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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended June 30, 2004



Or



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



Commission file number: 0-26190



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US Oncology, Inc.

(Exact name of registrant as specified in its charter)



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



16825 Northchase
Drive, Suite 1300

Houston, Texas

77060

(Address of principal executive offices)

(Zip Code)



(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 July 16, 2004, 86,475,384 shares of the
Registrants Common Stock were outstanding. In addition, as of July 16, 2004, the Registrant had agreed to deliver 805,790 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

JUNE 30, 2004



TABLE OF CONTENTS



|                                                                                              |  |         
|--------------------------------------------------------------------------------------------- |  | --------
|                                                                                              |  | PAGE NO.
|PART I. FINANCIAL INFORMATION                                                                 |  |         
|                                                                                              | 
|Item 1.
Condensed Consolidated Financial Statements                                           |  | 3       
|                                                                                              | 
|Condensed Consolidated Balance Sheet                                                          |  | 3       
|                                                                                              | 
|Condensed Consolidated Statement of Operations and Comprehensive Income                       |  | 4       
|                                                                                              | 
|Condensed Consolidated Statement of Cash Flows                                                |  | 5       
|                                                                                              | 
|Notes to Condensed Consolidated Financial Statements                                          |  | 6       
|                                                                                              | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17      
|                                                                                              | 
|Item 3.
Quantitative and Qualitative Disclosures about Market Risks                           |  | 33      
|                                                                                              | 
|Item 4.
Controls and Procedures                                                               |  | 33      
|                                                                                              | 
|PART II. OTHER INFORMATION                                                                    |  |         
|                                                                                              | 
|Item 1.
Legal Proceedings                                                                     |  | 35      
|                                                                                              | 
|Item 6.
Exhibits and Reports on Form 8-K                                                      |  | 37      
|                                                                                              | 
|SIGNATURES                                                                                    |  | 38      



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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)



|                                                                                                          |  |               |           |   |                   |   |           |  
|--------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                          |  | June 30, 2004 |           |   | December 31, 2003 |  
|ASSETS                                                                                                    |  |               |           |   |                   |   |           |  
|Current assets:                                                                                           |  |               |           |   |                   |   |           |  
|Cash and equivalents                                                                                      |  | $             | 221,118   |   |                   | $ | 124,514   |  
|Accounts receivable                                                                                       |  |               | 316,582   |   |                   |   | 304,507   |  
|Other receivables                                                                                         |  |               | 61,100    |   |                   |   | 47,738    |  
|Prepaid expenses and other current assets                                                                 |  |               | 17,507    |   |                   |   | 18,451    |  
|Inventories                                                                                               |  |               | 28,768    |   |                   |   | 7,481     |  
|Due from affiliates                                                                                       |  |               | 40,650    |   |                   |   | 43,629    |  
|                                                                                                          |  |               |           |   |                   |   |           |  
|Total current assets                                                                                      |  |               | 685,725   |   |                   |   | 546,320   |  
|Property and equipment, net                                                                               |  |               | 362,391   |   |                   |   | 356,125   |  
|Service agreements, net                                                                                   |  |               | 232,541   |   |                   |   | 239,108   |  
|Deferred income taxes                                                                                     |  |               | 6,715     |   |                   |   | 10,915    |  
|Other assets                                                                                              |  |               | 21,820    |   |                   |   | 22,551    |  
|                                                                                                          |  |               |           |   |                   |   |           |  
|                                                                                                          |  | $             | 1,309,192 |   |                   | $ | 1,175,019 |  
|                                                                                                          |  |               |           |   |                   |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                      |  |               |           |   |                   |   |           |  
|Current liabilities:                                                                                      |  |               |           |   |                   |   |           |  
|Current maturities of long-term indebtedness                                                              |  | $             | 74,251    |   |                   | $ | 79,748    |  
|Accounts payable                                                                                          |  |               | 201,146   |   |                   |   | 160,628   |  
|Due to affiliates                                                                                         |  |               | 88,299    |   |                   |   | 64,052    |  
|Accrued compensation cost                                                                                 |  |               | 20,965    |   |                   |   | 26,316    |  
|Income taxes payable                                                                                      |  |               | 39,911    |   |                   |   | 19,810    |  
|Other accrued liabilities                                                                                 |  |               | 42,027    |   |                   |   | 41,847    |  
|                                                                                                          |  |               |           |   |                   |   |           |  
|Total current liabilities                                                                                 |  |               | 466,599   |   |                   |   | 392,401   |  
|                                                                                                          |  |              
|Deferred revenue                                                                                          |  |               | 7,290     |   |                   |   | 5,349     |  
|Long-term indebtedness                                                                                    |  |               | 183,908   |   |                   |   | 188,412   |  
|                                                                                                          |  |               |           |   |                   |   |           |  
|Total liabilities                                                                                         |  |               | 657,797   |   |                   |   | 586,162   |  
|Minority interest                                                                                         |  |               | 10,529    |   |                   |   | 10,497    |  
|Commitments and contingencies (Note 9)                                                                    |  |               |           |   |                   |   |           |  
|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 issued, 86,451 and 83,363 outstanding     |  |               | 953       |   |                   |   | 953       |  
|Additional paid in capital                                                                                |  |               | 478,113   |   |                   |   | 473,800   |  
|Common Stock to be issued, approximately 820 and 2,102 shares                                             |  |               | 9,327     |   |                   |   | 21,146    |  
|Treasury Stock, 8,850 and 11,938 shares                                                                   |  |               | (77,021   | ) |                   |   | (102,367  | )
|Retained earnings                                                                                         |  |               | 229,494   |   |                   |   | 184,828   |  
|                                                                                                          |  |               |           |   |                   |   |           |  
|Total stockholders equity                                                                                |  |               | 640,866   |   |                   |   | 578,360   |  
|                                                                                                          |  |               |           |   |                   |   |           |  
|                                                                                                          |  | $             | 1,309,192 |   |                   | $ | 1,175,019 |  
|                                                                                                          |  |               |           |   |                   |   |           |  



The accompanying notes
are an integral part of this statement.



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##### Table of Contents

US ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)



|                                              |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|--------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | --------- | - |  | - | ------- | -
|                                              |  | Three Months EndedJune 30, |         |   | Six Months Ended June 30, |  
|                                              |  | 2004                       |         |   | 2003                      |   |         | 2004 |  |   | 2003      |  
|Product revenues                              |  | $                          | 355,454 |   |                           | $ | 298,895 |      |  | $ | 687,929   |   |  | $ | 562,426 |  
|Service revenues                              |  |                            | 209,789 |   |                           |   | 192,517 |      |  |   | 402,310   |   |  |   | 376,196 |  
|                                              |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|Total revenues                                |  |                            | 565,243 |   |                           |   | 491,412 |      |  |   | 1,090,239 |   |  |   | 938,622 |  
|                                              |  |                            |         |  
|Cost of product                               |  |                            | 332,783 |   |                           |   | 277,153 |      |  |   | 639,549   |   |  |   | 520,461 |  
|                                              |  |                            |         |  
|Costs of services:                            |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|Field compensation and benefits               |  |                            | 96,461  |   |                           |   | 88,631  |      |  |   | 189,154   |   |  |   | 175,663 |  
|Other field costs                             |  |                            | 55,216  |   |                           |   | 56,872  |      |  |   | 112,017   |   |  |   | 108,011 |  
|Depreciation and amortization                 |  |                            | 15,131  |   |                           |   | 12,912  |      |  |   | 28,957    |   |  |   | 25,913  |  
|                                              |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|Total costs of services                       |  |                            | 166,808 |   |                           |   | 158,415 |      |  |   | 330,128   |   |  |   | 309,587 |  
|                                              |  |                            |         |  
|Total costs of product and services           |  |                            | 499,591 |   |                           |   | 435,568 |      |  |   | 969,677   |   |  |   | 830,048 |  
|General and administrative expense            |  |                            | 16,616  |   |                           |   | 16,365  |      |  |   | 29,300    |   |  |   | 31,941  |  
|Depreciation and amortization                 |  |                            | 5,205   |   |                           |   | 6,054   |      |  |   | 10,333    |   |  |   | 11,866  |  
|                                              |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|                                              |  |                            | 521,412 |   |                           |   | 457,987 |      |  |   | 1,009,310 |   |  |   | 873,855 |  
|                                              |  |                            |         |  
|Income from operations                        |  |                            | 43,831  |   |                           |   | 33,425  |      |  |   | 80,929    |   |  |   | 64,767  |  
|                                              |  |                            |         |  
|Other income (expense):                       |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|Interest expense, net                         |  |                            | (4,541  | ) |                           |   | (4,952  | )    |  |   | (8,923    | ) |  |   | (10,084 | )
|Other income                                  |  |                            | 622     |   |                           |   |        |      |  |   | 622       |   |  |   |        |  
|                                              |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|Income before income taxes                    |  |                            | 39,912  |   |                           |   | 28,473  |      |  |   | 72,628    |   |  |   | 54,683  |  
|Income tax provision                          |  |                            | (15,366 | ) |                           |   | (10,820 | )    |  |   | (27,962   | ) |  |   | (20,780 | )
|                                              |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|Net income and comprehensive income           |  | $                          | 24,546  |   |                           | $ | 17,653  |      |  | $ | 44,666    |   |  | $ | 33,903  |  
|                                              |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|Net income per share - basic                  |  | $                          | 0.28    |   |                           | $ | 0.19    |      |  | $ | 0.52      |   |  | $ | 0.37    |  
|                                              |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|Shares used in per share computation  basic  |  |                            | 87,192  |   |                           |   | 91,358  |      |  |   | 86,590    |   |  |   | 92,165  |  
|                                              |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|Net income per share  diluted                |  | $                          | 0.27    |   |                           | $ | 0.19    |      |  | $ | 0.50      |   |  | $ | 0.36    |  
|                                              |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  
|Shares used in per share computation diluted |  |                            | 90,674  |   |                           |   | 93,017  |      |  |   | 89,975    |   |  |   | 93,825  |  
|                                              |  |                            |         |   |                           |   |         |      |  |   |           |   |  |   |         |  



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)



|                                                     |  |                           |         |   |      |   |         |  
|---------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                     |  | Six Months Ended June 30, |        
|                                                     |  | 2004                      |         |   | 2003 |  
|Cash flows from operating activities:                |  |                           |         |   |      |   |         |  
|Net income                                           |  | $                         | 44,666  |   |      | $ | 33,903  |  
|Non cash adjustments:                                |  |                           |         |   |      |   |         |  
|Depreciation and amortization                        |  |                           | 39,290  |   |      |   | 37,779  |  
|Deferred income taxes                                |  |                           | 4,200   |   |      |   | 12,222  |  
|Undistributed earnings (losses) in joint ventures    |  |                           | 32      |   |      |   | (900    | )
|Non cash compensation expense                        |  |                           | 48      |   |      |   | 100     |  
|Changes in operating assets and liabilities:         |  |                           | 41,870  |   |      |   | 33,468  |  
|                                                     |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities            |  |                           | 130,106 |   |      |   | 116,572 |  
|                                                     |  |                           |         |   |      |   |         |  
|Cash flows from investing activities:                |  |                           |         |   |      |   |         |  
|Acquisition of property and equipment                |  |                           | (37,853 | ) |      |   | (39,452 | )
|                                                     |  |                           |         |   |      |   |         |  
|Net cash used by investing activities                |  |                           | (37,853 | ) |      |   | (39,452 | )
|                                                     |  |                           |         |   |      |   |         |  
|Cash flows from financing activities:                |  |                           |         |   |      |   |         |  
|Repayment of other indebtedness                      |  |                           | (10,001 | ) |      |   | (14,728 | )
|Cash payment in lieu of stock issuance               |  |                           |        |   |      |   | (710    | )
|Proceeds from exercise of options                    |  |                           | 18,599  |   |      |   | 895     |  
|Purchase of Treasury Stock                           |  |                           | (4,247  | ) |      |   | (40,972 | )
|                                                     |  |                           |         |   |      |   |         |  
|Net cash provided (used) by financing activities     |  |                           | 4,351   |   |      |   | (55,515 | )
|                                                     |  |                           |         |   |      |   |         |  
|Increase in cash and equivalents                     |  |                           | 96,604  |   |      |   | 21,605  |  
|Cash and equivalents:                                |  |                           |         |   |      |   |         |  
|Beginning of period                                  |  |                           | 124,514 |   |      |   | 75,029  |  
|                                                     |  |                           |         |   |      |   |         |  
|End of period                                        |  | $                         | 221,118 |   |      | $ | 96,634  |  
|                                                     |  |                           |         |   |      |   |         |  
|Interest paid                                        |  | $                         | 9,775   |   |      | $ | 10,720  |  
|Taxes paid                                           |  | $                         | 575     |   |      | $ | 8,755   |  
|                                                     |  |                          
|Non cash transactions:                               |  |                           |         |   |      |   |         |  
|Delivery of Common Stock in affiliation transactions |  | $                         | 6,585   |   |      | $ | 6,839   |  



The accompanying notes
are an integral part of this statement



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



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. The unaudited condensed consolidated financial statements, notes and other information included in this form 10-Q should be read in conjunction with the financial statements and the accompanying notes included
in the Companys Form 10-K filed with the Securities and Exchange Commission on March 12, 2004, as amended.



Previously reported financial information has been reclassified to conform to the 2004 presentation. Such reclassifications did not affect the Companys financial
condition, net income or cash flows.



NOTE 2  THE
MERGER TRANSACTION



On March 20, 2004, US
Oncology Holdings, Inc. (Holdings) (which was formerly known as Oiler Holding Corp.) and its wholly owned subsidiary, Oiler Acquisition Corp., entered into a merger agreement with US Oncology pursuant to which Oiler Acquisition Corp.
will be merged with and into US Oncology, with US Oncology continuing as the surviving corporation. If the transaction is consummated, US Oncology would become a private company owned by Holdings. Members of senior management of the Company,
including its Chairman and CEO, will continue as employees, participate in the merger by purchasing equity securities in Holdings, and be awarded equity securities in Holdings. Both Holdings and Oiler Acquisition Corp. are Delaware corporations that
were formed by Welsh, Carson, Anderson & Stowe IX, L.P. (Welsh Carson) for the purpose of completing the merger and related financing transactions. Currently, Welsh Carson directly owns approximately 14.5% of the Companys
outstanding common stock and, together with its co-investors and the directors and executive officers of US Oncology that participate in the merger, would own all the capital stock of Holdings when and if the merger is consummated.



If the merger is completed, each issued and outstanding share of US Oncology common stock
(other than shares owned by Welsh Carson, its co-investors and directors and executive officers of US Oncology that participate in the merger) will be converted into the right to receive $15.05 in cash, subject to the rights of dissenting
stockholders who exercise and perfect their appraisal rights under Delaware law. Each outstanding option for US Oncology common stock will be canceled in exchange for (1) the excess, if any, of $15.05 over the per share exercise price of the option
multiplied by (2) the number of shares of common stock subject to the option, net of any applicable withholding taxes. Outstanding rights to receive shares of common stock under existing delayed stock delivery agreements between US Oncology and
certain physicians will be canceled in exchange for an amount in cash equal to (1) $15.05 multiplied by (2) the number of shares of common stock otherwise issuable under the delayed stock delivery agreements on the scheduled delivery dates, net of
any applicable withholding taxes.



US Oncologys Board of Directors
approved the merger following the unanimous recommendation of a special committee composed of independent directors Boone Powell, Jr., Burton S. Schwartz, M.D. and Vicki H. Hitzhusen. The special committee and the Board received an opinion from
Merrill Lynch & Co. as to the fairness, from a financial point of view, of the consideration to be received by US Oncology stockholders (other than Welsh Carson, its affiliates and members of US Oncologys board or management that
participate in the merger) in the merger transaction.



The closing of the
merger is subject to various conditions contained in the merger agreement, including the approval by the holders of a majority of US Oncologys shares held by stockholders other than Welsh Carson, its co-investors and members of US
Oncologys Board or management that participate in the merger, in addition to majority



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



stockholder approval statutorily required for a merger. A special meeting of stockholders will be held on August 20,
2004, for the purpose of voting on the merger agreement, the merger and related matters. On July 21, 2004, the Company filed a definitive proxy statement relating to the merger with the SEC. On July 22, 2004, the Company mailed the proxy statement
to its stockholders. Additional conditions included the closing of financing arrangements as set forth in bank commitment letters that have been received by Holdings, the tender of not less than a majority of the aggregate principal amount of US
Oncologys outstanding 95/8% Senior Subordinated Notes due 2012, the expiration of the applicable waiting
period under the Hart-Scott-Rodino Act and other customary conditions. As of July 22, 2004, the Company had received the consents and tenders of approximately 84% of the principal amount of its existing Senior Subordinated Notes and received early
termination of the waiting period under the Hart-Scott-Rodino Act.



In
addition, as disclosed in Part II, Item 1, under the heading Legal Proceedings, seven purported class action lawsuits have been filed naming the Company and each of its directors as defendants. Four of the lawsuits also name Welsh Carson
(or Welsh, Carson, Anderson & Stowe) as a defendant and two also name Acquisition Corp. The complaints allege, among other things, that the defendants have breached their fiduciary duties to the stockholders of the Company by entering into the
merger agreement. Among other things, the consideration offered in the merger is alleged to be inadequate and a result of unfair dealing. One of the lawsuits alleges that two of the three directors on the special committee, and several other
directors, are not independent, and that certain facts were not disclosed. Boone Powell, Jr. was alleged not to be an independent director on account of an alleged close connection between the Company and Baylor University of which the
Baylor University Medical Center in Dallas is a part. Baylor is alleged to have certain relationships with the Company and Mr. Powell is a former director and Chairman of the Baylor Health Care System. Burton S. Schwartz, M.D., is President and
Medical Director of Minnesota Oncology Hematology, PA, which has a service agreement with the Company, and is alleged not to be an independent director because of amounts paid under such service agreement by such entity to the Company. Messrs.
Powell and Schwartz are also alleged to be beholden to Russell L. Carson, a principal of Welsh Carson, and R. Dale Ross, the Companys President and Chief Executive Officer.



The complaints seek an injunction against the proposed transaction or, if it is consummated,
rescission of the transaction and imposition of a constructive trust, as well as money damages, attorneys fees, expenses and other relief. Additional lawsuits could be filed in the future. The Company believes that these lawsuits and the
allegations contained therein lack merit. Three of the lawsuits were filed in the Court of Chancery of the State of Delaware and four of the lawsuits were filed in state District Courts in Harris County, Texas by purported stockholders of the
Company on behalf of all similarly situated stockholders. On April 15, 2004, the Delaware Court of Chancery consolidated the Delaware lawsuits. On May 21, 2004, the 234th Texas District Court consolidated the Texas lawsuits. On May 21, 2004,
plaintiffs in the consolidated Delaware lawsuit moved for expedited proceedings, and those plaintiffs moved for a preliminary injunction against consummation of the merger due to alleged failures to disclose material facts in the preliminary proxy
statement that had been filed by the Company, which alleged failures were described in an amended complaint filed by those plaintiffs. On May 25, 2004, the Delaware Court of Chancery scheduled a preliminary injunction hearing in the Delaware
consolidated lawsuit, to commence on June 30, 2004. The defendants in the Delaware consolidated lawsuit, and in the Texas consolidated lawsuit, made substantial production of documents in response to requests by the plaintiffs.



As a result of arms-length settlement negotiations among counsel in the lawsuits, the
parties entered into an agreement providing for settlement of the consolidated Delaware lawsuit on behalf of the purported class, and for dismissal with prejudice of the consolidated Texas lawsuit. The agreement contemplated that, among other
things, the Company would make disclosures in the proxy statement to address the disclosure claims raised in the Delaware consolidated lawsuit.



Following confirmatory discovery by the parties, the parties then executed a stipulation of settlement, the substance of which is consistent with that of the agreement.
The proposed settlement is subject to final approval by the Delaware Court of Chancery, so any settlement may not be final at the time of the special meeting of stockholders. If the proposed settlement is ultimately not approved by the Delaware
Court of Chancery, the litigation could proceed and the plaintiffs could seek the relief sought in their respective complaints. As a result, we cannot assure our stockholders that the proposed settlement will be completed on the terms described
above or, in that event, that the merger will be completed.



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



The merger will be accounted for under the purchase method of accounting prescribed in Statement of Financial
Accounting Standards No. 141, Business Combination, (SFAS No. 141), with intangible assets recorded in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). The purchase price, including
transaction related fees, will be allocated to the Companys tangible and identifiable intangible assets and liabilities based upon estimates of fair value, with the remainder allocated to goodwill. In accordance with the provisions of SFAS No.
142, no amortization of indefinite-lived intangible assets or goodwill will be recorded.



NOTE 3  REVENUES



The Company provides the following services to physician practices: medical oncology services, cancer center services, and cancer research 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, medical oncology services and cancer research services are offered by the Company under separate agreements for each service line.



The Company derives revenue primarily in four areas:



| | PPM service fee revenues. Under the PPM model, the Company recognizes revenues derived from amounts it bills and collects on behalf of affiliated practices, which are reduced
by the amounts retained by those practices under its contracts. PPM service fee revenue is recorded when services are rendered based on established or negotiated rates reduced by contractual adjustments and allowances for doubtful accounts and by
the amounts retained by practices. Differences between estimated contractual adjustments and final settlements are reported in the period when final settlements are determined.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Service line fees. In the medical oncology services area under the Companys service line agreements, the Company bills practices on a monthly basis for services
rendered. These revenues include payment for all of the pharmaceutical agents used by the practice for which the Company must pay the pharmaceutical manufacturers, and a service fee for the pharmacy related services the Company provides.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | GPO and data fees. The Company receives fees from pharmaceutical companies for acting as a group purchasing organization (GPO) for its affiliated practices, as well as for
providing informational and other services to pharmaceutical companies. GPO fees are typically based upon the volume of drugs purchased by the practices. Fees for other services include amounts paid for data the Company collects and compiles.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Research fees. The Company receives fees for research services from pharmaceutical and biotechnology companies. These fees are separately negotiated for each study and
typically include a management fee, per patient accrual fees and fees for achieving various study milestones.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A portion of the Companys revenue under its PPM arrangements and its revenue under service line arrangements with affiliated practices are derived from sales of
pharmaceutical products and are reported as product revenues. The Companys remaining revenues under its PPM arrangements and its revenues from GPO fees, data fees and research fees are reported as service revenues. Physician practices that
enter into comprehensive service agreements with the Company receive a broad range of services and receive pharmaceutical products. These products and services represent multiple deliverables delivered under a single contract, with a single fee. The
Company has analyzed the component of the contract attributable to the provision of products (pharmaceuticals) and the component of the contract attributable to the provision of services and attributed fair value to each component. For revenue
recognition purposes, the product revenues and service revenues have each been accounted for as a separate unit of accounting under the guidance in Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements With Multiple
Deliverables (EITF 00-21). Adoption of EITF 00-21 did not have an impact on the Companys financial statements.



-8-



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



Product revenues consist of sales of pharmaceuticals to practices in connection with the Companys comprehensive
service agreements under the PPM model or under the Companys pharmaceutical services service line. Under all our arrangements with affiliated practices, we agree to furnish the practice with pharmaceuticals and supplies. In certain cases, the
Company takes legal title to the pharmaceuticals and resells them to practices. In other cases, title to the pharmaceuticals passes directly from the Companys distributor to the practices under arrangements negotiated and managed by the
Company pursuant to its service agreements with practices. The Company has analyzed its contracts with physician practices and vendors and distributors of pharmaceutical products purchased pursuant to its arrangements with affiliated practices and
has determined that, in all cases, it acts as a principal within the meaning of EITF No. 99-19, Reporting Gross Revenue as a Principal vs. Net as an Agent. For this reason, the Company recognizes the gross amounts from pharmaceuticals as
product revenue because the Company (a) has separate contractual relationships with affiliated practices and with vendors and distributors of pharmaceutical products under which it is the primary obligor, and has discretion to select those vendors
(b) is physically responsible for negotiating, managing, ordering and processing the pharmaceuticals until they are used by affiliated practices, (c) bears the carrying cost and maintains the equipment, staff and facilities used to manage the
inventory of pharmaceuticals, (d) manages the overall pharmaceutical program, including management of admixture and implementation of programs to minimize waste, enhance charge capture, and otherwise increase the efficiency of the operations of
affiliated practices, and (e) bears credit risk for the amounts due from the affiliated practice.



Because the Company acts as principal, product revenues are recognized at an amount equal to (a) the cost of the pharmaceutical (which is reimbursed to the Company pursuant to all of its contractual arrangements with
physician practices) plus (b) an additional amount. Under the service line model, this additional amount is the actual amount charged to practices under the service line model since all of the services provided under the service line model are
directly related to and not separable from the delivery of the products. Under the PPM model, the contracts do not provide for a separate fee for supplying pharmaceuticals other than reimbursement of the cost of pharmaceuticals. Accordingly, the
additional amount included in product revenue reflects the Companys estimate of the portion of its service fee that represents fair value relative to product sales. The portion of the service fee allocated to product revenue is based upon the
terms upon which the Company offers pharmaceutical services under its service line model. The Company assesses this allocation quarterly based upon overall gross margins under the service line model during the quarter. The Company provides the same
services related to delivery and management of pharmaceutical products under its PPM agreements as under its service line model agreements. Accordingly, the Company believes this allocation is appropriate. Discounts and rebates are deducted from
product revenues because they are passed through to the Companys affiliated practices.



Under the Companys PPM arrangements, product revenues are recognized as drugs are accepted and dispensed by affiliated physician practices. Service fee revenues are recognized when the fees are deemed fixed and
realizable at the time services are rendered based upon established or negotiated rates, less contractual adjustments, allowances and amounts to be retained by affiliated practices.



Under its PPM arrangements, fees are paid to the Company on a monthly basis. On a quarterly basis, the Company makes adjustments to its fees
to reconcile prior estimates to actual amounts. Adjustments are recognized as increases or reductions in revenue in the period they become known. Historically, the effect of these adjustments has not been material. Upon termination of a contract,
such reconciliation would occur effective upon termination of the contract.



In
a minority of the Companys PPM arrangements, if the affiliated practice were to incur losses prior to the payment of any physician compensation during a quarter, the Company would be required to bear a portion of those losses up to the amount
of the performance-based portion of our fee recognized in previous quarters during the year. This reduction would be reported as a reduction in fees from that practice in the quarter during which such losses were incurred. Historically, no practice
has incurred such losses resulting in such a reduction.



The Companys
most significant only service agreement, which is the only service agreement to provide more than 10% of revenues, is with Texas Oncology, P.A. (TOPA). TOPA accounted for approximately 25% of the Companys total revenues for the second quarter
of 2004 and approximately 24% of total revenues in the second quarter of 2003.



-9-



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



NOTE 4  STOCK-BASED COMPENSATION



At June 30, 2004, 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 six months ended June 30, 2004 and 2003.



The Company also provides a stock option 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 $0.2 million and $0.4 million for the three months ended June 30, 2004 and 2003 respectively. The Company
recognized $0.4 million and $0.8 million for the six months ended June 30, 2004 and 2003, respectively.



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



|                                                                                                                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                           |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                                                                                           |  | 2004                       |        |   | 2003                     |   |        | 2004 |  |   | 2003   |  
|Net income, as reported                                                                                                                    |  | $                          | 24,546 |   |                          | $ | 17,653 |      |  | $ | 44,666 |   |  | $ | 33,903 |  
|Less: total stock-based employee compensation expense determined under fair value based method for all awards, net of related income
taxes |  |                            | (1,233 | ) |                          |   | (1,821 | )    |  |   | (2,598 | ) |  |   | (3,279 | )
|                                                                                                                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Pro forma net income                                                                                                                       |  | $                          | 23,313 |   |                          | $ | 15,832 |      |  | $ | 42,068 |   |  | $ | 30,624 |  
|                                                                                                                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Earnings per share:                                                                                                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic, as reported                                                                                                                         |  | $                          | 0.28   |   |                          | $ | 0.19   |      |  | $ | 0.52   |   |  | $ | 0.37   |  
|                                                                                                                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic, pro forma                                                                                                                           |  | $                          | 0.27   |   |                          | $ | 0.17   |      |  | $ | 0.49   |   |  | $ | 0.33   |  
|                                                                                                                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Diluted, as reported                                                                                                                       |  | $                          | 0.27   |   |                          | $ | 0.19   |      |  | $ | 0.50   |   |  | $ | 0.36   |  
|                                                                                                                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Diluted, pro forma                                                                                                                         |  | $                          | 0.26   |   |                          | $ | 0.17   |      |  | $ | 0.47   |   |  | $ | 0.33   |  
|                                                                                                                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



NOTE 5 
INDEBTEDNESS



As of June 30, 2004 and December 31, 2003,
respectively, the Companys long-term indebtedness consisted of the following (in thousands):



|                                          |  |               |         |   |                  |   |         |  
|----------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                          |  | June 30, 2004 |         |   | December 31,2003 |  
|Credit Facility                           |  | $             |        |   |                  | $ |        |  
|9.625% Senior Subordinated Notes due 2012 |  |               | 175,000 |   |                  |   | 175,000 |  
|Lease facility                            |  |               | 67,277  |   |                  |   | 70,206  |  
|Subordinated notes                        |  |               | 15,656  |   |                  |   | 22,660  |  
|Capital lease obligations and other       |  |               | 226     |   |                  |   | 294     |  
|                                          |  |               |         |   |                  |   |         |  
|                                          |  |               | 258,159 |   |                  |   | 268,160 |  
|Less: current maturities                  |  |               | (74,251 | ) |                  |   | (79,748 | )
|                                          |  |               |         |   |                  |   |         |  
|                                          |  | $             | 183,908 |   |                  | $ | 188,412 |  
|                                          |  |               |         |   |                  |   |         |  



-10-



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



On February 1, 2002, the Company entered into a $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 PET systems, to provide working capital and for other general business uses. 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 have been borrowed or outstanding under the Credit Facility since its inception and through June 30, 2004.



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 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. The Company believes that the carrying value of the Senior Subordinated Notes is not in excess of fair value at June 30, 2004.



Proceeds from the Senior Subordinated Notes were used to pay off previously existing indebtedness and to pay facility fees and expenses in connection with Company
financings. 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 September 2004.



As of June 30, 2004, the Company had $67.3 million outstanding under the lease facility, and no further amounts are available under that
facility. The annual lease cost of the lease is approximately $2.6 million, based on the effective interest rate of 4.03% as of June 30, 2004. At June 30, 2004, the lessor under the lease held real estate assets (based on original acquisition and
construction costs) of approximately $51.0 million and equipment of approximately $16.3 million (based on original acquisition cost) at fourteen locations.



The lease is renewable in one-year increments, but only with the consent of the financial institutions that are parties thereto. In the event the lease is not renewed at
maturity, or is earlier terminated for various reasons, the Company must either purchase the properties under the lease for the total amount outstanding or market the properties to third parties. The Company guarantees 100% of the residual value of
the properties in the lease.



The lease matures in September 2004. The Company
anticipates refinancing substantially all of its indebtedness in connection with the merger transaction described in Note 2. In the event the merger is not consummated, the Company would pay the lease in full at its maturity and anticipates having
sufficient cash available to make such payment.



Subordinated notes



The subordinated notes were issued in substantially the same form and are
payable to the physicians with whom the Company entered into service agreements. Substantially all of the notes outstanding at June 30, 2004 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.



-11-



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



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 6  CAPITALIZATION



In November 2002, the Board of Directors of the Company authorized the repurchase of up to
$50.0 million in shares of its common stock in public or private transactions. Through December 31, 2002, the Company repurchased 884,000 shares of its Common Stock for $7.8 million, at an average price of $8.77 per share. During 2003, in connection
with this authorization, the Company repurchased 5.0 million shares of Common Stock for $42.2 million, at an average price of $8.42 per share, which completed this authorization.



In August 2003, the Board of Directors of the Company authorized the repurchase of $50.0 million in shares of its common stock in public or
private transactions. Through December 31, 2003, the Company had repurchased 5.2 million shares of its common stock for $45.3 million, at an average price of $8.70 per share. In January 2004, the Company repurchased 0.4 million shares of its Common
Stock for $4.2 million at an average price of $10.78 per share, completing this authorization.



The table below sets forth the Companys Treasury Stock activity (shares in thousands):



|                                                                                                         |  |        |  
|-------------------------------------------------------------------------------------------------------- |  | ------ | -
|                                                                                                         |  | Shares |  
|Treasury Stock shares as of January 1, 2003                                                              |  | 5,748  |  
|Treasury Stock purchases                                                                                 |  | 10,222 |  
|Treasury Stock issued in connection with affiliation transactions and exercise of employee stock options |  | (4,032 | )
|                                                                                                         |  |        |  
|Treasury Stock shares as of January 1, 2004                                                              |  | 11,938 |  
|Treasury Stock purchases                                                                                 |  | 394    |  
|Treasury Stock issued in connection with affiliation transactions and exercise of employee stock options |  | (3,482 | )
|                                                                                                         |  |        |  
|Treasury Stock shares as of June 30, 2004                                                                |  | 8,850  |  
|                                                                                                         |  |        |  



NOTE 7 
EARNINGS PER SHARE



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



-12-



---

##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



The following table summarizes the determination of shares used in per share calculations for the three and six
months ended June 30, 2004 and 2003 (in thousands):



|                                                                                                                       |  |                            |   |  |                          |   |  |        |   |  |        |  
|---------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ------ | - |  | ------ | -
|                                                                                                                       |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                                                                                                       |  | 2004                       |   |  | 2003                     |   |  | 2004   |   |  | 2003   |  
|Issued at end of period:                                                                                               |  |                            |   |  |                          |   |  |        |   |  |        |  
|Common Stock                                                                                                           |  | 95,301                     |   |  | 95,301                   |   |  | 95,301 |   |  | 95,301 |  
|Common Stock to be issued                                                                                              |  | 820                        |   |  | 2,919                    |   |  | 820    |   |  | 2,919  |  
|                                                                                                                       |  |                            |   |  |                          |   |  |        |   |  |        |  
|                                                                                                                       |  | 96,121                     |   |  | 98,220                   |   |  | 96,121 |   |  | 98,220 |  
|Treasury Stock                                                                                                         |  | (8,850                     | ) |  | (9,140                   | ) |  | (8,850 | ) |  | (9,140 | )
|Effect of weighting                                                                                                    |  | (79                        | ) |  | 2,278                    |   |  | (681   | ) |  | 3,085  |  
|                                                                                                                       |  |                            |   |  |                          |   |  |        |   |  |        |  
|Shares used in per share calculations-basic                                                                            |  | 87,192                     |   |  | 91,358                   |   |  | 86,590 |   |  | 92,165 |  
|Effect of weighting and assumed share equivalents for grants of stock options at less than average market price        |  | 3,482                      |   |  | 1,659                    |   |  | 3,385  |   |  | 1,660  |  
|                                                                                                                       |  |                            |   |  |                          |   |  |        |   |  |        |  
|Shares used in per share calculations-diluted                                                                          |  | 90,674                     |   |  | 93,017                   |   |  | 89,975 |   |  | 93,825 |  
|                                                                                                                       |  |                            |   |  |                          |   |  |        |   |  |        |  
|Anti-dilutive stock options (options where exercise price is greater than the average market price) not included above |  | 679                        |   |  | 5,785                    |   |  | 679    |   |  | 5,785  |  
|                                                                                                                       |  |                            |   |  |                          |   |  |        |   |  |        |  



NOTE 8 
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. The Companys reportable segments are medical oncology services, cancer center services, and other services which primarily
consist of cancer research services. All of our product revenues result from the sale of pharmaceuticals under the medical oncology service business line. Under the medical oncology services segment, the Company purchases and manages specialty
oncology pharmaceuticals and provides practice management services to medical oncology practices. Under the cancer center services segment, the Company 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. Under the other services segment, the Company contracts with pharmaceutical and biotechnology firms to provide a comprehensive
range of services relating to clinical trials. Results of operations for the medical oncology services segment and other services segment include arrangements under both our PPM and service line models. We provide cancer center services only in PPM
arrangements.



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



-13-



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



The table below presents information about reported segments for the three and six months ended June 30, 2004 and
2003 (in thousands):



Three Months Ended June 30, 2004:



|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|----------------------------- |  | --------------- | -------- | - | -------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | -------- | -
|                              |  | MedicalOncology |          |   | CancerCenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product revenues              |  | $               | 355,454  |   |                      | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 355,454  |  
|Service revenues              |  |                 | 133,458  |   |                      |   | 62,990  |       |  |   | 13,341                       |   |  |       |        |   |  |   | 209,789  |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Revenues                      |  |                 | 488,912  |   |                      |   | 62,990  |       |  |   | 13,341                       |   |  |       |        |   |  |   | 565,243  |  
|Other operating expenses      |  |                 | (431,240 | ) |                      |   | (42,028 | )     |  |   | (10,688                      | ) |  |       | (17,120 | ) |  |   | (501,076 | )
|Depreciation and amortization |  |                 | (21      | ) |                      |   | (9,003  | )     |  |   | (253                         | ) |  |       | (11,059 | ) |  |   | (20,336  | )
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Income (loss) from operations |  | $               | 57,651   |   |                      | $ | 11,959  |       |  | $ | 2,400                        |   |  | $     | (28,179 | ) |  | $ | 43,831   |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  



Three Months Ended June 30, 2003:



|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|----------------------------- |  | --------------- | -------- | - | -------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | -------- | -
|                              |  | MedicalOncology |          |   | CancerCenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product revenues              |  | $               | 298,895  |   |                      | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 298,895  |  
|Service revenues              |  |                 | 118,802  |   |                      |   | 57,954  |       |  |   | 15,761                       |   |  |       |        |   |  |   | 192,517  |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Revenues                      |  |                 | 417,697  |   |                      |   | 57,954  |       |  |   | 15,761                       |   |  |       |        |   |  |   | 491,412  |  
|Other operating expenses      |  |                 | (370,639 | ) |                      |   | (39,409 | )     |  |   | (12,335                      | ) |  |       | (16,638 | ) |  |   | (439,021 | )
|Depreciation and amortization |  |                 | (29      | ) |                      |   | (8,750  | )     |  |   | (276                         | ) |  |       | (9,911  | ) |  |   | (18,966  | )
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Income (loss) from operations |  | $               | 47,029   |   |                      | $ | 9,795   |       |  | $ | 3,150                        |   |  | $     | (26,549 | ) |  | $ | 33,425   |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  



-14-



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



Six Months Ended June 30, 2004:



|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |           |  
|----------------------------- |  | --------------- | -------- | - | -------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | --------- | -
|                              |  | MedicalOncology |          |   | CancerCenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product revenues              |  | $               | 687,929  |   |                      | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 687,929   |  
|Service revenues              |  |                 | 251,911  |   |                      |   | 124,054 |       |  |   | 26,345                       |   |  |       |        |   |  |   | 402,310   |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |           |  
|Revenues                      |  |                 | 939,840  |   |                      |   | 124,054 |       |  |   | 26,345                       |   |  |       |        |   |  |   | 1,090,239 |  
|Other operating expenses      |  |                 | (834,959 | ) |                      |   | (81,913 | )     |  |   | (23,119                      | ) |  |       | (30,029 | ) |  |   | (970,020  | )
|Depreciation and amortization |  |                 | (31      | ) |                      |   | (16,868 | )     |  |   | (494                         | ) |  |       | (21,897 | ) |  |   | (39,290   | )
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |           |  
|Income (loss) from operations |  | $               | 104,850  |   |                      | $ | 25,273  |       |  | $ | 2,732                        |   |  | $     | (51,926 | ) |  | $ | 80,929    |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |           |  



Six Months Ended June 30, 2003:



|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|----------------------------- |  | --------------- | -------- | - | -------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | -------- | -
|                              |  | MedicalOncology |          |   | CancerCenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product revenues              |  | $               | 562,426  |   |                      | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 562,426  |  
|Service revenues              |  |                 | 235,095  |   |                      |   | 112,259 |       |  |   | 28,842                       |   |  |       |        |   |  |   | 376,196  |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Revenues                      |  |                 | 797,521  |   |                      |   | 112,259 |       |  |   | 28,842                       |   |  |       |        |   |  |   | 938,622  |  
|Other operating expenses      |  |                 | (703,348 | ) |                      |   | (76,355 | )     |  |   | (23,871                      | ) |  |       | (32,502 | ) |  |   | (836,076 | )
|Depreciation and amortization |  |                 | (49      | ) |                      |   | (14,586 | )     |  |   | (485                         | ) |  |       | (22,659 | ) |  |   | (37,779  | )
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Income (loss) from operations |  | $               | 94,124   |   |                      | $ | 21,318  |       |  | $ | 4,486                        |   |  | $     | (55,161 | ) |  | $ | 64,767   |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  



NOTE 9 
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 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.



In addition, as disclosed in Part II, Item 1,
under the heading Legal Proceedings, several lawsuits naming the Company and each of its directors as defendants have been filed. Each of the suits relates to the proposed merger transaction described in Note 2.



As a result of arms-length settlement negotiations among counsel in the lawsuits, the
parties entered into an agreement providing for settlement of the consolidated Delaware lawsuit on behalf of the purported class, and for dismissal with prejudice of the consolidated Texas lawsuit. The agreement contemplated that, among other
things, the Company would make disclosures in the proxy statement to address the disclosure claims raised in the Delaware consolidated lawsuit.



Following confirmatory discovery by the parties, the parties then executed a stipulation of settlement, the substance of which is consistent with that of the agreement.
The proposed settlement is subject to final approval by the Delaware Court of Chancery, so any settlement may not be final at the time of the special meeting. If the proposed settlement is ultimately not approved by the Delaware Court of Chancery,
the litigation could proceed and the plaintiffs could seek the relief sought in their respective complaints. As a result, the Company cannot assure stockholders that the proposed settlement will be completed on the terms described above or, in that
event, that the merger will be completed.



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



NOTE 10  RECENT PRONOUNCEMENTS



In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities. It requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements for the company that has controlling financial interest. It also
provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support provided to it. Additionally, in December 2003, the FASB released a revised version of FIN 46
(FIN 46R) clarifying certain aspects of FIN 46 and providing certain entities with exemptions from the requirements of FIN 46. The adoption of FIN 46R in January 2004 had no impact on the Companys financial position, results of operations or
cash flows.



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US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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 2003 filed with the Securities and Exchange Commission (SEC), as amended.



Our Business



We provide comprehensive services to our network of affiliated practices, made up of more than 900 affiliated physicians in over 490 sites, with the mission of expanding access to and improving the quality of cancer
care in local communities. The services we offer include:



| | Medical Oncology Services.We purchase and manage specialty oncology pharmaceuticals for our affiliated practices. Annually, we are responsible for purchasing, delivering and
managing more than $1.4 billion of pharmaceuticals through a network of 46 licensed pharmacies, 152 pharmacists and 279 pharmacy technicians. Under our physician practice management arrangements, we act as the exclusive manager and administrator of
all day-to-day non-medical business functions connected with our affiliated practices. As such, we are responsible for billing and collecting for medical oncology services, physician recruiting, data management, accounting, systems and capital
allocation to facilitate growth in practice operations. All of our product revenues result from the sale of pharmaceuticals under the medical oncology services business line.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Cancer Center Services.We develop and manage comprehensive, community-based cancer centers, which integrate all aspects of outpatient cancer care, from laboratory and
radiology diagnostic capabilities to chemotherapy and radiation therapy. We have developed and operate 81 integrated community-based cancer centers. We also have installed and manage 25 Positron Emission Tomography Systems (PET).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Cancer Research Services.We facilitate a broad range of cancer research and development activities through our network. We contract with pharmaceutical and biotechnology
firms to provide a comprehensive range of services relating to clinical trials. We currently supervise 324 clinical trials, supported by our network of approximately 670 participating physicians in more than 190 research locations.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We provide 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 one fee based on overall performance; and the service line model, under which practices contract with the company to purchase
only the pharmaceutical aspects of medical oncology services and/or cancer research services, each under a separate contract, with a separate fee methodology for each service. Most of our revenues (90.6% during the second quarter of 2004) were
derived under the PPM model.



The Merger Transaction



On March 20, 2004, Holdings and its wholly owned subsidiary, Oiler Acquisition Corp.,
entered into a merger agreement with US Oncology pursuant to which Oiler Acquisition Corp. will be merged with and into US Oncology, with US Oncology continuing as the surviving corporation. If the transaction is consummated, we would become a
private company owned by Holdings. Members of our senior management, including our Chairman and CEO, will continue as employees, participate in the merger by purchasing equity securities in Holdings and be awarded equity securities in Holdings. Both
Holdings and Oiler Acquisition Corp. are Delaware corporations that were formed by Welsh Carson for the purpose of completing the merger and related financing transactions. Currently, Welsh Carson



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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



directly owns approximately 14.5% of our outstanding common stock and, together with its co-investors and our
directors and executive officers that participate in the merger, would own all the capital stock of Holdings when and if the merger is consummated.



If the merger is completed, each issued and outstanding share of our common stock (other than shares owned by Holdings and Oiler Acquisition Corp.) will be converted into
the right to receive $15.05 in cash, subject to the rights of dissenting stockholders who exercise and perfect their appraisal rights under Delaware law. Each outstanding option for our common stock will be canceled in exchange for (1) the excess,
if any, of $15.05 over the per share exercise price of the option multiplied by (2) the number of shares of common stock subject to the option, net of any applicable withholding taxes. Outstanding rights to receive shares of common stock under
existing delayed stock delivery agreements between us and certain physicians will be canceled in exchange for an amount in cash equal to (1) $15.05 multiplied by (2) the number of shares of common stock otherwise issuable under the delayed stock
delivery agreements on the scheduled delivery dates, net of any applicable withholding taxes.



Our Board of Directors approved the merger following the unanimous recommendation of a special committee composed of independent directors Boone Powell, Jr., Burton S. Schwartz, M.D. and Vicki H. Hitzhusen. The
special committee and the Board received an opinion from Merrill Lynch & Co. as to the fairness, from a financial point of view, of the consideration to be received by our stockholders (other than Welsh Carson, its affiliates and members of our
board or management that participate in the merger) in the merger transaction.



The closing of the merger is subject to various conditions contained in the merger agreement, including the approval by the holders of a majority of US Oncologys shares held by stockholders other than Welsh Carson, its co-investors
and members of US Oncologys Board or management that participate in the merger, in addition to majority stockholder approval statutorily required for a merger. A special meeting of stockholders will be held on August 20, 2004, for the purpose
of voting on the merger agreement, the merger and related matters. A definitive proxy statement relating to the special meeting was filed with the SEC on July 21, 2004, and mailed to stockholders on July 22, 2004. Additional conditions include the
closing of financing arrangements as set forth in bank commitment letters that have been received by Holdings, the tender of not less than a majority of the aggregate principal amount of US Oncologys outstanding 95/8% Senior Subordinated Notes due 2012, the expiration of the applicable waiting period under the Hart-Scott-Rodino
Act and other customary conditions. As of July 22, 2004, the Company had received the consents and tenders of approximately 84% of the principal amount of its existing Senior Subordinated Notes and received early termination of the waiting period
under the Hart-Scott-Rodino Act.



In addition, as disclosed in Part II,
Item 1, under the heading Legal Proceedings, seven purported class action lawsuits have been filed naming the Company and each of its directors as defendants. Four of the lawsuits also name Welsh Carson (or Welsh, Carson, Anderson &
Stowe) as a defendant and two also name Acquisition Corp. The complaints allege, among other things, that the defendants have breached their fiduciary duties to the stockholders of the Company by entering into the merger agreement. Among other
things, the consideration offered in the merger is alleged to be inadequate and a result of unfair dealing. One of the lawsuits alleges that two of the three directors on the special committee, and several other directors, are not independent, and
that certain facts were not disclosed. Boone Powell, Jr. was alleged not to be an independent director on account of an alleged close connection between the Company and Baylor University of which the Baylor University Medical Center in
Dallas is a part. Baylor is alleged to have certain relationships with the Company and Mr. Powell is a former director and Chairman of the Baylor Health Care System. Burton S. Schwartz, M.D., is President and Medical Director of Minnesota Oncology
Hematology, PA, which has a service agreement with the Company, and is alleged not to be an independent director because of amounts paid under such service agreement by such entity to the Company. Messrs. Powell and Schwartz are also alleged to be
beholden to Russell L. Carson, a principal of Welsh Carson, and R. Dale Ross, the Companys President and Chief Executive Officer.



The complaints seek an injunction against the proposed transaction or, if it is consummated, rescission of the transaction and imposition of a constructive trust, as well
as money damages, attorneys fees, expenses and other relief. Additional lawsuits could be filed in the future. The Company believes that these lawsuits and the allegations contained therein lack merit. Three of the lawsuits were filed in the
Court of Chancery of the State of Delaware and four of the lawsuits were filed in state District Courts in Harris County, Texas by purported stockholders of the Company on behalf of all similarly situated stockholders. On April 15, 2004, the
Delaware Court of Chancery consolidated the Delaware lawsuits. On May 21, 2004, the 234th Texas District Court consolidated the Texas



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US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



lawsuits. On May 21, 2004, plaintiffs in the consolidated Delaware lawsuit moved for expedited proceedings, and those
plaintiffs moved for a preliminary injunction against consummation of the merger due to alleged failures to disclose material facts in the preliminary proxy statement that had been filed by the Company, which alleged failures were described in an
amended complaint filed by those plaintiffs. On May 25, 2004, the Delaware Court of Chancery scheduled a preliminary injunction hearing in the Delaware consolidated lawsuit, to commence on June 30, 2004. The defendants in the Delaware consolidated
lawsuit, and in the Texas consolidated lawsuit, made substantial production of documents in response to requests by the plaintiffs.



As a result of arms-length settlement negotiations among counsel in the lawsuits, the parties entered into an agreement providing for settlement of the consolidated
Delaware lawsuit on behalf of the purported class, and for dismissal with prejudice of the consolidated Texas lawsuit. The agreement contemplated that, among other things, the Company would make disclosures in the proxy statement to address the
disclosure claims raised in the Delaware consolidated lawsuit.



Following
confirmatory discovery by the parties, the parties then executed a stipulation of settlement, the substance of which is consistent with that of the agreement. The proposed settlement is subject to final approval by the Delaware Court of Chancery, so
any settlement may not be final at the time of the special meeting. If the proposed settlement is ultimately not approved by the Delaware Court of Chancery, the litigation could proceed and the plaintiffs could seek the relief sought in their
respective complaints. As a result, we cannot assure our stockholders that the proposed settlement will be completed on the terms described above or, in that event, that the merger will be completed.



Our Strategy



Our mission is to increase access to and advance the delivery of high-quality cancer care in America. We do this by offering services to
physicians to enable them to provide cancer patients with a full continuum of care, including professional medical services, chemotherapy infusion, radiation oncology, diagnostic services, access to clinical trials, patient education and other
services, primarily in a community setting. We aim to enhance efficiency and lower cost structures at our affiliated practices, while enabling them to continue to deliver quality patient care.



We believe that in todays marketplace, particularly in light of recent reductions in
Medicare reimbursement and continued pressures on overall reimbursement, the most successful oncology practices will be those that have a preeminent position in their local market, that are diversified beyond medical oncology and that have
implemented efficient management. We believe that our services best position practices to attain these characteristics.



We intend to continue to offer practices and physicians the opportunity to take advantage of our services through a comprehensive strategic alliance, encompassing all of
the management services we offer. We also continue to offer medical oncology practices who do not wish to obtain comprehensive services our less comprehensive, lower cost service line option.



During the last several years, we have worked to enhance the platform upon which we hope to
build. Our model conversions and disaffiliations have stabilized our network by aligning our incentives with those of our affiliated practices, better ensuring that our economic arrangements are sustainable and eliminating the distraction of
underperforming practices and assets.



Economic Models



Most of our revenue is derived under the PPM model. Under the PPM model, we provide all of
our services to a physician practice under a single management agreement under which we are appointed exclusive business manager, responsible for all of the non-clinical aspects of the practice.



Our PPM agreements are long-term agreements (generally with initial terms of 25 to 40 years)
and cannot be terminated unilaterally without cause. Physicians joining the PPM practices are required to enter into employment or non-competition agreements with the practice. Prior to 2002, we generally paid consideration to physicians in
physician groups in exchange for the groups selling us operating assets and entering into such long-term contracts or joining an already affiliated group. Historically, we also have helped affiliated groups expand by recruiting individual
physicians without buying assets or paying consideration for service agreements.



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US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



We intend to continue to expand our business, both by recruiting new physicians and by affiliating with new groups.
We will pay consideration for operating assets of groups and may, under some circumstances, pay other consideration.



Under most of our PPM agreements, we are compensated under the earnings model. Under that model, we are reimbursed for all expenses we incur in connection
with managing a practice, and are paid an additional fee based upon a percentage of the practices earnings before income taxes, subject to certain adjustments. During the second quarter of 2004, 74.3% of our revenue was derived from affiliated
practices managed under agreements on the earnings model. As of June 30, 2004, PPM agreements accounting for 16.3% of our revenue during the first six months of 2004 were under the net revenue model described below. In some states, our agreements
provide for a fixed management fee.



Of our second quarter 2004 revenue, 8.2%
was derived under the service line model. Under our service line agreements, fees include payment for pharmaceuticals and supplies used by the group, reimbursement for certain pharmacy related expenses and payment for the other services we provide.
Rates for our services typically are based on the level of services required by the practice.



Realignment of Net Revenue Model Practices



Under the net revenue model, our fee consists of a fixed amount, plus a percentage of net revenues, plus, if certain performance criteria are met, a performance fee. Under these agreements, once we have been reimbursed for expenses, the
practice is entitled to retain a fixed portion of its revenues before any additional service fee is paid to us. The effect of this priority of payments is that we bear a disproportionate share of increasing practice costs, since if there are
insufficient funds to pay both our fee and the fixed amount to be retained by the practice, the entire amount of the shortfall reduces our management fee. Rapidly increasing pharmaceutical costs have increased practice revenues and thus the amounts
retained by physicians. At the same time rising costs have eroded margins, leaving less available to pay our management fees.



The net revenue model does not appropriately align our and our practices economic incentives, since the parties do not have similar motivation to control costs or
efficiently utilize capital. For this reason, we have been seeking to convert net revenue model practices to the earnings model since the beginning of 2001. In some cases, net revenue model practices have converted instead to the service line model
or disaffiliated entirely. Of our 2000 revenue, 56.3% was derived from net revenue model practices, while only 16.3% of our second quarter 2004 revenue was derived from practices under the net revenue model as of June 30, 2004. We no longer enter
into new affiliations under the net revenue model.



Since announcing our
initiative to convert practices away from the net revenue model in November 2000, we have recorded charges of $251.3 million relating to impairment of net revenue model practices resulting either from termination of those agreements or the
determination that their carrying values were not recoverable. As of June 30, 2004, only one net revenue model service agreement, with a carrying value of $21.9 million, was reflected on our balance sheet.



Practices on the net revenue model as of June 30, 2004, accounted for 16.3% of our revenue
for the first six months of 2004. Since that time, two additional practices, accounting for 4.6% of our revenue for the first six months of 2004, converted from the net revenue model to the earnings model. We are continuing our efforts to convert
our remaining net revenue model practices to the earnings model or service line model. At this time, we believe that it is unlikely that all of the remaining net revenue model practices will convert to the earnings model.



Specifically, we currently expect that we will end our affiliation with one net revenue model
practice, comprising 33 physicians. In addition, we expect that another net revenue model practice comprising 36 physicians, will likely transition to the service line model or disaffiliate. In order to effectuate such a transition or
disaffiliation, we will need to negotiate asset sales with the physician groups in question and there can be no assurance that we will be able to negotiate such transactions on terms acceptable to us, if at all.



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US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



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 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 our 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.



The merger transaction discussed above is subject to numerous risks and uncertainties, including the possibility that the merger may not occur due to the failure of the parties to satisfy the conditions in the merger
agreement, such as the inability of Holdings to obtain financing, our failure to obtain stockholder approval or the occurrence of events that would have a material adverse effect on us as described in the merger agreement.



Additional risks and uncertainties relating to our operations include recent legislation
relating to prescription drug reimbursement under Medicare, including the way in which such legislation is implemented with respect to modifications in practice expense reimbursement, calculation of average sales price, implementation of third-party
vendor programs and other matters, the impact of the recent legislation on other aspects of our business (such as private payor reimbursement, our ability to obtain favorable pharmaceutical pricing, the ability of practices to continue offering
chemotherapy services to Medicare patients or maintaining existing practice sites, physician response to the legislation, including with respect to retirement or choice of practice setting, development activities, and the possibility of additional
impairments of assets, including management services agreements), reimbursement for pharmaceutical products generally, our ability to maintain good relationships with existing practices, expansion into new markets and development of existing
markets, our ability to complete cancer centers and PET facilities currently in development, our ability to recover the costs of our investments in cancer centers, our ability to complete negotiations and enter into agreements with practices
currently negotiating with us, reimbursement for health-care services, continued efforts by payors to lower their costs, government regulation and enforcement, continued relationships with pharmaceutical companies and other vendors, changes in
cancer therapy or the manner in which care is delivered, drug utilization, increases in the cost of providing cancer treatment services and the operations of our affiliated physician practices. Please refer to our filings with the SEC, including our
Annual Report on Form 10-K for 2003, as amended, for a more extensive discussion of factors that could cause actual results to differ materially from our expectations.



The cautionary statements contained or referred to in this report should be considered in connection with any written or oral
forward-looking statements that may be issued by us or persons acting on our behalf. We do not undertake any obligation to release any revisions to or to update publicly any forward-looking statements to reflect events or circumstances after the
date thereof or to reflect the occurrence of unanticipated events.



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 (GAAP). The preparation of these financial
statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these
estimates, including those related to service agreements, accounts receivable, intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.



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US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



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. This risk is
particularly relevant for periods in which there is a significant shift in reimbursement from large payors, such as the recent changes in Medicare reimbursement.



Please refer to the Critical Accounting Policies section of our Annual Report on Form 10-K, as amended, for the year ended
December 31, 2003 for a discussion of our critical accounting policies. Management believes such critical accounting policies affect its more significant judgments and estimates used in the preparation of our 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.



Recent Pronouncements



In January 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. It requires that the assets, liabilities and results of the activity of variable interest entities be
consolidated into the financial statements for the company that has controlling financial interest. It also provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or significant
financial support provided to it. Additionally, in December 2003, the FASB released a revised version of FIN 46 (FIN 46R) clarifying certain aspects of FIN 46 and providing certain entities with exemptions from the requirements of FIN 46. The
adoption of FIN 46R in January 2004 had no impact on the Companys financial position, results of operations or cash flows.



From time to time, the FASB, the SEC and other regulatory bodies change accounting rules, including rules applicable to our business and financial statements. We cannot
assure you that future changes in accounting rules would not require us to make restatements.



Discussion of Non-GAAP Information



In
this report, we use the terms EBITDA and EBITDA margin. Neither term is calculated in accordance with GAAP. EBITDA and EBITDA margin are derived from relevant items in our GAAP financials. A reconciliation of EBITDA to our
income statement is included in this report.



Management believes that EBITDA
and EBITDA margin are useful to investors, since they can provide investors with additional information that is not directly available in a GAAP presentation.



EBITDA is earnings before interest, taxes depreciation and amortization. We believe EBITDA is useful to investors because it measures our liquidity and
financial condition, and is commonly used by investors to evaluate the value and liquidity of companies in general, their debt service obligations and their ability to service their indebtedness.



EBITDA margin is EBITDA divided by revenue. EBITDA and EBITDA margin are tools
used by management in assessing our business operations and financial condition both as a whole and with respect to individual sites and product lines.



In all events, EBITDA and EBITDA margin 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.



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US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



Results of Operations



The Company was affiliated (including under the service line) with the following number of physicians, by specialty:



|                                  |  |          |  |     
|--------------------------------- |  | -------- |  | ----
|                                  |  | June 30,
|                                  |  | 2004     |  | 2003
|Medical oncologists/hematologists |  | 756      |  | 686 
|Radiation oncologists             |  | 122      |  | 113 
|Other oncologists                 |  | 36       |  | 37  
|                                  |  |          |  |     
|Total oncologists/hematologists   |  | 914      |  | 836 
|                                  |  |          |  |     



As of July 19, 2004, 941 physicians
are affiliated with the Company.



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



|                                           |  |                            |   |  |                          |   |  |      |   |  |      |  
|------------------------------------------ |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                                           |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                           |  | 2004                       |   |  | 2003                     |   |  | 2004 |   |  | 2003 |  
|Affiliated physicians, beginning of period |  | 897                        |   |  | 885                      |   |  | 897  |   |  | 884  |  
|Physician practice affiliations            |  | 13                         |   |  | 4                        |   |  | 16   |   |  | 17   |  
|Recruited physicians                       |  | 11                         |   |  | 11                       |   |  | 24   |   |  | 20   |  
|Physician practice separations             |  | 0                          |   |  | (52                      | ) |  | (13  | ) |  | (62  | )
|Retiring/other                             |  | (7                         | ) |  | (12                      | ) |  | (10  | ) |  | (23  | )
|                                           |  |                            |   |  |                          |   |  |      |   |  |      |  
|Affiliated physicians, end of period       |  | 914                        |   |  | 836                      |   |  | 914  |   |  | 836  |  
|                                           |  |                            |   |  |                          |   |  |      |   |  |      |  



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##### Table of Contents

US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



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



|                                    |  |                            |  |      |                          |  |      |   |  |      |  
|----------------------------------- |  | -------------------------- |  | ---- | ------------------------ |  | ---- | - |  | ---- | -
|                                    |  | Three Months EndedJune 30, |  |      | Six Months EndedJune 30, | 
|                                    |  | 2004                       |  | 2003 |                          |  | 2004 |   |  | 2003 |  
|Cancer centers, beginning of period |  | 80                         |  | 75   |                          |  | 78   |   |  | 79   |  
|Cancer centers opened               |  | 1                          |  | 2    |                          |  | 4    |   |  | 2    |  
|Cancer centers closed               |  | 0                          |  | 0    |                          |  | (1   | ) |  | (1   | )
|Cancer centers disaffiliated        |  | 0                          |  | (1   | )                        |  | 0    |   |  | (4   | )
|                                    |  |                            |  |      |                          |  |      |   |  |      |  
|Cancer centers, end of period       |  | 81                         |  | 76   |                          |  | 81   |   |  | 76   |  
|                                    |  |                            |  |      |                          |  |      |   |  |      |  
|PET systems                         |  | 25                         |  | 19   |                          |  | 25   |   |  | 19   |  
|                                    |  |                            |  |      |                          |  |      |   |  |      |  



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



|                                          |  |                            |  |                           |  |           |  |          
|----------------------------------------- |  | -------------------------- |  | ------------------------- |  | --------- |  | ---------
|                                          |  | Three Months EndedJune 30, |  | Six Months Ended June 30,
|                                          |  | 2004                       |  | 2003                      |  | 2004      |  | 2003     
|Medical oncology visits(1)                |  | 585,413                    |  | 609,208                   |  | 1,164,121 |  | 1,194,894
|Radiation treatments                      |  | 163,606                    |  | 165,358                   |  | 328,163   |  | 330,928  
|PET scans                                 |  | 7,023                      |  | 4,752                     |  | 13,604    |  | 8,963    
|CT scans                                  |  | 25,312                     |  | 18,551                    |  | 48,394    |  | 34,679   
|New patients enrolled in research studies |  | 718                        |  | 951                       |  | 1,461     |  | 1,856    

---

|(1) | Medical Oncology visits include consults by medical oncologists under our PPM model only and do not include service line results.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



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. The following information should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere
herein.



|                                    |  |                             |    |  |                          |    |  |      |    |  |      |   
|----------------------------------- |  | --------------------------- | -- |  | ------------------------ | -- |  | ---- | -- |  | ---- | --
|                                    |  | Three Months Ended June 30, |    |  | Six Months EndedJune 30, |   
|                                    |  | 2004                        |    |  | 2003                     |    |  | 2004 |    |  | 2003 |   
|Product revenues                    |  | 62.9                        | %  |  | 60.8                     | %  |  | 63.1 | %  |  | 59.9 | % 
|Service revenues                    |  | 37.1                        | %  |  | 39.2                     | %  |  | 36.9 | %  |  | 40.1 | % 
|                                    |  |                             |    |  |                          |    |  |      |    |  |      |   
|Total revenues                      |  | 100                         | %  |  | 100                      | %  |  | 100  | %  |  | 100  | % 
|                                    |  |                             |    | 
|Cost of product                     |  | 58.9                        | %  |  | 56.4                     | %  |  | 58.7 | %  |  | 55.4 | % 
|Costs of services:                  |  |                             |    |  |                          |    |  |      |    |  |      |   
|Field compensation and benefits     |  | 17.1                        | %  |  | 18.0                     | %  |  | 17.3 | %  |  | 18.7 | % 
|Other field costs                   |  | 9.8                         | %  |  | 11.6                     | %  |  | 10.3 | %  |  | 11.5 | % 
|Depreciation and amortization       |  | 2.7                         | %  |  | 2.6                      | %  |  | 2.7  | %  |  | 2.8  | % 
|                                    |  |                             |    |  |                          |    |  |      |    |  |      |   
|Total costs of services             |  | 29.6                        | %  |  | 32.2                     | %  |  | 30.3 | %  |  | 33.0 | % 
|Total costs of product and services |  | 88.5                        | %  |  | 88.6                     | %  |  | 89.0 | %  |  | 88.4 | % 
|General and administrative expense  |  | 2.9                         | %  |  | 3.3                      | %  |  | 2.7  | %  |  | 3.4  | % 
|Depreciation and amortization       |  | 0.9                         | %  |  | 1.3                      | %  |  | 0.9  | %  |  | 1.3  | % 
|                                    |  |                             |    |  |                          |    |  |      |    |  |      |   
|Income from operations              |  | 7.7                         | %  |  | 6.8                      | %  |  | 7.4  | %  |  | 6.9  | % 
|Other income (expense):             |  |                             |    |  |                          |    |  |      |    |  |      |   
|Interest expense, net               |  | (0.8                        | )% |  | (1.0                     | )% |  | (0.8 | )% |  | (1.1 | )%
|Other income                        |  | 0.1                         | %  |  |                         |    |  | 0.1  | %  |  |     |   
|                                    |  |                             |    |  |                          |    |  |      |    |  |      |   
|Income before income taxes          |  | 7.0                         | %  |  | 5.8                      | %  |  | 6.7  | %  |  | 5.8  | % 
|Income tax provision                |  | (2.7                        | )% |  | (2.2                     | )% |  | (2.6 | )% |  | (2.2 | )%
|                                    |  |                             |    |  |                          |    |  |      |    |  |      |   
|Net income and comprehensive income |  | 4.3                         | %  |  | 3.6                      | %  |  | 4.1  | %  |  | 3.6  | % 
|                                    |  |                             |    |  |                          |    |  |      |    |  |      |   



The Company provides the following
services to physician practices: medical oncology services, cancer center services, and cancer research 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, medical oncology services and cancer research services are offered by the Company under separate agreements for each service line.



The Company derives revenue primarily in four areas:



| | PPM service fee revenues. Under the PPM model, the company recognizes revenues derived from amounts it bills and collects on behalf of affiliated practices, which are reduced
by the amounts retained by those practices under its contracts. PPM service fee revenue is recorded when services are rendered based on established or negotiated rates reduced by contractual adjustments and allowances for doubtful accounts and by
the amounts retained by practices. Differences between estimated contractual adjustments and final settlements are reported in the period when final settlements are determined.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Service line fees. In the medical oncology services area under the Companys service line agreements, the Company bills practices on a monthly basis for services
rendered. These revenues include payment for all of the pharmaceutical agents used by the practice for which the Company must pay the pharmaceutical manufacturers, and a service fee for the pharmacy related services the Company provides.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



| | GPO and data fees. The Company receives fees from pharmaceutical companies for acting as a group purchasing organization (GPO) for its affiliated practices, as well as for
providing informational and other services to pharmaceutical companies. GPO fees are typically based upon the volume of drugs purchased by the practices. Fees for other services include amounts paid for data the Company collects and compiles.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Research fees. The Company receives fees for research services from pharmaceutical and biotechnology companies. These fees are separately negotiated for each study and
typically include some management fee, as well as per patient accrual fees and fees for achieving various study milestones.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A portion of the Companys revenue under its PPM arrangements and its revenue under service line arrangements with affiliated practices are derived from sales of
pharmaceutical products and are reported as product revenues. The Companys remaining revenues are reported as service revenues. Physician practices that enter into comprehensive service agreements with the Company receive a broad range of
services and receive pharmaceutical products. These products and services represent multiple deliverables delivered under a single contract, with a single fee. The Company has analyzed the component of the contract attributable to the provision of
products (pharmaceuticals) and the component of the contract attributable to the provision of services and attributed fair value to each component.



We retain all the amounts we collect in respect of practice receivables. On a monthly basis, we calculate what portion of their revenues our practices are entitled to
retain by subtracting our accrued fees and accrued practice expenses from accrued revenues. We pay practices this remainder in cash, which they use primarily for physician compensation. These amounts we remit to physician groups are excluded from
our revenue, since they are not part of our fees. By paying physicians on a cash basis for accrued amounts, we finance their working capital.



Revenue increased from $491.4 million in the second quarter of 2003 to $565.2 million in the second quarter of 2004, an increase of $73.8 million, or 15.0%. The primary
increase was in product revenues, which increased from $298.9 million in the second quarter of 2003 to $355.5 million in the second quarter of 2004, an increase of $56.6 million, or 18.9%. Service revenues also increased from $192.5 million in the
second quarter of 2003 to $209.8 million in the second quarter of 2004, an increase of $17.3 million, or 9.0%. Revenue growth was primarily caused by increases in revenues attributable to pharmaceuticals, and diagnostic services growth in the
service revenue. For the six months ended revenues increased from $938.6 million in 2003 to $1,090.2 million in 2004, an increase of $151.6 million, or 16.2%. Product revenues increased from $562.4 million for the six months ended 2003 to $687.9
million for the six months ended 2004, an increase of $125.5 million, or 22.3%. Service revenues increased from $376.2 million in the six months ended 2003 to $402.3 million in the six months ended 2004, an increase of $26.1 million, or 6.9%.
Revenue growth in pharmaceuticals as well as growth in PET and CT scans contributed to the overall increase in revenues.



The following table shows our revenue by segment for the three months and six months ended June 30, 2004 and 2003 (in thousands):



|                       |  |                            |         |                           |   |         |  |      |           |  |   |        
|---------------------- |  | -------------------------- | ------- | ------------------------- | - | ------- |  | ---- | --------- |  | - | -------
|                       |  | Three Months EndedJune 30, |         | Six Months Ended June 30,
|                       |  | 2004                       |         | 2003                      |   | 2004    |  | 2003
|Medical oncology       |  | $                          | 488,912 |                           | $ | 417,697 |  | $    | 939,840   |  | $ | 797,521
|Cancer center services |  |                            | 62,990  |                           |   | 57,954  |  |      | 124,054   |  |   | 112,259
|Other services         |  |                            | 13,341  |                           |   | 15,761  |  |      | 26,345    |  |   | 28,842 
|                       |  |                            |         |                           |   |         |  |      |           |  |   |        
|                       |  | $                          | 565,243 |                           | $ | 491,412 |  | $    | 1,090,239 |  | $ | 938,622
|                       |  |                            |         |                           |   |         |  |      |           |  |   |        



Medical oncology revenue increased
from $417.7 million in the second quarter of 2003 to $488.9 million for the second quarter of 2004, an increase of $71.2 million or 17.0%. $14.7 million of such increase is attributed to growth in the service line model and the remaining is growth
in the medical oncology revenue in product revenue. Growth of medical oncology revenue during the second quarter of 2004 was partially offset by a 3.9% decline in medical oncology visits compared to the same period during 2003 as a result of PPM
practice disaffiliations and conversions



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##### Table of Contents

US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



to the service line model. Service line model visits are not included in our patient volume statistics. Medical
oncology revenue increased from $797.5 million for the six months ended 2003 to $939.8 million for the six months ended 2004, an increase of $142.3 million or 17.8%. This increase is attributable to continued growth in the service line model and due
to increased fees for drug administration. This growth for the six months ended June 2004 was partially offset by a 2.6% decline in medical oncology visits compared to the same period during 2003.



Cancer center services revenue increased from $58.0 million in the second quarter of 2003 to
$63.0 million in the second quarter of 2004, an increase of $5.0 million or 8.7%. This increase is attributable to IMRT, an increase in radiology revenue from CT and PET scans and additional cancer centers. PET scans increased from 4,752 in the
second quarter of 2003 to 7,023 in the second quarter of 2004, an increase of 47.8%. This growth was attributable to an increase in same-facility PET scans per day of 22.3%. Radiation treatments decreased slightly from 165,358 in the second quarter
of 2003 to 163,606 in the second quarter of 2004, or 1.1%. In addition, since the second quarter of 2003 we have added a net total of 5 cancer centers (taking into account closures and disaffiliations). We currently have 9 cancer centers and 2 PET
systems in various stages of development. For the first six months ended 2004, cancer center services revenue increased from $112.3 million to $124.1 million, an increase of $11.8 million or 10.5% from the same period in 2003. This increase is
attributable to increases in CT and PET scans, while radiation treatments remained relatively flat.



Other services revenue decreased from $15.8 million in the second quarter of 2003 to $13.3 million for the second quarter of 2004, a decrease of $2.4 million, or 15.4%. For the six months ended June 2004, other
services revenue decreased $2.5 million or 8.7%. This decrease is attributable to a decrease in patients enrolled in research for both the quarter and six months ended 2004.



Cost of Products. Cost of products, which includes drugs, medications and related supplies used by the practices, as well as certain
personnel and other drug-related costs, increased from $277.2 million in the second quarter of 2003 to $332.8 million in the same period of 2004, an increase of $55.6 million, or 20.1%. As a percentage of revenue, cost of product increased from
56.4% in the second quarter of 2003 to 58.9% in the same period in 2004, primarily because of an increase in our service line business and an increase in product revenue as a percentage of total revenue.



Costs of Services:



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 $88.6 million in the second quarter of 2003 to $96.5 million in the first quarter of 2004, an increase of $7.8 million, or 8.8%. As a percentage of revenue, field compensation and
benefits decreased from 18.0% in the second quarter of 2003 to 17.1% in the second quarter of 2004. The decrease as a percentage of revenue is primarily attributable to economies of scale resulting from the increase in product revenue and revenue
attributable to diagnostic and radiation services.



General and
Administrative. General and administrative expenses increased from $16.4 million in the second quarter of 2003 to $16.6 million in the second quarter of 2004, an increase of $0.3 million, or 1.5%. As a percentage of revenue, general and
administrative costs decreased from 3.3% in the second quarter 2003 to 2.9% in the second quarter 2004.



Overall, we experienced an increase in operating margins with earnings before taxes, interest, depreciation and amortization, EBITDA, as a percentage of revenue, increasing from 10.7% in the second quarter of 2003 to
11.4% in the second quarter of 2004.



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##### Table of Contents

US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



The following is the EBITDA of our operations by operating segment for the three months and six months ended June 30,
2004 and 2003 (in thousands):



Three Months Ended June 30, 2004:



|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|----------------------------- |  | --------------- | -------- | - | -------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | -------- | -
|                              |  | MedicalOncology |          |   | CancerCenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product revenue               |  | $               | 355,454  |   |                      | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 355,454  |  
|Service revenue               |  |                 | 133,458  |   |                      |   | 62,990  |       |  |   | 13,341                       |   |  |       |        |   |  |   | 209,789  |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Revenue                       |  |                 | 488,912  |   |                      |   | 62,990  |       |  |   | 13,341                       |   |  |       |        |   |  |   | 565,243  |  
|Operating expenses            |  |                 | (431,261 | ) |                      |   | (51,031 | )     |  |   | (10,941                      | ) |  |       | (28,179 | ) |  |   | (521,412 | )
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Income (loss) from operations |  |                 | 57,651   |   |                      |   | 11,959  |       |  |   | 2,400                        |   |  |       | (28,179 | ) |  |   | 43,831   |  
|Depreciation and amortization |  |                 | 21       |   |                      |   | 9,003   |       |  |   | 253                          |   |  |       | 11,059  |   |  |   | 20,336   |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|EBITDA                        |  | $               | 57,672   |   |                      | $ | 20,962  |       |  | $ | 2,653                        |   |  | $     | (17,120 | ) |  | $ | 64,167   |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  



Three Months Ended June 30, 2003:



|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|----------------------------- |  | --------------- | -------- | - | -------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | -------- | -
|                              |  | MedicalOncology |          |   | CancerCenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product revenue               |  | $               | 298,895  |   |                      | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 298,895  |  
|Service revenue               |  |                 | 118,802  |   |                      |   | 57,954  |       |  |   | 15,761                       |   |  |       |        |   |  |   | 192,517  |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Revenue                       |  |                 | 417,697  |   |                      |   | 57,954  |       |  |   | 15,761                       |   |  |       |        |   |  |   | 491,412  |  
|Operating expenses            |  |                 | (370,668 | ) |                      |   | (48,159 | )     |  |   | (12,611                      | ) |  |       | (26,549 | ) |  |   | (457,987 | )
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Income (loss) from operations |  |                 | 47,029   |   |                      |   | 9,795   |       |  |   | 3,150                        |   |  |       | (26,549 | ) |  |   | 33,425   |  
|Depreciation and amortization |  |                 | 29       |   |                      |   | 8,750   |       |  |   | 276                          |   |  |       | 9,911   |   |  |   | 18,966   |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|EBITDA                        |  | $               | 47,058   |   |                      | $ | 18,545  |       |  | $ | 3,426                        |   |  | $     | (16,638 | ) |  | $ | 52,391   |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  



The growth in medical oncology EBITDA
is attributed to an increase in product revenue and resulting economies of scale from non-product expenses. EBITDA margin increased from 11.3% for the three months ended June 30, 2003 to 11.8% for the three months ended June 30, 2004.



Growth in cancer center services revenue contributed to the EBITDA margin increase from 32.0%
for the three months ended June 2003 to 33.3% for the three months ended 2004. This increase is attributable to investment in technology such as intensity modulated radiation therapy (IMRT), CT and PET, and growth in same practice treatments.



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##### Table of Contents

US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



Six Months Ended June 30, 2004:



|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |            |  
|----------------------------- |  | --------------- | -------- | - | -------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | ---------- | -
|                              |  | MedicalOncology |          |   | CancerCenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product revenue               |  | $               | 687,929  |   |                      | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 687,929    |  
|Service revenue               |  |                 | 251,911  |   |                      |   | 124,054 |       |  |   | 26,345                       |   |  |       |        |   |  |   | 402,310    |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |            |  
|Revenue                       |  |                 | 939,840  |   |                      |   | 124,054 |       |  |   | 26,345                       |   |  |       |        |   |  |   | 1,090,239  |  
|Operating expenses            |  |                 | (834,990 | ) |                      |   | (98,781 | )     |  |   | (23,613                      | ) |  |       | (51,926 | ) |  |   | (1,009,310 | )
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |            |  
|Income (loss) from operations |  |                 | 104,850  |   |                      |   | 25,273  |       |  |   | 2,732                        |   |  |       | (51,926 | ) |  |   | 80,929     |  
|Depreciation and amortization |  |                 | 31       |   |                      |   | 16,868  |       |  |   | 494                          |   |  |       | 21,897  |   |  |   | 39,290     |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |            |  
|EBITDA                        |  | $               | 104,881  |   |                      | $ | 42,141  |       |  | $ | 3,226                        |   |  | $     | (30,029 | ) |  | $ | 120,219    |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |            |  



Six Months Ended June 30, 2003:



|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|----------------------------- |  | --------------- | -------- | - | -------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | -------- | -
|                              |  | MedicalOncology |          |   | CancerCenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product revenue               |  | $               | 562,426  |   |                      | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 562,426  |  
|Service revenue               |  |                 | 235,095  |   |                      |   | 112,259 |       |  |   | 28,842                       |   |  |       |        |   |  |   | 376,196  |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Revenue                       |  |                 | 797,521  |   |                      |   | 112,259 |       |  |   | 28,842                       |   |  |       |        |   |  |   | 938,622  |  
|Operating expenses            |  |                 | (703,397 | ) |                      |   | (90,941 | )     |  |   | (24,356                      | ) |  |       | (55,161 | ) |  |   | (873,855 | )
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Income (loss) from operations |  |                 | 94,124   |   |                      |   | 21,318  |       |  |   | 4,486                        |   |  |       | (55,161 | ) |  |   | 64,767   |  
|Depreciation and amortization |  |                 | 49       |   |                      |   | 14,586  |       |  |   | 485                          |   |  |       | 22,659  |   |  |   | 37,779   |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|EBITDA                        |  | $               | 94,173   |   |                      | $ | 35,904  |       |  | $ | 4,971                        |   |  | $     | (32,502 | ) |  | $ | 102,546  |  
|                              |  |                 |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  



The decrease in medical oncology
services EBITDA margin from 11.8% for the six months ended of 2003 to 11.2% for the six months ended 2004 was a result of increased product revenue partially offset by an increase in product cost.



Cancer center services EBITDA margin increased from 32.0% for the six months ended 2003 to
34.0% for the first six months ended 2004. This increase is attributable investment in technology such as intensity modulated radiation therapy (IMRT), CT and PET, and growth in same practice treatments.



Interest. Net interest expense decreased from $5.0 million in the second quarter of
2003 to $4.5 million in the second quarter of 2004, a decrease of $0.4 million, or 8.3%, because of a reduction in outstanding indebtedness. As a percentage of revenue, net interest expense decreased from 1.0% for the second quarter of 2003 to 0.8%
for the second quarter of 2004.



Income Taxes. We had an effective tax
rate of 38.5% for the second quarter of 2004 and 38.0% for the second quarter of 2003.



Net Income. Net income increased from $17.7 million, or $0.19 per diluted share, in the second quarter of 2003 to $24.5 million, or $0.27 per diluted share, in the second quarter 2004, an increase of $6.9 million or 39.0%. Net income
as a percentage of revenue increased from 3.6% in the second quarter of 2003 to 4.3% in the second quarter of 2004.



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US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



Liquidity and Capital Resources



EBITDA



Earnings before interest, taxes, depreciation and amortization (EBITDA) for the six months ended June 30, 2004 and June 30, 2003 was $120.2 million and $102.5
million, respectively. EBITDA is presented (i) because EBITDA is used by the Company to measure its liquidity and financial condition and (ii) because the Company believes EBITDA is frequently used by securities analysts, investors and other
interested parties in evaluating the value of companies in general, and in evaluating the liquidity of companies with debt service obligations and their ability to service their indebtedness. The EBITDA calculation is not an alternative to operating
earnings under generally accepted accounting principles, or GAAP, as an indicator of operating performance or to cash flows as a measure of liquidity. The following table reconciles net income and comprehensive income as shown in the Condensed
Consolidated Statement of Operations and Comprehensive Income to EBITDA and reconciles EBITDA to net cash provided by operating activities as shown in the Condensed Consolidated Statement of Cash Flows:



|                                                  |  |                           |         |   |      |   |         |  
|------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                  |  | Six Months Ended June 30, |        
|                                                  |  | 2004                      |         |   | 2003 |  
|Net income                                        |  | $                         | 44,666  |   |      | $ | 33,903  |  
|Interest expense, net, and other                  |  |                           | 8,301   |   |      |   | 10,084  |  
|Income taxes                                      |  |                           | 27,962  |   |      |   | 20,780  |  
|Depreciation and amortization                     |  |                           | 39,290  |   |      |   | 37,779  |  
|                                                  |  |                           |         |   |      |   |         |  
|EBITDA                                            |  |                           | 120,219 |   |      |   | 102,546 |  
|Changes in assets and liabilities                 |  |                           | 41,870  |   |      |   | 33,468  |  
|Undistributed earnings (losses) in joint ventures |  |                           | 32      |   |      |   | (900    | )
|Non-cash stock compensation expense               |  |                           | 48      |   |      |   | 100     |  
|Deferred income taxes                             |  |                           | 4,200   |   |      |   | 12,222  |  
|Interest expense, net, and other                  |  |                           | (8,301  | ) |      |   | (10,084 | )
|Income tax expense                                |  |                           | (27,962 | ) |      |   | (20,780 | )
|                                                  |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities         |  | $                         | 130,106 |   |      | $ | 116,572 |  
|                                                  |  |                           |         |   |      |   |         |  



The following table
presents selected data from our condensed consolidated statement of cash flows (in millions):



|                                                 |  |                           |         |   |      |   |         |  
|------------------------------------------------ |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                 |  | Six Months Ended June 30, |        
|                                                 |  | 2004                      |         |   | 2003 |  
|Net cash provided by operating activities        |  | $                         | 130,106 |   |      | $ | 116,572 |  
|Net cash used by investing activities            |  |                           | (37,853 | ) |      |   | (39,452 | )
|Net cash provided/(used) by financing activities |  |                           | 4,351   |   |      |   | (55,515 | )
|                                                 |  |                           |         |   |      |   |         |  
|Net increase in cash and equivalents             |  |                           | 96,604  |   |      |   | 21,605  |  
|Cash and equivalents at beginning of period      |  |                           | 124,514 |   |      |   | 75,029  |  
|                                                 |  |                           |         |   |      |   |         |  
|Cash and equivalents at end of period            |  | $                         | 221,118 |   |      | $ | 96,634  |  
|                                                 |  |                           |         |   |      |   |         |  



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US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



As of June 30, 2004, we had net working capital of $219.1 million, including cash and cash equivalents of $221.1
million. We had current liabilities of $466.6 million, including $74.3 million in current maturities of long-term debt, and $183.9 million of long-term indebtedness. During the six months ended June 30, 2004, we provided $130.1 million in net
operating cash flow, invested $37.9 million, and provided cash from financing activities in the amount of $4.4 million. As of July 19, 2004, we had cash and equivalents of approximately $276.0 million.



Cash Flows from Operating Activities



During the six months ended June 30, 2004, we provided $130.1 million in cash flows from
operating activities as compared to $116.6 million in the comparable prior year period. The increase in cash flow is primarily due to a decrease in accounts receivable days, and an increase in accounts payable days as we have renegotiated new terms
with certain vendors. Also contributing to this increase is the decrease in tax payments from the prior year in anticipation of the merger transaction, as we will be entitled to certain tax benefits upon closing.



Cash Flows from Investing Activities



During the six months ended June 30, 2004 and 2003, we expended $37.9 million and $39.5
million in capital expenditures, including $30.1 million and $27.2 million on the development and construction of cancer centers, respectively. Maintenance capital expenditures were $7.8 million and $12.3 million for the six months ended June 30,
2004 and 2003, respectively. For all of 2004, we anticipate expending a total of approximately $30 to $35 million on maintenance capital expenditures and approximately $55 to $60 million on development of new cancer centers and PET installations,
which may be acquired pursuant to operating leases or purchased.



Cash Flows
from Financing Activities



During the six months ended June 30, 2004, we
provided cash from financing activities of $4.4 million as compared to cash used of $55.5 million for the six months ended June 30, 2003. The change is primarily due to purchasing treasury stock of $41.0 million during the six months ended June 30,
2003, this is offset with the proceeds from the exercise of options in 2004.



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 systems, 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 revolving credit facility.



On February 1, 2002, we issued $175 million in 9.625% Senior Subordinated Notes due 2012 (Senior Subordinated Notes) 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 revolving credit facility and certain other debt.



We entered into a leasing facility in December 1997, which we have used to finance the
acquisition and development of cancer centers. Since December 31, 2002, the lease has been classified as indebtedness on our financial statements since we have guaranteed 100% of the residual value of the properties in the lease since that date. As
of June 30, 2004, we had $67.3 million outstanding under the facility and no further amounts are available under that facility. The annual cost of the lease is approximately $2.6 million, based on interest rates in effect as of June 30, 2004. The
lease matures in September 2004. We anticipate refinancing substantially all of our indebtedness in connection with the merger transaction described above. We have extended the maturity of the lease through September 2004 to allow such a
refinancing. In the event the merger is not consummated, we would pay the lease in full at its maturity and anticipate having sufficient cash available to make such payment.



Because the lease payment floats with a referenced interest rate, we are also exposed to interest rate risk under the leasing facility. An
increase of one percent in the referenced rate would result in an increase in lease payments of approximately $0.7 million annually.



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US Oncology, Inc

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS 
continued



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 formula. The revolving 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 revolving 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 security under the credit facility and the guarantee
obligations of our leasing facility.



We are currently 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 historically 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, investment in information systems and the acquisition or lease of real estate for the development of integrated cancer
centers and PET centers. 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 us or at all.



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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. Any borrowings under the credit facility and leasing facility contain an element of market risk from changes in interest rates. As of June 30, 2004, we had no outstanding
borrowings under our credit facility and $67.3 million outstanding under the leasing facility. Historically, at times we have managed this risk, in part, through the use of interest rate swaps; however, no such agreements were entered into in the
second quarter of 2004. 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 second quarter of 2004.



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 June 30, 2004. The market values that result from these computations are compared with the market values of these
financial instruments at June 30, 2004. 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



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-15 as of the end of the period covered by this report. 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.



There was no change in internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.



Beginning in
2005, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report of management in our Annual Report on Form 10-K. The internal control report must contain (1) a statement of managements responsibility
for establishing and maintaining adequate internal control over financial reporting for our company, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over
financial reporting, (3) managements assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not our internal control over financial
reporting is effective, and (4) a statement that our independent auditors have issued an attestation report on managements assessment of our internal control over financial reporting.



Management previously has acknowledged its responsibility for internal controls and seeks to
continue to improve those controls. In addition, in order to achieve compliance with Section 404 within the prescribed period, we have, since 2003, been engaged in a process to document and evaluate our internal control over financial reporting. In
this regard, management has dedicated internal resources, engaged outside consultants and adopted a detailed project work plan to (i) assess the adequacy of our internal control over financial reporting, (ii) take steps to improve control processes
where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. During the second quarter of 2004, we
commenced testing of internal controls that we had previously documented as part of this process.



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US Oncology, Inc



As a result of work completed to date in preparation for implementation of Section 404, we have made
improvements to the design and effectiveness of certain internal controls. In addition, we anticipate continuing to enhance our internal controls as part of our ongoing review and assessment of those controls.



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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. 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. The United
States has determined not to intervene in any of the qui tam suits of which we are aware and all but one of such suits has been dismissed. The individuals who filed the remaining claim of which we are aware may still pursue the litigation,
although none of those individuals has indicated intent to do so. 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.



Seven purported class action lawsuits were filed naming the Company and each of its directors as defendants. Four of the lawsuits also name Welsh Carson (or Welsh Carson,
Anderson & Stowe) as a defendant and two also name Acquisition Corp. The complaints allege, among other things, that the defendants have breached their fiduciary duties to the stockholders of the Company by entering into the merger agreement.
Among other things, the consideration offered in the merger is alleged to be inadequate and a result of unfair dealing. One of the lawsuits alleges that two of the three directors on the special committee, and several other directors, are not
independent, and that certain facts were not disclosed. Boone Powell, Jr. was alleged not to be an independent director on account of an alleged close connection between the Company and Baylor University of which the Baylor University
Medical Center in Dallas is a part. Baylor is alleged to have certain relationships with the Company and Mr. Powell is a former director and Chairman of the Baylor Health Care System. Burton S. Schwartz, M.D., is President and Medical Director of
Minnesota Oncology Hematology, PA, which has a service agreement with the Company, and is alleged not to be an independent director because of amounts paid under such service agreement by such entity to the Company. Messrs. Powell and Schwartz are
also alleged to be beholden to Russell L. Carson, a principal of Welsh Carson, and R. Dale Ross, the Companys President and Chief Executive Officer.



The complaints seek an injunction against the proposed transaction or, if it is consummated, rescission of the transaction and imposition of
a constructive trust, as well as money damages, attorneys fees, expenses and other relief. Additional lawsuits could be filed in the future. The Company believes that these lawsuits and the allegations contained therein lack merit. Three of
the lawsuits were filed in the Court of Chancery of the State of Delaware and four of the lawsuits were filed in District Courts in Harris County, Texas by purported stockholders of the Company on behalf of all similarly situated stockholders. On
April 15, 2004, the Delaware Court of Chancery consolidated the Delaware lawsuits. On May 21, 2004, the 234th Texas



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US Oncology, Inc



District Court consolidated the Texas lawsuits. On May 21, 2004, plaintiffs in the consolidated Delaware lawsuit
moved for expedited proceedings, and those plaintiffs moved for a preliminary injunction against consummation of the merger due to alleged failures to disclose material facts in the preliminary proxy statement that had been filed by the Company,
which alleged failures were described in an amended complaint filed by those plaintiffs. On May 25, 2004, the Delaware Court of Chancery scheduled a preliminary injunction hearing in the Delaware consolidated lawsuit, to commence on June 30, 2004.
The defendants in the Delaware consolidated lawsuit, and in the Texas consolidated lawsuit, made substantial production of documents in response to requests by the plaintiffs.



As a result of arms-length settlement negotiations among counsel in the lawsuits, the parties entered into an agreement providing for
settlement of the consolidated Delaware lawsuit on behalf of the purported class, and for dismissal with prejudice of the consolidated Texas lawsuit. The agreement contemplated that, among other things, The Company would make disclosures in the
proxy statement to address the disclosure claims raised in the Delaware consolidated lawsuit.



Following confirmatory discovery by the parties, the parties then executed a stipulation of settlement, the substance of which is consistent with that of the agreement. The proposed settlement is subject to final
approval by the Delaware Court of Chancery, so any settlement may not be final at the time of the special meeting. If the proposed settlement is ultimately not approved by the Delaware Court of Chancery, the litigation could proceed and the
plaintiffs could seek the relief sought in their respective complaints. As a result, we cannot assure our stockholders that the proposed settlement will be completed on the terms described above or, in that event, that the merger will be completed.



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US Oncology, Inc



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|              | 
|2.1           |  | Agreement and Plan of Merger, dated as of March 20, 2004, among Oiler Holding Company, Oiler Acquisition Corp. and US Oncology, Inc. (filed as exhibit 2.1 to the Companys Form 8-K dated
March 20, 2004 and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                        
|              | 
|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).                                                                                                                                                                                                                                                                                                                 
|              | 
|4.3           |  | Amendment No. 1, dated as of March 20, 2004, amends the Rights Agreement dated as of May 29, 1997 (as amended and in effect from time to time, the Rights Agreement), between US
Oncology, Inc., a Delaware corporation (the Corporation), and American Stock Transfer & Trust Company, as Rights Agent (the Rights Agent). Terms not otherwise defined herein shall have the meanings assigned to such terms
in the Rights Agreement. (filed as exhibit 4.1 to the Companys Form 8-K dated March 20, 2004 and incorporated herein by reference.)
|              | 
|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
|--- | -------------------



The Company filed an 8-K on April 1, 2004, disclosing under Item 12 a company press release regarding its results of operations for the quarter ended March 31, 2004.



The Company filed an 8-K on May 3, 2004, disclosing under Item 5 events relating to the
merger agreement.



The Company filed an 8-K on May 21, 2004, disclosing under
Item 5 the commencement of a tender offer and consent solicitation for its 95/8% Senior Subordinated Notes due
2012.



The Company filed an 8-K on June 14, 2004, disclosing under Item
5 the receipt of the requisite consent to proposed amendments under its 95/8% Senior Subordinated Notes due 2012
and extending the tender offer and consent solicitation.



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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: July 23, 2004: |  | By:                                   |  | /s/ R. Dale Ross                            
| |  |  |  |                      |  | R. Dale Ross, Chief Executive Officer
| |  |  |  |                      |  |                                       |  | (duly authorized signatory)                 
| |  |  |  |                     
| |  |  |  | Date: July 23, 2004: |  | By:                                   |  | /s/ Bruce D. Broussard                      
| |  |  |  |                      |  |                                       |  | Bruce D. Broussard, Chief Financial Officer 
| |  |  |  |                      |  |                                       |  | (principal financial and accounting officer)



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