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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

Or

Commission file number: 0-26190

US Oncology, Inc.

(Exact name of registrant as specified in its charter)

16825 Northchase Drive, Suite 1300

Houston, Texas

77060

(Address of principal executive offices)

(Zip Code)

(832) 601-8766

(Registrant’s telephone number, including area code)

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

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

As of July 16, 2004, 86,475,384 shares of the Registrant’s Common Stock were outstanding. In addition, as of July 16, 2004, the Registrant had agreed to deliver 805,790 shares of its Common Stock on certain future dates for no additional consideration.

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US ONCOLOGY, INC.

FORM 10-Q

JUNE 30, 2004

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

US ONCOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands, except par value)

(unaudited)

The accompanying notes are an integral part of this statement.

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US ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of this statement.

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US ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

(unaudited)

The accompanying notes are an integral part of this statement

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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and in accordance with Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contained in this report reflect all adjustments that are normal and recurring in nature and considered necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as disclosures on contingent assets and liabilities. Because of inherent uncertainties in this process, actual future results could differ from those expected at the reporting date. The unaudited condensed consolidated financial statements, notes and other information included in this form 10-Q should be read in conjunction with the financial statements and the accompanying notes included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 12, 2004, as amended.

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

NOTE 2 – THE MERGER TRANSACTION

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

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

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

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

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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)

stockholder approval statutorily required for a merger. A special meeting of stockholders will be held on August 20, 2004, for the purpose of voting on the merger agreement, the merger and related matters. On July 21, 2004, the Company filed a definitive proxy statement relating to the merger with the SEC. On July 22, 2004, the Company mailed the proxy statement to its stockholders. Additional conditions included the closing of financing arrangements as set forth in bank commitment letters that have been received by Holdings, the tender of not less than a majority of the aggregate principal amount of US Oncology’s outstanding 9 ⁵/8% Senior Subordinated Notes due 2012, the expiration of the applicable waiting period under the Hart-Scott-Rodino Act and other customary conditions. As of July 22, 2004, the Company had received the consents and tenders of approximately 84% of the principal amount of its existing Senior Subordinated Notes and received early termination of the waiting period under the Hart-Scott-Rodino Act.

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

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

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

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

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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)

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

NOTE 3 – REVENUES

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

The Company derives revenue primarily in four areas:

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

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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)

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

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

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

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

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

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

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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)

NOTE 4 – STOCK-BASED COMPENSATION

At June 30, 2004, the Company had seven stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Stock based employee compensation costs for options granted under those plans with exercise prices less than the market value of the underlying Common Stock on the date of the grant are insignificant for the three and six months ended June 30, 2004 and 2003.

The Company also provides a stock option plan to non-employee affiliates, which is accounted for using fair value based accounting with compensation expense being recognized over the respective vesting period. The Company recognized $0.2 million and $0.4 million for the three months ended June 30, 2004 and 2003 respectively. The Company recognized $0.4 million and $0.8 million for the six months ended June 30, 2004 and 2003, respectively.

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

NOTE 5 – INDEBTEDNESS

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

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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)

On February 1, 2002, the Company entered into a $100 million five-year revolving credit facility (Credit Facility), which expires in February 2007. Proceeds from loans under the Credit Facility may be used to finance development of cancer centers and new PET systems, to provide working capital and for other general business uses. Costs incurred in connection with establishing the Credit Facility were capitalized and are being amortized over the term of the Credit Facility.

Borrowings under the Credit Facility are collateralized by substantially all of the Company’s assets. At the Company’s option, funds may be borrowed at the base interest rate or the London Interbank Offered Rate (LIBOR), plus an amount determined under a defined formula. The base rate is selected by First Union National Bank (First Union) and is defined as its prime rate or Federal Funds Rate plus 1/2%. No amounts have been borrowed or outstanding under the Credit Facility since its inception and through June 30, 2004.

Senior subordinated notes

On February 1, 2002, the Company issued $175 million in 9.625% senior subordinated notes (“Senior Subordinated Notes”) to various institutional investors in a private offering pursuant to Rule 144A. The notes were subsequently exchanged for substantially identical notes in an offering registered under the Securities Act of 1933. The notes are unsecured, bear interest at 9.625% annually and mature in February 2012. Payments under the Senior Subordinated Notes are subordinated, in substantially all respects, to the Company’s Credit Facility and other “Senior Indebtedness,” as defined in the indenture governing the Senior Subordinated Notes. The Company believes that the carrying value of the Senior Subordinated Notes is not in excess of fair value at June 30, 2004.

Proceeds from the Senior Subordinated Notes were used to pay off previously existing indebtedness and to pay facility fees and expenses in connection with Company financings. Costs incurred in connection with establishing the Senior Subordinated Notes, including facility fees, were capitalized, and are being amortized over the term of those notes.

Leasing facility

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

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

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

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

Subordinated notes

The subordinated notes were issued in substantially the same form and are payable to the physicians with whom the Company entered into service agreements. Substantially all of the notes outstanding at June 30, 2004 bear interest at 7%, are due in installments through 2007, and are subordinated to senior bank and certain other debt. If the Company fails to make payments under any of the notes, the respective practice can terminate the related service agreement.

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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)

Capital lease obligations and other indebtedness

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

NOTE 6 – CAPITALIZATION

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

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

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

NOTE 7 – EARNINGS PER SHARE

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

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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)

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

NOTE 8 – SEGMENT FINANCIAL INFORMATION

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

The Company has determined that its reportable segments are those that are based on the Company’s method of internal reporting, which disaggregates its business by service line. The Company’s reportable segments are medical oncology services, cancer center services, and other services which primarily consist of cancer research services. All of our product revenues result from the sale of pharmaceuticals under the medical oncology service business line. Under the medical oncology services segment, the Company purchases and manages specialty oncology pharmaceuticals and provides practice management services to medical oncology practices. Under the cancer center services segment, the Company develops and manages comprehensive, community-based cancer centers, which integrate all aspects of outpatient cancer care, from laboratory and radiology diagnostic capabilities to chemotherapy and radiation therapy. Under the other services segment, the Company contracts with pharmaceutical and biotechnology firms to provide a comprehensive range of services relating to clinical trials. Results of operations for the medical oncology services segment and other services segment include arrangements under both our PPM and service line models. We provide cancer center services only in PPM arrangements.

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

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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)

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

Three Months Ended June 30, 2004:

Three Months Ended June 30, 2003:

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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)

Six Months Ended June 30, 2004:

Six Months Ended June 30, 2003:

NOTE 9 – COMMITMENTS AND CONTINGENCIES

As disclosed in Part II, Item 1, under the heading “Legal Proceedings,” the Company is aware that it and certain of its subsidiaries and affiliated practices have in the past been subject of qui tam lawsuits filed under seal alleging healthcare law violations. Although the suits of which the Company is aware have been dismissed, because qui tam actions are filed under seal, there is a possibility that the Company could be the subject of other qui tam actions of which it is unaware.

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

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

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

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US Oncology, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued

(unaudited)

NOTE 10 – RECENT PRONOUNCEMENTS

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

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US Oncology, Inc

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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion should be read in conjunction with the financial statements, related notes, and other financial information appearing elsewhere in this report. In addition, see “Forward-Looking Statements and Risk Factors” included in our Annual Report on Form 10-K for 2003 filed with the Securities and Exchange Commission (SEC), as amended.

Our Business

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

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

The Merger Transaction

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

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US Oncology, Inc

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

OPERATIONS – continued

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

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

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

The closing of the merger is subject to various conditions contained in the merger agreement, including the approval by the holders of a majority of US Oncology’s shares held by stockholders other than Welsh Carson, its co-investors and members of US Oncology’s Board or management that participate in the merger, in addition to majority stockholder approval statutorily required for a merger. A special meeting of stockholders will be held on August 20, 2004, for the purpose of voting on the merger agreement, the merger and related matters. A definitive proxy statement relating to the special meeting was filed with the SEC on July 21, 2004, and mailed to stockholders on July 22, 2004. Additional conditions include the closing of financing arrangements as set forth in bank commitment letters that have been received by Holdings, the tender of not less than a majority of the aggregate principal amount of US Oncology’s outstanding 9 ⁵/8% Senior Subordinated Notes due 2012, the expiration of the applicable waiting period under the Hart-Scott-Rodino Act and other customary conditions. As of July 22, 2004, the Company had received the consents and tenders of approximately 84% of the principal amount of its existing Senior Subordinated Notes and received early termination of the waiting period under the Hart-Scott-Rodino Act.

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

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

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

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

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

Our Strategy

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

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

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

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

Economic Models

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

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

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

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

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

Realignment of Net Revenue Model Practices

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

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

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

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

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

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Forward-looking Statements and Risk Factors

The following statements are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995: (i) certain statements, including possible or assumed future results of operations contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (ii) any statements contained herein regarding the prospects for any of our business or services and our development activities relating to the service line model, cancer centers and PET installations; (iii) any statements preceded by, followed by or that include the words “believes”, “expects”, “anticipates”, “intends”, “estimates”, “plans” or similar expressions; and (iv) other statements contained herein regarding matters that are not historical facts.

US Oncology’s business and results of operations are subject to risks and uncertainties, many of which are beyond our ability to control or predict. Because of these risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements, and investors are cautioned not to place undue reliance on such statements, which speak only as of the date thereof.

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

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

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

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to service agreements, accounts receivable, intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

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

Please refer to the “Critical Accounting Policies” section of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2003 for a discussion of our critical accounting policies. Management believes such critical accounting policies affect its more significant judgments and estimates used in the preparation of our consolidated condensed financial statements. These critical accounting policies include our policy of non-consolidation of the results of affiliated practices, revenue recognition (including calculation of physician compensation), general estimates of accruals, including accruals relating to accounts receivable, and intangible asset amortization and impairment.

Recent Pronouncements

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

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

Discussion of Non-GAAP Information

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

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

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

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

In all events, EBITDA and EBITDA margin are not intended to be a substitute for GAAP measures, and investors are advised to review such non-GAAP measures in conjunction with GAAP information provided by us.

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Results of Operations

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

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

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