##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A-1

Amendment No. 1



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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 March 31, 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 April 30, 2004, 86,354,244 shares of the Registrants Common Stock were outstanding. In addition, as of April 30, 2004, the Registrant had agreed to deliver 831,058 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

MARCH 31, 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 |  | 15      
|                                                                                              | 
|Item 3.
Quantitative and Qualitative Disclosures about Market Risks                           |  | 29      
|                                                                                              | 
|Item 4.
Controls and Procedures                                                               |  | 29      
|                                                                                              | 
|PART II.
OTHER INFORMATION                                                                    |  |         
|                                                                                              | 
|Item 1.
Legal Proceedings                                                                     |  | 30      
|                                                                                              | 
|Item 2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |  | 31      
|                                                                                              | 
|Item 6.
Exhibits and Reports on Form 8-K                                                      |  | 32      
|                                                                                              | 
|SIGNATURES                                                                                    |  | 33      



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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)



|                                                                                                          |  |                |           |   |                   |   |           |  
|--------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                          |  | March 31, 2004 |           |   | December 31, 2003 |  
|ASSETS                                                                                                    |  |                |           |   |                   |   |           |  
|Current assets:                                                                                           |  |                |           |   |                   |   |           |  
|Cash and equivalents                                                                                      |  | $              | 152,021   |   |                   | $ | 124,514   |  
|Accounts receivable                                                                                       |  |                | 317,589   |   |                   |   | 304,507   |  
|Other receivables                                                                                         |  |                | 44,590    |   |                   |   | 47,738    |  
|Prepaid expenses and other current assets                                                                 |  |                | 18,498    |   |                   |   | 18,451    |  
|Inventories                                                                                               |  |                | 2,065     |   |                   |   | 7,481     |  
|Due from affiliates                                                                                       |  |                | 39,696    |   |                   |   | 43,629    |  
|                                                                                                          |  |                |           |   |                   |   |           |  
|Total current assets                                                                                      |  |                | 574,459   |   |                   |   | 546,320   |  
|Property and equipment, net                                                                               |  |                | 362,524   |   |                   |   | 356,125   |  
|Service agreements, net                                                                                   |  |                | 235,817   |   |                   |   | 239,108   |  
|Deferred income taxes                                                                                     |  |                | 8,915     |   |                   |   | 10,915    |  
|Other assets                                                                                              |  |                | 22,011    |   |                   |   | 22,551    |  
|                                                                                                          |  |                |           |   |                   |   |           |  
|                                                                                                          |  | $              | 1,203,726 |   |                   | $ | 1,175,019 |  
|                                                                                                          |  |                |           |   |                   |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                      |  |                |           |   |                   |   |           |  
|Current liabilities:                                                                                      |  |                |           |   |                   |   |           |  
|Current maturities of long-term indebtedness                                                              |  | $              | 74,849    |   |                   | $ | 79,748    |  
|Accounts payable                                                                                          |  |                | 159,466   |   |                   |   | 160,628   |  
|Due to affiliates                                                                                         |  |                | 71,985    |   |                   |   | 64,052    |  
|Accrued compensation cost                                                                                 |  |                | 19,324    |   |                   |   | 26,316    |  
|Income taxes payable                                                                                      |  |                | 30,463    |   |                   |   | 19,810    |  
|Other accrued liabilities                                                                                 |  |                | 33,539    |   |                   |   | 41,847    |  
|                                                                                                          |  |                |           |   |                   |   |           |  
|Total current liabilities                                                                                 |  |                | 389,626   |   |                   |   | 392,401   |  
|Deferred revenue                                                                                          |  |                | 6,387     |   |                   |   | 5,349     |  
|Long-term indebtedness                                                                                    |  |                | 185,495   |   |                   |   | 188,412   |  
|                                                                                                          |  |                |           |   |                   |   |           |  
|Total liabilities                                                                                         |  |                | 581,508   |   |                   |   | 586,162   |  
|Minority interest                                                                                         |  |                | 10,391    |   |                   |   | 10,497    |  
|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, 86,212 and 83,363 outstanding     |  |                | 953       |   |                   |   | 953       |  
|Additional paid in capital                                                                                |  |                | 475,260   |   |                   |   | 473,800   |  
|Common Stock to be issued, approximately 916 and 2,102 shares                                             |  |                | 9,659     |   |                   |   | 21,146    |  
|Treasury Stock, 9,089 and 11,938 shares                                                                   |  |                | (78,993   | ) |                   |   | (102,367  | )
|Retained earnings                                                                                         |  |                | 204,948   |   |                   |   | 184,828   |  
|                                                                                                          |  |                |           |   |                   |   |           |  
|Total stockholders equity                                                                                |  |                | 611,827   |   |                   |   | 578,360   |  
|                                                                                                          |  |                |           |   |                   |   |           |  
|                                                                                                          |  | $              | 1,203,726 |   |                   | $ | 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 Ended March 31, |        
|                                             |  | 2004                         |         |   | 2003 |  
|Product revenues                             |  | $                            | 332,475 |   |      | $ | 263,531 |  
|Service revenues                             |  |                              | 192,521 |   |      |   | 183,679 |  
|                                             |  |                              |         |   |      |   |         |  
|Total revenues                               |  |                              | 524,996 |   |      |   | 447,210 |  
|Cost of product                              |  |                              | 306,766 |   |      |   | 243,308 |  
|Costs of services:                           |  |                              |         |   |      |   |         |  
|Field compensation and benefits              |  |                              | 92,693  |   |      |   | 87,032  |  
|Other field costs                            |  |                              | 56,801  |   |      |   | 51,139  |  
|Depreciation and amortization                |  |                              | 13,826  |   |      |   | 13,001  |  
|                                             |  |                              |         |   |      |   |         |  
|Total costs of services                      |  |                              | 163,320 |   |      |   | 151,172 |  
|                                             |  |                             
|Total costs of products and services         |  |                              | 470,086 |   |      |   | 394,480 |  
|General and administrative expense           |  |                              | 12,684  |   |      |   | 15,576  |  
|Depreciation and amortization                |  |                              | 5,128   |   |      |   | 5,812   |  
|                                             |  |                              |         |   |      |   |         |  
|Income from operations                       |  |                              | 37,098  |   |      |   | 31,342  |  
|Other income (expense):                      |  |                              |         |   |      |   |         |  
|Interest expense, net                        |  |                              | (4,382  | ) |      |   | (5,132  | )
|                                             |  |                              |         |   |      |   |         |  
|Income before income taxes                   |  |                              | 32,716  |   |      |   | 26,210  |  
|Income tax provision                         |  |                              | (12,596 | ) |      |   | (9,960  | )
|                                             |  |                              |         |   |      |   |         |  
|Net income and comprehensive income          |  | $                            | 20,120  |   |      | $ | 16,250  |  
|                                             |  |                              |         |   |      |   |         |  
|Net income per sharebasic                   |  | $                            | 0.23    |   |      | $ | 0.17    |  
|                                             |  |                              |         |   |      |   |         |  
|Shares used in per share computationbasic   |  |                              | 85,988  |   |      |   | 92,972  |  
|                                             |  |                              |         |   |      |   |         |  
|Net income per sharediluted                 |  | $                            | 0.23    |   |      | $ | 0.17    |  
|                                             |  |                              |         |   |      |   |         |  
|Shares used in per share computationdiluted |  |                              | 89,276  |   |      |   | 94,632  |  
|                                             |  |                              |         |   |      |   |         |  



The accompanying notes
are an integral part of this statement.



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##### Table of Contents

US ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

(unaudited)



|                                                     |  |                             |         |   |      |   |         |  
|---------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                     |  | Three Months EndedMarch 31, |        
|                                                     |  | 2004                        |         |   | 2003 |  
|Cash flows from operating activities:                |  |                             |         |   |      |   |         |  
|Net income                                           |  | $                           | 20,120  |   |      | $ | 16,250  |  
|Non cash adjustments:                                |  |                             |         |   |      |   |         |  
|Depreciation and amortization                        |  |                             | 18,954  |   |      |   | 18,813  |  
|Deferred income taxes                                |  |                             | 2,000   |   |      |   | 1,722   |  
|Undistributed (losses) earnings in joint ventures    |  |                             | (106    | ) |      |   | 49      |  
|Changes in operating assets and liabilities:         |  |                             | 2,562   |   |      |   | (37,957 | )
|                                                     |  |                             |         |   |      |   |         |  
|Net cash provided (used) by operating activities     |  |                             | 43,530  |   |      |   | (1,123  | )
|                                                     |  |                             |         |   |      |   |         |  
|Cash flows from investing activities:                |  |                             |         |   |      |   |         |  
|Acquisition of property and equipment                |  |                             | (21,546 | ) |      |   | (16,878 | )
|                                                     |  |                             |         |   |      |   |         |  
|Net cash used by investing activities                |  |                             | (21,546 | ) |      |   | (16,878 | )
|                                                     |  |                             |         |   |      |   |         |  
|Cash flows from financing activities:                |  |                             |         |   |      |   |         |  
|Repayment of other indebtedness                      |  |                             | (7,816  | ) |      |   | (9,536  | )
|Proceeds from exercise of options                    |  |                             | 17,586  |   |      |   | 339     |  
|Purchase of Treasury Stock                           |  |                             | (4,247  | ) |      |   | (3,482  | )
|                                                     |  |                             |         |   |      |   |         |  
|Net cash provided (used) by financing activities     |  |                             | 5,523   |   |      |   | (12,679 | )
|                                                     |  |                             |         |   |      |   |         |  
|Increase (decrease) in cash and equivalents          |  |                             | 27,507  |   |      |   | (30,680 | )
|Cash and equivalents:                                |  |                             |         |   |      |   |         |  
|Beginning of period                                  |  |                             | 124,514 |   |      |   | 105,564 |  
|                                                     |  |                             |         |   |      |   |         |  
|End of period                                        |  | $                           | 152,021 |   |      | $ | 74,884  |  
|                                                     |  |                             |         |   |      |   |         |  
|Interest paid                                        |  | $                           | 9,218   |   |      | $ | 9,708   |  
|Taxes paid                                           |  | $                           | 150     |   |      | $ |        |  
|Non cash transactions:                               |  |                             |         |   |      |   |         |  
|Delivery of Common Stock in affiliation transactions |  | $                           | 5,788   |   |      | $ | 5,376   |  



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 - continued

(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. These unaudited condensed consolidated financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto included in US Oncology,
Inc.s Form 10-K filed with the Securities and Exchange Commission on March 12, 2004, as amended.



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 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 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 stockholder approval statutorily required for a merger. 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



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



than a majority of the aggregate principal amount of US Oncologys outstanding 9 5/8% Senior Subordinated Notes
due 2012, and other customary conditions.



The Company has filed preliminary
proxy materials with SEC. Once the SEC has given clearance to these proxy materials, they will be sent to stockholders in connection with a special meeting called in connection with the merger. The Company has also filed under the Hart-Scott-Rodino
Act and was granted early termination of the waiting period on May 7, 2004.



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 in connection with the proposed merger. The Company believes
these suits are without merit and intends to vigorously defend itself. However, there can be no assurance that it will ultimately prevail. In addition, the Companys bylaws provide for indemnification by the Company of its directors in
connection with these lawsuits.



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  REVENUE



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 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.



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



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 recognized. 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.



For the three months ended March 31, 2004 and 2003, the affiliated practices derived approximately 42% and 41% respectively, of their net patient revenue from services provided under the Medicare program and
approximately 3% and 2% respectively, of their net patient revenue from services provided under the state Medicaid programs. Capitation revenues were less than 1% of total net patient revenue in 2004 and 2003. Changes in the payor reimbursement
rates, particularly Medicare and Medicaid due to its concentration, or affiliated practices payor mix can materially and adversely affect the Companys revenues.



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



NOTE 4 - STOCK-BASED COMPENSATION



At March 31, 2004, the Company had eight 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 months ended March 31, 2004 and 2003.



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##### Table of Contents

US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



The Company also provides a benefit plan to non-employee affiliates, which is accounted for using fair value based
accounting with compensation expense being recognized over the respective vesting period. The Company recognized $0.2 million and $0.4 million for the three months ended March 31, 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 EndedMarch 31, |       
|                                                                                                                                           |  | 2004                        |        | 2003 |  
|Net income, as reported                                                                                                                    |  | $                           | 20,120 |      | $ | 16,250 |  
|Less: total stock-based employee compensation expense determined under fair value based method for all awards, net of related income
taxes |  |                             | 0      |      |   | (1,458 | )
|                                                                                                                                           |  |                             |        |      |   |        |  
|Pro forma net income                                                                                                                       |  | $                           | 20,120 |      | $ | 14,792 |  
|                                                                                                                                           |  |                             |        |      |   |        |  
|Earnings per share:                                                                                                                        |  |                             |        |      |   |        |  
|Basic, as reported                                                                                                                         |  | $                           | 0.23   |      | $ | 0.17   |  
|                                                                                                                                           |  |                             |        |      |   |        |  
|Basic, pro forma                                                                                                                           |  | $                           | 0.23   |      | $ | 0.16   |  
|                                                                                                                                           |  |                             |        |      |   |        |  
|Diluted, as reported                                                                                                                       |  | $                           | 0.23   |      | $ | 0.17   |  
|                                                                                                                                           |  |                             |        |      |   |        |  
|Diluted, pro forma                                                                                                                         |  | $                           | 0.23   |      | $ | 0.16   |  
|                                                                                                                                           |  |                             |        |      |   |        |  



NOTE 5 
INDEBTEDNESS



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



|                                          |  |                |         |   |                   |   |         |  
|----------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                          |  | March 31, 2004 |         |   | December 31, 2003 |  
|Credit facility                           |  | $              |        |   |                   | $ |        |  
|9.625% Senior Subordinated Notes due 2012 |  |                | 175,000 |   |                   |   | 175,000 |  
|Lease facility                            |  |                | 67,328  |   |                   |   | 70,206  |  
|Subordinated notes                        |  |                | 17,774  |   |                   |   | 22,660  |  
|Capital lease obligations and other       |  |                | 242     |   |                   |   | 294     |  
|                                          |  |                |         |   |                   |   |         |  
|                                          |  |                | 260,344 |   |                   |   | 268,160 |  
|Less: current maturities                  |  |                | (74,849 | ) |                   |   | (79,748 | )
|                                          |  |                |         |   |                   |   |         |  
|                                          |  | $              | 185,495 |   |                   | $ | 188,412 |  
|                                          |  |                |         |   |                   |   |         |  



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.



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



Borrowings under the Credit Facility are secured by substantially all of the Companys assets. At the
Companys option, funds may be borrowed at the base interest rate or the London Interbank Offered Rate (LIBOR), plus an amount determined under a defined formula. The base rate is selected by First Union National Bank (First Union) and is
defined as its prime rate or Federal Funds Rate plus 1/2%. No amounts have been borrowed or outstanding under the Credit Facility since its inception and through March 31, 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 March 31, 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 secured by the property to which it relates and matures in June 2004.



As of March 31, 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 $2.9 million, based on the prevailing interest rate of 4.0% as of March 31, 2004. At March 31, 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 fifteen 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. In January 2004, the Company sold one property under the lease in connection with practice disaffiliations.



The lease matures in June 2004. The Company anticipates refinancing substantially all of its indebtedness in connection with the merger transaction described in Note 2.
The Company intends to extend the maturity of the lease to allow such a refinancing in the event the merger transaction does not close prior to its maturity. In the event the merger is not consummated or if the Company does not extend the term, 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 March 31, 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.



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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
an additional $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 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 repurchase activity during the first quarter of 2004 (in thousands except of average price paid per share):



|                                     |  |                             |       |                                                   |     |                                                           |  
|------------------------------------ |  | --------------------------- | ----- | ------------------------------------------------- | --- | --------------------------------------------------------- | -
|                                     |  | Average Price Paidper share |       | Shares Purchasedas Part of PubliclyAnnounced Plan |     | Dollar ValueShares that mayyet be PurchasedUnder the Plan
|January 1, 2004  January 31, 2004   |  | $                           | 10.78 |                                                   | 0.4 |                                                           | 
|February 1, 2004  February 29, 2004 |  | $                           |      |                                                   |    |                                                           | 
|March 1, 2004  March 31, 2004       |  | $                           |      |                                                   |    |                                                           | 
|                                     |  |                             |       |                                                   |     |                                                           |  
|Total                                |  | $                           | 10.78 |                                                   | 0.4 |                                                           | 
|                                     |  |                             |       |                                                   |     |                                                           |  



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 during 2003                                                                     |  | 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 |  | (3,243 | )
|                                                                                                         |  |        |  
|Treasury Stock shares as of March 31, 2004                                                               |  | 9,089  |  
|                                                                                                         |  |        |  



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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)



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.



The following table summarizes the determination of shares used in per share calculations for the three months ended March 31, 2004 and 2003 (in thousands):



|                                                                                                                       |  |                             |   |  |        |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | - |  | ------ | -
|                                                                                                                       |  | Three Months EndedMarch 31, |  
|                                                                                                                       |  | 2004                        |   |  | 2003   |  
|Outstanding at end of period:                                                                                          |  |                             |   |  |        |  
|Common Stock                                                                                                           |  | 95,301                      |   |  | 95,301 |  
|Common Stock to be issued                                                                                              |  | 916                         |   |  | 3,209  |  
|                                                                                                                       |  |                             |   |  |        |  
|                                                                                                                       |  | 96,217                      |   |  | 98,510 |  
|Treasury Stock                                                                                                         |  | (9,089                      | ) |  | (5,056 | )
|Effect of weighting                                                                                                    |  | (1,140                      | ) |  | (482   | )
|                                                                                                                       |  |                             |   |  |        |  
|Shares used in per share calculations-basic                                                                            |  | 85,988                      |   |  | 92,972 |  
|Effect of weighting and assumed for grants of stock options at less than average market price                          |  | 3,288                       |   |  | 1,660  |  
|                                                                                                                       |  |                             |   |  |        |  
|Shares used in per share calculations-diluted                                                                          |  | 89,276                      |   |  | 94,632 |  
|                                                                                                                       |  |                             |   |  |        |  
|Anti-dilutive stock options (options where exercise price is greater than the average market price) not included above |  | 986                         |   |  | 5,837  |  
|                                                                                                                       |  |                             |   |  |        |  



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. 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 model. 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.



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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 quarter ended March 31, 2004 and 2003 (in
thousands):



Quarter Ended March 31, 2004:



|                              |  |                          |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|----------------------------- |  | ------------------------ | -------- | - | -------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | -------- | -
|                              |  | MedicalOncology Services |          |   | CancerCenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product Revenues              |  | $                        | 332,475  |   |                      | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 332,475  |  
|Service Revenues              |  |                          | 118,453  |   |                      |   | 61,064  |       |  |   | 13,004                       |   |  |       |        |   |  |   | 192,521  |  
|                              |  |                          |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Revenue                       |  |                          | 450,928  |   |                      |   | 61,064  |       |  |   | 13,004                       |   |  |       |        |   |  |   | 524,996  |  
|Depreciation and amortization |  |                          | (10      | ) |                      |   | (7,865  | )     |  |   | (241                         | ) |  |       | (10,838 | ) |  |   | (18,954  | )
|Other operating expenses      |  |                          | (403,719 | ) |                      |   | (39,885 | )     |  |   | (12,656                      | ) |  |       | (12,684 | ) |  |   | (468,944 | )
|                              |  |                          |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Income (loss) from operations |  | $                        | 47,199   |   |                      | $ | 13,314  |       |  | $ | 107                          |   |  | $     | (23,522 | ) |  | $ | 37,098   |  
|                              |  |                          |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  



Quarter Ended March 31, 2003:



|                              |  |                          |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|----------------------------- |  | ------------------------ | -------- | - | -------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | -------- | -
|                              |  | MedicalOncology Services |          |   | CancerCenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product Revenues              |  | $                        | 263,531  |   |                      | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 263,531  |  
|Service Revenues              |  |                          | 116,293  |   |                      |   | 54,305  |       |  |   | 13,081                       |   |  |       |        |   |  |   | 183,679  |  
|                              |  |                          |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Revenue                       |  |                          | 379,824  |   |                      |   | 54,305  |       |  |   | 13,081                       |   |  |       |        |   |  |   | 447,210  |  
|Depreciation and amortization |  |                          | (20      | ) |                      |   | (5,836  | )     |  |   | (209                         | ) |  |       | (12,748 | ) |  |   | (18,813  | )
|Other operating expenses      |  |                          | (332,708 | ) |                      |   | (36,946 | )     |  |   | (11,824                      | ) |  |       | (15,577 | ) |  |   | (397,055 | )
|                              |  |                          |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Income (loss) from operations |  | $                        | 47,096   |   |                      | $ | 11,523  |       |  | $ | 1,048                        |   |  | $     | (28,325 | ) |  | $ | 31,342   |  
|                              |  |                          |          |   |                      |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  



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. The Company believes
these suits are without merit and intends to vigorously defend itself. However, there can be no assurance that it will ultimately prevail. In addition, the Companys bylaws provide for indemnification by the Company of its directors in
connection with these lawsuits.



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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 for the three months ended March 31, 2004.



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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.



General



We provide comprehensive services to our network of affiliated practices, made up of more than 875 affiliated physicians in over 470 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 $1.2 billion of pharmaceuticals through a network of 45 licensed pharmacies, 145 pharmacists and 278 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 are derived from sales of pharmaceuticals in the medical oncology 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 80 integrated community-based cancer centers and manage over one million square feet of medical office space. We also have installed and manage 24
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 222 clinical trials, supported by our network of approximately 620 participating physicians in more than 170 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 (90.2% during the first quarter 2004) was 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,



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US Oncology, Inc

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

OPERATIONS 
continued



Carson for the purpose of completing the merger and related financing transactions. Currently, Welsh Carson 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 our shares held by
stockholders other than Welsh Carson, its co-investors and members of our board or management that participate in the merger, in addition to majority stockholder approval statutorily required for a merger. 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 our outstanding 9 5/8% Senior Subordinated Notes and other customary
conditions.



We have filed preliminary proxy materials with SEC. Once the SEC
has given clearance to these proxy materials, they will be sent to stockholders in connection with a special meeting called in connection with the merger. We have also filed under the Hart-Scott-Rodino Act and were granted early termination of the
waiting period on May 7, 2004. Depending on clearance of regulatory authorities and the satisfaction of other conditions precedent to the merger, we anticipate holding a meeting of stockholders to vote on the merger in August 2004.



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 physicians
services 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.



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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 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 physicians 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.



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 first quarter of 2004, 73.9% of our revenue was derived from affiliated practices managed under agreements on the earnings model. PPM agreements accounting for 16.3% of our revenue are under the net revenue model described
below. In some states, our agreements provide for a fixed management fee.



Of
our first 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 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,



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US Oncology, Inc

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

OPERATIONS 
continued



56.3% was derived from net revenue model practices, while only 16.3% of our first quarter 2004 revenue was derived
from practices under the net revenue model as of March 31, 2004. We no longer enter into new affiliations under the net revenue model.



Conversions and disaffiliations have helped to stabilize our operating platform.



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 March 31, 2004, only one net revenue model service agreement, with a carrying
value of $22.2 million, was reflected on our balance sheet.



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.



Our business and results of operations are subject to risks and uncertainties, many of which are beyond our ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed
or implied by 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 the
companys 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.



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US Oncology, Inc

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

OPERATIONS 
continued



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.



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 for the year ended December 31, 2003,
as amended, 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 for the three months ended March 31, 2004.



From time to time, the FASB, the SEC and other regulatory bodies seek to 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.



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US Oncology, Inc

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

OPERATIONS 
continued



Discussion of Non-GAAP Information



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



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



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



Results of Operations



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



|                                  |  |           |  |     
|--------------------------------- |  | --------- |  | ----
|                                  |  | March 31,
|                                  |  | 2004      |  | 2003
|Medical oncologists/hematologists |  | 738       |  | 693 
|Radiation oncologists             |  | 122       |  | 115 
|Other oncologists                 |  | 37        |  | 39  
|                                  |  |           |  |     
|Total oncologists/hematologists   |  | 897       |  | 847 
|Diagnostic radiologists           |  |          |  | 38  
|                                  |  |           |  |     
|Total physicians                  |  | 897       |  | 885 
|                                  |  |           |  |     



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

OPERATIONS 
continued



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



|                                           |  |                             |   |  |      |  
|------------------------------------------ |  | --------------------------- | - |  | ---- | -
|                                           |  | Three Months EndedMarch 31, |  
|                                           |  | 2004                        |   |  | 2003 |  
|Affiliated physicians, beginning of period |  | 897                         |   |  | 884  |  
|Physician practice affiliations            |  | 3                           |   |  | 13   |  
|Recruited physicians                       |  | 13                          |   |  | 9    |  
|Physician practice separations             |  | (13                         | ) |  | (10  | )
|Retiring/Other                             |  | (3                          | ) |  | (11  | )
|                                           |  |                             |   |  |      |  
|Affiliated physicians, end of period       |  | 897                         |   |  | 885  |  
|                                           |  |                             |   |  |      |  



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



|                                    |  |                             |   |  |      |  
|----------------------------------- |  | --------------------------- | - |  | ---- | -
|                                    |  | Three Months EndedMarch 31, |  
|                                    |  | 2004                        |   |  | 2003 |  
|Cancer Centers, beginning of period |  | 78                          |   |  | 79   |  
|Cancer Centers opened               |  | 3                           |   |  | 0    |  
|Cancer Centers closed               |  | (1                          | ) |  | 0    |  
|Cancer Centers disaffiliated        |  |                            |   |  | (3   | )
|                                    |  |                             |   |  |      |  
|Cancer Centers, end of period       |  | 80                          |   |  | 76   |  
|                                    |  |                             |   |  |      |  
|PET Systems                         |  | 24                          |   |  | 17   |  
|                                    |  |                             |   |  |      |  



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



|                                          |  |                             |  |        
|----------------------------------------- |  | --------------------------- |  | -------
|                                          |  | Three Months EndedMarch 31,
|                                          |  | 2004                        |  | 2003   
|Medical oncology visits(1)                |  | 578,708                     |  | 585,686
|Radiation treatments                      |  | 164,557                     |  | 165,542
|PET scans                                 |  | 6,581                       |  | 4,154  
|CT scans                                  |  | 23,082                      |  | 16,090 
|New patients enrolled in research studies |  | 743                         |  | 874    



|(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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US Oncology, Inc

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

OPERATIONS



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 EndedMarch 31, |   
|                                    |  | 2004                        |    |  | 2003  |   
|Product revenues                    |  | 63.3                        | %  |  | 58.9  |   
|Service revenues                    |  | 36.7                        | %  |  | 41.1  | % 
|                                    |  |                             |    |  |       |   
|Total revenues                      |  | 100.0                       | %  |  | 100.0 | % 
|Cost of product                     |  | 58.4                        | %  |  | 54.4  | % 
|Costs of services:                  |  |                             |    |  |       |   
|Field compensation and benefits     |  | 17.7                        | %  |  | 19.5  | % 
|Other field costs                   |  | 10.8                        | %  |  | 11.4  | % 
|Depreciation and amortization       |  | 2.6                         | %  |  | 2.9   | % 
|                                    |  |                             |    |  |       |   
|Total costs of services             |  | 31.1                        | %  |  | 33.8  | % 
|                                    |  |                            
|Total cost of products and services |  | 89.5                        | %  |  | 88.2  | % 
|General and administrative expense  |  | 2.4                         | %  |  | 3.5   | % 
|Depreciation and amortization       |  | 1.0                         | %  |  | 1.3   | % 
|                                    |  |                             |    |  |       |   
|Income from operations              |  | 7.1                         | %  |  | 7.0   | % 
|Other income (expense):             |  |                             |    |  |       |   
|Interest expense, net               |  | (0.9                        | )% |  | (1.2  | )%
|                                    |  |                             |    |  |       |   
|Income before income taxes          |  | 6.2                         | %  |  | 5.8   | % 
|Income tax provision                |  | (2.4                        | )% |  | (2.2  | )%
|                                    |  |                             |    |  |       |   
|Net income and comprehensive income |  | 3.8                         | %  |  | 3.6   | % 
|                                    |  |                             |    |  |       |   



Revenue.Our
revenue is primarily derived in four areas.



| |  | PPM service fee revenues. Under the PPM model we recognize revenues derived from amounts we bill and collect for affiliated practices which are reduced by the amounts
retained by those practices under our contracts. We record revenue attributable to amounts we bill and collect under the PPM model when services are rendered based on established or negotiated rates reduced by contractual adjustments and allowances
for doubtful accounts and by the amounts to be retained by the affiliated 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 our service line agreements, we bill practices on a monthly basis for services rendered. These revenues include
payment for all of the pharmaceutical agents used by the practice for which we must pay the pharmaceutical manufacturers, and a service fee for the pharmacy related services we provide.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | GPO and data fees. We receive fees from pharmaceutical companies for acting as a group purchasing organization (GPO) for our 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 we collect and compile.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Research fees. We receive 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 our revenue under our comprehensive PPM arrangements and our revenue under service line arrangements with physician practices are derived
from sales of pharmaceutical products, and reported as product revenues. Our remaining revenues are reported as service revenues.



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 $447.2 million for the first quarter of 2003 to $525.0 million for the first quarter of 2004, an increase of $77.8 million, or 17.4%. Revenue
growth was caused primarily by increases in product revenues. Product revenues increased from $263.5 million in the first quarter of 2003 to $332.5 million in the first quarter of 2004, an increase of $68.9 million, or 26.2%. Service revenues
increased from $183.7 million in the first quarter of 2003 to $192.5 million in the first quarter of 2004, an increase of $8.8 million, or 4.8%.



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US Oncology, Inc

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

OPERATIONS



The following table shows our revenue by segment for the three months ended March 31, 2004 and 2003 (in thousands):



|                          |  |                             |         |      |   |        
|------------------------- |  | --------------------------- | ------- | ---- | - | -------
|                          |  | Three Months EndedMarch 31,
|                          |  | 2004                        |         | 2003
|Medical oncology services |  | $                           | 450,928 |      | $ | 379,824
|Cancer center services    |  |                             | 61,064  |      |   | 54,305 
|Other services            |  |                             | 13,004  |      |   | 13,081 
|                          |  |                             |         |      |   |        
|                          |  | $                           | 524,996 |      | $ | 447,210
|                          |  |                             |         |      |   |        



Medical oncology
revenue, which includes all of our product revenue, increased from $379.8 million in the first quarter of 2003 to $450.9 million for the first quarter of 2004, an increase of $71.1 million or 18.7%. $27.1 million of such increase is attributed to
growth in the service line model, including $7.8 million attributable to new markets, $8.2 million attributable to a conversion from the PPM model during the second quarter of 2003 and $11.1 million attributable to growth in the service line
business existing during the first quarter of 2003. The remainder of the growth in medical oncology revenue is attributable to increased fees for drug administration and use of more expensive chemotherapy agents and additional supportive care drugs.
Growth of medical oncology revenue during the first quarter of 2004 was partially offset by a 1.2% decline in medical oncology visits compared to the same period during 2003 as a result of PPM practice disaffiliations and conversions to the service
line model. Service line model visits are not included in our patient volume statistics.



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

OPERATIONS 
continued



Cancer center services revenue increased from $54.3 million in the first quarter of 2003 to $61.1 million for the
first quarter of 2004, an increase of $6.8 million, or 12.4%. This increase is attributable to the addition of IMRT, an increase in radiology revenue from CT and PET scans and additional cancer centers. PET scans increased from 4,154 in the first
quarter of 2003 to 6,581 in the first quarter of 2004, an increase of 58.4%. This growth was attributable to an increase in same-facility PET scans per day of 20.6% and the addition of 8 PET systems during 2003 and the first quarter of 2004.
Radiation treatments decreased slightly from 165,542 in the first quarter of 2003 to 164,557 in the first quarter of 2004, or 0.6%. Same practice radiation treatments increased from 156,827 in the first quarter of 2003 to 158,102 in the first
quarter of 2004, or 0.8%. In addition, since the first quarter of 2003 we have added a net total of 4 cancer centers (taking into account closures and disaffiliations). We currently have 11 cancer centers and 4 PET systems in various stages of
development.



Other services revenue decreased from $13.1 million in the first
quarter of 2003 to $13.0 million for the first quarter of 2004, a decrease of $0.1 million, or 0.6%. The decrease is attributable to a decrease in research revenue. Patients enrolled in research trials decreased from 874 in the first quarter of 2003
to 743 in the first quarter of 2004.



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US Oncology, Inc

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

OPERATIONS 
continued



Medicare and Medicaid are the practices largest payors. For the three months ended March 31, 2004 and 2003, the
affiliated practices derived approximately 42% and 41% respectively, of their net patient revenue from services provided under the Medicare program and approximately 3% and 2% respectively, of their net patient revenue from services provided under
the state Medicaid programs. Capitation revenues were less than 1% of total net patient revenue in 2004 and 2003. Changes in the payor reimbursement rates, particularly Medicare and Medicaid due to its concentration, or affiliated practices
payor mix can materially and adversely affect our revenues.



Cost of
Products. Cost of Products, which includes drugs, medications and other supplies used by the practices, increased from $243.3 million in the first quarter of 2003 to $306.8 million in the same period of 2004, an increase of $63.5 million, or
26.1%. As a percentage of revenue, pharmaceuticals and supplies increased from 54.4% in the first quarter of 2003 to 58.4% in the same period in 2004, primarily because of an increase in our service line business and an increase in pharmaceutical
revenue as a percentage of total revenue.



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 $87.0 million in the first quarter of 2003 to $92.7 million in
the first quarter of 2004, an increase of $5.7 million, or 6.5%. As a percentage of revenue, field compensation and benefits decreased from 19.5% in the first quarter of 2003 to 17.7% in the first quarter of 2004. The decrease as a percentage of
revenue is primarily attributable to economies of scale resulting from the increase in pharmaceutical, diagnostic and radiation revenue.



Other Field Costs. Other field costs, which consist of rent, utilities, repairs and maintenance, insurance and other direct field costs, increased from $51.1
million in the first quarter of 2003 to $56.8 million in the first quarter of 2004, an increase of $5.7 million, or 11.1%. As a percentage of revenue, other field costs decreased from 11.4% in the first quarter of 2003 to 10.8% in the first quarter
of 2004 as a result of growth in pharmaceutical, diagnostic and radiation revenue.



General and Administrative. General and administrative expenses decreased from $15.6 million in the first quarter of 2003 to $12.7 million in the first quarter of 2004, a decrease of $2.9 million, or 18.6% due to a reductions in
personnel and other costs during 2003, as well as expenses for strategic planning and lobbying costs incurred during the first quarter of 2003. As a percentage of revenue, general and administrative costs decreased from 3.5% in the first quarter
2003 to 2.4% in the first quarter 2004.



Overall, we experienced a decline in
operating margins with earnings before taxes, interest, depreciation and amortization, EBITDA, as a percentage of revenue, decreasing from 11.2% in the first quarter of 2003 to 10.7% in the first quarter of 2004.



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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 ended March 31, 2004 and 2003
(in thousands):



Three Months Ended March 31, 2004:



|                              |  |                           |          |   |                       |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|----------------------------- |  | ------------------------- | -------- | - | --------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | -------- | -
|                              |  | Medical Oncology Services |          |   | Cancer CenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product Revenues              |  | $                         | 332,475  |   |                       | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 332,475  |  
|Service Revenues              |  |                           | 118,453  |   |                       |   | 61,064  |       |  |   | 13,004                       |   |  |       |        |   |  |   | 192,521  |  
|                              |  |                           |          |   |                       |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Revenue                       |  |                           | 450,928  |   |                       |   | 61,064  |       |  |   | 13,004                       |   |  |       |        |   |  |   | 524,996  |  
|Operating expenses            |  |                           | (403,729 | ) |                       |   | (47,750 | )     |  |   | (12,897                      | ) |  |       | (23,522 | ) |  |   | (487,898 | )
|                              |  |                           |          |   |                       |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Income (loss) from operations |  |                           | 47,199   |   |                       |   | 13,314  |       |  |   | 107                          |   |  |       | (23,522 | ) |  |   | 37,098   |  
|Depreciation and amortization |  |                           | 10       |   |                       |   | 7,865   |       |  |   | 241                          |   |  |       | 10,838  |   |  |   | 18,954   |  
|                              |  |                           |          |   |                       |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|EBITDA                        |  | $                         | 47,209   |   |                       | $ | 21,179  |       |  | $ | 348                          |   |  | $     | (12,684 | ) |  | $ | 56,052   |  
|                              |  |                           |          |   |                       |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  



Three Months Ended March 31, 2003:



|                              |  |                           |          |   |                       |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|----------------------------- |  | ------------------------- | -------- | - | --------------------- | - | ------- | ----- |  | - | ---------------------------- | - |  | ----- | ------- | - |  | - | -------- | -
|                              |  | Medical Oncology Services |          |   | Cancer CenterServices |   |         | Other |  |   | UnallocatedCorporateExpenses |   |  | Total |        
|Product Revenues              |  | $                         | 263,531  |   |                       | $ |        |       |  | $ |                             |   |  | $     |        |   |  | $ | 263,531  |  
|Service Revenues              |  |                           | 116,293  |   |                       |   | 54,305  |       |  |   | 13,081                       |   |  |       |        |   |  |   | 183,679  |  
|                              |  |                           |          |   |                       |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Revenue                       |  |                           | 379,824  |   |                       |   | 54,305  |       |  |   | 13,081                       |   |  |       |        |   |  |   | 447,210  |  
|Operating expenses            |  |                           | (332,728 | ) |                       |   | (42,782 | )     |  |   | (12,033                      | ) |  |       | (28,325 | ) |  |   | (415,868 | )
|                              |  |                           |          |   |                       |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|Income (loss) from operations |  |                           | 47,096   |   |                       |   | 11,523  |       |  |   | 1,048                        |   |  |       | (28,325 | ) |  |   | 31,342   |  
|Depreciation and amortization |  |                           | 20       |   |                       |   | 5,836   |       |  |   | 209                          |   |  |       | 12,748  |   |  |   | 18,813   |  
|                              |  |                           |          |   |                       |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  
|EBITDA                        |  | $                         | 47,116   |   |                       | $ | 17,359  |       |  | $ | 1,257                        |   |  | $     | (15,577 | ) |  | $ | 50,155   |  
|                              |  |                           |          |   |                       |   |         |       |  |   |                              |   |  |       |         |   |  |   |          |  



Medical oncology services EBITDA
margin decreased from 12.4% in the first quarter of 2003 to 10.5% in the first quarter of 2004. This decrease is attributable to an increase in lower margin pharmaceuticals and increase in service line revenues. All product revenues are included in
the Medical Oncology Services segment.



Cancer center services EBITDA margin
increased from 32.0% in the first quarter of 2003 to 34.7% in the first quarter of 2004. This increase is attributable to exiting from unprofitable sites, 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 $5.1 million in the first quarter of 2003 to $4.4 million in the first quarter of 2004, a decrease of $0.8 million, or 14.6%, because of a reduction in outstanding indebtedness. As a percentage of revenue, net interest expense
decreased from 1.2% for the first quarter of 2003 to 0.9% for the first quarter of 2004.



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

OPERATIONS 
continued



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



Net Income. Net income increased from $16.3
million, or $0.17 per diluted share, in the first quarter of 2003 to $20.1 million, or $0.23 per share, in the first quarter 2004, an increase of $3.9 million or 23.8%. Net income as a percentage of revenue increased from 3.6% in the first quarter
of 2003 to 3.8% in the first quarter of 2004.



Liquidity and Capital
Resources



As of March 31, 2004, we had net working capital of $184.8
million, including cash and cash equivalents of $152.0 million. We had current liabilities of $389.6 million, including $74.8 million in current maturities of long-term debt, and $185.5 million of long-term indebtedness. During the first quarter of
2004, we provided $43.5 million in net operating cash flow, invested $21.5 million, and provided cash from financing activities in the amount of $5.5 million. As of April 26, 2004, we had cash and cash equivalents of approximately $183.0 million.



Cash Flows from Operating Activities



During the first quarter of 2004, we provided $43.5 million in cash flows from operating
activities as compared to using $1.1 million in the comparable prior year period. The increase in cash flow is primarily due to advance purchases of certain pharmaceutical products paid for during 2003, and timing of certain working capital
payments.



Cash Flows from Investing Activities



During the first quarter of 2004 and 2003, we expended $21.5 million and $16.9 million in
capital expenditures, including $19.4 million and $13.1 million on the development and construction of cancer centers, respectively. Maintenance capital expenditures were $2.1 million and $3.8 million in the first quarters of 2004 and 2003,
respectively. For all of 2004, we anticipate expending a total of approximately $30-$35 million on maintenance capital expenditures and approximately $55-$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 first quarter of 2004, we provided cash from
financing activities of $5.5 million as compared to cash used of $12.7 million in the first quarter of 2003.



On February 1, 2002, we entered into a five-year $100 million syndicated revolving credit facility and terminated our existing syndicated revolving credit facility. Proceeds under that credit facility may be used to
finance the development of cancer centers and new PET 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 March 31, 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 $2.9 million, based on interest rates in
effect as of March 31, 2004. The lease was scheduled to mature in June 2004. We anticipate refinancing substantially all of our indebtedness in connection with the merger transaction described above. We extended the maturity of the



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US Oncology, Inc

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

OPERATIONS 
continued



lease to allow such a refinancing in connection with the merger transaction.



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.



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 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 management 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 March 31, 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
first 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 first 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 March 31, 2004. The market values that result from these computations are compared with the market values of these
financial instruments at March 31, 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.



The CEO and CFO note that, there have been no change in internal controls over financial reporting identified in connection with the evaluation described above that
occurred during our last fiscal quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.



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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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

---

|* | Filed herewith
|- | --------------



(b) Reports on Form 8-K



The Company
filed an 8-K on March 1, 2004, disclosing under Item 12 a company press release regarding its results of operations for the fourth quarter and full year 2003.



The Company filed an 8-K on March 22, 2004, disclosing under Item 5 that the Company had entered into a merger agreement.



The Company filed an 8-K on March 24, 2004, disclosing under Item 5 the existence of several
lawsuits relating to the merger agreement described above.



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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 19, 2004: |  | By:               |  | /s/ R. Dale Ross                            
|                     |  |                   |  | R. Dale Ross, Chief Executive Officer       
|                     |  |                   |  | (duly authorized signatory)                 
|                     |  |                  
|Date: July 19, 2004: |  | By:               |  | /s/ Bruce D. Broussard                      
|                     |  |                   |  | Bruce D. Broussard, Chief Financial Officer 
|                     |  |                   |  | (principal financial and accounting officer)



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