AMERICAN ONCOLOGY RESOURCES INC /DE/ - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K
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(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (fee required)

For the fiscal year ended December 31, 1997

OR

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required)

Commission file number 0-26190

AMERICAN ONCOLOGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 84-1213501
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)

16825 Northchase Drive, Suite 1300, Houston, Texas 77060
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code: (281) 873-2674

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

None

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

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

Series A Preferred Stock Purchase Rights
(Title of class)

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

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 10, 1998 was $487,827,443.

There were 31,121,368 shares of the Registrant's Common Stock outstanding on
March 10, 1998. In addition, as of March 10, 1998, the Registrant had agreed to
deliver 17,219,632 shares of its Common Stock on certain future dates for no
additional consideration.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement issued in connection with the
Registrant's 1998 Annual Meeting of Stockholders are incorporated by reference
into Part III hereof.

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PART I

ITEM 1. BUSINESS

American Oncology Resources, Inc. (together with its subsidiaries, "AOR" or
the "Company") is a national physician practice management company focusing
exclusively on oncology. As of December 31, 1997, the Company provided
comprehensive management services under long-term agreements to oncology
practices comprised of 304 physicians in 16 states. Affiliated physicians
provide a broad range of medical services to cancer patients, integrating the
specialties of medical and gynecological oncology, hematology, radiation
oncology, stem cell transplantation and diagnostic radiology. The Company
believes that the coordinated delivery of comprehensive cancer care in an
outpatient setting offers high quality care that is more cost-effective than
traditional approaches and is increasingly preferred by patients, payors and
physicians. The Company's affiliation strategy is designed to enhance the
affiliated physician groups' competitiveness while preserving their autonomy
regarding medical practice decisions.

The Company was incorporated in October 1992 under the laws of the state of
Delaware. The Company's principal executive offices are located at 16825
Northchase Drive, Suite 1300, Houston, Texas, and its telephone number is (281)
873-2674.

Cancer and Its Treatment

Cancer is a group of more than 100 complex diseases characterized by the
uncontrolled growth and spread of abnormal cells. Cancer treatment is provided
primarily by physicians utilizing chemotherapy, radiation therapy, surgery and
immunotherapy. Due to cancer's complexity and the variety of cancer treatment
therapies, physicians who treat cancer typically have had extensive, highly-
specialized training. Chemotherapy and immunotherapy are typically provided
under the care of a medical oncologist or hematologist, typically an internist
with additional subspecialty training in oncology. Radiation therapy is
typically provided under the care of a radiation oncologist, a physician with
additional subspecialty training in radiation oncology. The Company estimates
that at least 6,000 community-based physicians in the United States specialize
in oncology.

Because the treatment of cancer requires a multidisciplinary approach,
numerous health care professionals with different medical and surgical
specialties are involved in treating cancer patients. In addition, cancer
patients typically receive treatment in a variety of settings, including
hospitals, outpatient facilities and physicians' offices. The Company believes
that this system can result in uncoordinated treatment and is inherently
inefficient. In the Company's view, oncology group practices that provide
comprehensive, coordinated oncology services in outpatient facilities offer
high-quality, low-cost and convenient medical care to cancer patients.

Traditionally, most oncologists in the United States have practiced
individually or in small groups of two to five physicians, offering their
services to cancer patients in hospitals and, to a lesser extent, in outpatient
facilities. In recent years, however, there has been a trend among oncologists
to form larger group practices that provide a broader range of services to
cancer patients in outpatient settings, rather than in hospitals or other
inpatient settings. The Company believes this trend is attributable to several
factors, including (i) initiatives by governmental and private payors to contain
health care expenditures, (ii) the competitiveness and rising costs of medical
practice generally, (iii) advances in cancer therapies that permit treatment in
outpatient settings and (iv) patients' desire to receive treatment outside the
hospital. The Company believes that many of these large oncology practices
recognize the need for outside managerial, financial and business expertise to
more efficiently manage the increasingly complex, burdensome and time-consuming
nonmedical aspects of their practice. Such management relationships free
oncologists to practice medicine without sacrificing autonomy and control over
the medical aspects of their practices. The Company believes that these
physicians will seek long-term relationships with a management entity that
endeavors to (i) promote and facilitate the consolidation of physicians and
resources into regional group practices providing comprehensive, outpatient
oncology services, (ii) assist in strategic and financial planning, (iii)
develop and expand managed care relationships, (iv) provide strategic
information systems

1

and administrative policies and procedures, (v) assist in managing the
practices' expenditures, (vi) provide a source of capital to support practice
expansion and (vii) assist in physician recruitment and other significant
strategic decisions.

Growth Strategy

The Company's objective is to be the leading national physician practice
management company providing comprehensive services to an integrated network of
affiliated oncology physician groups. The Company intends to achieve this
objective by (i) focusing exclusively on oncology, (ii) affiliating with leading
oncology groups throughout the United States, (iii) expanding each affiliated
physician groups presence in its market by affiliating with additional
physician groups in that market and recruiting new physicians, (iv) assisting
affiliated physician groups in offering coordinated, comprehensive cancer care
by adding new services (for example, gynecological oncology, diagnostic
radiology and stem cell transplantation), (v) negotiating and expanding managed
care relationships on behalf of the affiliated physician groups and improving
reimbursement from payors and (vi) expanding the clinical research operations of
the affiliated physician groups. Based on the Companys success in expanding its
business to date, the Company believes that it has effective strategies for
achieving its objective of becoming the leading national oncology practice
management company.

Management Services

The Company provides management services that extend to all business aspects
of an oncology group s operations. After establishing an oncology group
affiliation, the Company begins implementing the following policies, procedures
and systems necessary to provide the management services contemplated by its
management agreement with the group:

STRATEGIC SERVICES. At each affiliated practice, a policy board composed of
equal representation from the Company and affiliated physicians is created to
develop and adopt a strategic plan designed to improve the performance of the
practice by (i) outlining physician recruiting goals, (ii) identifying services
and equipment to be added, (iii) identifying desirable payor relationships and
other oncology groups that are possible affiliation candidates and (iv)
facilitating communication with other affiliated physician groups in the AOR
network.

FINANCIAL SERVICES. The Company provides comprehensive financial analysis to
each affiliated physician group in connection with managed care contracting and
billing, collection, reimbursement, tax and accounting services and also
implements its cash management system. In addition, the Company and the
affiliated physician group jointly develop a comprehensive budget that involves
the adoption of financial controls and cost containment measures.

MANAGEMENT INFORMATION SYSTEMS. The Company implements its management
information system to facilitate and organize the exchange of clinical and
operational information among the Company's affiliated physicians. The Company
believes that an integrated information system will enable the Company and its
affiliated physicians to identify effective protocols and manage the costs of
cancer care in future years. The Company intends to significantly expand its
clinical information system in 1998 and 1999, with the goal of better
understanding and analyzing the means of providing high-quality, cost effective
cancer care.

ADMINISTRATIVE SERVICES. The Company manages the facilities used by the
affiliated physicians and, in consultation with the physicians, determines the
number and location of practice sites. The Company is implementing its
integrated management information system to support practice management, billing
functions and patient record keeping. The Company also provides comprehensive
purchasing services for drugs, supplies, equipment, insurance and other costs.
In addition, the Company provides the regulatory expertise to assist the group
in complying with increasingly complex laws and regulations applicable to
oncology practices.

2

PERSONNEL MANAGEMENT. The Company employs and manages all nonmedical
personnel of the physician group, including the executive director, controller
and other administrative personnel. The Company evaluates these employees,
makes staffing recommendations, provides and manages employee benefits and
implements personnel policies and procedures. The Company also provides similar
administrative services to the physician group's employees.

CLINICAL RESEARCH SERVICES. Through its clinical research network, the
Company facilitates clinical research conducted by its affiliated physician
groups and markets the groups' ability to perform and manage clinical trials to
pharmaceutical and biotechnology companies. Clinical research conducted by the
oncology groups focuses on (i) improving cancer survival rates, (ii) enhancing
the cancer patient's quality of life, (iii) reducing the costs of cancer care
and (iv) developing new approaches to cancer diagnosis, treatment and post-
treatment monitoring. The Company believes that a well-managed clinical
research program enhances its affiliated oncologists' reputations and the
Company's ability to recruit new physicians.

CLINICAL INITIATIVES AND STANDARDS. The Company organizes clinical
conferences for its affiliated physicians to discuss and identify clinical care,
research and educational strategies for the Company's network of affiliated
physicians. The Company also assists its affiliated physicians in developing
clinical practice guidelines for the different types of cancer and in operating
in accordance with standards of care required for accreditation by the Joint
Committee on Accreditation of Health Care Organizations and other managed care
accreditation bodies. The Company is also implementing a clinical information
system with the goal of facilitating the exchange of information among
affiliated physicians, permitting them to share clinical data and treatment
patterns and allowing ready access to current patient care as well as studies
regarding cancer therapies and research developments.

Operations of Oncology Groups

Since the Company's incorporation in October 1992, the Company has grown
rapidly from managing a single practice comprised of six physicians in one state
to managing multiple oncology practices comprised of 304 physicians in 16 states
as of December 31, 1997.

DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------

Affiliated physicians..................... 304 227 148 42 9
States.................................... 16 15 14 6 1

The Company estimates that most of the affiliated physician groups are among
the largest group practices providing medical oncology services in their
markets. The physician members of these groups have staff privileges at most
private hospitals in their markets and have long-standing relationships with
governmental and private payors.

The oncologists are employed by the affiliated physician group, not the
Company, and maintain control over all aspects of the provision of medical care
to their patients. The Company does not provide medical care to patients or
employ any of the non-physician personnel of its affiliated physician groups who
provide medical care. However, under the terms of the management agreements
with the affiliated physician groups, the Company is responsible for the
compensation and benefits of the groups' non-physician medical personnel, and
the financial statements of the Company reflect the costs of such compensation
and benefits.

The affiliated physician groups offer a wide array of services to cancer
patients in outpatient settings, including professional medical services,
chemotherapy infusion, radiation oncology services, stem cell transplantation,
clinical laboratory, diagnostic radiology, pharmacy services and patient
education. The groups employ a range of personnel to provide these services,
including medical assistants, nurses (including oncology certified nurses),
radiation therapy technicians, physicists and laboratory and pharmacy
technicians. The practice sites are generally located in close proximity to
other health care providers and typically are equipped to provide the outpatient
services necessary to treat and care for cancer patients and their families.

3

Affiliation Structure

The Company's structure enables its affiliated physicians to retain their
autonomy through ownership and participation in their local professional
corporation or other entity, thereby maintaining local authority and control
over medical practice decisions. The Company believes that this local
governance structure is critical to its success.

Identifying appropriate physician groups and proposing, negotiating and
implementing economically attractive affiliations with them is a lengthy,
complex and costly process, typically requiring three to six months. In
connection with affiliating with an oncology group, the Company enters into a
management agreement with the group and purchases the group's nonmedical assets.
In consideration of these arrangements, the Company typically pays cash and
promissory notes and agrees to deliver shares of its Common Stock at specified
future dates (typically on the third through fifth anniversaries of the closing
date). In addition, each affiliated physician enters into an employment
agreement with the physician group containing non-competition terms. The
Company believes that the delivery of shares on a delayed basis, the Company's
affiliation structure and the compensation formulas defined in the management
agreements all serve to align the long-term interests of the affiliated
physicians with those of the Company.

All of the management agreements with the affiliated physician groups have
contractual terms of 40 years. These agreements cannot be terminated by the
physician groups without cause. As consideration for the Company's management
services, each management agreement provides for payment to the Company of a
management fee, which typically includes all practice costs (other than amounts
retained by physicians), a fixed fee, an amount equal to a percentage of the
affiliated physician group's net revenue (in most states) and, if certain
financial and performance criteria are satisfied, a performance fee. In the
event the physician group breaches the agreement, the physician group must
purchase the related assets owned by the Company, including the unamortized
portion of the management agreement asset, at book value.

Competition

The business of providing health care services generally, and of managing and
providing oncology services specifically, is intensely competitive. The Company
is aware of several competitors specializing in the management of oncology
practices; in addition, several health care companies with established operating
histories and significantly greater resources than the Company are also
providing at least some management services to oncologists. Furthermore, the
Company believes that others in the health care industry may adopt strategies
similar to those of the Company. The Company's revenues depend on the continued
success of its affiliated physician groups. These physician groups face
competition from several sources, including sole practitioners, single and
multi-specialty groups, hospitals and managed care organizations.

Regulation

General. The health care industry is highly regulated, and there can be no
assurance that the regulatory environment in which the Company and its
affiliated physician groups operate will not change significantly and adversely
in the future. In general, regulation of health care providers and companies is
increasing.

There are currently several federal and state initiatives designed to amend
regulations relating to the provision of health care services, the access to
health care, the costs of health care and the manner in which health care
providers are reimbursed for their services. It is not possible to predict
whether any such initiatives will be enacted as legislation or, if enacted, what
their form, effective dates or impact on the Company will be.

The Company's affiliated physician groups are intensely regulated at the
federal, state and local levels. Although these regulations often do not
directly apply to the Company, to the extent an affiliated physician group is

4

found to have violated any of these regulations and, as a result, suffers a
decrease in its revenues or an increase in costs, the Company's results of
operations might be materially and adversely affected.

Every state imposes licensing requirements on individual physicians and on
facilities and services operated or provided by physicians. Many states require
regulatory approval, including certificates of need, before establishing certain
types of health care facilities, offering certain services or making
expenditures in excess of statutory thresholds for health care equipment,
facilities or programs. The execution of a management agreement with a
physician group currently does not require any health care regulatory approval
on the part of the Company or the physician group. However, in connection with
the expansion of existing operations and the entry into new markets, the Company
and its affiliated physician groups may become subject to additional regulation.

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

Medicare Fraud and Abuse Provisions. Federal law prohibits the offer,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare or state health program patients or patient care
opportunities, or in return for the purchase, lease or order of any item or
service that is covered by Medicare or a state health program. Pursuant to this
law, the federal government has pursued a policy of increased scrutiny of joint
ventures and other transactions among health care providers in an effort to
reduce potential fraud and abuse relating to Medicare costs. The applicability
of these provisions to many business practices in the health care industry,
including the Company's arrangements with its affiliated physician groups, has
not been subject to judicial and regulatory interpretation.

The Medicare and Medicaid anti-kickback amendments (the "Anti-Kickback
Amendments") provide criminal penalties for individuals or entities
participating in the Medicare or Medicaid programs who knowingly and willfully
offer, pay, solicit or receive remuneration in order to induce referrals for
items or services reimbursed under such programs. In addition to federal
criminal penalties, the Social Security Act also establishes the intermediate
sanction of excluding violators from participation in the Medicare or Medicaid
programs.

A violation of the Anti-Kickback Amendments requires several elements: (i) the
offer, payment, solicitation or receipt of remuneration; (ii) the intent to
induce referrals; (iii) the ability of the parties to make or influence
referrals of patients; (iv) the provision of services that are reimbursable
under Medicare or state health programs; and (v) patient coverage under the
Medicare program or a state health program. Management believes that the
Company is receiving compensation under the management agreements for management
services. The Company also believes that it is not in a position to make or
influence referrals of patients or services reimbursed under Medicare or state
health programs to its affiliated physician groups. Consequently, the Company
does not believe that the management fees payable to it should be viewed as
remuneration for referring or influencing referrals of patients or services
covered by such programs as prohibited by the Anti-Kickback Amendments. The
Company is not a provider or supplier of services or items reimbursed by
Medicare or state health programs.

In 1991, the Inspector General of the United States Department of Health and
Human Services published "Safe Harbor Regulations," defining safe harbors for
certain arrangements that do not violate the Anti-Kickback Amendments. One of
the safe harbors specifically provided is a safe harbor for personal services
and management contracts. Under this safe harbor, "remuneration" prohibited by
the Anti-Kickback Amendments will not include any payment made by a principal to
an agent as compensation for services of the agent as long as certain standards
are

5

met. To the Company's knowledge, there have been no agency interpretations or
case law decisions of management agreements similar to the Company's that would
indicate that such agreements do not fall within a safe harbor. Further, the
Company believes that since it is not a provider of medical services, and is not
in a position to refer patients to any particular medical practice, the
remuneration it receives for providing services does not violate the Anti-
Kickback Amendments.

Prohibitions on Certain Referrals. The Omnibus Budget Reconciliation Act of
1993 ("OBRA") includes a provision that significantly expands the scope of the
Ethics in Patient Referral Act, also known as the "Stark Bill." The Stark Bill
originally prohibited a physician from referring a Medicare or Medicaid patient
to any entity for the provision of clinical laboratory services if the physician
or a family member of the physician had an ownership interest or compensation
relationship with the entity. The revisions to the Stark Bill included in OBRA
prohibit a referral to an entity in which the physician or a family member has
an ownership interest or compensation relationship if the referral is for any of
a list of "designated health services." In January 1998, the Health Care
Financing Administration issued proposed regulations to the Stark Bill. The
proposed regulations, if enacted, would limit reimbursement for pharmaceutical
expenses, would classify chemotherapy as a "designated health service" and would
restrict the manner in which health care services are provided. It is not yet
possible to predict whether these proposed regulations will be adopted or, if
adopted, what their final form, effective dates and impact on the Company will
be.

Prohibitions on Certain Compensation Arrangements. The OBRA legislation also
prohibits physician group practices from developing compensation or bonus
arrangements that are directly related to the volume or value of referrals by a
physician in the group for designated health services. The Company believes
that the compensation arrangements of the affiliated physician groups
administered by the Company are in compliance with the OBRA requirements.

Reimbursement Requirements. In order to participate in the Medicare and
Medicaid programs, the Company's affiliated physicians must comply with
stringent reimbursement regulations, including those that require many health
care services to be conducted "incident to" a physician's supervision.
Satisfaction of these reimbursement requirements is an integral component the
Company's compliance program. The Company believes that its affiliated
physicians are in compliance with the reimbursement requirements; however,
affiliated physicians' failure to comply with these requirements could
negatively affect the Company's results of operations.

Antitrust. The Company and its affiliated physician groups are subject to a
range of antitrust laws that prohibit anti-competitive conduct, including price
fixing, concerted refusals to deal and division of market. The Company believes
it is in compliance with such federal and state laws, but there can be no
assurance that a review of the Company's business would not result in a
determination that could adversely affect the operations of the Company and its
affiliated physician groups.

Regulatory Compliance. The Company recognizes that health care regulations
will continue to change and, as a result, regularly monitors developments in
health care law. The Company expects to modify its agreements and operations
from time to time as the business and regulatory environment changes. While the
Company believes it will be able to structure all of its agreements and
operations in accordance with applicable law, there can be no assurance that its
arrangements will not be successfully challenged.

Employees

As of December 31, 1997, the Company employed 1,162 people. In addition, as
of December 31, 1997, the affiliated physician groups employed 1,601 people
(excluding the affiliated physicians). Under the terms of the management
agreements with the affiliated physician groups, the Company is responsible for
the practice compensation and benefits of the groups' non-physician medical
personnel. No employee of the Company or of any affiliated physician group is a
member of a labor union or subject to a collective bargaining agreement. The
Company considers its relations with its employees to be good.

6

Service Marks

The Company has registered the service marks "American Oncology Resources" and
"AOR" with the United States Patent and Trademark Office.

ITEM 2. PROPERTIES

The Company leases 45,750 square feet of space at 16825 Northchase Drive,
Suite 1300, in Houston, Texas, where the Company's headquarters are located.
The Company or its affiliated physician groups also own, lease, sublease or
occupy the facilities where the affiliated physician groups provide medical
services. In connection with the development of integrated cancer centers, the
Company has acquired land valued at approximately $2.2 million. The Company
anticipates that, as its affiliated group practices grow, expanded facilities
will be required.

ITEM 3. LEGAL PROCEEDINGS

The provision of medical services by the affiliated physicians with which
the Company contracts entails an inherent risk of professional liability
claims. The Company does not control the practice of medicine by physicians or
the compliance with certain regulatory and other requirements directly
applicable to physicians and physician groups. Because the practices purchase
and resell pharmaceutical products, they face the risk of product liability
claims. Although the Company has not been a party to any claims, suits or
complaints relating to services and products provided by the Company, or
physicians affiliated with the Company, there can be no assurances that such
claims will not be asserted against the Company in the future. The Company
maintains insurance coverage that it believes to be adequate both as to risks
and amounts. In addition, pursuant to the management services agreements with
the affiliated physician groups, the affiliated practices and the Company are
required to maintain comprehensive professional liability insurance. Successful
malpractice claims asserted against the Company or one of the affiliate
physician groups could, however, have a material adverse effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 1997.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded on the Nasdaq Stock Market's National
Market under the symbol AORI. The high and low closing sale prices of the
Common Stock, as reported by Nasdaq, were as follows for the quarterly periods
indicated. All stock prices have been adjusted to reflect a 2-for-1 split of
the Company's Common Stock that was effected as a stock dividend on June 10,
1996.

Year Ended December 31, 1996
High Low
------ ------
Fiscal Quarter Ended March 31, 1996 $24.81 $18.19
Fiscal Quarter Ended June 30, 1996 $26.00 $20.06
Fiscal Quarter Ended September 30, 1996 $22.25 $ 6.25
Fiscal Quarter Ended December 31, 1996 $11.25 $ 7.31

Year Ended December 31, 1997

Fiscal Quarter Ended March 31, 1997 $11.00 $ 8.75
Fiscal Quarter Ended June 30, 1997 $16.88 $ 7.44
Fiscal Quarter Ended September 30, 1997 $17.38 $13.31
Fiscal Quarter Ended December 31, 1997 $19.00 $12.75

As of March 10, 1998, there were approximately 5,810 holders of the Common
Stock. The Company has not declared or paid any cash dividends on its Common
Stock. The payment of cash dividends in the future will depend on the Company's
earnings, financial condition, capital needs and other factors deemed pertinent
by the Company's board of directors, including the limitations, if any, on the
payment of dividends under state law and then-existing credit agreements. It is
the present policy of the Company's board of directors to retain earnings, if
any, to finance the operations and expansion of the Company's business. The
Company's credit facility currently requires creditor approval for the payment
of cash dividends. See "Management Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."

RECENT SALES OF UNREGISTERED SECURITIES

In connection with each affiliation transaction between the Company and an
oncology group, the Company purchases the nonmedical assets of, and enters into
a long-term management agreement with, that oncology group. In consideration for
that arrangement, the Company typically pays cash, issues subordinated
promissory notes (in general, payable on each of the third through seventh
anniversaries of the closing date at an annual interest rate of seven percent)
and unconditionally agrees to deliver shares of Common Stock at specified future
dates (in general, on each of the third through fifth anniversaries of the
closing date).

The following table describes all private placements by the Company of the
Company's securities during 1997. Each sale was a private placement made in
connection with a physician transaction, described in general in the preceding
paragraph, to affiliated oncologists, the overwhelming majority of whom are
accredited investors. No underwriter was involved in any such sale, and no
commission or similar fee was paid with respect thereto. Each sale was not
registered under the Securities Act of 1933 in reliance on Section 4(2) of such
Act and Rule 506 enacted thereunder.

8

Number of Shares of Common Aggregate Principal Amount of
Date of Transaction Number of Physicians Stock (1) Notes

1/97 2 94,452 $ 1,620,000
1/97 2 67,022 859,000
3/97 1 25,134 470,000
3/97 8 514,124 6,006,000
4/97 4 342,632 4,223,000
4/97 4 253,385 600,000
4/97 1 12,717 149,000
4/97 1 30,088 646,000
6/97 2 28,658 420,000
9/97 2 28,230 602,000
11/97 5 155,396 1,240,000
11/97 3 397,947 2,200,000
11/97 23 1,117,074 19,925,000

(1) In connection with each affiliation transaction, the Company
unconditionally agrees to deliver shares of Common Stock at specified
future dates (typically on each of the third through fifth anniversaries of
the closing date).

9

ITEM 6. SELECTED FINANCIAL DATA

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

YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- --------- --------- ---------

(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue................................................ $321,840 $205,460 $ 99,174 $20,410 $ 7,177
-------- -------- -------- ------- -------
Operating expenses:
Pharmaceuticals and supplies.......................... 144,890 85,210 35,763 7,575 2,461
Practice compensation and benefits.................... 61,296 41,350 19,766 4,001 1,809
Other practice costs.................................. 35,090 23,495 12,032 2,258 885
General and administrative............................ 21,174 14,095 9,406 4,367 2,076
Depreciation and amortization......................... 14,177 9,343 4,655 746 219
-------- -------- -------- ------- -------
276,627 173,493 81,622 18,947 7,450
-------- -------- -------- ------- -------
Income (loss) from operations.......................... 45,213 31,967 17,552 1,463 (273)
Interest income........................................ 348 1,062 2,007 143 52
Interest expense....................................... (8,715) (4,307) (3,690) (237) (96)
Other, net............................................. 1,600(1)
-------- -------- -------- ------- -------
Income (loss) before taxes............................. 36,846 28,722 17,469 1,369 (317)
Income taxes (2)....................................... 13,979 11,072 5,852 126
-------- -------- -------- ------- -------
Net income (loss)...................................... $ 22,867 $ 17,650 $ 11,617 $ 1,243 $ (317)
======== ======== ======== ======= =======

Net income (loss) per share - basic.................... $0.50 $0.40 $0.33 $0.08 $ (0.04)
======== ======== ======== ======= =======
Shares used in per share computations - basic (3)...... 45,571 44,228 35,559 15,926 7,734
======== ======== ======== ======= =======

Net income (loss) per share - diluted.................. $0.48 $0.37 $0.30 $0.07 $(0.04)
======== ======== ======== ======= =======
Shares used in per share computations - diluted (3).... 48,100 47,549 39,318 16,995 7,734
======== ======== ======== ======= =======

DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
(in thousands)
BALANCE SHEET DATA:
Working capital (deficit)............................ $ 43,864 $ 42,972 $ 59,724 $ 6,653 $(1,175)
Management service agreements, net................... 326,295 240,034 164,522 40,444 1,545
Total assets......................................... 483,893 339,400 272,359 55,709 5,413
Long-term debt....................................... 139,716 81,707 44,190 18,703 79
Stockholders' equity................................. 263,994 221,854 191,180 30,977 1,288

- ----------------
(1) Consists of life insurance proceeds of $2,091,000, less lease termination
costs of $491,000.
(2) No taxes are provided for 1993 due to operating losses.
(3) See Note 1 to the Company's Consolidated Financial Statements. For
information concerning the number of shares of Common Stock that the Company
is obligated to issue at specified future dates to physicians whose groups
have affiliated with the Company, see Note 7 to the Company's Consolidated
Financial Statements.

10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

AOR provides comprehensive management services under long-term agreements to
oncology practices that provide a broad range of medical services to cancer
patients, integrating the specialties of medical and gynecological oncology,
hematology, radiation oncology, diagnostic radiology and stem cell
transplantation. Since the Company's incorporation in October 1992, it has
grown rapidly from managing six affiliated physicians in one state to 311
affiliated physicians in 16 states as of March 10, 1998:

MARCH 10, December 31,
------------ -------------------------------------------
1998 1997 1996 1995
------------ ------------ ------------ -------------

Affiliated physicians............................ 311 304 227 148
States........................................... 16 16 15 14

The Company enters into management agreements with, and purchases the
nonmedical assets of, oncology practices. Under the terms of the management
agreements, the Company provides comprehensive management services to its
affiliated physician groups, including operational and administrative services,
and furnishes personnel, facilities, supplies and equipment. The physician
groups, in return, agree to practice medicine exclusively in affiliation with
the Company under the management agreements. Substantially all of the Company's
revenue consists of management fees paid under the terms of the management
agreements. Management fees include all practice costs (other than amounts
retained by physicians), a fixed monthly fee, an amount equal to a percentage of
each affiliated physician group's net revenue (in most states) and, if certain
financial criteria are satisfied, a performance fee. For the year ended
December 31, 1997, none of the Company's affiliated physician groups contributed
more than 10% of the Company's revenue. For the year ended December 31, 1996,
only one of the Company's affiliated physician groups contributed more than 10%
of the Company's revenue. For the year ended December 31, 1995, two of the
Company's affiliated physician groups contributed more than 10% of the Company's
revenue.

In 1997, the payor mix of the affiliated physician groups' medical practice
revenue, expressed as a percentage, was 33% for Medicare and Medicaid, 47% for
managed care and 20% for private insurance and other payors. In 1996, the payor
mix was 33% for Medicare and Medicaid, 45% for managed care and 22% for private
insurance and other payors. In 1995, the payor mix was 27% for Medicare and
Medicaid, 51% for managed care and 22% for private insurance and other payors.
The payor mix varies from physician group to physician group and changes as a
result of new practice affiliations.

11

Results of Operations

The following table sets forth the percentages of revenue represented by
certain items reflected in the Company's Statement of Operations. The
information that follows should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto included elsewhere herein.

Year Ended December 31,
-------------------------
1997 1996 1995
------ ------ -----

Revenue................................. 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Pharmaceuticals and supplies...... 45.0 41.5 36.1
Practice compensation and benefits 19.0 20.1 19.9
Other practice costs.............. 10.9 11.4 12.1
General and administrative........ 6.6 6.9 9.5
Depreciation and amortization..... 4.4 4.5 4.7
Net interest............................ 2.6 1.6 1.7
Other income............................ ____. (1.6)
-----
Income before income taxes.............. 11.5 14.0 17.6
Income taxes............................ 4.4 5.4 5.9
----- ----- -----
Net income.............................. 7.1% 8.6% 11.7%
===== ===== =====

1997 COMPARED TO 1996

The Company affiliated with thirteen and seventeen oncology groups in 1997
and 1996, respectively, the results of which are included in the Company's
operating results from the dates of affiliation. Changes in results of
operations year to year were caused in part by affiliations with these oncology
practices.

Overall, the Company experienced a decrease in operating margins from 1996 to
1997, with earnings before taxes, interest, depreciation and amortization
("EBITDA"), as a percentage of revenue, declining from 20.1% to 18.5%. A number
of factors contributed to the decrease in operating margins, including (i) the
introduction of a number of chemotherapy agents that are used in combination
with or in addition to existing therapies, some of which have significantly
lower margins than existing chemotherapy regimens, (ii) difficulty in
efficiently integrating practices that affiliated with the Company in late 1996
and 1997 and (iii) higher discounts to managed care payors. The Company
benefited, however, from lower general and administrative costs, practice
compensation and benefits and other practice costs, in each case as a percentage
of revenue. To address the decline in margins, the Company has adopted a number
of strategies, including enhancing purchasing power by initiating preferred
pharmaceutical relationships on behalf of its affiliated physician groups.

Revenue. Revenue increased from $205.5 million in 1996 to $321.8 million in
1997, an increase of $116.3 million, or 57%. Revenue for markets under
management in 1996 and 1997 increased $85.5 million or 42% over the same period
from the prior year. The methodology for calculating same market growth is a
change from the same practice growth disclosed in prior periods. The Company
changed the methodology to more accurately reflect the revenue growth of a
market from period to period as well as the changing structure of new physician
transactions in 1997. Under the new method, revenue growth for all practices
within a metropolitan service area in which the Company has operations in both
periods is treated as same market growth. Under the old methodology, the same
practice growth for 1997 over the comparable period in 1996 would have been a
25% increase in revenue. This growth was the result of expansion of services,
increases in patient volume, recruitment of or affiliation with additional
physicians and, to a lesser extent, increases in charges for certain physician
services. The remaining $30.8 million was attributable to affiliations with
oncology practices in new markets.

Pharmaceuticals and Supplies. Pharmaceuticals and supplies, which include
drugs, medications and other supplies used by the affiliated physician groups,
increased from $85.2 million for 1996 to $144.9 million for 1997, an

12

increase of $59.7 million, or 70%. This increase was principally attributable to
the same factors that caused revenue to increase. As a percentage of revenue,
pharmaceuticals and supplies increased from 41.5% for 1996 to 45.0% for 1997.
This increase was primarily due to a shift in the revenue mix to a higher
percentage of drug revenue, the introduction of a number of new chemotherapy
agents and, to a lesser extent, lower reimbursement from payors. Management
expects that third-party payors will continue to negotiate the reimbursement
rate for medical services, pharmaceuticals (including chemotherapy drugs) and
other supplies, with the goal of lowering reimbursement and utilization rates,
and that such lower reimbursement and utilization rates as well as shifts in
revenue mix may continue to adversely impact the Company's margins with respect
to such items. The Company has adopted a number of strategies to address this
matter, including initiating preferred pharmaceutical relationships.

Practice Compensation and Benefits. Practice compensation and benefits, which
include the salaries, wages and benefits of the affiliated physician groups'
employees (excluding affiliated physicians) and the Company's employees located
at the affiliated physician practice sites and business offices, increased from
$41.4 million in 1996 to $61.3 million in 1997, an increase of $19.9 million or
48%. This increase was principally attributable to the same factors that caused
revenue to increase. As a percentage of revenue, practice compensation and
benefits decreased from 20.1% for 1996 to 19.0% for 1997, primarily as a result
of economies of scale.

Other Practice Costs. Other practice costs, which consist of rent, utilities,
repairs and maintenance, insurance and other direct practice costs, increased
from $23.5 million in 1996 to $35.1 million in 1997, an increase of $11.6
million or 49%. This increase was principally attributable to the same factors
that caused revenue to increase. As a percentage of revenue, other practice
costs decreased from 11.4% for 1996 to 10.9% for 1997, primarily as a result of
economics of scale.

General and Administrative. General corporate expenses increased from $14.1
million in 1996 to $21.2 million in 1997, an increase of $7.1 million or 50%.
This increase was primarily attributable to the addition of personnel and
greater support costs associated with the Company's growth since December 31,
1996. As a percentage of revenue, general and administrative expenses decreased
from 6.9% for 1996 to 6.6% for 1997, primarily as a result of economies of
scale.

Depreciation and Amortization. Depreciation and amortization expenses
increased from $9.3 million in 1996 to $14.2 million in 1997, an increase of $
4.9 million or 53%. This increase was primarily attributable to the new
physician groups with which the Company affiliated as well as investments in
equipment, leasehold improvements and management information systems during
1997.

Interest. Net interest expense increased from $3.2 million in 1996 to $8.4
million in 1997, an increase of $5.2 million or 163%. The increase was the
result of higher levels of debt, principally incurred to finance transactions
with thirteen oncology groups during 1997. As a percentage of revenue, net
interest expense increased from 1.6% in 1996 to 2.6% in 1997. Indebtedness to
physicians increased from approximately $66 million at December 31, 1996 to
approximately $ 94.7 million at December 31, 1997. In the future, management
expects that net interest expense as a percentage of revenue will continue to
increase due to anticipated debt related to medical practice transactions.

Income Taxes. Income tax expense increased from the prior year as a result of
the Company's increased profitability. For 1997, the Company recognized a tax
provision of $14.0 million resulting in an effective rate of 38% as compared to
a rate of 38.5% for 1996. The decrease in the effective rate is due primarily
to a change in the Company's composition of revenue by state since 1996.

1996 COMPARED TO 1995

The Company affiliated with seventeen and fifteen oncology groups in 1996 and
1995, respectively, the results of which are included in the Company's operating
results from the dates of affiliation. Changes in results of operations year to
year were caused primarily by affiliations with these oncology practices.

13

Revenue. Revenue increased from $99.2 million in 1995 to $205.5 million in
1996, an increase of $106.3 million or 107%. Of this increase, $32.0 million
was attributable to same market growth. This growth was the result of expansion
of services, increases in patient volume, recruitment of or affiliation with
additional physicians and, to a lesser extent, increases in charges for certain
physician services. The remainder of the growth was attributable to
affiliations with oncology practices in new markets.

Pharmaceuticals and Supplies. Pharmaceuticals and supplies increased from
$35.8 million for 1995 to $85.2 million for 1996, an increase of $49.4 million
or 138%. This increase was principally attributable to the same factors that
caused revenue to increase. As a percentage of revenue, pharmaceuticals and
supplies increased from 36.1% for 1995 to 41.5% for 1996. This increase was
primarily due to a shift in the revenue mix to a higher percentage of drug
revenue, the introduction of a number of new chemotherapy agents and, to a
lesser extent, lower reimbursement from payors.

Practice Compensation and Benefits. Practice compensation and benefits
increased from $19.8 million in 1995 to $41.4 million in 1996, an increase of
$21.6 million or 109%. This increase was principally attributable to the same
factors that caused revenue to increase. As a percentage of revenue, practice
compensation and benefits increased from 19.9% for 1995 to 20.1% for 1996.
Practice compensation and benefit costs relative to patient volumes decreased as
a result of economies of scale. However, these improvements were offset by
lower reimbursement rates caused by a shift in payor mix, higher discounts to
payors and practice integration factors resulting from the Company's rapid
growth.

Other Practice Costs. Other practice costs increased from $12.0 million in
1995 to $23.5 million in 1996, an increase $11.5 million or 96%. This increase
was principally attributable to the same factors that caused revenue to
increase. As a percentage of revenue, other practice costs decreased from 12.1%
for 1995 to 11.4% for 1996, primarily as a result of economies of scale.

General and Administrative. General corporate expenses increased from $9.4
million in 1995 to $14.1 million in 1996, an increase of $4.7 million or 50%.
This increase was primarily attributable to the addition of personnel and
greater support costs associated with the Company's rapid growth since December
31, 1995. As a percentage of revenue, general and administrative expenses
decreased from 9.5% for 1995 to 6.9% for 1996, primarily as a result of
economies of scale.

Depreciation and Amortization. Depreciation and amortization expenses
increased from $4.7 million in 1995 to $9.3 million in 1996, an increase of $4.6
million or 98%. This increase was primarily attributable to the new physician
groups with which the company affiliated as well as investments in equipment,
leasehold improvements and management information systems during 1996.

Interest. Net interest expense increased from $1.7 million in 1995 to $3.2
million in 1996, an increase of $1.5 million or 88%. The increase was the
result of higher levels of debt, principally incurred to finance transactions
with seventeen oncology practices during 1996. As a percentage of revenue, net
interest expense decreased from 1.7% in 1995 to 1.6% in 1996. Indebtedness to
physicians increased from approximately $57 million at December 31, 1995 to
approximately $66 million at December 31, 1996.

Income Taxes. Income tax expense increased from the prior year as a result of
the Company's increased profitability as well as a change in the Company's
composition of revenue by state since 1995. For 1996, the Company recognized a
tax provision of $11.1 million resulting in an effective rate of 38.5% compared
to 38% for 1995 adjusted for non-taxable, non-recurring life insurance proceeds
of $2.1 million.

14

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This Annual Report on Form 10-K includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical fact included in this report are forward-
looking statements and, although the Company believes that the expectations
reflected in such forward looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. The following
are certain important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements"). All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements. The Company does not undertake to update
any forward-looking statement that may be made from time to time on behalf of
the Company.

Growth Strategy; Rapid Growth. One of the Company's strategies is to grow
through transactions with additional oncology groups and through the expansion
of its affiliated physician groups. Identifying appropriate physician groups
and proposing, negotiating and implementing economically attractive affiliations
with them can be a lengthy, complex and costly process. There can be no
assurance that the Company will continue to be successful in identifying and
establishing relationships with additional oncology groups. The Company has
experienced rapid growth in its business and staff. Continued rapid growth may
impair the Company's ability to efficiently provide its management services to
its affiliated physician groups and to adequately manage and supervise its
employees. The Company's future results could be materially adversely affected
if it is unable to manage growth effectively.

In the event that the Company is successful in establishing relationships with
additional physician groups, there can be no assurance that the Company will be
able to successfully integrate the operations of such groups or to institute
Company-wide systems and procedures to operate as a combined enterprise with
such groups. In addition, a strategy of growth by acquisition or affiliation
involves the risk of assuming unknown or contingent liabilities of the
affiliated physician groups, which could be material, individually or in the
aggregate. Any failure by the Company to successfully integrate newly
affiliated physician groups or to effectively insulate itself from unwanted
liabilities of such groups may have a material, adverse effect on the Company's
business, financial condition and results of operations.

Another strategy of the Company is to develop integrated cancer centers. The
development of integrated cancer centers is subject to a number of risks,
including (i) obtaining regulatory approval, including certificates of need (in
some states), (ii) delays that often accompany construction of facilities and (
iii) environmental liabilities that attach to ownership, lease or operation of
real property. Any failure or delay by the Company to successfully build and
operate integrated cancer centers or to effectively insulate itself from
liabilities arising from operating these centers may have a material, adverse
effect on the Company's business, financial condition and results of operation.

Dependence on Affiliated Physician Groups. The Company's revenue depends on
revenue generated by the Company's affiliated physician groups. There can be
no assurance that existing and future physician groups with which the Company
affiliates will maintain successful medical practices, that the management
agreements with the affiliated physician groups will not be terminated or that
any of the key members of a particular physician group will continue practicing
with such group. Loss of revenue by the affiliated physician groups could have
a material adverse effect on the Company.

Competition. The business of providing health care related services is
intensely competitive. The Company is aware of a number of competitors
specializing in the management of oncology practices, and several health care
companies with established operating histories and significant resources are
currently providing at least some management services to oncologists. In
addition, there are other companies with substantial resources that
may decide to enter the oncology practice management business. The Company's
revenues depend on the continued success of its affiliated physician groups.
The physician groups face competition from several sources, including sole

15

practitioners, single and multi-specialty groups, hospitals and managed care
organizations. See "Business - Competition."

Reductions in Third-Party Reimbursement. Physician groups typically bill
various third-party payors, such as governmental programs (e.g., Medicare and
Medicaid), private insurance plans and managed care plans, for the health care
services provided to their patients. These third-party payors are increasingly
negotiating or legislating the prices charged for medical services,
pharmaceuticals and other supplies, with the goal of lowering reimbursement and
utilization rates. For example, the proposed Stark II regulations would, if
enacted, limit the reimbursement of pharmaceuticals expenses. Third-party
payors can also deny reimbursement for medical services, pharmaceuticals and
other supplies if they determine that a treatment was not performed in
accordance with treatment protocols established by such payors or for other
reasons. Loss of revenue by the Company's affiliated physician groups caused by
cost containment efforts could have a material adverse effect on the Company.
To the extent that patients or enrollees covered by a contract require more
frequent or extensive care than is anticipated by the physician groups, the
revenue to the affiliated physician groups derived from such contract may be
insufficient to cover the costs of the services provided.

Health Care Regulation. The health care industry is highly regulated at the
federal and state levels. The Company believes its business and the practices
of its affiliated physician groups are in material compliance with applicable
law. The relationships between the Company and its affiliated physician groups,
however, are unique and many aspects of these relationships have not been the
subject of judicial or regulatory interpretation. There can be no assurance
that a review of the Company's business or its affiliated physician groups by
courts or by health care, tax, labor or other regulatory authorities would not
result in determinations that could adversely affect the Company's operations or
that the health care regulatory environment will not change so as to restrict
the Company's existing operations or potential for expansion. There are
currently several federal and state initiatives designed to amend regulations
relating to the provision of health care services, the access to health care,
the costs of health care and the manner in which health care providers are
reimbursed for their services. However, it is not possible to predict whether
any such initiatives will be enacted as legislation or, if enacted, what their
form, effective dates or impact on the Company will be. See
"Business Regulation."

Risks Inherent in Provision of Medical Services. The Company's affiliated
physician groups are involved in the delivery of health care services to the
public and are exposed to the risk of professional liability claims. Claims of
this nature, if successful, could result in damage awards to the claimants in
excess of the limits of any applicable insurance coverage. Insurance against
losses related to claims of this type can be expensive and varies widely from
state to state. The Company and its affiliated physician groups maintain
liability insurance in amounts and coverages believed to be usual and customary.
Nevertheless, successful malpractice claims asserted against the physician
groups or the Company could have a material adverse effect on the Company. See
"Legal Proceedings."

Dependence on Key Personnel. The Company depends on the services of its
executive officers for the management of the Company and the implementation of
its business strategy. The Company has obtained key man life insurance on its
chief executive officer and its president. Nevertheless, the Company could be
materially adversely affected if the chief executive officer, president or other
executive officers were unwilling or unable to continue in the Company's employ.
See "Directors and Executive Officers of the Registrant."

16

Risk of Applicability of Insurance Regulations. The Company and its
affiliated groups may in the future enter into contracts with managed care
organizations whereby the Company and its affiliated groups would assume risk in
connection with providing healthcare services under capitation arrangements. If
the Company or its affiliated groups are considered to be in the business of
insurance as a result of entering into such risk sharing arrangements, the
Company and such groups could become subject to a variety of regulatory and
licensing requirements applicable to insurance companies which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.

Volatility of Stock Price. From time to time, there may be significant
volatility in the market price for the Common Stock. Quarterly results of the
Company, changes in earnings estimates by analysts, changes in general
conditions in the economy, the financial markets or the health care industry,
reimbursement trends or other developments affecting the Company or its
competitors could cause the market price of the Common Stock to fluctuate
substantially. Any shortfall in revenue, earnings or other financial results
from levels expected by analysts could have an immediate and significant adverse
effect on the market price of the Common Stock. In this regard the Company
neither endorses nor accepts any responsibility for the estimates or
recommendations issued by stock research analysts from time to time. In
addition, in recent years, the stock market has experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to their
operating performance. See "Market for Registrant's Common Equity and Related
Stockholder Matters."

Shareholder Rights Plan; Anti-Takeover Provisions. Certain provisions of the
Company's Certificate of Incorporation and certain provisions of the General
Corporation Law of Delaware (the state in which the Company is incorporated) may
make it difficult to change control of the Company and to replace incumbent
management. For example, the Company's Certificate of Incorporation permits the
Board of Directors, without stockholder approval, to issue additional shares of
Common Stock or to establish one or more classes or series of Preferred Stock
having the number of shares, designations, relative voting rights, dividend
rates, liquidation and other rights, preferences and limitations that the Board
of Directors can establish. The Company has also adopted a Shareholder Rights
Plan, which would materially inhibit the ability of another entity to acquire
control of the Company through a tender offer or otherwise without the approval
of the Company's board of directors. These provisions could limit the price
that certain investors might be willing to pay in the future for shares of
Common Stock.

SUMMARY OF OPERATIONS BY QUARTER

The following table presents unaudited quarterly operating results for 1997
and 1996. The Company believes that all necessary adjustments have been
included in the amounts stated below to present fairly the quarterly results
when read in conjunction with the Consolidated Financial Statements. Results of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year or predictive of future periods.

1997 QUARTER ENDED 1996 QUARTER ENDED
-------------------------------------- -----------------------------------------
DEC 31 SEP 30 JUN 30 MAR 31 Dec 31 SEP 30 JUN 30 MAR 31
-------- ------- ------- -------- -------- -------- ------- ----------
(In thousands, except per share data)

Net revenue.................. $89,626 $82,293 $79,525 $70,396 $63,635 $53,701 $47,374 $40,750
Income from operations....... 12,468 11,513 11,343 9,889 9,259 7,782 7,297 7,629
Net income................... 6,166 5,910 5,719 5,072 4,840 4,303 4,060 4,447
Net income per share-basic .13 .13 .13 .11 .11 .10 .09 .10
Net income per share-diluted .13 .12 .12 .11 .10 .09 .09 .09

17

LIQUIDITY AND CAPITAL RESOURCES

The Company requires capital primarily to enter into management agreements
with, and to purchase the nonmedical assets of, oncology medical practices.
During 1996, the Company paid total consideration of $91 million in connection
with affiliations with seventeen physician groups, including cash and
transaction costs of $46 million. During 1997, the Company paid total
consideration of $102 million in connection with affiliations with thirteen
physician groups, including cash and transaction costs of $33 million.

To fund this rapid growth and development, the Company has satisfied its
transaction and working capital needs through debt and equity financings and
borrowings under a $150 million syndicated revolving credit facility ("Credit
Facility") with First Union National Bank of North Carolina ("First Union"), as
agent for the various lenders. In addition, as part of the Credit Facility, the
Company has recently obtained a $75 million end-loaded leasing facility, which
will principally be used to finance the purchase of property and construction of
integrated cancer centers. The Company has relied primarily on management fees
received from its affiliated physician groups to fund its operations. Cash
derived from operations was $33.4 million in 1997, an increase of $26.4 million
from 1996. The increase was due to increased income from operations as well as
improvements in cash management through vendor payment terms.

During 1997, the Company borrowed $43 million, net, under the Credit Facility
to fund medical practice transactions, development of integrated cancer centers
and the purchase of its common stock under the Company's stock repurchase
program. Borrowings under the Credit Facility bear interest at a rate equal to
a rate based on prime rate or the London Interbank Offer Rate, based on a
defined formula. The Credit Facility contains affirmative and negative
covenants, including the maintenance of certain ratios, restrictions on sales,
leases or other dispositions of properties, restrictions on other indebtedness
and on the payment of dividends. The Company's management services agreements
and the capital stock of the Company's subsidiaries are pledged as security
under the Credit Facility. The Company is currently in compliance with the
Credit Facility covenants, with additional capacity under the Credit Facility of
$62.5 million at December 31, 1997.

At December 31, 1997, the Company had working capital of $43.9 million and
cash and equivalents of $5.0 million. The Company also had $71.2 million of
current liabilities, including approximately $22.6 million of short-term notes
and long-term indebtedness maturing before December 31, 1998. The Company
currently expects that its principal use of funds in the near future will be in
connection with future transactions with oncology groups, the purchase of
medical equipment, investment in information systems and the acquisition or
lease of real estate for the development of integrated cancer centers. The
Company expects that cash generated from operations and amounts available under
the Credit Facility will be adequate to satisfy the Company's cash requirements
for the next 12 months.

YEAR 2000 ISSUE

The Year 2000 issue (i.e., the ability of computer systems to accurately
identify and process dates beginning with year 2000 and beyond) affects
virtually all companies and organizations. Recognizing the need to limit
problems associated with year 2000 software failures, the Company has developed
plans to address this potential exposure. Key financial information and
operational systems are being assessed, detailed plans have been developed and
initial conversion efforts are underway. The Company recognizes that
information systems are integral to its operations, and in 1998 and 1999 the
Company intends to make significant capital investments in developing an
integrated clinical and financial information system throughout its network of
affiliated physicians. As a result of these investments, the Company believes
that the year 2000 issue will not pose significant internal problems for the
Company's business. The Company is also communicating with suppliers, financial
institutions and, most importantly, third-party payors (such as managed care
companies and governmental payors) to determine their plans to limit problems
associated with the year 2000 issue. Despite these efforts, the year 2000 issue
is complex and may present unforeseen problems in the Company's systems and from
third parties with which the Company deals, such as third party payors. Failure

18

of the Company's or third parties' computer systems could materially and
adversely impact the Company's operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Index to Consolidated Financial Statements,
which appears on page 22 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held o n May 14, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Election of Directors" information required by Item 10 of Form 10-K as to
directors and certain executive officers of the Company and is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on May 14, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Compensation of Executive Officers" information required by Item 11 of Form 10-
K as to directors and certain executive officers of the Company and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on May 14, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Beneficial Ownership of Common Stock of Directors, Nominees and Executive
Officers" information required by Item 12 of Form 10-K as to directors, certain
executive officers and certain beneficial owners of the Company and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on May 14, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Certain Relationships and Related Transactions" information required by Item 13
of Form 10-K as to directors and certain executive officers of the Company and
is incorporated herein by reference.

19

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

1. Financial Statements: See Item 8 of this report.

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

3. Exhibit Index

Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of the Company, as
amended (filed as Exhibit 3.1 to Form 10-Q for the
quarter ended March 31, 1997 and incorporated herein by
reference)

3.2 By-Laws of the Company, as amended (filed as Exhibit
3.2 to Form 10-Q for the quarter ended March 31, 1997
and incorporated herein by reference)

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

10.1 Third Amended and Restated Loan Agreement among the
Company and First Union National Bank, as agent

10.2 Participation Agreement among AOR Synthetic Real
Estate, Inc., the Company, First Union National Bank
and the other parties identified therein

10.3 Credit Agreement among the Company, First Security
Bank, First Union National Bank and the other parties
identified therein

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

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

10.6 Non-Employee Director Stock Option Plan (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996 and incorporated
herein by reference)

10.7 Key Employee Stock Option Plan, as amended (filed as
an exhibit to the Registration Statement on Form S-8
(Registration No. 333-30057) and incorporated herein by
reference)

20

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

11 Statement Re - Computation of Per Share Earnings

21.1 Subsidiaries of the Registrant

23(a) Consent of Independent Accountants

27 Financial Data Schedule

(b) Reports on Form 8-K.

During the fiscal quarter ended December 31, 1997, the Registrant filed no
reports on Form 8-K.

21

AMERICAN ONCOLOGY RESOURCES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements as of December 31, 1997 and 1996 and for the
three years ended December 31, 1997:
Page
----

Report of Independent Accountants................ 23
Consolidated Balance Sheet....................... 24
Consolidated Statements of Operations............ 25
Consolidated Statements of Stockholders' Equity.. 26
Consolidated Statements of Cash Flows............ 27
Notes to Consolidated Financial Statements....... 28

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

22

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
American Oncology Resources, Inc.

In our opinion, the consolidated financial statements listed in the index on
page 22 present fairly, in all material respects, the financial position of
American Oncology Resources, Inc. and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
Houston, Texas
March 11, 1998

23

AMERICAN ONCOLOGY RESOURCES, INC.

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

December 31,
--------------------
1997 1996
--------- ---------

ASSETS
Current assets:
Cash and equivalents..................................................... $ 5,000 $ 3,429
Accounts receivable...................................................... 92,038 61,183
Prepaids and other current assets........................................ 10,149 5,775
Due from affiliated physician groups..................................... 7,904 5,356
-------- --------
Total current assets................................................... 115,091 75,743
-------- --------
Property and equipment:
Land..................................................................... 2,229 1,336
Computers and software................................................... 11,617 6,200
Equipment, furniture and fixtures........................................ 20,578 13,169
Buildings and leasehold improvements..................................... 16,685 4,439
-------- --------
51,109 25,144
Less - accumulated depreciation and amortization......................... (12,545) (6,201)
-------- --------
38,564 18,943
Management service agreements, net of amortization of $15,589 and $8,343.. 326,295 240,034
Other assets.............................................................. 3,943 4,680
-------- --------
$483,893 $339,400
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes payable................................................. $ 14,011 $ 4,219
Current maturities of long-term indebtedness............................. 8,628 5,564
Accounts payable......................................................... 38,870 15,148
Due to affiliated physician groups....................................... 289 616
Accrued compensation costs............................................... 2,783 1,806
Accrued interest payable................................................. 2,804 2,325
Income taxes payable..................................................... 8 641
Other accrued liabilities................................................ 3,834 2,452
-------- --------
Total current liabilities.............................................. 71,227 32,771
Deferred income taxes..................................................... 8,956 3,068
Long-term indebtedness.................................................... 139,716 81,707
-------- --------
Total liabilities...................................................... 219,899 117,546
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued and outstanding
Series A Preferred Stock, $.01 par value, 500,000 shares
authorized and reserved, none issued and outstanding
Common stock, $.01 par value, 80,000,000 shares authorized,
29,721,754 and 28,369,482 shares issued and
29,721,754 and 27,371,422 shares outstanding............................ 297 284
Additional paid-in capital............................................... 138,381 139,804
Common stock to be issued, 17,937,752 and 17,462,782 shares.............. 74,757 61,225
Treasury stock, 998,060 shares........................................... (8,530)
Retained earnings........................................................ 50,559 29,071
-------- --------
Total stockholders' equity............................................. 263,994 221,854
-------- --------
Commitments and contingencies (Note 9)....................................
-------- --------
$483,893 $339,400
======== ========

The accompanying notes are an integral part of this statement.

24

AMERICAN ONCOLOGY RESOURCES, INC.

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

Year ended December 31,
------------------------------
1997 1996 1995
--------- --------- --------

Revenue.......................................... $321,840 $205,460 $99,174
-------- -------- -------
Operating expenses:
Pharmaceuticals and supplies................... 144,890 85,210 35,763
Practice compensation and benefits............. 61,296 41,350 19,766
Other practice costs........................... 35,090 23,495 12,032
General and administrative..................... 21,174 14,095 9,406
Depreciation and amortization.................. 14,177 9,343 4,655
-------- -------- -------
276,627 173,493 81,622
-------- -------- -------
Income from operations........................... 45,213 31,967 17,552
Other income (expense):
Interest income................................ 348 1,062 2,007
Interest expense............................... (8,715) (4,307) (3,690)
Other, net..................................... 1,600
-------- -------- -------
Income before income taxes....................... 36,846 28,722 17,469
Income taxes..................................... 13,979 11,072 5,852
-------- -------- -------

Net income....................................... $ 22,867 $ 17,650 $11,617
======== ======== =======
Net income per share - basic..................... $0.50 $0.40 $0.33
======== ======== =======
Shares used in per share calculations - basic.... 45,571 44,228 35,559
======== ======== =======
Net income per share - diluted................... $0.48 $0.37 $0.30
======== ======== =======
Shares used in per share calculations - diluted.. 48,100 47,549 39,318
======== ======== =======

The accompanying notes are an integral part of this statement.

25

AMERICAN ONCOLOGY RESOURCES, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)

Common Stock Additional Common Treasury Stockholder
---------------------- paid-in Stock to Stock Retained notes
Shares Par Value capital be issued Cost earnings receivable Total
---------- --------- ----------- ---------- -------- ---------- ----------- --------

Balance at December 31, 1994......... 15,266 $ 153 $ 22,085 $ 8,811 $ 28 $ (100) $ 30,977

Issuances of Common Stock............ 12,199 122 110,875 110,997

Medical practice transactions -
value of 9,628,388 shares to
be issued............................ 37,207 37,207

Compensation value of non-employee
options to purchase Common Stock.. 250 250

Exercise of options to purchase
Common Stock...................... 12 32 32

Repayment of promissory notes........ 100 100

Net income........................... 11,617 11,617

---------- --------- ----------- ---------- -------- --------- ---------- --------
Balance at December 31, 1995......... 27,477 275 133,242 46,018 11,645 0 191,180

Medical practice transactions -
value of 2,313,250 shares to
be issued......................... 15,312 15,312
Purchase of 1,110,500 shares of
Treasury Stock.................... $ (9,414) (9,414)

Delivery of 112,440 shares of
Common Stock to be issued from
Treasury.......................... (555) (105) 884 (224)
Exercise of options to purchase
Common Stock...................... 892 9 1,116 1,125
Tax benefit from exercise of
non-qualified stock options....... 6,001 6,001
Net income........................... 17,650 17,650
---------- --------- ----------- ---------- -------- --------- ---------- --------
Balance at December 31, 1996......... 28,369 284 139,804 61,225 (8,530) 29,071 0 221,854

Medical practice transactions -
value of 3,066,859 shares to
be issued......................... 22,355 22,355
Purchase of 657,000 shares of
Treasury Stock.................... (6,418) (6,418)

Delivery of 1,650,064 shares of
Common Stock to be issued from
Treasury.......................... (7,981) (5,540) 14,900 (1,379)
Delivery of 941,825 shares from
issuance of Common Stock.......... 942 9 3,274 (3,283)
Exercise of options to purchase
Common Stock...................... 411 4 1,242 48 1,294
Tax benefit from exercise of
non-qualified stock options....... 2,042 2,042
Net income........................... 22,867 22,867
---------- --------- ----------- ---------- -------- --------- ---------- --------
Balance at December 31, 1997......... 29,722 $ 297 $ 138,381 $ 74,757 $ 0 $ 50,559 $ 0 $263,994
========== ========= =========== ========== ======== ========= ========== ========

The accompanying notes are an integral part of this statement.

26

AMERICAN ONCOLOGY RESOURCES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

Year ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ----------

Cash flows from operating activities:
Net income................................................. $ 22,867 $ 17,650 $ 11,617
Noncash adjustments:
Depreciation and amortization............................ 14,177 9,343 4,655
Deferred income taxes.................................... 5,916 2,130 876
Imputed interest on medical practice transactions........ 248 122 315
Cash provided (used), net of effects of
medical practice transactions, by changes in:
Accounts receivable...................................... (26,392) (24,084) (9,190)
Prepaids and other current assets........................ (4,342) (2,088) (2,566)
Other assets............................................. 252
Accounts payable......................................... 22,064 1,670 3,033
Due from/to affiliated physician groups.................. (2,636) (2,524) (873)
Income taxes payable..................................... 1,409 2,672 4,186
Other accrued liabilities................................ 71 2,068 2,059
-------- -------- ---------
Net cash provided by operating activities.............. 33,382 6,959 14,364
-------- -------- ---------
Cash flows from investing activities:
Sales of short-term investments............................ 44,967 323,991
Purchases of short-term investments........................ (368,100)
Acquisition of property and equipment...................... (22,538) (10,030) (3,705)
Net payments in medical practice transactions.............. (33,228) (46,221) (51,312)
Other...................................................... 1,188 (3,052)
-------- -------- ---------
Net cash used by investing activities.................. (54,578) (14,336) (99,126)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from Credit Facility.............................. 142,000 23,000 35,000
Repayment of Credit Facility............................... (99,000) (35,000)
Repayment of other indebtedness............................ (14,549) (17,444) (14,489)
Debt financing costs....................................... (560) (1,277) (411)
Proceeds from exercise of stock options.................... 1,294 1,125 32
Purchase of Treasury Stock................................. (6,418) (9,414)
Net proceeds from issuance of Common Stock................. 110,997
Collection of promissory notes............................. 100
-------- -------- ---------
Net cash provided (used) by financing activities....... 22,767 (4,010) 96,229
-------- -------- ---------
Increase (decrease) in cash and equivalents................. 1,571 (11,387) 11,467
Cash and equivalents:
Beginning of period........................................ 3,429 14,816 3,349
-------- -------- ---------

End of period.............................................. $ 5,000 $ 3,429 $ 14,816
======== ======== =========

Interest paid............................................... $ 7,894 $ 3,735 $ 2,104
Taxes paid.................................................. 6,380 6,567 790
Noncash transactions:
Tax benefit from exercise of non-qualified stock options... 2,042 6,001
Value of Common Stock to be issued in medical practice
transactions............................................. 22,355 15,312 37,207
Delivery of Common Stock to be issued in medical practice
transactions............................................. 18,183 884
Debt issued in medical practice transactions............... 37,860 25,295 50,817
Debt assumed in medical practice transactions.............. 4,554 684 4,712

The accompanying notes are an integral part of this statement.

27

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

American Oncology Resources, Inc., a Delaware corporation (the "Company"),
is a physician practice management company focusing exclusively on oncology.
The Company provides comprehensive management services under long-term
agreements to oncology practices comprised of 304 physicians in 16 states at
December 31, 1997. These practices provide a comprehensive range of medical
services to cancer patients, integrating the multiple specialties of cancer
care, including medical and gynecological oncology, hematology, radiation
oncology, diagnostic radiology and stem cell transplantation.

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

Principles of consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions and balances
have been eliminated.

Use of estimates

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 of contingent assets and
liabilities. Because of inherent uncertainties in this process, actual future
results could differ from those expected at the reporting date.

Cash equivalents and investments

The Company considers all highly liquid debt securities with original
maturities of three months or less to be cash equivalents. At December 31,
1995, the Company considered all investments in debt securities as available for
use in current operations and therefore classified them as available for sale.

Revenue recognition

Substantially all of the Company's revenues represent the contractual fees
earned under its long-term management service agreements with affiliated
physician groups. Under the agreements, the Company is contractually
responsible and at risk for the operating costs of the affiliated physician
groups, except for amounts retained by physicians. The Company's revenues
include the reimbursement of all affiliated physician group operating costs and
the fixed and variable contractual management fees as defined in the management
services agreements. Contractual fees are accrued when collection is probable.

Property and equipment

Property and equipment is stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of three to ten years for equipment, computers and software, furniture and
fixtures, the lesser of ten years or the remaining lease term for leasehold
improvements and twenty years for buildings.

28

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Management service agreements

Management service agreements consist of the costs of purchasing the rights
to manage oncology groups. These costs are amortized on a straight-line basis
over the initial noncancelable 40-year terms of the related management service
agreements. Under the long-term agreements, the affiliated physician groups
have agreed to provide medical services on an exclusive basis only through
facilities managed by the Company. The agreements are noncancelable except for
performance defaults. In the event an affiliated physician group breaches the
agreement, or if the Company terminates with cause, the physician group is
required to purchase all related tangible and intangible assets, including the
unamortized portion of the management service agreement, at the then net book
value.

The carrying value of the management service agreements is reviewed for
impairment when events or changes in circumstances indicate their recorded cost
may not be recoverable. If the review indicates that the undiscounted cash
flows from operations of the related management service agreement over the
remaining amortization period is expected to be less than the recorded amount of
the management service agreement, the Company's carrying value of the
management service agreement will be reduced to its estimated fair value.

Other assets

The costs associated with obtaining long-term financing are capitalized and
amortized over the terms of the related debt agreements.

Income taxes

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

Fair Value of Financial Instruments

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

Earnings per share

During 1997, the Company adopted the provisions of Financial Accounting
Standards Board (FASB) Statement No. 128, "Earnings Per Share," (FAS 128) which
requires the Company to disclose "basic" and "diluted" EPS and to restate all
prior periods presented for comparative purposes. In addition, the Securities
and Exchange Commission recently issued Staff Accounting Bulletin No. 98 (SAB
98) which eliminates the impact of "cheap stock" issued prior to an initial
public offering. The Company has restated all periods presented to comply with
the provisions of FAS 128 and SAB 98.

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
the periods. The computation of the diluted earnings per share is based on a
weighted average number of Common Stock and Common Stock to be issued shares
outstanding during the periods as well as all dilutive potential Common Stock
calculated under the treasury stock method. The diluted

29

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

EPS amount currently approximates the primary EPS amount which would previously
have been reported due to the adoption of this Statement.

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

Year ended December 31,
--------------------------
1997 1996 1995
-------- ------- -------

Basic
Outstanding at end of period:
Common Stock...................................... 29,722 27,371 27,476
Common Stock to be issued......................... 17,938 17,463 15,262
------ ------ ------
47,660 44,834 42,738
Effect of weighting................................. (2,089) (606) (7,179)
------ ------ ------
Shares used in per share calculation............. 45,571 44,228 35,559
====== ====== ======

Diluted
Outstanding at end of period:
Common Stock...................................... 29,722 27,371 27,476
Common Stock to be issued......................... 17,938 17,463 15,262
------ ------ ------
47,660 44,834 42,738
Effect of weighting and assumed share equivalents
for grants of stock options and issuances of stock
at less than the weighted-average price............. 440 2,715 (3,420)
------ ------ ------
Shares used in diluted share calculation.......... 48,100 47,549 39,318
====== ====== ======

Reclassifications

Certain amounts previously reported have been reclassified to conform with
their 1997 presentation.

Accounting Pronouncements for Future Adoption

The FASB recently issued Statement No. 130, "Comprehensive Income," which
is effective for the Company's financial statements as of and for the year
ending December 31, 1998. In addition to net income, comprehensive income is
comprised of "other comprehensive income" which includes all charges and credits
to equity that are not the result of transactions with owners of the Company's
Common Stock. This Statement is not anticipated to materially affect the
Company's financial statements.

The FASB recently issued statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which is effective for the Company's
financial statements as of and for the year ending December 31, 1998. This
Statement requires reporting of summarized financial results for operating
segments as well as established standards for related disclosures about products
and services, geographic areas and major customers. Primary disclosure
requirements include total segment revenues, total segment profit or loss and
total segment assets. The Company has not yet completed its evaluation of the
impact of this Statement on the Company's financial statements.

30

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 2 - REVENUE

Medical service revenue for services to patients by the physician groups
affiliated with the Company is recorded when services are rendered based on
established or negotiated charges reduced by contractual adjustments and
allowances for doubtful accounts. Differences between estimated contractual
adjustments and final settlements are reported in the period when final
settlements are determined. Medical service revenue of the affiliated physician
groups is reduced by the contractual amounts retained by the physician groups to
arrive at the Company's revenue.

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

Year ended December 31,
-----------------------------
1997 1996 1995
--------- -------- --------

Medical service revenue.......................... $424,446 $269,380 $129,709
Amounts retained by affiliated physician groups.. 102,606 63,920 30,535
-------- -------- --------

Revenue.......................................... $321,840 $205,460 $ 99,174
======== ======== ========

In 1997, none of the Company's affiliated physician groups provided more
than 10% of revenues. In 1996, 11% of the Company's revenues were derived from
one affiliated physician group, which was the only group that provided 10% or
more of revenues. In 1995, 15% and 11% of the Company's revenues were derived
from two affiliated physician groups.

For the years ended December 31, 1997, 1996 and 1995, the affiliated
physician groups derived approximately 33%, 33% and 27%, respectively, of their
medical service revenue from services provided under the Medicare and state
Medicaid programs and 47%, 45% and 51%, respectively, from contractual, fee-for-
service arrangements with managed care programs, none of which individually
aggregated more than 10% of medical service revenue. The remaining 20%, 22% and
22%, respectively, was derived from various non-contracted fee-for-service
payors. Capitation revenues were less than 1% of total revenue in 1997, 1996
and 1995. Changes in the payor reimbursement rates, particularly Medicare due to
its concentration, or affiliated physician groups' payor mix can materially and
adversely affect the Company's revenues.

Under its management service agreements, receivables generated by
affiliated physician groups from patient services are purchased at their net
collectible value on a full recourse basis by the Company; thus, the Company
does not have an allowance for doubtful accounts. As a result, the Company's
accounts receivable are a function of medical service revenue of the affiliated
physician groups rather than the Company's revenue. Such receivables are
recorded by the affiliated physician groups net of contractual adjustments and
allowances for doubtful accounts. Receivables from the Medicare and state
Medicaid programs are considered to have minimal credit risk, and no other payor
comprised more than 10% of accounts receivable at December 31, 1997.

31

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 3 - MEDICAL PRACTICE TRANSACTIONS

From January 1995 through December 31, 1997, the Company affiliated with
oncology groups comprised of 262 physicians.

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

Year ended
December 31,
---------------------------------------------
1997 1996 1995
-------------- -------------- -------------

Cash and transaction costs.......................... $ 33,228 $46,221 $ 51,312
Short-term and subordinated notes................... 37,860 25,295 50,817
Common Stock to be issued........................... 22,355 15,312 37,207
Liabilities assumed................................. 8,252 3,794 11,014
-------- ------- --------

Total costs......................................... $101,695 $90,622 $150,350
======== ======= ========

During 1997, the Company affiliated with 13 oncology physician groups on
the effective dates indicated as follows: January 10, Williamsburg Hematology
and Oncology of Virginia, total consideration of $4,566,000 including 94,452
shares of Common Stock to be issued with a value of $588,000; March 14, Virginia
Oncology Associates, P.C., of Norfolk, Virginia, total consideration of
$21,085,000 including 514,124 shares of Common Stock to be issued with a value
of $3,239,000; April 1, Central Indiana Radiation Oncology, P.S.C. of Indiana,
total consideration of $4,622,000, including 253,385 shares of Common Stock to
be issued with a value of $1,393,000; March 24, Texas Radiation Oncology Group,
L.L.P. of Austin, Texas, total consideration of $12,065,000, including 342,632
shares of Common Stock to be issued with a value of $1,754,000; November 1,
Hematology Associates of South Texas, P.A., total consideration of $6,082,000,
including 155,396 shares of Common Stock to be issued with a value of
$1,366,000; November 1, Clinical Hematology Oncology Associates, P.C. of
Arizona, total consideration of $9,855,000, including 397,947 shares of Common
Stock to be issued with a value of $3,767,000; November 17, Florida Community
Cancer Centers, P.A. of Tampa, Florida, total consideration of $34,846,000
including 1,117,074 shares of Common Stock to be issued with a value of
$8,964,000; and in January through September of 1997, six smaller transactions
with physician groups in Tulsa, Oklahoma; Las Vegas, Nevada; Portland, Oregon;
Fairfax, Virginia; Vancouver, Washington; and Franklin Pennsylvania; for total
consideration of $8,574,000 which includes 191,849 shares of Common Stock to be
issued with a value of $1,284,000.

During 1996, the Company affiliated with 17 oncology physician groups on
the effective dates indicated as follows: March 1, Cancer Center of Kansas, P.A.
of Wichita, Kansas, total consideration of $12,547,000 including 163,676 shares
of Common Stock to be issued with a value of $1,926,000; March 1, Coram
Physician Services of Fairfax, Virginia, total consideration of $15,518,000
including 116,298 shares of Common Stock to be issued with a value of
$1,375,000; May 1, San Antonio Tumor and Blood Clinic, P.A. and Drs. Cohen,
Gordon and Lopez, P.A. of San Antonio, Texas, total consideration of $12,479,000
including 210,048 shares of Common

32

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Stock to be issued with a value of $1,980,000; September 1, Central Texas
Diagnostic Center, P.A. of Austin, Texas, total consideration of $18,863,000
including 770,589 shares of Common Stock to be issued with a value of
$4,157,000; November 1, Hematology-Oncology Associates, P.A. of Jacksonville,
Florida, total consideration of $8,012,000 including 258,992 shares of Common
Stock to be issued with a value of $1,113,000; and, in January through November
of 1996, twelve smaller transactions with physician groups in Durham, North
Carolina; Denver, Colorado; Portland, Oregon; Tucson, Arizona; San Antonio,
Texas; Independence, Missouri; Flagstaff, Arizona and Orange Park, St. Augustine
and Ocala, Florida; for total consideration of $23,203,000 which includes
793,647 shares of Common Stock to be issued with a value of $4,761,000.

During 1995, the Company affiliated with 16 oncology physician groups on
the effective dates indicated as follows: January 1, Southwestern Radiation
Oncology, Ltd. and Miked, Inc. of Tucson, Arizona, total consideration of
$10,249,000 including 1,378,000 shares of Common Stock to be issued with a value
of $2,897,000; March 1, Pikes Peak Cancer Specialists, P.C. and Paul N.
Anderson, M.D., P.C. of Colorado Springs, Colorado, total consideration of
$8,799,000 including 910,000 shares of Common Stock to be issued with a value of
$1,916,000; March 1, Cancer Care Associates, P.A. of Tulsa, Oklahoma, total
consideration of $26,309,000 including 2,888,000 shares of Common Stock to be
issued with a value of $6,431,000; March 15, Hematology and Oncology
Associates, P.A. of Greenville, South Carolina, total consideration of
$9,587,000 including 1,098,000 shares of Common Stock to be issued with a value
of $2,580,000; April 1, Hematology-Oncology Medical Associates, Inc. of
Pittsburgh, Pennsylvania, total consideration of $18,205,000 including 1,622,000
shares of Common Stock to be issued with a value of $8,072,000; August 1, James
River Clinic, P.C. and Mattern, Schultz & Booth Company of Hampton, Virginia,
total consideration of $7,602,000 including 172,000 shares of Common Stock to be
issued with a value of $1,517,000; October 1, Riverview Cancer Care Medical
Associates, P.C. of Rexford, New York, total consideration of $9,101,000
including 206,000 shares of Common Stock to be issued with a value of
$2,774,000; October 1, Capital District Hematology Oncology Associates, P.C. of
Latham, New York, total consideration of $16,060,000 including 308,000 shares of
Common Stock to be issued with a value of $4,203,000; December 1, Triad
Hematology-Oncology Associates, P.L.L.C. of Winston-Salem, North Carolina, total
consideration of $4,185,000 including 64,000 shares of Common Stock to be issued
with a value of $663,000 and, in September through December of 1995, the
following seven smaller transactions in Raleigh, North Carolina; Asheville,
North Carolina; Boulder, Colorado; Jacksonville, Florida; Las Vegas, Nevada;
Winston-Salem, North Carolina and Pittsburgh, Pennsylvania, for total
consideration of $40,253,000 which includes 626,000 shares of Common Stock to be
issued with a value of $6,154,000.

In conjunction with five medical practice transactions occurring in 1996
and 1997, the Company is contingently obligated to pay up to an additional
$3,870,000 in future years, depending on the achievement of certain financial
objectives. Such liability, if any, will be recorded in the period in which the
outcome of the contingency becomes probable. Any payment made will be allocated
to the affiliated long-term management services agreements and will be amortized
over the remaining life of that asset.

The accompanying financial statements include the results of operations
derived from the management services agreements from their respective effective
dates. The following unaudited pro forma information presents the results of
operations of the Company for the year ended December 31, 1996 as if the 1997
and 1996 transactions had been consummated on January 1, 1996 and for the year
ended December 31, 1997 as if the 1997 transactions were consummated on January
1, 1997. Such pro forma information is based on the historical financial
information of the physician groups and does not include operational or other
changes which might have been affected pursuant to the Company's management of
the nonmedical aspects of such groups.

33

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The unaudited pro forma information presented below is for illustrative
information only and is not necessarily indicative of results which would have
been achieved or results which may be achieved in the future (in thousands,
except per share amounts):

Pro forma (unaudited)
Year Ended December 31,
-----------------------
1997 1996
---- ----

Revenue....................... $355,201 $269,870
Net income.................... 24,234 20,533
Net income per share-basic.... 0.51 0.43
Net income per share-diluted.. 0.49 0.40

NOTE 4 - INDEBTEDNESS

Short-term notes payable

Short-term notes payable bear interest at 7% and have original maturities
of less than one year. The notes are payable to physicians with whom the
Company entered into long-term management agreements and relate to medical
practice transactions.

Long-term indebtedness

Long-term indebtedness consists of the following (in thousands):

December 31,
-------------------
1997 1996
--------- --------

Subordinated notes................... 80,710 62,113
Credit Facility...................... 66,000 23,000
Capital lease obligations and other.. 1,634 2,158
-------- -------
148,344 87,271
Less - current maturities............ (8,628) (5,564)
-------- -------

$139,716 $81,707
======== =======

Subordinated notes

The subordinated notes are issued in substantially the same form in
different series and are payable to the physicians with whom the Company entered
into management agreements. Substantially all of the notes outstanding at
December 31, 1997 and 1996 bear interest at 7%, are due in installments through
2004 and are subordinated to senior bank and certain other debt. If the Company
fails to make payment under any of the notes, the respective physician group can
terminate the related management service agreement for cause.

Credit Facility

The Company has a loan agreement and revolving credit/term facility (Credit
Facility) with First Union National Bank of North Carolina (First Union)
individually and as Agent for twelve additional lenders (Lenders),

34

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

which was amended as of December 29, 1997 to improve certain terms and
covenants. Under the terms of the agreement, the amount available for borrowing
is $150 million through October 31, 2002. Proceeds of loans may be used to
finance medical group transactions, provide working capital or for other general
corporate uses. At December 31, 1997, the Company had an outstanding balance of
$66 million under the Credit Facility. The Company has classified this facility
as long term due to its ability and intent to maintain the borrowings past 1998.

Borrowings under the Credit Facility are secured by capital stock of the
Company's subsidiaries and all material contracts, including management service
agreements. At the Company's option, funds may be borrowed at the Base
interest rate or the London Interbank Offer Rate (LIBOR) up to London Interbank
Offer Rate plus an amount determined under a defined formula. The Base rate is
selected by First Union and is defined as their prime rate or Federal Funds Rate
plus 1/2%. Interest on amounts outstanding under Base rate loans is due
quarterly while interest on London Interbank Offer Rate related loans is due at
the end of each applicable interest period or quarterly, if earlier. As of
December 31, 1997, the interest on all outstanding draws was 8.5%, which
represented borrowings at the Base rate which were converted to LIBOR loans at
a rate of 6.6% in January 1998.

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

Capital lease obligations and other

Leases for medical and office equipment are capitalized using effective
interest rates between 7.5% and 11.5%. At December 31, 1997 and 1996, the gross
amount of assets recorded under the capital leases was $3,239,000 and $3,710,000
and the related accumulated amortization was $1,945,000 and $1,431,000.
Amortization expense is included with depreciation. Total future capital lease
payments are $1,548,288. Other indebtedness consists principally of installment
notes and bank debt, with varying interest rates, assumed in medical practice
transactions.

Maturities

Future principal maturities of long-term indebtedness, including capital
lease obligations, is $8,628,000 in 1998, $13,525,000 in 1999, $16,099,000 in
2000, $15,774,000 in 2001, $80,795,000 in 2002 and $13,523,000 thereafter.

35

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 5 - INCOME TAXES

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

Year ended December 31,
--------------------------------
1997 1996 1995
---- ---- -----
Federal:
Current...................... $ 8,137 $ 7,787 $4,352
Deferred..................... 4,592 1,914 815
State:
Current...................... 896 1,155 701
Deferred..................... 354 216 61
------- ------- ------
13,979 11,072 5,929

Reversal of valuation allowance
due to net operating loss
utilization................... (77)
------- ------- ------
$13,979 $11,072 $5,852
======= ======= ======

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

Year ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
Provision for income taxes at U.S. 35.0% 35.0% 35.0%
statutory rates..............
State income taxes, net of 3.0 3.5 3.0
federal benefit..............
Nontaxable life insurance (4.2)
proceeds.....................
Nondeductible items and other.... .1
Reversal of valuation allowance
due to net operating loss
utilization.................. (.4)
------ ------- ------
38.0% 38.5% 33.5%
====== ======= ======

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

December 31,
--------------
1997 1996
------ ------

Deferred tax assets:
Deferred rent.................................. $ 101 $ 48
Accrued expenses............................... 24
Other.......................................... 175 111
------ ------
$ 300 $ 159
====== ======

Deferred tax liabilities:
Amortization of management service agreements.. $7,909 $2,973
Depreciation................................... 457 140
Prepaid expenses............................... 890 86
------ ------
$9,256 $3,199
====== ======

36

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 6 - OTHER INCOME, NET

Other income, net in 1995 consists of a gain from life insurance proceeds
of $2,090,000 less lease termination costs of $490,000.

NOTE 7 - STOCKHOLDERS' EQUITY

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

Effective May 8, 1997, the Company's stockholders approved an increase in
the number of shares of Common Stock authorized to be issued to 80,000,000
shares

On August 13, 1996, the Board of Directors of the Company authorized the
purchase of up to 3,000,000 shares of the Company's Common Stock in public or
private transactions.

On May 16, 1996, the Board of Directors of the Company declared a two-for-
one stock split of the Company's Common Stock which was paid on June 10, 1996 to
stockholders of record on May 31, 1996. All references herein to the number of
shares and per share amounts have been adjusted to reflect the effect of the
split.

In June 1995, the Company consummated its initial public offering of
10,925,000 shares of Common Stock. Proceeds from the offering were
$105,743,000, net of commissions and expenses of $8,970,000. Of this amount,
$35,000,000 was used to repay amounts outstanding under the Company's credit
facility. The remainder was used for general corporate purposes and working
capital needs, including medical practice transactions.

In February 1995, the Company issued for cash 1,273,642 shares of Common
Stock for $4.13 per share, of which 1,209,192 shares were purchased by the
Company's major stockholder and certain executive officers, directors and
employees.

As part of entering into long-term management services agreements with
physician practices described in Note 3, the Company has made nonforfeitable
commitments to issue shares of Common Stock at specified future dates for no
further consideration. Common Stock to be issued is shown as a separate
component in stockholders' equity. The amounts, upon issuance of the shares,
are reclassified to other equity accounts as appropriate.

The shares of Common Stock to be issued at specified future dates were
valued at a discount from the estimated fair value of a delivered share after
considering all relevant factors, including normal discounts for marketability
due to the time delay in delivery of the shares, estimates of the value of the
respective management service agreements and proximate sales of Common Stock for
cash. The Common Stock in the transactions is to be delivered under the terms
of the respective agreements for periods up to seven years. The Common Stock to
be delivered is discounted at weighted-averages of 39%, 39% and 38% for 1997,
1996 and 1995 respectively, from comparable cash sales of Common Stock.

For transactions completed through December 31, 1997, the scheduled
issuance of the shares of Common Stock that the Company is committed to deliver
over the passage of time are 2,940,618 in 1998, 5,244,319 in 1999, 5,491,405 in
2000, 1,694,212 in 2001, 1,934,599 in 2002 and 632,599 thereafter.

37

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 8 - STOCK OPTIONS

The Company's 1993 Key Employee Stock Option Plan, as amended, provides
that employees may be granted options to purchase Common Stock. Total shares
available for grant are limited to 7% of the outstanding common shares plus the
shares to be issued to physician groups at specified future dates. Individual
option vesting and related terms are determined by the Compensation Committee of
the Board of Directors. However, the stock option plan provides that the
options granted may be incentive options at an exercise price no less than fair
value at the grant date or 85% of fair value in the case of nonqualified
options. Option terms may not exceed ten years. Individual option grants vest
ratably over time, generally five years. Effective November 7, 1996, the Board
of Directors exchanged 626,100 options with exercise prices of $18.10 to $24.18
for new options with an exercise price of $8.79, which approximated fair value
on the date of grant.

Under the terms of the Company's Chief Executive Officer Stock Option Plan
and Agreement and the Everson Stock Option Plan and Agreement, two executives
were granted 3,693,798 non-qualified options to purchase Common Stock with an
exercise price effectively equal to the fair market value at the date of grant.
The options vested on the date of the Company's initial public offering and
expire between 2000 and 2003. The Company's ability to grant further options
under these plans ceased on the date of the Company's initial public stock
offering. At December 31, 1997, 2,218,428 Common Stock options with a weighted-
average exercise price of $3.33 per share were outstanding and exercisable under
the terms of these plans.

The Company's 1993 Non-Employee Director Stock Option Plan provides that up
to 200,400 options to purchase Common Stock can be granted. The options vest in
6 months or ratably over 4 years, have a term of 10 years and exercise prices
effectively equal to the fair market value at the date of grant. As of December
31, 1997, 104,000 options were outstanding , all of which were vested and
exercisable.

The Company's 1993 Affiliate Stock Option Plan, as amended, provides that
options to purchase up to 1,000,000 shares of Common Stock can be granted.
Options under the plan have a term of 10 years. All individual option grants
vest ratably over the vesting periods of 3 to 5 years. Effective November 7,
1996, the Board of Directors exchanged 61,500 options with exercise prices of
$18.10 to $24.18 for new options with an exercise price of $8.79 which
approximated fair value on the date of grant. Of the outstanding options to
purchase shares of Common Stock granted under this plan, 324,000 were granted to
physician employees of the affiliated physician groups and 24,250 were granted
to other employees of the affiliated physician groups. In 1997 and 1996, the
fair value of the options granted to non-employees was $8.21 and $13.06,
respectively. Compensation expense will be recognized over the respective
vesting periods. Expense of $270,000 and $106,000 was recognized in 1997 and
1996, respectively.

All of the Company's Common Stock options vest automatically upon a change
in control of the Company, as defined in such stock option plans.

38

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The following summarizes the activity for all option plans:

Weighted
Average
Shares Exercise Price
----------- --------------

Balance, December 31, 1994.. 3,298,000 $ 2.28

Granted................... 2,549,000 8.78
Exercised................. (12,000) 2.67
Canceled.................. (49,000) 3.17
----------

Balance, December 31, 1995.. 5,786,000 5.14

Granted................... 1,080,000 13.53
Exercised................. (893,000) 1.70
Canceled.................. (1,154,000) 19.09
----------

Balance, December 31, 1996.. 4,819,000 4.30

Granted 1,440,000 12.73
Exercised................. (415,000) 3.14
Canceled.................. (135,000) 10.68
----------

Balance, December 31, 1997.. 5,709,000 $ 6.36
==========

The following table summarizes information about the Company's stock options
outstanding at December 31, 1997:

Options Outstanding Options Exercisable
------------------------------------------------------------ ---------------------------------------
Number Weighted-Average Weighted Number Weighted
Range of Outstanding Remaining Contractual Average Exercisable at Average
Exercise Prices at 12/31/97 Life Exercise Price 12/31/97 Exercise Price
- ----------------- ------------- ---------------------- ------------------ ----------------- --------------------

$ 1 to 3 1,774,000 3.8 years $ 2.25 1,616,000 $ 2.26
4 to 9 3,220,000 6.5 6.49 1,764,000 4.80
15 to 24 715,000 9.6 16.00 16,000 24.18
----------- -----------
1 to 24 5,709,000 6.1 $ 6.36 3,396,000 $ 3.68
=========== ===========

39

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-
Based Compensation. " Accordingly, no compensation cost has been recognized for
fixed options granted to Company employees. Had compensation cost for the
Company's five stock option plans been determined based on the fair value at the
grant date for awards in 1996 and 1995 consistent with the provisions of SFAS
No. 123, the Company's pro forma net income and net income per share would have
been as follows:

Pro forma
Year Ended December 31,
-----------------------
1997 1996
------------ ---------

Net income............ $21,102 $16,656
Net income per share.. $ 0.44 $ 0.35

During the initial phase-in of SFAS No. 123, this pro forma is not likely
to be representative of the effects on reported net income for future years as
options granted prior to 1995 are not included in the calculation.

Options granted in 1997 and 1996 had weighted-average fair values of $9.11
and $6.04, respectively. The fair value of each Common Stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants from all plans in
1997 and 1996:

1997 1996
----- -----
Expected life (years)........... 5 5
Risk-free interest rate......... 5.2% 5.1%
Expected volatility (post IPO).. 81% 87%
Expected dividend yield......... 0% 0%

40

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 9 - COMMITMENTS AND CONTINGENCIES

The Company leases office space and certain equipment under noncancelable
operating lease agreements. Total future minimum lease payments, including
escalation provisions and leases with entities affiliated with physician groups,
are $12,315,000 in 1998, $11,074,000 in 1999, $9,686,000 in 2000, $8,649,000 in
2001, $7,064,000 in 2002 and $11,417,000 thereafter. Rental expense under
noncancelable operating leases was $12,274,000 in 1997, $8,565,000 in 1996 and
$4,459,000 in 1995.

In December 1997, the Company entered into a $75,000,000 master lease
agreement for the purpose of financing property and construction of integrated
cancer centers. Under the agreement, the lessor purchases the properties, pays
for the construction costs and thereafter leases the facilities to the Company.
The initial term of the lease is for five years and can be renewed in one year
increments if approved by the lessor. The lease provides for substantial
residual value guarantees and includes purchase options at original cost on each
option.

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

NOTE 10 - RELATED PARTIES

The management services agreement activity between the Company and the
affiliated physician groups is reflected in the due to/from affiliated physician
groups components on the consolidated balance sheet.

The Company leases a portion of its medical office space and equipment, at
rates which the Company believes approximate fair market value, from entities
affiliated with certain of the stockholders of physician groups affiliated with
the Company. Payments under these leases were $2,621,000 in 1997, $2,296,000 in
1996 and $1,854,000 in 1995 and total future commitments are $12,649,000.

The subordinated notes are payable to the persons or entities which are
also stockholders or holders of rights to receive Common Stock at specified
future dates. Total interest expense to these parties was $5,186,000 in 1997,
$3,885,000 in 1996 and $1,909,000 in 1995.

A director and a stockholder is a partner of a law firm utilized by the
Company. The Company incurred $584,000 in 1997, $651,000 in 1996 and $904,000
in 1995 for legal services provided by the firm.

Three of the Company's directors are practicing physicians with physician
groups affiliated with the Company. In 1997, the three physician groups
generated total medical service revenues of $40,378,000 of which $8,484,000 was
retained by the groups and $31,894,000 was included in the Company's revenue. In
1996, the three physician groups generated total medical service revenues of
$37,725,000 of which $8,218,000 was retained by the groups and $29,507,000 was
included in the Company's revenue. In 1995, three physician groups generated
total medical service revenues of $31,782,000 of which $6,694,000 was retained
by the groups and $25,088,000 was included in the Company's revenue.

41

AMERICAN ONCOLOGY RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 11 - QUARTERLY FINANCIAL DATA

The following table presents the Company's unaudited quarterly information
(in thousands, except per share amounts):

1997 Quarter Ended 1996 Quarter Ended
------------------------------ --------------------------------------
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
------ ------ ------ ------ -------- -------- -------- --------

Revenue................... 89,626 82,293 79,525 70,396 $63,635 $53,701 $47,374 $40,750
Income from operations.... 12,468 11,513 11,343 9,889 9,259 7,782 7,297 7,629

Net income................ 6,166 5,910 5,719 5,072 4,840 4,303 4,060 4,447
Net income per share
(Basic).................. 0.13 0.13 0.13 0.11 0.11 0.10 0.09 0.10

Net income per share
(Diluted)................ 0.13 0.12 0.12 0.11 0.10 0.09 0.09 0.09

42

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 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.

AMERICAN ONCOLOGY RESOURCES, INC.

By: /s/ R. DALE ROSS
--------------------------------
R. Dale Ross
Chairman of the Board and
Chief Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ R. DALE ROSS Chairman of the Board, March 19, 1998
- ----------------------------------- Chief Executive Officer
R. Dale Ross and Director

/s/ LLOYD K. EVERSON, M.D. President and Director March 19, 1998
- -----------------------------------
Lloyd K. Everson, M.D.

/s/ L. FRED POUNDS Vice President of Finance, March 19, 1998
- ----------------------------------- Chief Financial Officer
L. Fred Pounds and Treasurer

/s/ RUSSELL L. CARSON Director March 19, 1998
- -----------------------------------
Russell L. Carson

Director
- -----------------------------------
Kyle M. Fink, M.D.

/s/ RICHARD B. MAYOR Director March 17, 1998
- -----------------------------------
Richard B. Mayor

/s/ MAGARAL S. MURALI, M.D. Director March 18, 1998
- -----------------------------------
Magaral S. Murali, M.D.

/s/ ROBERT A. ORTENZIO Director March 19, 1998
- -----------------------------------
Robert A. Ortenzio

/s/ EDWARD E. ROGOFF, M.D. Director March 18, 1998
- -----------------------------------
Edward E. Rogoff, M.D.

43