transfer & Trust Company (incorporated by reference from the Companys 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 Companys Form 8-K filed February 5, 2002).
|            | 
|31.1        |  | Certification of Chief Executive Officer                                                                                                                                                                                               
|            | 
|31.2        |  | Certification of Chief Financial Officer                                                                                                                                                                                               
|            | 
|32.1        |  | Certification of Chief Executive Officer                                                                                                                                                                                               
|            | 
|32.2        |  | Certification of Chief Financial Officer                                                                                                                                                                                               



|(b) | Reports on Form 8-K
|--- | -------------------



During the third quarter, on August 8, 2003, we filed a form 8-K pursuant to Item 12 disclosing our release of financial results for the quarter ended
June 30, 2003.



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US Oncology, Inc.



SIGNATURES



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



|                         |  |  |  | US ONCOLOGY, INC.
|------------------------ |  |  |  | -----------------
|                         |  |  | 
|Date: November 13, 2003: |  |  |  | By:              
|                         |  |  |  |                  
|                         |  |  |  |                  



|                         |  |  | 
|------------------------ |  |  | 
|Date: November 13, 2003: |  |  | 
|                         |  |  | 
|                         |  |  | 



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