US Oncology 10-Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2006

Or

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

Commission file numbers:            and 0-26190

US Oncology Holdings, Inc.

US Oncology, Inc.

(Exact name of registrants as specified in their charters)

Delaware	20-0873619
Delaware	20-0873619
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

16825 Northchase Drive, Suite 1300

Houston, Texas

77060

(Address of principal executive offices)

(Zip Code)

(832) 601-8766

(Registrants’ telephone number, including area code)

Indicate by check mark whether the Registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrants are a large accelerated filers, an accelerated filers, or a non-accelerated filers. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filers  ¨    Accelerated filers  ¨    Non-accelerated filers  x

Indicate by check mark whether the Registrants are a shell companies (as defined in Rule 12(b)-2 of the Securities Exchange Act of 1934.)    Yes  ¨    No  x

As of November 1, 2006, 118,938,401 and 100 shares of US Oncology Holdings, Inc. and US Oncology, Inc. common stock were outstanding, respectively.

This Form 10-Q is a combined quarterly report being filed separately by two registrants; US Oncology Holdings, Inc. and US Oncology, Inc. Unless the context indicates otherwise, any reference in this report to “Holdings” refers to US Oncology Holdings, Inc. and any reference to “US Oncology” refers to US Oncology, Inc., the wholly-owned operating subsidiary of Holdings. References to the “Company”, “we”, “us”, and “our” refer collectively to US Oncology Holdings, Inc. and US Oncology, Inc.

US ONCOLOGY HOLDINGS, INC.

US ONCOLOGY, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

TABLE OF CONTENTS

		PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Income	4
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 4.	Controls and Procedures	52
PART II.OTHER INFORMATION
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	55
Item 4.	Submission of Matters to a Vote of Security Holders	55
Item 6.	Exhibits	56
SIGNATURES		59

This Form 10-Q is being filed by each of the registrants, US Oncology Holdings, Inc. and US Oncology, Inc. Each Registrant hereto is filing on its own behalf the information as required by Form 10-Q which is contained in this quarterly report.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share data)

	US Oncology Holdings, Inc.					US Oncology, Inc.
	September 30, 2006		December 31, 2005			September 30, 2006		December 31, 2005
ASSETS
Current assets:
Cash and equivalents	$	88,403	$	125,838		$	88,401	$	125,837
Accounts receivable		357,258		347,224			357,258		347,224
Other receivables		111,285		84,654			111,285		84,654
Prepaid expenses and other current assets		21,356		22,531			21,356		22,531
Inventories		109,896		47,679			109,896		47,679
Deferred income taxes		8,739		5,630			8,739		5,630
Due from affiliates		64,667		55,996			64,667		55,996
Total current assets		761,604		689,552			761,602		689,551
Property and equipment, net		394,315		412,334			394,315		412,334
Service agreements, net		240,454		242,687			240,454		242,687
Goodwill		761,019		716,732			761,019		716,732
Other assets		73,083		57,669			65,854		49,743
	$	2,230,475	$	2,118,974		$	2,223,244	$	2,111,047
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term indebtedness	$	8,151	$	10,359		$	8,151	$	10,359
Accounts payable		240,224		237,963			240,028		237,516
Due to affiliates		146,140		122,385			146,140		122,385
Accrued compensation cost		25,224		33,772			25,224		33,772
Accrued interest payable		11,041		31,792			10,062		24,938
Income taxes payable		6,559		7,388			20,077		14,222
Other accrued liabilities		33,259		30,938			33,259		30,938
Total current liabilities		470,598		474,597			482,941		474,130
Deferred revenue		8,686		6,971			8,686		6,971
Deferred income taxes		31,596		28,459			31,063		27,863
Long-term indebtedness		1,316,924		1,230,871			1,066,924		980,871
Other long-term liabilities		7,478		7,894			7,478		7,894
Total liabilities		1,835,282		1,748,792			1,597,092		1,497,729
Commitments and contingencies (Note 7)
Minority interests		13,707		13,069			13,707		13,069
Preferred stock, 15,000,000 shares authorized, 13,938,657 shares issued and outstanding, respectively		307,568		292,716			—		—
Stockholders’ equity:
Common stock, $0.001 par value, 250,000,000 shares authorized, 118,934,101 and 119,546,351 shares issued and outstanding, respectively		119		120			—		—
Common stock, $0.01 par value, 100 shares authorized, issued and outstanding		—		—			1		1
Additional paid-in capital		59,897		61,990			581,407		583,778
Deferred compensation		—		(3,536	)		—		(3,536	)
Accumulated other comprehensive income, net of tax		938		912			—		—
Retained earnings		12,964		4,911			31,037		20,006
Total stockholders’ equity		73,918		64,397			612,445		600,249
	$	2,230,475	$	2,118,974		$	2,223,244	$	2,111,047

The accompanying notes are an integral part of these statements.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited, in thousands)

	US Oncology Holdings, Inc.						US Oncology, Inc.
	Three Months Ended September 30,						Three Months Ended September 30,
	2006			2005			2006			2005
Product revenues	$	458,862		$	418,724		$	458,862		$	418,724
Service revenues		239,776			229,621			239,776			229,621
Total revenues		698,638			648,345			698,638			648,345
Cost of products		432,553			400,876			432,553			400,876
Cost of services:
Operating compensation and benefits		113,628			107,138			113,628			107,138
Other operating costs		71,772			62,920			71,772			62,920
Depreciation and amortization		17,578			17,159			17,578			17,159
Total cost of services		202,978			187,217			202,978			187,217
Total cost of products and services		635,531			588,093			635,531			588,093
General and administrative expense		18,404			18,381			18,370			18,267
Depreciation and amortization		2,587			3,783			2,587			3,783
Total costs and expenses		656,522			610,257			656,488			610,143
Income from operations		42,116			38,088			42,150			38,202
Other expense:
Interest expense, net		(30,369	)		(26,949	)		(24,229	)		(20,833	)
Minority interest expense		(593	)		(149	)		(593	)		(149	)
Income before income taxes		11,154			10,990			17,328			17,220
Income tax provision		(4,436	)		(4,102	)		(6,731	)		(6,657	)
Net income	$	6,718		$	6,888		$	10,597		$	10,563
Other comprehensive income:
Unrealized gain (loss) on interest rate swap, net of tax		(124	)		1,375			—			—
Comprehensive income	$	6,594		$	8,263		$	10,597		$	10,563

The accompanying notes are an integral part of these statements.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited, in thousands)

	US Oncology Holdings, Inc.						US Oncology, Inc.
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Product revenues	$	1,359,957		$	1,181,431		$	1,359,957		$	1,181,431
Service revenues		729,842			672,179			729,842			672,179
Total revenues		2,089,799			1,853,610			2,089,799			1,853,610
Cost of products		1,292,913			1,129,637			1,292,913			1,129,637
Cost of services:
Operating compensation and benefits		343,665			310,447			343,665			310,447
Other operating costs		204,409			182,070			204,409			182,070
Depreciation and amortization		51,497			50,027			51,497			50,027
Total cost of services		599,571			542,544			599,571			542,544
Total cost of products and services		1,892,484			1,672,181			1,892,484			1,672,181
General and administrative expense		59,692			53,189			59,499			52,879
Compensation expense under long-term incentive plan		—			14,507			—			14,507
Depreciation and amortization		10,177			13,105			10,177			13,105
Total costs and expenses		1,962,353			1,752,982			1,962,160			1,752,672
Income from operations		127,446			100,628			127,639			100,938
Other expense:
Interest expense, net		(87,541	)		(74,539	)		(69,380	)		(62,166	)
Minority interest expense		(1,728	)		(1,047	)		(1,728	)		(1,047	)
Income before income taxes		38,177			25,042			56,531			37,725
Income tax provision		(15,272	)		(10,449	)		(22,047	)		(14,976	)
Net income	$	22,905		$	14,593		$	34,484		$	22,749
Other comprehensive income:
Unrealized gain on interest rate swap, net of tax		826			556			—			—
Comprehensive income	$	23,731		$	15,149		$	34,484		$	22,749

The accompanying notes are an integral part of these statements.

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US ONCOLOGY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

	Shares Issued		Par Value			Additional Paid-In Capital			Deferred Compensation			Other Comprehensive Income		Retained Earnings			Total
Balance at December 31, 2005	119,546		$	120		$	61,990		$	(3,536	)	$	912	$	4,911		$	64,397
Elimination of unamortized deferred compensation balance	—			—			(3,536	)		3,536			—		—			—
Restricted stock award issuances, net of forfeitures	(646	)		(1	)		—			—			—		—			(1	)
Stock-based compensation expense	—			—			1,403			—			—		—			1,403
Accretion of preferred stock dividends	—			—			—			—			—		(14,852	)		(14,852	)
Proceeds from exercise of options to purchase common stock	34			—			40			—			—		—			40
Accumulated other comprehensive income for unrealized gain on interest rate swap, net of tax	—			—			—			—			26		—			26
Net income	—			—			—			—			—		22,905			22,905
Balance at September 30, 2006	118,934		$	119		$	59,897		$	—		$	938	$	12,964		$	73,918

US ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

(unaudited, in thousands except share information)

	Shares Issued	Par Value		Additional Paid-In Capital			Deferred Compensation			Retained Earnings			Total
Balance at December 31, 2005	100	$	1	$	583,778		$	(3,536	)	$	20,006		$	600,249
Elimination of unamortized deferred compensation balance	—		—		(3,536	)		3,536			—			—
Stock-based compensation expense	—		—		1,403			—			—			1,403
Contribution of proceeds from exercise of options to purchase common stock	—		—		22			—			—			22
Dividend paid	—		—		(260	)		—			(23,453	)		(23,713	)
Net income	—		—		—			—			34,484			34,484
Balance at September 30, 2006	100	$	1	$	581,407		$	—		$	31,037		$	612,445

The accompanying notes are an integral part of these statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	US Oncology Holdings, Inc.						US Oncology, Inc.
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Cash flows from operating activities:
Net income	$	22,905		$	14,593		$	34,484		$	22,749
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization, including amortization of deferred financing costs		67,125			63,132			66,576			63,132
Deferred income taxes		3,008			16,661			3,103			14,976
Stock-based compensation expense		1,403			2,862			1,403			2,862
Minority interest expense		1,728			1,047			1,728			1,047
(Increase) Decrease in:
Accounts receivable		(63,304	)		(34,733	)		(63,304	)		(34,733	)
Prepaid expenses and other current assets		48			(31,163	)		48			(31,163	)
Inventories		(61,693	)		(21,036	)		(61,693	)		(21,036	)
Other assets		4,381			4,153			4,175			3,467
Increase (Decrease) in:
Accounts payable		1,368			96,304			1,619			95,810
Due from/to affiliates		16,678			13,127			16,678			13,127
Income taxes payable		(3,949	)		(13,853	)		2,735			(7,640	)
Other accrued liabilities		(26,308	)		(21,429	)		(20,433	)		(22,410	)
Net cash provided by (used in) operating activities		(36,610	)		89,665			(12,881	)		100,188
Cash flows from investing activities:
Acquisition of property and equipment		(57,944	)		(62,762	)		(57,944	)		(62,762	)
Proceeds from sale of property and equipment		1,197			—			1,197			—
Acquisition of business, net of cash acquired		(31,378	)		—			(31,378	)		—
Payments in affiliation transactions		(3,152	)		(4,515	)		(3,152	)		(4,515	)
Investment in unconsolidated ventures		(2,656	)		—			(2,656	)		—
Proceeds from contract separation		—			1,807			—			1,807
Proceeds from sale of real estate interests in joint venture		—			900			—			900
Net cash used in investing activities		(93,933	)		(64,570	)		(93,933	)		(64,570	)
Cash flows from financing activities:
Proceeds from term loan		100,000			—			100,000			—
Proceeds from senior floating rate notes		—			250,000			—			—
Proceeds from other indebtedness		—			13,245			—			13,245
Net distributions to parent		—			—			(23,713	)		(16,824	)
Payment of dividends on preferred stock		—			(200,015	)		—			—
Payment of dividends on common stock		—			(49,985	)		—			—
Repayment of term loan		(1,000	)		(16,912	)		(1,000	)		(16,912	)
Repayment of other indebtedness		(4,214	)		(4,944	)		(4,214	)		(4,944	)
Issuance of stock		—			899			—			—
Debt issuance costs		(627	)		(7,200	)		(627	)		—
Distributions to minority interests		(1,572	)		—			(1,572	)		—
Contributions from minority interests		482			—			482			—
Proceeds from exercise of options		39			—			—			—
Contribution of proceeds from exercise of options		—			—			22			—
Net cash provided by (used in) financing activities		93,108			(14,912	)		69,378			(25,435	)
Increase (Decrease) in cash and equivalents		(37,435	)		10,183			(37,436	)		10,183
Cash and equivalents:
Beginning of period		125,838			120,400			125,837			120,399
End of period	$	88,403		$	130,583		$	88,401		$	130,582
Supplemental Cash Flow Information:
Interest paid	$	105,115		$	83,159		$	80,624		$	73,066
Taxes paid		15,030			150			15,030			150

The accompanying notes are an integral part of these statements.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006

NOTE 1 – Basis of Presentation

In March, 2004, US Oncology Holdings, Inc. (“Holdings”), which was formerly known as Oiler Holding Company, and its wholly-owned subsidiary, Oiler Acquisition Corp. (“Oiler”), entered into a merger agreement with US Oncology, Inc. (“US Oncology”) pursuant to which Oiler was merged with and into US Oncology, with US Oncology continuing as the surviving corporation and a wholly-owned subsidiary of Holdings. On August 20, 2004, the merger was consummated, and US Oncology became a wholly-owned subsidiary of Holdings. Holdings and US Oncology and their subsidiaries are collectively referred to as the “Company.”

The consolidated financial statements of Holdings include the accounts of its wholly-owned subsidiary US Oncology. Holdings conducts substantially all of its business through US Oncology and its subsidiaries that provide extensive services and support to its affiliated cancer care sites nationwide to help them expand their offering of the most advanced treatments, build integrated community-based cancer care centers, improve their therapeutic drug management programs, and participate in many of the new cancer-related clinical research studies. US Oncology is affiliated with 1,029 physicians operating in 411 locations, including 91 radiation oncology facilities in 35 states. US Oncology also provides a broad range of services to pharmaceutical manufacturers, including product distribution and informational services such as data reporting and analysis.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial reporting and in accordance with instructions for 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 year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the interim period are not necessarily indicative of the results expected for the full year. The preparation of financial statements in conformity with GAAP 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. These unaudited, condensed, consolidated financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 15, 2006, and subsequent filings.

Certain previously reported financial information, including minority interest expense, has been reclassified to conform to the current interim presentation.

NOTE 2 – Revenues

The Company derives revenues primarily from (i) comprehensive service arrangements with physician practices; (ii) pharmaceutical services agreements with physician practices under the oncology pharmaceutical services (“OPS”) model; (iii) fees paid by pharmaceutical companies for services as a group purchasing organization, data services and other manufacturer services and (iv) research agreements with pharmaceutical manufacturers and other trial sponsors.

Governmental programs, such as Medicare and Medicaid, are collectively the affiliated practices’ largest payers, in terms of patients and patient revenue. For the three months ended September 30, 2006 and 2005, the affiliated practices derived 38.3% and 38.0%, respectively, of their net patient revenue from services provided under the Medicare program (of which 3.2% and 2.2%, respectively, relates to Medicare managed care) and 3.1% and 2.9%, respectively, from services provided under state Medicaid programs. For the nine months ended September 30, 2006 and 2005, the affiliated practices derived 37.9% and 39.0%, respectively, of their net patient revenue from services provided under the Medicare program (of which 2.8% and 2.1%, respectively, relates to Medicare managed care) and 3.1% and 2.8%, respectively, from services provided under state Medicaid programs. Capitation revenues were less than 1% of total net patient revenue in all periods. Changes in the payer reimbursement rates, or in affiliated practices’ payer mix could materially and adversely affect the Company’s revenues.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

Effective January 1, 2005, Medicare changed the method by which it reimburses providers for oncology pharmaceuticals administered in physicians’ offices, including those in the US Oncology network. Medicare now pays oncologists the average sales price (“ASP”) for drugs plus 6%. Previously, Medicare reimbursed physicians for oncology pharmaceuticals based on average wholesale price (“AWP”), which was significantly higher than ASP. Conversion to ASP-based reimbursement from AWP reduced Medicare reimbursement for pharmaceuticals approximately 15%, effective January 1, 2005. ASP-based reimbursement is adjusted quarterly, and as a result of these quarterly adjustments, the Company experienced a decline of approximately 7.5% in Medicare reimbursement during the year ended December 31, 2005 and a 1.2% increase during the nine months ended September 30, 2006.

The decline in pharmaceutical reimbursement under Medicare was partially offset by the Medicare Demonstration Project which was initiated in 2005 and continued in 2006. In 2005, the Medicare Demonstration Project provided payments for certain data related to symptom management for cancer patients and, in 2006, the project was revised to gather more specific information relevant to the quality of care for cancer patients that is focused on physician evaluation and management. The Centers for Medicare and Medicaid Services (“CMS”) has indicated that extension of the Medicare Demonstration Project through 2007 is under consideration but the project has not been renewed.

Medicare reimbursement for physician services is based upon a fee schedule. The fee schedule establishes payment for a given service based on relative value units (“RVUs”), which are a reflection of physician work intensity, practice expenses and geographic cost variations. RVU’s are monetized, through application of a conversion factor, into reimbursement rates for physician services. In 2006, the conversion factor was scheduled to decrease by 4.5% but did not due to the Deficit Reduction Act (“DRA”) which was passed by Congress and signed into law by the President in February, 2006. The DRA contains a provision that maintained the 2006 conversion factor at 2005 levels. This provision will expire on December 31, 2006, and if Congress does not revise the formula-driven conversion factor before that date, Medicare reimbursement for physician services will decrease by approximately 5.0% effective January 1, 2007. The DRA also contains a provision impacting imaging reimbursement. The technical component of the physician fee schedule for physician-office imaging services has been capped at the Hospital Outpatient Prospective Payment System (“HOPPS”) rates effective January 1, 2007. If Congress does not act to revise the DRA provision between now and December 31, 2006, Medicare reimbursement will be limited to no more than the HOPPS rates. The impact on US Oncology affiliated practices primarily relates to reduced reimbursement for PET, PET/CT and CT services.

In November, 2006, CMS released its Final Rule of the Five-Year Review of Work Relative Value Units under the Physician Fee Schedule and Proposed Changes to the Practice Expense (“PE”) Methodology (the “Final Rule”). The Final Rule contains a provision that changes the RVU’s under the physician fee schedule that will be fully implemented on January 1, 2007 and a provision that changes the PE methodology that will be phased in over a four-year period beginning in 2007. For 2007, the Company estimates that the Final Rule will increase non-pharmaceutical reimbursement by 1.8% and, upon full implementation in 2011, by 4.1%.

The Company’s most significant, and only service agreement to provide more than 10% of total revenues, is with Texas Oncology, P.A. which accounted for 25.8% and 25.0% of revenue for the nine month periods ended September 30, 2006, and 2005, respectively.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

NOTE 3 – Intangible Assets and Goodwill

Changes in intangible assets relating to service agreements and goodwill during the nine months ended September 30, 2006 consisted of the following (in thousands):

	Service Agreements, net			Goodwill
Balance at December 31, 2005	$	242,687		$	716,732
Additions, net		8,486			44,287
Amortization expense		(10,719	)		—
Balance at September 30, 2006	$	240,454		$	761,019

On July 6, 2006, the Company acquired 100% of the outstanding capital stock of AccessMed Holdings, Inc., the parent company of AccessMed, Inc. (collectively “AccessMed”), for cash consideration of $31.4 million, net of cash acquired. AccessMed is a provider of reimbursement hotline and patient assistance programs and is located in Overland Park, Kansas. The acquisition expands the services offered by the Company to pharmaceutical manufacturers and also allows the Company to centralize the appeals and patient financial assistance processes for affiliated practices. Additional cash consideration of up to $6.0 million could be payable based upon the financial performance of the acquired business for the period from January 1, 2007 through December 31, 2007.

The total purchase price was allocated to AccessMed’s net tangible and identifiable intangible assets based on their estimated fair values. The excess of the purchase price over the net assets was recorded as goodwill, in the amount of $30.6 million, and is included in the Condensed Consolidated Balance Sheet as of September 30, 2006 and is a component of the pharmaceutical services segment. None of the goodwill related to this acquisition is deductible for tax purposes. The balances included in the Condensed Consolidated Balance Sheet related to the acquisition are based on preliminary information and are subject to change when asset valuations are finalized and the liabilities have been evaluated. Acquisitions are accounted for using the purchase method of accounting and the purchase price was allocated to the net assets acquired based upon their fair values at the date of acquisition. Final valuations of assets and liabilities are determined and recorded within one year from the date of the acquisition.

In the third quarter of 2006, the Company recorded an adjustment to certain assets classified as buildings and land that had been incorrectly recorded at the date of the August 20, 2004 merger (see Note 1). To correct this error in accounting, the Company reduced the cost of buildings and land by $11.8 million and $1.9 million, respectively, which was offset by an increase to goodwill of $13.7 million in its Condensed Consolidated Balance Sheet as of September 30, 2006. In addition, depreciation and amortization expense was reduced by $0.9 million in its consolidated statement of operations for the quarter ended September 30, 2006 to adjust for the cumulative error recorded in depreciation expense since the August 20, 2004 merger. The correction was recorded in the current period rather than restating previously issued financial statements as management concluded that the impact on prior years was not material.

The carrying value of goodwill is subject to impairment tests under the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”. The Company performs impairment tests annually during the fourth quarter, and more frequently in the event that circumstances indicate impairment may have occurred. No impairments were recorded during the nine months ended September 30, 2006 or 2005.

Accumulated amortization relating to service agreements was $29.8 million and $19.1 million at September 30, 2006 and December 31, 2005, respectively.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

NOTE 4 – Indebtedness

As of September 30, 2006 and December 31, 2005, long-term indebtedness consisted of the following (in thousands):

	September 30, 2006			December 31, 2005
US Oncology, Inc.:
Senior Secured Credit Facility	$	479,088		$	380,088
9.0% Senior Notes, due 2012		300,000			300,000
10.75% Senior Subordinated Notes, due 2014		275,000			275,000
9.625% Senior Subordinated Notes, due 2012		3,000			3,000
Subordinated notes		3,215			6,936
Mortgage, capital lease obligations and other		14,772			26,206
		1,075,075			991,230
Current maturities of long-term indebtedness		(8,151	)		(10,359	)
	$	1,066,924		$	980,871
US Oncology Holdings, Inc.:
Senior Floating Rate Notes, due 2015		250,000			250,000
	$	1,316,924		$	1,230,871

Future principal obligations under US Oncology’s and Holdings’ long-term indebtedness as of September 30, 2006, are as follows (in thousands):

	Twelve months ending September 30,
	2007		2008		2009		2010		2011		Thereafter		Total
US Oncology payments due	$	8,151		6,053		5,726		120,316		348,217		586,612	$	1,075,075
Holdings payments due		—		—		—		—		—		250,000		250,000
	$	8,151	$	6,053	$	5,726	$	120,316	$	348,217	$	836,612	$	1,325,075

Senior Secured Credit Facility

The senior secured credit facility provides for senior secured financing of up to $660.0 million, consisting of:

• a $160.0 million revolving credit facility, including a letter of credit sub-facility and a swingline loan sub-facility that will terminate on August 20, 2010. At September 30, 2006, $137.2 million was available for borrowing. The availability has been reduced by outstanding letters of credit amounting to $22.8 million. At September 30, 2006 and December 31, 2005, no amounts had been borrowed under the revolving credit facility.

• a $500.0 million term loan facility with a maturity of August, 2011. The amount outstanding under the term loan was $479.1 million and $380.1 million as of September 30, 2006 and December 31, 2005, respectively. On July 10, 2006, the Company amended its senior secured credit facility to provide for an additional term loan of $100.0 million to US Oncology (the “2006 Term Loan”). The 2006 Term Loan bears interest at the same rate as the Company’s existing senior secured term loan and interest is payable semi-annually. The 2006 Term Loan is subject to the same covenants, terms and conditions, and is secured by the same collateral as the Company’s existing senior secured debt.

The interest rates applicable to loans, other than swingline loans, under the senior secured credit facility are, at the Company’s option, equal to either an alternate base rate or an adjusted LIBOR for one, two, three or six month interest periods chosen by

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

the Company (or a nine or 12 month period if all lenders agree to make an interest period of such duration available) in each case, plus an applicable margin percentage. Swingline loans bear interest at the interest rate applicable to alternate base rate revolving loans.

The adjusted LIBOR is based upon settlement rates in the London interbank market. The alternate base rate is the greater of (1) the prime rate or (2) one-half of 1% over the weighted average of the rates on overnight Federal funds transactions as published by the Federal Reserve Bank of New York. Currently, the applicable margin percentage is a percentage per annum equal to (1) 1.25% for alternate base rate term loans, (2) 2.25% for adjusted LIBOR term loans, (3) 1.25% for alternate base rate revolving loans and (4) 2.25% for adjusted LIBOR revolving loans.

Indebtedness under the senior secured credit facility is guaranteed by all of US Oncology’s current restricted subsidiaries (see Note 9), all of US Oncology’s future restricted subsidiaries and by Holdings, and is secured by a first priority security interest in substantially all of US Oncology’s existing and future real and personal property, including accounts receivable, inventory, equipment, general intangibles, intellectual property, investment property, cash and a first priority pledge of US Oncology’s capital stock and the capital stock of the guarantor subsidiaries.

The senior secured credit facility requires US Oncology to comply, on a quarterly basis, with certain financial covenants, including an interest coverage ratio (interest expense divided by EBITDA, as defined by the indenture) and a maximum leverage ratio (indebtedness divided by EBITDA, as defined by the indenture). At September 30, 2006, the Company was required to maintain an interest coverage ratio of 2.10:1 and a maximum leverage ratio of 5.50:1. Both of these covenants become more restrictive over time and, at maturity in 2011, both will be 3.00:1. Also, the Company may be obligated (based on certain leverage thresholds) to make payments on its term loan facility of up to 75% of “excess cash flow”, as defined. No such payment was required for the year ended December 31, 2005. In addition, the senior secured credit facility includes various negative covenants, including with respect to indebtedness, liens, investments, permitted businesses and transactions and other matters, as well as certain customary representations and warranties, affirmative covenants and events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, actual or asserted failure of any guaranty or security document supporting the senior secured credit facility to be in full force and effect and change of control. If such an event of default occurs, the lenders under the senior secured credit facility are entitled to take various actions, including the acceleration of amounts due under the senior secured credit facility and all actions permitted to be taken by a secured creditor. As of September 30, 2006, the Company is in compliance with all financial covenants.

Senior Floating Rate Notes

During March, 2005, Holdings issued $250 million Senior Floating Rate Notes, due 2015 (“the Holdings Notes”). The Holdings Notes are senior unsecured obligations that bear interest at a floating rate, reset semi-annually, equal to 6-month LIBOR plus 5.25%. Simultaneously with the financing, Holdings entered into an interest rate swap agreement, effectively fixing the interest rate at 9.4% for a period of two years ending March 15, 2007. During the period that the interest expense has been fixed, interest expense will amount to approximately $23.5 million annually, and may be more or less than that amount thereafter.

The Company designated the interest rate swap as a cash flow hedge against the variability of future interest payments for accounting purposes. Derivatives that have been designated and qualify as cash flow hedging instruments are reported at fair value. The gain or loss on the effective portion of the hedge is initially reported as a component of other comprehensive income in the Company’s Condensed Consolidated Statement of Stockholders’ Equity. The remaining gain or loss, if any, is recognized currently in earnings. Amounts in accumulated other comprehensive income are reclassified into net income in the same period in which the hedged forecasted transaction affects earnings.

Because Holdings’ principal asset is its investment in US Oncology, US Oncology provides funds to service Holding’s indebtedness through payment of dividends to Holdings. During the first nine months of 2006, US Oncology paid Holdings dividends of $23.7 million to finance the semi-annual interest payments due March 15, 2006 and September 15, 2006. The terms of the existing senior secured credit facility, as well as the indentures governing US Oncology’s senior notes and senior subordinated notes, and certain other agreements, restrict it and certain of its subsidiaries from making payments or transferring assets to Holdings, including dividends, loans or other distributions. Such restrictions include prohibition of dividends in an event of default and limitations on the total amount of dividends paid to Holdings. In the event these agreements do not permit US Oncology to provide Holdings with sufficient distributions to fund interest and principal

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

payments on the Holdings Notes when due, Holdings may default on its notes, unless other sources of funding are available. The amount available under the restricted payments provision is based upon a portion of US Oncology’s cumulative net income adjusted upward for certain transactions, primarily receipt of equity offering proceeds, and reduced principally by cumulative dividends paid to Holdings, among other transactions. Amounts available under this restricted payments provision were $76.8 million as of September 30, 2006.

Additionally, the indenture governing the Holdings Notes contains certain covenants that limit, among other things, the Company’s ability to incur additional debt, pay dividends, redeem or repurchase capital stock, issue capital stock, make certain investments, enter into certain types of transactions with affiliates, engage in unrelated businesses, create liens securing its debt, and sell certain assets or merge with or into other companies.

Proceeds from the Holdings Notes issued in March, 2005 were used to pay a $250 million dividend to Holdings’ common and preferred shareholders. The dividend payment triggered a payment obligation of $14.5 million under Holdings’ 2004 Long-Term Cash Incentive Plan, and Holdings incurred approximately $7.2 million in expenses related to the offering. These amounts were financed with a dividend from US Oncology to Holdings.

Mortgages, Capital Lease Obligations and Other

In March, 2006, the Company amended the lease agreements for two cancer centers operated through capital leases in a manner that resulted in the modified leases being classified as operating leases. Consequently, the remaining capital lease obligation of $11.0 million and the carrying value of the related capital assets of $10.7 million were retired, resulting in a $0.3 million gain that has been deferred and recognized as a reduction to rent expense over the remaining term of the leases.

NOTE 5 - Stock-Based Compensation

The following disclosures relate to stock incentive plans involving shares of Holdings common stock or options to purchase Holdings common stock. Activity related to Holdings’ stock-based compensation is included in the financial statements of US Oncology, as the participants in such plans are employees of US Oncology.

Effective January 1, 2006, the Company adopted SFAS No. 123R,Share-Based Payments(“SFAS 123R”). SFAS 123R requires nonpublic companies that used the minimum value method to apply the prospective transition method upon adoption of the standard. Under this method, no compensation expense is recognized for options awarded prior to January 1, 2006, unless these awards are modified subsequent to the adoption of the standard. The Company applied the prospective transition method and the adoption of SFAS 123R did not have a material effect on our financial condition or results of operations. In accordance with the prospective transition method, results for prior periods have not been restated. Upon adopting SFAS 123R, the Company eliminated the unamortized balance of deferred compensation associated with outstanding restricted share awards to additional paid-in-capital.

For all awards issued or modified after the adoption of SFAS 123R, compensation expense is recognized in the Company’s financial statements over the requisite service period, net of estimated forfeitures, and based on the fair value as of the grant date.

US Oncology Holdings, Inc. 2004 Equity Incentive Plan

The Holdings’ Board of Directors adopted the US Oncology Holdings, Inc. 2004 Equity Incentive Plan (the “Equity Incentive Plan”) effective in August, 2004. The purpose of the plan is to attract and retain the best available personnel and to provide additional incentives to employees and consultants to promote the success of the business. The Equity Incentive Plan provides for grants of up to 22,290,371 shares of restricted stock and 3,933,595 options to purchase common stock. Depending on the individual grants, awards vest either at the grant date, over defined service periods, or upon achieving a return on invested capital in excess of established thresholds. Based on the individual vesting criteria for each award, the Company recorded total compensation expense of approximately $0.3 million and $1.4 million, respectively, for the three and nine months ended September 30, 2006 related to awards made under the Equity Incentive Plan.

At September 30, 2006, 21,324,000 shares of restricted stock had been granted and 966,371 shares were available for future awards. During the nine months ended September 30, 2006 and 2005, respectively, the Company granted awards of 500,000 and 240,000 restricted shares with fair values of approximately $0.7 million and $0.4 million. During the nine months ended September 30, 2006, 1,146,000 restricted shares were forfeited by holders and previously recognized expense of $0.3 million related to the forfeited shares was reversed.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

Compensation expense related to outstanding restricted share awards is estimated to be $2.0 million, $0.8 million, $0.5 million and $0.3 million for the fiscal years ending December 31, 2006, 2007, 2008 and 2009, respectively. Deferred compensation related to these awards becomes fully amortized during the year ending December 31, 2009.

The following summarizes activity for options awarded under the Equity Incentive Plan:

	Shares Represented by Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Options outstanding, December 31, 2005	2,801,500		$	1.13
Granted	976,500			1.43
Exercised	(21,750	)		1.00
Forfeited	(187,250	)		1.00
Options outstanding, September 30, 2006	3,569,000		$	1.23	8.7 years	$	714
Options exercisable, September 30, 2006	1,293,260		$	1.08	8.3 years	$	449

At September 30, 2006, 3,569,000 options to purchase Holdings common stock were outstanding and 337,095 options were available for future awards. Holdings granted 976,500 and 470,000 options to purchase common shares during the nine months ended September 30, 2006 and 2005, respectively. The fair value of options awarded during the quarter ended September 30, 2006 was estimated at $0.56 per share using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 5.25%; expected life of five years; expected volatility of 34.2% based on an index of peer companies; and expected dividend yield of zero. As required upon adoption of SFAS 123R, compensation expense related to options granted during the nine months ended September 30, 2006 has been recorded based on the fair value as of the grant date and vesting provisions. Compensation expense incurred during the three and nine months ended September 30, 2006 for these awards was not material.

During the nine months ended September 30, 2006, holders of options to purchase common stock exercised a total of 21,750 options resulting in aggregate proceeds in the amount of 21,750 Also during the nine months ended September 30, 2006, 187,250 options to purchase common stock were forfeited by the holders.

Holdings 2004 Director Stock Option Plan

The Holdings’ Board of Directors also adopted the US Oncology Holdings 2004 Director Stock Option Plan (the “Director Stock Option Plan”), which was effective in October, 2004 upon stockholder approval. The total number of shares of common stock for which options may be granted under the Director Stock Option Plan is 500,000 shares. Under this plan, each eligible director in office and each eligible director who joined the board after adoption is automatically granted an option, annually, to purchase 5,000 shares of common stock. In addition, each such director is automatically granted an option, annually, to purchase 1,000 shares of common stock for each board committee on which such director served. At September 30, 2006, options to purchase 99,000 shares of common stock have been granted to directors under the Director Stock Option Plan. The options vest six months after the date of grant. During the nine months ended September 30, 2006, 12,000 options issued under the Director Stock Option Plan were exercised for aggregate proceeds of $14,400.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

Holdings 2004 Long-Term Cash Incentive Plan

In addition to stock incentive plans, Holdings has adopted the US Oncology Holdings, Inc. 2004 Long-Term Cash Incentive Plan (the “Cash Incentive Plan”). Under the Cash Incentive Plan, which is administered by the Compensation Committee of the Board of Directors of Holdings, awards granted to participants provide for cash payments upon (i) a qualified initial public offering or change in control or (ii) dividends on or redemptions of preferred stock. Cash payments are payable to participants based upon certain performance objectives as set forth in the terms, conditions and other provisions of the awards under the Cash Incentive Plan. During the quarter ended March 31, 2005, Holdings declared a special dividend of $250.0 million to its common and preferred stockholders. As a result of the dividend to preferred stockholders, Holdings became obligated to make a cash payment of $14.5 million under the Cash Incentive Plan that was financed with a dividend from US Oncology. Compensation expense associated with this obligation was recorded during the three months ended March 31, 2005. No triggering events have occurred since March 31, 2005 under the Cash Incentive Plan.

If any of the payment triggering events described in the Cash Incentive Plan occur in the future, the additional obligation (and compensation expense) as a result of such event or events would be approximately $4.3 million as of September 30, 2006. The amount of this obligation may increase or decrease based upon future performance of the Company.

NOTE 6 – Segment Financial Information

The Company follows the provisions of SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information” (“SFAS 131”). SFAS 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’s reportable segments are based on internal management reporting that disaggregates the business by service line. In the first quarter of 2006, the Company changed its reportable segments to present information for its recently established service offerings related to oncology pharmaceuticals. The Company’s reportable segments are medical oncology services, cancer center services, pharmaceutical services, and research/other services (primarily consisting of research services). The Company provides comprehensive practice management services for the non-clinical aspects of practice management to affiliated practices in its medical oncology and cancer center services segments. In addition to managing their non-clinical operations, the medical oncology segment provides oncology pharmaceutical services to practices affiliated under comprehensive service agreements. The cancer center services segment develops and manages comprehensive, community-based cancer centers, which integrate various aspects of outpatient cancer care, from laboratory and radiology diagnostic capabilities to radiation therapy for practices affiliated under comprehensive service agreements. The pharmaceutical services segment distributes oncology pharmaceuticals to our affiliated practices, including practices affiliated under our OPS model, and provides informational and other services to pharmaceutical manufacturers. The research/other services segment contracts with pharmaceutical and biotechnology firms to provide a comprehensive range of services relating to clinical trials. The segment presentation for the three and nine months ended September 30, 2005 has been conformed to the current presentation.

Balance sheet information by reportable segment is not reported, since the Company does not produce such information internally.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

The tables below present segment results for the three and nine months ended September 30, 2006 and 2005 (in thousands). The segment results of Holdings are identical to those of US Oncology with the exception of nominal administrative expenses:

	Three Months Ended September 30, 2006
	Medical Oncology Services			Cancer Center Services			Pharmaceutical Services			Research/ Other			Corporate Costs			Eliminations(1)			Total
US Oncology, Inc.
Product revenues	$	376,978		$	—		$	502,097		$	—		$	—		$	(420,213	)	$	458,862
Service revenues		134,550			82,448			6,828			15,950			—			—			239,776
Total revenues		511,528			82,448			508,925			15,950			—			(420,213	)		698,638
Operating expenses		(480,088	)		(53,250	)		(488,488	)		(16,340	)		(18,370	)		420,213			(636,323	)
Depreciation and amortization		—			(9,388	)		(1,014	)		(216	)		(9,547	)		—			(20,165	)
Income (loss) from operations	$	31,440		$	19,810		$	19,423		$	(606	)	$	(27,917	)	$	—		$	42,150
US Oncology Holdings, Inc.
Operating expenses	$	—		$	—		$	—		$	—		$	(34	)	$	—		$	(34	)
Income (loss) from operations	$	31,440		$	19,810		$	19,423		$	(606	)	$	(27,951	)	$	—		$	42,116
Goodwill	$	409,322		$	191,615	(2)	$	160,082	(3)(4)	$	—		$	—		$	—		$	761,019
	Three Months Ended September 30, 2005
	Medical Oncology Services			Cancer Center Services			Pharmaceutical Services			Research/ Other			Corporate Costs			Eliminations(1)			Total
US Oncology, Inc.
Product revenues	$	350,359		$	—		$	91,589		$	—		$	—		$	(23,224	)	$	418,724
Service revenues		139,390			72,879			5,114			12,238			—			—			229,621
Total revenues		489,749			72,879			96,703			12,238			—			(23,224	)		648,345
Operating expenses		(450,199	)		(47,975	)		(83,915	)		(12,068	)		(18,268	)		23,224			(589,201	)
Depreciation and amortization		—			(10,446	)		(437	)		(347	)		(9,712	)		—			(20,942	)
Income (loss) from operations	$	39,550		$	14,458		$	12,351		$	(177	)	$	(27,980	)	$	—		$	38,202
US Oncology Holdings, Inc.
Operating expenses	$	—		$	—			—		$	—		$	(114	)	$	—		$	(114	)
Income (loss) from operations	$	39,550		$	14,458		$	12,351		$	(177	)	$	(28,094	)	$	—		$	38,088

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

	Nine Months Ended September 30, 2006
	Medical Oncology Services			Cancer Center Services			Pharmaceutical Services			Research/ Other			Corporate Costs			Eliminations(1)			Total
US Oncology, Inc.
Product revenues	$	1,138,949		$	—		$	1,445,635		$	—		$	—		$	(1,224,627	)	$	1,359,957
Service revenues		417,006			242,055			30,034			40,747			—			—			729,842
Total revenues		1,555,955			242,055			1,475,669			40,747			—			(1,224,627	)		2,089,799
Operating expenses		(1,456,734	)		(155,004	)		(1,413,400	)		(40,476	)		(59,499	)		1,224,627			(1,900,486	)
Depreciation and amortization		—			(28,699	)		(2,711	)		(663	)		(29,601	)		—			(61,674	)
Income (loss) from operations	$	99,221		$	58,352		$	59,558		$	(392	)	$	(89,100	)	$	—		$	127,639
US Oncology Holdings, Inc.
Operating expenses	$	—		$	—		$	—		$	—		$	(193	)	$	—		$	(193	)
Income (loss) from operations	$	99,221		$	58,352		$	59,558		$	(392	)	$	(89,293	)	$	—		$	127,446
Goodwill	$	409,322		$	191,615	(2)	$	160,082	(3)(4)	$	—		$	—		$	—		$	761,019
	Nine Months Ended September 30, 2005
	Medical Oncology Services			Cancer Center Services			Pharmaceutical Services			Research/ Other			Corporate Costs			Eliminations(1)			Total
US Oncology, Inc.
Product revenues	$	992,635		$	—		$	212,020		$	—		$	—		$	(23,224	)	$	1,181,431
Service revenues		400,052			217,753			19,263			35,111			—			—			672,179
Total revenues		1,392,687			217,753			231,283			35,111			—			(23,224	)		1,853,610
Operating expenses		(1,266,740	)		(140,419	)		(200,076	)		(37,406	)		(53,616	)		23,224			(1,675,033	)
Compensation expense under long-term incentive plan		—			—			—			—			(14,507	)		—			(14,507	)
Depreciation and amortization		(28	)		(29,781	)		(446	)		(1,064	)		(31,813	)		—			(63,132	)
Income (loss) from operations	$	125,919		$	47,553		$	30,761		$	(3,359	)	$	(99,936	)	$	—		$	100,938
US Oncology Holdings, Inc.
Operating expenses	$	—		$	—		$	—		$	—		$	(310	)	$	—		$	(310	)
Income (loss) from operations	$	125,919		$	47,553		$	30,761		$	(3,359	)	$	(100,246	)	$	—		$	100,628

(1) Eliminations represent the sale of pharmaceuticals from our distribution center (pharmaceutical services segment) to our practices affiliated under comprehensive service agreements (medical oncology segment). The distribution center began operations, on a limited basis, in September of 2005.

(2) During the quarter ended September 30, 2006, the Company recorded an adjustment to increase goodwill by $13.7 million in the cancer center services segment to correct an error at the time of the August 20, 2004 merger (see Note 3).

(3) As a result of segment reporting changes effective January 1, 2006, the Company also adjusted the amount of goodwill assigned to its reportable segments. Goodwill in the amount of $129.5 million was assigned to the pharmaceutical services segment and goodwill assigned to the medical oncology services segment was reduced by the same amount. Prior to management changes and the establishment of new service offerings related to oncology pharmaceuticals, certain activities in the pharmaceutical services segment had been included in the medical oncology services segment.

(4) Goodwill in the amount of $30.6 million recorded as a result of the preliminary purchase price allocation for the AccessMed acquisition in July, 2006 has been assigned to the pharmaceutical services segment based upon the nature of services and organizational integration of the acquired company.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

NOTE 7 – Commitments and Contingencies

Leases

The Company leases office space, along with certain comprehensive cancer centers and equipment under noncancelable operating lease agreements. As of September 30, 2006, total future minimum lease payments, including escalation provisions and leases with entities affiliated with practices, are as follows (in thousands):

	Twelve months ending September 30,
	2007		2008		2009		2010		2011		Thereafter
Payments due	$	68,702	$	61,001	$	52,578	$	42,490	$	32,705	$	179,777

Insurance

The Company and its affiliated practices maintain insurance with respect to various liability risks on a claims-made basis, in amounts believed to be customary and adequate. The Company is not aware of any outstanding claims or unasserted claims that are likely to be asserted against it or its affiliated practices, which would have a material impact on its financial position or results of operations.

The Company maintains all other traditional insurance coverage types on either a fully insured or high deductible basis.

The provision of medical services by the Company’s affiliated practices entails an inherent risk of professional liability claims. The Company does not control the practice of medicine by the clinical staff or their compliance with regulatory and other requirements directly applicable to patients. In addition, because the practices purchase and prescribe pharmaceutical products, they face the risk of product liability claims. In addition, because of licensing requirements and affiliated practices’ participation in governmental healthcare programs, the Company and affiliated practices are, from time to time, subject to governmental audits and investigations, as well as internally initiated audits, some of which may result in refunds to governmental programs. Although the Company and its affiliated practices maintain insurance coverage, successful malpractice, regulatory or product liability claims asserted against it or one of the affiliated practices, in excess of insurance coverage, could have a material adverse effect on the Company.

Guarantees

Beginning January 1, 1997, the Company guaranteed that amounts retained by the Company’s affiliated practice in Minnesota will amount to a minimum of $5.2 million annually under the terms of the related service agreement, provided that certain targets are met. The Company has not been required to make any payments associated with this guarantee.

The Company previously provided guarantees up to predetermined amounts for amounts owed by practices under OPS agreements to the Company’s third-party distributor for products purchased by such affiliated practices. These guarantees amounted to $4.7 million at December 31, 2005. No amounts were guaranteed as of September 30, 2006 as a result of the Company’s introduction of its own distribution function, which now ships to these practices.

Litigation

The Company believes the allegations in suits against it are customary for the size and scope of the Company’s operations. However, adverse judgments, individually or in the aggregate, could have a material adverse effect on the Company.

Assessing the Company’s financial and operational exposure on litigation matters requires the application of substantial subjective judgments and estimates based upon facts and circumstances, resulting in estimates that could change as more information becomes available.

U.S. Department of Justice Subpoena

During the fourth quarter of 2005, the Company received a subpoena from the United States Department of Justice’s Civil Litigation Division (“DOJ”) requesting a broad range of information about the Company and its business, generally in relation to the Company’s contracts and relationships with pharmaceutical manufacturers. The Company is in the process of

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

responding to the subpoena and is cooperating fully with the DOJ. At the present time, the DOJ has not made any specific allegation of wrongdoing on the part of the Company. The Company cannot, however, provide assurance that such an allegation or litigation will not result from this investigation. While the Company believes that it is operating and has operated its business in compliance with the law, including with respect to the matters covered by the subpoena, the Company cannot provide assurance that the DOJ will not make a determination that wrongdoing has occurred. In addition, the Company is devoting significant resources to responding to the DOJ subpoena and anticipates that such resources will be required on an ongoing basis to fully respond to the subpoena.

The Company has also received requests for information relating to class action litigation against pharmaceutical manufacturers relating to alleged manipulation of AWP and alleged inappropriate marketing practices with respect to AWP and relating to other third party litigation.

Qui Tam Lawsuits

In the past, the Company and certain of its subsidiaries and affiliated practices have been the subject of qui tam lawsuits (commonly referred to as “whistle-blower” suits) of which the Company became aware. The United States has determined not to intervene in any of the qui tam suits of which the Company is aware and all such suits have been dismissed. Because qui tam actions are filed under seal, a possibility exists that the Company could be the subject of other qui tam actions of which it is unaware. The Company intends to continue to investigate and vigorously defend itself against any and all such claims, and continues to believe that it conducts its operations in compliance with the law.

Qui tam suits are brought by private individuals, and there is no minimum evidentiary or legal threshold for bringing such a suit. The DOJ is legally required to investigate the allegations in these suits. The subject matter of many such claims may relate both to alleged actions of the Company and alleged actions of an affiliated practice. Because the affiliated practices are separate legal entities not controlled by the Company, such claims necessarily involve a more complicated, higher cost defense, and may adversely impact the relationship between US Oncology and the practices. If the individuals who file complaints and/or the United States were to prevail in these claims against the Company, and the magnitude of the alleged wrongdoing were determined to be significant, the resulting judgment could have a material adverse financial and operational effect on the Company, including potential limitations in future participation in governmental reimbursement programs. In addition, addressing complaints and government investigations requires the Company to devote significant financial and other resources to the process, regardless of the ultimate outcome of the claims.

Breach of Contract Claims

The Company and its network physicians are defendants in a number of lawsuits involving employment and other disputes and breach of contract claims. In addition, the Company is involved from time to time in disputes with, and claims by, its affiliated practices against the Company.

Specifically, the Company is involved in litigation with one net revenue model practice of 35 physicians. The Company initiated arbitration proceedings pursuant to a provision in the service agreement providing for contract reformation in certain events. The practice countered with a lawsuit that alleges, among other things, that the Company has breached the service agreement and that the service agreement is unenforceable as a matter of public policy due to alleged violations of healthcare laws. The practice sought unspecified damages and a termination of the contract. The Company believes that its service agreement is lawful and enforceable and that the Company is operating in accordance with applicable law.

As a result of alleged breaches of the service agreement by the practice, the Company terminated the service agreement in April, 2006. During the first quarter of 2006, the practice represented 4.6% of the Company’s consolidated revenue. At September 30, 2006, the Company had recorded amounts related to this practice of $32.4 million which consisted of a receivable in the amount of $24.3 million and $8.1 million of property, plant and equipment. In October, 2006, the Company sold, for cash, the property, plant and equipment to the practice for an amount that approximated net book value at the time of sale. In connection with the purchase price allocation for the merger in August, 2004, no value was assigned to goodwill or the management service agreement with this practice due to the ongoing dispute that existed at that time.

As a result of the ongoing litigation, the Company has been unable to collect on a timely basis a receivable relating to accounts receivable purchased by the Company under the service agreement and amounts for reimbursement of expenses paid by the Company on the practice’s behalf. At September 30, 2006, the total receivable owed to the Company of $24.3

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

million is reflected on the Company’s balance sheet as other assets. Currently, certain amounts are held in an escrowed bank account into which the practice has been making, and is required to continue to make, monthly deposits. These amounts will be released upon resolution of the litigation. In addition, certain amounts are being held in a bank account that has been frozen pending the outcome of related litigation regarding that account. In addition, the Company has filed a security lien on the receivables of the practice. The Company believes that the amounts held in the bank accounts combined with the receivables of the practice in which the Company has filed a security lien represent adequate collateral to recover the $24.3 million receivable recorded in other assets at September 30, 2006. Accordingly, the Company expects to realize the amount it believes to be owed by the practice. However, realization is subject to a successful conclusion to the litigation with the practice, and the Company cannot assure you as to when the litigation will be finally concluded or as to what the ultimate outcome of the litigation will be. The Company expects to incur expenses in connection with its litigation with the practice.

The Company intends to vigorously pursue its claims, including claims for any costs and expenses that it incurs as a result of the termination of the service agreement and to defend itself against the practice’s allegations that the Company breached the agreement and that the agreement is unenforceable. However, the Company cannot provide assurance as to what the outcome of the litigation will be, or, even if the Company prevails in the litigation, whether it will be successful in recovering the full amount, or any, of its costs associated with the litigation and termination of the service agreement.

Certificate of Need Regulatory Action

During the third quarter of 2006, one of the Company’s affiliated practices in North Carolina lost (through state regulatory action) the ability, currently, to provide radiation services at its cancer center in Asheville. The practice continues to provide medical oncology services, but is not permitted to use the radiation services area of the center (approximately 18% of the square footage of the cancer center). The practice is appealing the regulatory action and is exploring other strategic alternatives with respect to radiation oncology and the cancer center space.

At September 30, 2006, the Company’s Condensed Consolidated Balance Sheet included net assets in the amount of $5.9 million related to this practice, which includes equipment in the amount of $1.6 million, a service agreement intangible asset in the amount of $2.7 million and working capital in the amount of $1.6 million. The cancer center used by this practice is accounted for as an operating lease and, as such, is not included on the Company’s balance sheet. At September 30, 2006, the lease had a remaining term of 20 years and the net present value of minimum future lease payments is approximately $7.2 million. In the event the Company’s appeal of the regulatory action or other efforts are unsuccessful, it may determine certain amounts related to this practice to be impaired. The Company does not believe the net assets of the cancer center are impaired as of September 30, 2006. Management will continue to monitor this matter.

NOTE 8 – Recent Accounting Pronouncements

From time to time, the Financial Accounting Standards Board (“FASB”), the SEC and other regulatory bodies seek to change accounting rules, including rules applicable to the Company’s business and financial statements. The Company cannot assure you that future changes in accounting rules would not require it to make retrospective application to its financial statements.

In July, 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109”(“FIN 48”), which clarifies the accounting and disclosure for uncertain tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact if any, of the adoption of FIN 48 on its consolidated financial statements.

In September, 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. The Statement does not require any new fair value measurements, however for some entities, the application of this Statement will change current practice. In developing this Statement, the FASB considered the need for increased consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions of SFAS No. 157 should be applied prospectively as of the beginning of the fiscal year in which the Statement is initially applied except for certain limited retrospective application with respect to certain financial instruments. The Company will adopt this Statement as required, and adoption is not expected to have a material impact on the Company’s results of operations, financial condition or liquidity.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

In September, 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R)”(“SFAS No. 158”).SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit post retirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The Statement also requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 is effective for all employers with publicly traded securities as of the end of the fiscal year ending after December 15, 2006. The Company does not currently sponsor benefit plans covered by this Statement and does not expect it to have a material impact on its results of operations, financial condition or liquidity.

NOTE 9 – Financial Information for Subsidiary Guarantors and Non-Subsidiary Guarantors

The 9% Senior Secured Notes (the “Senior Notes”) and 10.75% Senior Subordinated Notes (the “Senior Subordinated Notes”) issued by US Oncology, Inc. are guaranteed fully and unconditionally, and on a joint and several basis, by all of the US Oncology’s wholly-owned subsidiaries. Certain of US Oncology’s subsidiaries, primarily joint ventures, do not guarantee the Senior Notes and the Senior Subordinated Notes.

Presented on the following pages are condensed consolidating financial statements for US Oncology, Inc. (the issuer of the Senior Notes and the Senior Subordinated Notes), the subsidiary guarantors and the non-guarantor subsidiaries as of and for the three and nine months ended September 30, 2006. The equity method has been used with respect to US Oncology’s investments in its subsidiaries.

As of September 30, 2006, the non-guarantor subsidiaries include Cancer Treatment Associates of Northeast Missouri, Ltd., Colorado Cancer Centers, L.L.C., Southeast Texas Cancer Centers, L.P., East Indy CC, L.L.C., KCCC JV, L.L.C., AOR Real Estate of Greenville, L.P., The Carroll County Cancer Center, Ltd, MDH-USO Management Company, L.P. and Oregon Cancer Center, Ltd. Condensed consolidated information for periods prior to December 31, 2005 is not presented because the non-guarantor subsidiaries represented less than 3% of US Oncology’s consolidated income from continuing operations and cash flow from operations for these periods and were considered minor.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

US Oncology, Inc.

Condensed Consolidating Balance Sheet

as of September 30, 2006

(unaudited, in thousands, except share information)

	US Oncology, Inc. (Parent Company Only)			Subsidiary Guarantors		Non-guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and equivalents	$	—		$	88,401	$	—		$	—		$	88,401
Accounts receivable		—			345,877		11,381			—			357,258
Other receivables		—			111,285		—			—			111,285
Prepaid expenses and other current assets		—			21,356		—			—			21,356
Inventories		—			107,777		2,119			—			109,896
Deferred income taxes		8,739			—		—			—			8,739
Due from affiliates		907,184			—		—			(842,517	)(1)		64,667
Investment in subsidiaries		531,186			—		—			(531,186	)(2)		—
Total current assets		1,447,109			674,696		13,500			(1,373,703	)		761,602
Property and equipment, net		—			359,489		34,826			—			394,315
Service agreements, net		—			234,706		5,748			—			240,454
Goodwill		—			755,426		5,593			—			761,019
Other assets		37,907			26,417		1,530			—			65,854
	$	1,485,016		$	2,050,734	$	61,197		$	(1,373,703	)	$	2,223,244
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Current maturities of long-term indebtedness	$	7,500		$	150	$	501		$	—		$	8,151
Accounts payable		—			238,561		1,467			—			240,028
Intercompany accounts		(249,114	)		251,752		(2,638	)		—			—
Due to affiliates		—			969,891		18,766			(842,517	)(1)		146,140
Accrued compensation cost		—			24,729		495			—			25,224
Accrued interest payable		10,062			—		—			—			10,062
Income taxes payable		20,077			—		—			—			20,077
Other accrued liabilities		278			33,806		(825	)		—			33,259
Total current liabilities		(211,197	)		1,518,889		17,766			(842,517	)		482,941
Deferred revenue		—			8,686		—			—			8,686
Deferred income taxes		31,063			—		—			—			31,063
Long-term indebtedness		1,052,705			2,482		11,737			—			1,066,924
Other long-term liabilities		—			3,523		3,955			—			7,478
Total liabilities		872,571			1,533,580		33,458			(842,517	)		1,597,092
Commitments and contingencies
Minority interests		—			—		13,707			—			13,707
Stockholders’ equity:
Common stock, $0.01 par value, 100 shares authorized issued and outstanding shares issued and outstanding		1			—		—			—			1
Additional paid-in capital		581,407			—		—			—			581,407
Retained earnings		31,037			—		—			—			31,037
Subsidiary equity		—			517,154		14,032			(531,186	)(2)		—
Total stockholders’ equity		612,445			517,154		14,032			(531,186	)		612,445
	$	1,485,016		$	2,050,734	$	61,197		$	(1,373,703	)	$	2,223,244

(1) Elimination of intercompany balances

(2) Elimination of investment in subsidiaries

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

US Oncology, Inc.

Condensed Consolidating Balance Sheet

as of December 31, 2005

(unaudited, in thousands, except share information)

	US Oncology, Inc. (Parent Company Only)			Subsidiary Guarantors		Non-guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and equivalents	$	—		$	125,836	$	1		$	—		$	125,837
Accounts receivable		—			336,312		10,912			—			347,224
Other receivables		—			84,654		—			—			84,654
Prepaid expenses and other current assets		—			21,619		912			—			22,531
Inventories		—			46,336		1,343			—			47,679
Deferred income taxes		5,630			—		—			—			5,630
Due from affiliates		882,051			—		—			(826,055	)(1)		55,996
Investment in subsidiaries		425,607			—		—			(425,607	)(2)		—
Total current assets		1,313,288			614,757		13,168			(1,251,662	)		689,551
Property and equipment, net		—			378,098		34,236			—			412,334
Service agreements, net		—			236,502		6,185			—			242,687
Goodwill		—			711,139		5,593			—			716,732
Other assets		42,093			6,120		1,530			—			49,743
	$	1,355,381		$	1,946,616	$	60,712		$	(1,251,662	)	$	2,111,047
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Current maturities of long-term indebtedness	$	8,786		$	263	$	1,310		$	—		$	10,359
Accounts payable		—			235,996		1,520			—			237,516
Intercompany accounts		(277,094	)		279,382		(2,288	)		—			—
Due to affiliates		—			932,875		15,565			(826,055	)(1)		122,385
Accrued compensation cost		—			33,026		746			—			33,772
Accrued interest payable		24,938			—		—			—			24,938
Income taxes payable		14,222			—		—			—			14,222
Other accrued liabilities		179			30,698		61			—			30,938
Total current liabilities		(228,969	)		1,512,240		16,914			(826,055	)		474,130
Deferred revenue		—			6,971		—			—			6,971
Deferred income taxes		27,863			—		—			—			27,863
Long-term indebtedness		956,238			13,333		11,300			—			980,871
Other long-term liabilities		—			3,804		4,090			—			7,894
Total liabilities		755,132			1,536,348		32,304			(826,055	)		1,497,729
Commitments and contingencies
Minority interests		—			—		13,069			—			13,069
Stockholder’s equity:
Common stock, $0.01 par value, 100 shares authorized issued and outstanding shares issued and outstanding		1			—		—			—			1
Additional paid-in-capital		583,778			—		—			—			583,778
Deferred compensation		(3,536	)		—		—			—			(3,536	)
Retained earnings		20,006			—		—			—			20,006
Subsidiary equity		—			410,268		15,339			(425,607	)(2)		—
Total stockholder’s equity		600,249			410,268		15,339			(425,607	)		600,249
	$	1,355,381		$	1,946,616	$	60,712		$	(1,251,662	)	$	2,111,047

(1) Elimination of intercompany balances

(2) Elimination of investment in subsidiaries

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

US Oncology, Inc.

Condensed Consolidating Statement of Operations

For the Three Months Ended September 30, 2006

(unaudited, in thousands)

	US Oncology, Inc. (Parent Company Only)			Subsidiary Guarantors			Non-guarantor Subsidiaries			Eliminations			Consolidated
Product revenues	$	—		$	447,113		$	11,749		$	—		$	458,862
Service revenues		—			232,569			7,207			—			239,776
Total revenues		—			679,682			18,956			—			698,638
Cost of products		—			425,280			7,273			—			432,553
Cost of services:
Operating compensation and benefits		—			110,209			3,419			—			113,628
Other operating costs		—			66,475			5,297			—			71,772
Depreciation and amortization		—			16,547			1,031			—			17,578
Total cost of services		—			193,231			9,747			—			202,978
Total cost of products and services		—			618,511			17,020			—			635,531
General and administrative expense		94			18,276			—			—			18,370
Depreciation and amortization		—			2,587			—			—			2,587
Total costs and expenses		94			639,374			17,020			—			656,488
Income from operations		(94	)		40,308			1,936			—			42,150
Other expense:
Interest expense, net		(23,079	)		(915	)		(235	)		—			(24,229	)
Intercompany interest		6,715			(6,715	)		—			—			—
Minority interest expense		—			—			(593	)		—			(593	)
Income before income taxes		(16,458	)		32,678			1,108			—			17,328
Income tax provision		(6,731	)		—			—			—			(6,731	)
Equity in subsidiaries		33,785			—			—			(33,785	)(1)		—
Net income	$	10,596		$	32,678		$	1,108		$	(33,785	)	$	10,597

(1) Elimination of equity in earnings of consolidated subsidiaries

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

US Oncology, Inc.

Condensed Consolidating Statement of Operations

For the Nine Months Ended September 30, 2006

(unaudited, in thousands)

	US Oncology, Inc. (Parent Company Only)			Subsidiary Guarantors			Non-guarantor Subsidiaries			Eliminations			Consolidated
Product revenues	$	—		$	1,323,804		$	36,153		$	—		$	1,359,957
Service revenues		—			707,429			22,413			—			729,842
Total revenues		—			2,031,233			58,566			—			2,089,799
Cost of products		—			1,270,547			22,366			—			1,292,913
Cost of services:
Operating compensation and benefits		—			332,305			11,360			—			343,665
Other operating costs		—			188,539			15,870			—			204,409
Depreciation and amortization		—			48,442			3,055			—			51,497
Total cost of services		—			569,286			30,285			—			599,571
Total cost of products and services		—			1,839,833			52,651			—			1,892,484
General and administrative expense		327			59,172			—			—			59,499
Depreciation and amortization		—			10,177			—			—			10,177
Total costs and expenses		327			1,909,182			52,651			—			1,962,160
Income from operations		(327	)		122,051			5,915			—			127,639
Other expense:
Interest expense, net		(68,867	)		195			(708	)		—			(69,380	)
Intercompany interest		20,145			(20,145	)		—			—			—
Minority interest expense		—			—			(1,728	)		—			(1,728	)
Income before income taxes		(49,049	)		102,101			3,479			—			56,531
Income tax provision		(22,047	)		—			—			—			(22,047	)
Equity in subsidiaries		105,579			—			—			(105,579	)(1)		—
Net income	$	34,483		$	102,101		$	3,479		$	(105,579	)	$	34,484

(1) Elimination of equity in earnings of consolidated subsidiaries

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 30, 2006-continued

US Oncology, Inc.

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2006

(unaudited, in thousands)

	US Oncology, Inc. (Parent Company Only)			Subsidiary Guarantors			Non-guarantor Subsidiaries			Consolidated
Cash flows from operating activities:
Net cash provided by (used in) operating activities	$	(70,605	)	$	53,054		$	4,670		$	(12,881	)
Cash flows from investing activities:
Acquisition of property and equipment		—			(54,736	)		(3,208	)		(57,944	)
Proceeds from sale of property and equipment		—			1,197			—			1,197
Acquisition of business, net of cash acquired		—			(31,378	)		—			(31,378	)
Payments in affiliation transactions		—			(3,152	)		—			(3,152	)
Investment in unconsolidated ventures		—			(2,656	)		—			(2,656	)
Net cash used in investing activities		—			(90,725	)		(3,208	)		(93,933	)
Cash flows from financing activities:
Proceeds from term loan		100,000			—			—			100,000
Net distributions to parent		(23,713	)		—			—			(23,713	)
Repayment of term loan		(1,000	)		—			—			(1,000	)
Repayment of other indebtedness		(4,077	)		235			(372	)		(4,214	)
Debt issuance costs		(627	)		—			—			(627	)
Distributions to minority shareholders		—			—			(1,572	)		(1,572	)
Contributions from minority shareholders		—			—			482			482
Proceeds from exercise of options		22			—			—			22
Net cash used in financing activities		70,605			235			(1,462	)		69,378
Decrease in cash and equivalents		—			(37,436	)		—			(37,436	)
Cash and equivalents:
Beginning of period		—			125,837			—			125,837
End of period	$	—		$	88,401		$	—		$	88,401

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US ONCOLOGY HOLDINGS, INC. AND 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, filed with the SEC on March 15, 2006, and subsequent filings.

General

US Oncology, headquartered in Houston, Texas, is one of the nation’s largest cancer treatment and research networks. As of September 30, 2006, our network included:

• 1,029 affiliated physicians

• 411 sites of service

• 78 comprehensive cancer centers and 13 other facilities providing radiation therapy only

• A clinical trial program that currently is managing 70 active clinical trials

• A pharmaceutical distribution business that currently distributes $1.7 billion in oncology pharmaceuticals annually from its 75,000 square foot oncology pharmaceutical distribution facility

Throughout our network, we aim to enhance efficiency and lower cost structures at our affiliated practices, while enabling them to continue to deliver quality patient care. The services we provide are designed to increase patient access and advance the delivery of high-quality, community-based cancer care by enabling physicians 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, often in a single location.

We believe that today, particularly in light of recent changes 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, have diversified beyond medical oncology and have efficient management processes. We believe that our services best position practices to achieve these characteristics. The aging of the American population and improvements in screening technology have resulted in significant growth in the incidences of cancer. Additionally, the development of new treatment alternatives, such as targeted radiation and drug therapies and supportive care pharmaceuticals, has resulted in cancer evolving from a chronic disease to an acute disease which requires extended treatment periods that consume substantial resources. While these trends increase demand for cancer care services, they also create pressure to reduce healthcare costs and increase the efficiency of medical practice operations. We believe that community-based oncology care is the most patient-friendly and cost-effective care available, and we believe that we can continue to enhance practice efficiency within the community setting.

We provide practice management services primarily under comprehensive services agreements in both our medical oncology and cancer center services segments. Financial results relating to these services are reflected in the appropriate segment. Under comprehensive service agreements with affiliated practices, we provide services designed to encompass all of the non-clinical aspects of practice management. To a lesser extent, we contract with practices solely for the purchase and management of specialty oncology pharmaceuticals under our oncology pharmaceutical services (“OPS”) model, which does not encompass all of our other services. OPS revenues are included in our pharmaceutical services segment. A more complete description of the services we provide to network practices is included in our Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on March 15, 2006.

In addition to providing services to our network physicians, we capitalize on our network’s size and scope by providing services to pharmaceutical manufacturers and payers, to improve the delivery of cancer care in America. These services include:

• Group Purchasing Organization (“GPO”) services. We negotiate purchasing contracts with pharmaceutical manufacturers and other vendors, administer the contracts and provide related services.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

• Pharmaceutical Distribution services. Through our distribution center in Fort Worth, Texas, we supply over 90% of the value of pharmaceuticals administered by our network of affiliated practices.

• Market Focus information, marketing and analytical services. We provide a range of data and analytical services relating to purchasing and utilization of pharmaceuticals and other matters, as well as marketing assistance and other product related services.

• To expand the services we offer pharmaceutical manufacturers, on July 6, 2006, the Company acquired 100% of the outstanding capital stock of AccessMed Holdings, Inc., the parent company of AccessMed, Inc. (collectively “AccessMed”) for cash consideration of $31.4 million, net of cash acquired. AccessMed is a provider of reimbursement hotline and patient assistance programs and is located in Overland Park, Kansas. The acquisition expands the services offered by the Company to pharmaceutical manufacturers and also allows the Company to centralize the appeals and patient financial assistance processes for affiliated practices.

• In addition, on August 1, 2006, we launched our specialty pharmacy and mail order service, OncologyRx^TM Care Advantage, at our distribution facility. This new capability is designed to address the increasing number of new oral chemotherapeutical compounds, as well as the needs of payers seeking to consolidate their pharmaceutical purchasing power to reduce costs. In addition to providing patients with pharmaceuticals through OncologyRx^TM Care Advantage, we provide patient counseling services that are directed toward appropriate use of medications, side effect and complication monitoring and reimbursement issues.

We continue to work with the physician leadership in the network to identify opportunities to improve the quality of cancer care. The focus of these efforts in 2006 is to:

• Further enhance the network’s ability to deliver high quality cancer care. The Practice Quality and Efficiency (PQE) initiative is being led and supported by the network’s National Policy Board and by various physician committees and task forces. The initiative includes implementing an evidence-based approach to medical decision making, defining the key elements of a comprehensive quality program, and enhancing practice capacity to treat new patients. Currently, the Company is in the process of identifying the processes that will have the most impact on the quality and timeliness of patient care. The Company next intends to evaluate and, if necessary, redesign these processes so that practices will be able to implement standardized best practices aimed at optimizing the patient experience.

• Expand the network’s evidence-based medicine initiative, Cancer Care Pathways, which continues to enjoy strong adoption among physicians and practices.

• Continue implementation of iKnowMed, the Company’s oncology-specific electronic medical records system.

During 2005 we completed development of our pharmaceutical distribution operations as part of our strategy to broaden the range of services offered to affiliated practices and pharmaceutical manufacturers. The cost to build out the 75,000 square foot facility in Fort Worth, Texas was approximately $12.1 million. The distribution center began supplying a limited number of pharmaceuticals to our affiliated practices during the third quarter of 2005, and we believe it has now achieved normal operating levels as it currently serves all affiliated practice sites and provides over 90% of the value of pharmaceuticals administered by our affiliated practices. The initial working capital investment of approximately $113.0 million for the distribution center was made primarily during the first quarter of 2006. The distribution center provided a platform to further expand our services related to oncology pharmaceuticals with the launch of our OncologyRx^TM Care Advantage specialty pharmacy and mail order business in August, 2006.

One of our ongoing objectives is to expand our network of affiliated physicians. We plan to grow in two ways. First, we seek to enter into comprehensive service agreements with practices in new markets and those where we already have a regional presence. By seeking new markets we can grow our national presence while taking advantage of the efficiencies that result from leveraging our existing regional and national infrastructure and capabilities. Second, we intend to expand our existing markets both by assisting practices with individual physician recruitment and by affiliating with already established practices. On a local level, this helps our affiliated practices solidify their standing in local communities, while taking advantage of efficiencies that result from leveraging existing local assets and infrastructure.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

Economic Models

Our comprehensive service agreements are long-term agreements (generally with initial terms of 25 to 40 years), which cannot be terminated unilaterally without cause. Physicians at practices managed under comprehensive agreements are required to enter into employment or non-competition agreements with the practice. We may pay consideration to physicians in physician groups in exchange for the groups selling us operating assets and entering into such long-term contracts or joining an already affiliated group. Historically, we also have assisted affiliated groups expand by recruiting individual physicians without buying assets or paying consideration for service agreements. We intend to continue to expand our business, both by affiliating with new groups and recruiting new physicians.

Under substantially all of our comprehensive service agreements, we are compensated on the “earnings model” (as contrasted with the “net revenue” model). Under this 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 third quarter of 2006, 98.7% of our comprehensive management services revenue was derived from affiliated practices managed under agreements other than the net revenue model. In some states, our agreements provide for a fixed management fee.

Of our comprehensive services revenue for the quarter ended September 30, 2006, 1.3% was derived from comprehensive service agreements under the net revenue model, in which our fee consists of a fixed amount, plus a percentage of net revenues, plus, if certain performance criteria are met, a performance fee.

We believe the net revenue model does not appropriately align the interests of the Company and the affiliated practices and have sought to convert net revenue model practices to the earnings model or OPS model. On April 18, 2006 we terminated our relationship with the only large net revenue practice remaining in our network. This practice constituted 4.6% of our consolidated revenue and 2.3% of our EBITDA for the quarter ended March 31, 2006.

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 physician affiliations, cancer centers and PET installations; (iii) any statements preceded by, followed by or that include the words “believes”, “expects”, “anticipates”, “intends”, “estimates”, “plans” or similar expressions; and (iv) other statements contained herein regarding matters that are not historical facts.

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

Additional risks and uncertainties relating to our operations include Medicare reimbursement for prescription drugs used by affiliated practices, including continued implementation of the Medicare Modernization Act of 2003 (“MMA”), calculation of average sales price, implementation of third-party vendor programs and other matters, impact of ASP-based reimbursement on other aspects of our business (such as private payer 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), concentration of pharmaceutical purchases and favorable pricing among a limited number of vendors, reimbursement for pharmaceutical products generally, our ability to maintain good relationships with existing practices, our ability to successfully implement our strategic initiatives, (such as expansion of the array of services offered to pharmaceutical manufacturers, implementation of our iKnowMed medical record system, expansion into new markets and development of existing markets), our ability to continue to comply with restrictive covenants in our debt agreements, our ability to fund our operations through operating cash flow or utilization of our existing credit facility or our ability to obtain additional financing on acceptable terms, our ability to complete cancer centers and PET facilities currently in development, our ability to recover the costs of our investments in

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

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 payers to lower their costs, government regulation and enforcement, continued relationships with pharmaceutical companies and other vendors, changes in cancer therapy or the manner in which care is delivered, drug utilization, increases in the cost of providing cancer treatment services and the operations of the company’s affiliated physician practices.

The reductions in Medicare reimbursement may also cause some oncologists to cease providing care in the physician office setting by retiring from the practice of medicine, moving to a hospital setting, or beginning in 2006, choosing to obtain drugs through the CAP or other similar non-government payer program. Any such changes in our affiliated practices would adversely affect our results of operations. In addition, any reduction in the overall size of the outpatient oncology market could adversely affect our prospects for growth and business development. We believe that the increasing U.S. budget deficit, aging U.S. population and newly enacted prescription drug benefit will mean that pressure to reduce healthcare costs, drug costs in particular, will continue to intensify.

Please refer to our filings with the SEC, including our Annual Report on Form 10-K, filed with the SEC on March 15, 2006, and subsequent filings, 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.

Reimbursement Matters

Pharmaceutical Reimbursement under Medicare

Effective January 1, 2005, Medicare (“Centers for Medicare and Medicaid Services” or “CMS”) changed the method by which it reimburses providers for oncology pharmaceuticals administered in physicians’ offices, including those in the US Oncology network. Medicare now pays oncologists the average sales price (“ASP”) for drugs plus 6%. Previously, Medicare reimbursed physicians for oncology pharmaceuticals based on average wholesale price (“AWP”) minus 15%. This shift in reimbursement methodology represented approximately a 15% reduction in reimbursement for oncology pharmaceuticals paid as of January 1, 2005, as compared to 2004 levels. ASP-based reimbursement is adjusted quarterly, and as a result of these quarterly adjustments, the Company experienced a decline of approximately 7.5% in Medicare reimbursement during the year ended December 31, 2005. During the three months and nine months ended September 30, 2006, the Company experienced an increase of approximately 0.6% and 1.2%, respectively, in Medicare reimbursement.

Adoption of ASP pricing by Medicare, combined with the importance of pharmaceuticals to our business and concentration of our purchases with a limited number of manufacturers, represents a significant risk for the Company. Nearly all of our pricing advantage relative to ASP is derived from purchases of drugs from a relatively small number of manufacturers.

Implementation of ASP-based reimbursement has reduced the amount of differential pricing that is available to us from pharmaceutical manufacturers, which is one of our key competitive strengths.

Medicare Demonstration Project

The decline in oncology pharmaceutical reimbursement has been partially offset by payments for certain data relating to symptom management for cancer patients (“the Medicare Demonstration Project”). For 2005, the Medicare Demonstration Project was projected by CMS to add an aggregate of $260 million in Medicare payments to oncologists across the United States. The project continued for 2006, however it includes substantial revisions to gather more specific information relevant to the quality of care for cancer patients. Reporting is no longer specific to chemotherapy, but instead is focused on physician evaluation and management. CMS reports that they expect the demonstration project payments in 2006 to be $150 million, or a 42.3% reduction from 2005 levels. We estimate that reduced reimbursement under the Medicare Demonstration Project will negatively impact pre-tax income in 2006 by approximately $5-6 million based on application of revised rates to our 2005 results. CMS has indicated that an extension of the Medicare Demonstration Project in 2007 is under consideration. If the project is not renewed, the reduced reimbursement will negatively impact 2007 pre-tax income by an estimated $3-4 million based on annualized results, through September 30, 2006.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

Competitive Acquisition Program

CMS was required to implement the Competitive Acquisition Program (“CAP”) in 2006, whereby physician practices could elect to have an external supplier both provide the drugs and biologicals administered in the physician’s office to the patient and to bill and collect from Medicare. One approved vendor chose to participate in the program and the program was effective for physician practices on August 1, 2006. CMS and the U.S. Congress are monitoring the effectiveness and viability of the program based on the number of physicians who have chosen to contract with this vendor. US Oncology affiliated practices have not elected to participate in this program.

Reimbursement for Physician Services

Medicare reimbursement for services of physicians is based on a fee schedule, which establishes payment for a given service, in relation to actual resources used in providing the service, through the application of relative value units (“RVUs”). RVUs are intended to reflect the intensity of the physicians’ work, practice expenses and geographic variations in costs. The units are converted into a dollar amount of reimbursement through a conversion factor. CMS updates the conversion factor each year based on a formula. For 2006, application of the formula resulted in a 4.4% decrease in the conversion factor, and when combined with a modification for budget neutrality, the conversion factor was slated to decrease by 4.5%. As of January 1, 2006 this decrease went into effect and claims were paid at the lower amount. On February 1, 2006 Congress passed, and on February 8, 2006 the President signed into law, the Deficit Reduction Act (“DRA”) that contained a provision freezing the Conversion Factor at 2005 levels for 2006. CMS reprocessed claims with 2006 dates of service that were paid at the lower Conversion Factor and reimbursed providers at the higher rate.

The provision freezing the conversion factor is effective only for 2006. If Congress does not revise the formula-driven conversion factor between now and December 31, 2006, Medicare reimbursement for physician services could decrease by 5.0% effective January 1, 2007, and if applied to annualized September 30, 2006 reimbursement, the decrease will negatively impact 2007 pre-tax income by an estimated $5-6 million. Also, there is likelihood that if Congress does not revise the conversion factor, reimbursement for some managed care contracts linked to Medicare reimbursement would decrease ratably.

On November 1, 2006, CMS released its Final Rule of the Five-Year Review of Work Relative Value Units under the Physician Fee Schedule and Proposed Changes to the Practice Expense (PE) Methodology. Our initial review indicates that CMS retained each aspect of its June 21, 2006 Proposed Rule covering these two issues. The Work RVU changes are slated to be implemented in full beginning January 1, 2007, while the PE Methodology changes will be phased in over a four year period (2007 to 2010). Among other changes, the Final Rule increases E & M reimbursement, adopts a “bottom-up” payment methodology for calculating direct practice costs, modifies the methodology used to calculate indirect practice costs, and eliminates the “non-physician work pool” (that is currently used to calculate practice expense RVUs for services without physician involvement, such as radiation oncology treatment planning), and substitutes, instead, reimbursement using the standard methodology.

For 2007, we estimate that the rule will result in a 1.8% increase in overall Medicare non-drug reimbursement, (or approximately $2.0 million of pre-tax income), based on our affiliated physicians’ practice patterns for the first nine months of 2006. This is comprised of a 2.3% increase in radiation oncology reimbursement and a 1.8% increase in non-drug medical oncology reimbursement. When fully implemented in 2010, we would expect a 4.1% increase in Medicare reimbursement for all non-drug services, compared to 2006, comprised of a 13% increase in radiation oncology reimbursement and a 0.1% decrease in non-drug medical oncology reimbursement. Some managed care contracts linked to Medicare reimbursement would also increase ratably.

Imaging Reimbursement

The Deficit Reduction Act also contained a provision affecting imaging reimbursement. The technical component of the physician fee schedule for physician-office imaging services has been capped at the Hospital Outpatient Prospective Payment System (“HOPPS”) rates effective January 1, 2007. If Congress does not act to revise the DRA provision between now and December 31, 2006, Medicare reimbursement will be limited to no more than the HOPPS rates. The impact on US Oncology affiliated practices primarily relates to reduced reimbursement for PET, PET/CT and CT services. By applying the 2007 reimbursement levels to annualized September 30, 2006 results, pre-tax income would be expected to decrease by an estimated $6-7 million.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

General Reimbursement Matters

Other reimbursement matters that could impact our future results include the risk factors described herein, as well as:

• changes in our business, including new cancer centers, PET system installations or otherwise expanding operations of affiliated physician groups;

• the extent to which non-governmental payers change their reimbursement rates or implement other initiatives, such as pay for performance, or change benefit structures;

• changes in practice performance or behavior, including the extent to which physicians continue to administer drugs to Medicare patients, or changes in our contracts with physicians;

• changes in our cost structure or the cost structure of affiliated practices, including any change in the prices our affiliated practices pay for drugs; and

• any other changes in reimbursement or practice activity that are unrelated to the prescription drug legislation.

Summary

If Congress does not revise the formula-driven conversion factor between now and December 31, 2006, the Company estimates a decrease in pre-tax income of $5-6 million for 2007, applying the conversion factor to annualized September 30, 2006 results. Similarly, if no Congressional action is taken prior to January 1, 2007 with regard to the proposed imaging reimbursement reductions called for by the Deficit Reduction Act, the company estimates a decrease in pre-tax income of $6-7 million for 2007, based on the application of the new rates to annualized September 30, 2006 results. If the Medicare Oncology Demonstration Project is not renewed by CMS for 2007, pre-tax income for 2007 is estimated to decrease by $3-4 million. These decreases are offset, in part, by increases in reimbursement of approximately 1.8% in overall non-drug reimbursement (or $2.0 million of pre-tax income) relating to Work RVU and PE Methodology changes referred to previously.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements. 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 accounts receivable, intangible assets, goodwill, accrued expenses, income taxes, and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.

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 valuation of accounts receivable as a result of actual collection patterns. We maintain decentralized billing systems and continue to upgrade and modify those systems. We take this into account as we evaluate the realizability of 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 payers, such as the recent changes in Medicare reimbursement.

Please refer to the “Critical Accounting Policies and Estimates” section of our Annual Report on Form 10-K, filed with the SEC on March 15, 2006, and subsequent filings, for a discussion of our critical accounting policies. Management believes

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

such critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated condensed financial statements. These critical accounting policies include our policy for recognition of revenue from affiliated practices, valuation of accounts receivable, stock-based compensation, impairment of long-lived assets, and volume-based pharmaceutical rebates.

Recent Accounting Pronouncements

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

In July, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109”(“FIN 48”), which clarifies the accounting and disclosure for uncertain tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact, if any, of the adoption of FIN 48 on our consolidated financial statements.

In September, 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. The Statement does not require any new fair value measurements, however for some entities, the application of this Statement will change current practice. In developing this Statement, the FASB considered the need for increased consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions of SFAS No. 157 should be applied prospectively as of the beginning of the fiscal year in which the Statement is initially applied except for certain limited retrospective application with respect to certain financial instruments. The Company will adopt this Statement as required, and adoption is not expected to have a material impact on the Company’s results of operations, financial condition or liquidity.

In September, 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R)”(“SFAS No. 158”) .SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit post retirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The Statement also requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 is effective for all employers with publicly traded securities as of the end of the fiscal year ending after December 15, 2006. The Company does not currently sponsor benefit plans covered by this Statement and does not expect it to have a material impact on its results of operations, financial condition or liquidity.

Discussion of Non-GAAP Information

In this report, the Company uses the term “EBITDA” which represents earnings before interest, taxes, depreciation and amortization (including amortization of stock-based compensation). EBITDA is not calculated in accordance with GAAP; rather it is derived from relevant items in the Company’s GAAP-based financial statements. A reconciliation of EBITDA to the Condensed Consolidated Statement of Operations and Comprehensive Income and the Condensed Consolidated Statement of Cash Flows is included in this quarterly report.

The Company believes EBITDA is useful to investors in evaluating the value of companies in general, and in evaluating the liquidity of companies with debt service obligations and their ability to service their indebtedness. Management uses EBITDA as a key indicator to evaluate liquidity and financial condition, both with respect to the business as a whole and with respect to individual sites in the US Oncology network. The Company’s senior secured credit facility also requires that we comply on a quarterly basis with certain financial covenants that include EBITDA as a financial measure. Management believes that EBITDA is useful to investors, since it provides investors with additional information that is not directly available in a GAAP presentation.

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As a non-GAAP measure, EBITDA should not be viewed as an alternative to the Company’s income from operations, as an indicator of operating performance, or the Company’s cash flow from operations as a measure of liquidity. For example, EBITDA does not reflect:

• the Company’s significant interest expense, or the cash requirements necessary to service interest and principal payments on the Company’s indebtedness;

• cash requirements for the replacement of capital assets being depreciated and amortized, which typically need to be replaced in the future, even though deprecation and amortization are non-cash charges;

• changes in, or cash equivalents available for, the Company’s working capital needs;

• the Company’s cash expenditures, or future requirements, for other capital expenditure or contractual commitments; and

• the fact that other companies may calculate EBITDA differently than we do, which may limit its usefulness as a comparative measure.

Despite these limitations, management believes that EBITDA provides investors and analysts with a useful measure of liquidity and financial condition unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. Management compensates for these limitations by relying primarily on the Company’s GAAP results and using EBITDA as a supplement for comparative purposes and for analyzing compliance with the Company’s loan covenants.

Results of Operations

As of September 30, 2006 and 2005, respectively, we have affiliated with the following number of physicians (including those under OPS arrangements), by specialty:

	September 30,
	2006	2005
Medical oncologists/hematologists	836	805
Radiation oncologists	148	140
Other oncologists	45	40
Total physicians	1,029	985

The following tables set forth the sources of growth in the number of physicians affiliated with the Company under both comprehensive and OPS agreements:

Comprehensive Service Agreements(1)(2)	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Affiliated physicians, beginning of period	848		803		856		797
Physician practice affiliations	6		10		18		27
Recruited physicians	39		45		56		54
Physician practice separations(2)	—		—		(35	)	(5	)
Retiring/Other	(20	)	(17	)	(32	)	(32	)
Net conversions from OPS agreements	—		—		10		—
Affiliated physicians, end of period	873		841		873		841

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Oncology Pharmaceutical Services Agreements(3)	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Affiliated physicians, beginning of period	129		141		138		133
Physician practice affiliations	35		9		51		24
Physician practice separations	(7	)	(4	)	(17	)	(11	)
Retiring/Other	(1	)	(2	)	(6	)	(2	)
Net conversions to comprehensive service agreements	—		—		(10	)	—
Affiliated physicians, end of period	156		144		156		144
Total affiliated physicians	1,029		985		1,029		985

(1) Operations related to comprehensive service agreements are included in the medical oncology and cancer center services segments.

(2) On April 18, 2006 we terminated our relationship with a net revenue practice comprised of 35 physicians.

(3) Operations related to OPS agreements are included in the pharmaceutical services segment.

The following table sets forth the number of radiation oncology facilities and PET systems managed by us:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2006	2005	2006		2005
Cancer Centers, beginning of period	78	81	82		83
Cancer Centers opened	—	2	—		4
Cancer Centers closed	—	—	(4	)	(4	)
Cancer Centers, end of period	78	83	78		83
Radiation oncology-only facilities, end of period	13	11	13		11
Total Radiation Oncology Facilities	91	94	91		94
PET Systems (1)	31	30	31		30

(1) Includes 10 and 8 PET/CT systems at September 30, 2006 and 2005, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

The following table sets forth the key operating statistics as a measure of the volume of services provided by our practices affiliated under comprehensive service arrangements:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2006	2005	2006	2005
Per Operating Day Statistics:
Medical oncology visits	9,599	9,342	9,752	9,300
Radiation treatments	2,687	2,602	2,716	2,661
IMRT treatments (included in radiation treatments)	505	379	481	381
PET scans	165	147	160	144
CT scans	675	587	657	558
Per Operating Day Same Store Statistics:
Medical oncology visits	9,481	8,853	9,472	8,807
Radiation treatments	2,652	2,494	2,662	2,543
IMRT treatments (included in radiation treatments)	423	379	423	379
PET scans	162	145	157	142
CT scans	656	553	629	523
New patients enrolled in research studies	645	888	1,933	2,642

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

The following table sets forth the percentages of revenue represented by certain items reflected in our Condensed Consolidated Statement of Operations and Comprehensive Income. The following information should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere herein.

	US Oncology Holdings, Inc.				US Oncology, Inc.
	Three Months Ended September 30,				Three Months Ended September 30,
	2006		2005		2006		2005
Product revenues	65.7	%	64.6	%	65.7	%	64.6	%
Service revenues	34.3		35.4		34.3		35.4
Total revenues	100.0		100.0		100.0		100.0
Cost of products	61.9		61.8		61.9		61.8
Cost of services:
Operating compensation and benefits	16.3		16.6		16.3		16.6
Other operating costs	10.3		9.7		10.3		9.7
Depreciation and amortization	2.5		2.6		2.5		2.6
Total cost of services	29.1		28.9		29.1		28.9
Total cost of products and services	91.0		90.7		91.0		90.7
General and administrative expense	2.6		2.8		2.6		2.8
Depreciation and amortization	0.4		0.6		0.4		0.6
Total costs and expenses	94.0		94.1		94.0		94.1
Income from operations	6.0		5.9		6.0		5.9
Other expense:
Interest expense, net	(4.3	)	(4.2	)	(3.4	)	(3.2	)
Minority interest expense	(0.1	)	—		(0.1	)	—
Income before income taxes	1.6		1.7		2.5		2.7
Income tax provision	(0.6	)	(0.6	)	(1.0	)	(1.0	)
Net income	1.0	%	1.1	%	1.5	%	1.7	%

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

	US Oncology Holdings, Inc.				US Oncology, Inc.
	Nine Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Product revenues	65.1	%	63.7	%	65.1	%	63.7	%
Service revenues	34.9		36.3		34.9		36.3
Total revenues	100.0		100.0		100.0		100.0
Cost of products	61.8		60.9		61.8		60.9
Cost of services:
Operating compensation and benefits	16.4		16.7		16.4		16.7
Other operating costs	9.8		9.8		9.8		9.8
Depreciation and amortization	2.5		2.7		2.5		2.7
Total cost of services	28.7		29.2		28.7		29.2
Total cost of products and services	90.5		90.1		90.5		90.1
General and administrative expense	2.9		2.9		2.9		2.9
Compensation expense under long-term incentive plan	—		0.8		—		0.8
Depreciation and amortization	0.5		0.7		0.5		0.7
Total costs and expenses	93.9		94.5		93.9		94.5
Income from operations	6.1		5.5		6.1		5.5
Other expense:
Interest expense, net	(4.2	)	(4.0	)	(3.3	)	(3.4	)
Minority interest expense	(0.1	)	(0.1	)	(0.1	)	(0.1	)
Income before income taxes	1.8		1.4		2.7		2.0
Income tax provision	(0.7	)	(0.6	)	(1.1	)	(0.8	)
Net income	1.1	%	0.8	%	1.6	%	1.2	%

In the following discussion, we address the results of operations of US Oncology and Holdings. With the exception of incremental interest expense associated with its $250.0 million floating rate notes and nominal administrative expenses, the results of operations of Holdings are identical to those of US Oncology. Therefore, discussion related to revenue, cost of products and cost of services is identical for both companies. Beginning with the discussion of corporate costs, which include interest and general and administrative expense, we first address the results of US Oncology, since it incurs the substantial portion of such expenses. Following the discussion of US Oncology, we separately address the incremental costs related to Holdings.

We derive revenue primarily in four areas:

• Comprehensive service fee revenues. Under our comprehensive service agreements, we recognize revenues derived from amounts we bill and collect on behalf of affiliated practices, which are reduced by the amounts retained by those practices under our contracts. Service fee revenue is recorded when services are rendered based on established or negotiated rates, reduced by a) contractual adjustments and allowances for doubtful accounts and b) the amounts retained by practices. Differences between estimated contractual adjustments and final settlements are reported in the period when final settlements are determined.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

• Oncology pharmaceutical services fees. Under our OPS agreements, we bill practices on a monthly basis for services rendered. These revenues include payment for all of the pharmaceutical agents used by the practice for which we pay the pharmaceutical manufacturers and a service fee for the pharmacy-related services we provide.

• GPO, data and other pharmaceutical service fees. We receive fees from pharmaceutical companies for acting as a group purchasing organization (“GPO”) for our affiliated practices, and for providing informational and other services to pharmaceutical companies. GPO fees are typically based upon the volume of drugs purchased by the practices. Fees for other services include amounts paid for data we collect, compile and analyze, as well as fees for other services we provide to pharmaceutical companies.

• Clinical research fees. We receive fees for clinical research services from pharmaceutical and biotechnology companies. These fees are separately negotiated for each study and typically include a management fee, per patient accrual fees and fees for achieving various study milestones.

A portion of our revenue under our comprehensive service agreements and our OPS arrangements with affiliated practices is derived from sales of pharmaceutical products and is reported as product revenues. Our remaining revenues are reported as service revenues. Physician practices that enter into comprehensive service agreements with us receive a broad range of services and receive pharmaceutical products. These products and services represent multiple deliverables rendered under a single contract, with a single fee. We have analyzed the component of the contract attributable to the provision of products (pharmaceuticals) and the component of the contract attributable to the provision of services and attributed fair value to each component.

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

Revenue

The following tables reflect our revenue by segment for the three and nine months ended September 30, 2006 and 2005:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Medical oncology services	73.2	%	75.5	%	74.6	%	75.1	%
Cancer center services	11.8		11.2		11.6		11.7
Pharmaceutical services	72.8		14.9		70.6		12.5
Research and other services	2.3		1.9		1.8		1.9
Eliminations	(60.1	)(1)	(3.5	)(1)	(58.6	)(1)	(1.2	)(1)
	100.0	%	100.0	%	100.0	%	100.0	%

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

	Three Months Ended September 30, (in thousands)								Nine Months Ended September 30, (in thousands)
	2006			2005			Change		2006			2005			Change
Medical oncology services	$	511,528		$	489,749		4.4	%	$	1,555,955		$	1,392,687		11.7	%
Cancer center services		82,448			72,879		13.1			242,055			217,753		11.2
Pharmaceutical services		508,925			96,703		nm	(2)		1,475,669			231,283		nm	(2)
Research and other services		15,950			12,238		30.3			40,747			35,111		16.1
Eliminations		(420,213	)(1)		(23,224	)(1)	nm	(2)		(1,224,627	)(1)		(23,224	)(1)	nm	(2)
	$	698,638		$	648,345		7.8	%	$	2,089,799		$	1,853,610		12.7	%

(1) Eliminations represent the sale of pharmaceuticals from our distribution center (pharmaceutical services segment) to our affiliated practices (medical oncology segment). The distribution center began operations, on a limited basis, in September of 2005.

(2) Not meaningful.

Medical Oncology Services.Medical oncology services revenue for the three months ended September 30, 2006 increased 4.4% over the comparable quarter in the prior year. The increase reflects the growth in pharmaceutical revenue attributable to both growth in our network of affiliated medical oncologists and increased revenue on a per physician basis. Partially offsetting pharmaceutical revenue growth was a $4.3 million reduction of the management fees paid by affiliated practices (as discussed below), a January 1, 2006 reduction in payments under the Medicare Demonstration Project, which provides physician payments for certain data relating to physician evaluation and management of patient care, and the separation of our last large net revenue model practice in April, 2006.

Medical oncology services revenue for the nine months ended September 30, 2006 increased 11.7% over comparable period in prior year and reflects the items referred to above. The impact of the management fee reduction and the net revenue model practice separation was less significant for the nine month period, as compared to the quarter ended September 30, 2006, as a portion of the nine month period ended September 30, 2006 includes activities prior to their occurrence.

The involvement of affiliated practices in our medical oncology services segment is important to the success of our pharmaceutical services segment. Effective July 1, 2006, to promote continued support of initiatives in this area, we initiated a program to reduce management fees paid by affiliated practices based upon compliance with distribution efficiency guidelines established by the Company and the profitability of the pharmaceutical services segment.

Cancer Center Services.Cancer center services revenue for the three months ended September 30, 2006 increased 13.1% over the comparable quarter in the prior year. The increase reflects the clinical acceptance of new technology, as evidenced by a 33.2% increase in IMRT treatments and a 14.4% increase in diagnostic scans.

Cancer center services revenue for the nine months ended September 30, 2006 increased 11.2% over the comparable period in the prior year reflecting a 26.2% increase in IMRT treatments and a 16.4% increase in diagnostic scans.

Pharmaceutical Services.Pharmaceutical services revenue for the three months ended September 30, 2006 was $508.9 million and increased $412.2 million over the comparable quarter in the prior year due primarily to sales from the distribution center to affiliated practices in the medical oncology segment that increased $397.0 million over the prior year period. The distribution center began operations in September, 2005, on a limited basis, and its sales to affiliated medical oncology practices are eliminated in the determination of our consolidated revenue. Excluding the impact of distribution sales, pharmaceutical services revenue was $88.7 million and increased $15.2 million over the quarter ended September 30, 2005 due primarily to increased sales to physicians affiliated under OPS agreements as well as revenues derived from services provided to pharmaceutical manufacturers and from AccessMed, subsequent to its acquisition in July, 2006.

Pharmaceutical services revenue for the nine months ended September 30, 2006 was $1,475.7 million and increased $1,244.4 million over the comparable quarter in the prior year. The increase is due primarily to incremental sales of $1,201.4 million from the distribution center to affiliated practices in the medical oncology segment. Excluding the impact of distribution sales,

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

pharmaceutical services revenue was $251.0 million and increased $43.0 million over the nine months ended September 30, 2005 due primarily to increased sales to physicians affiliated under OPS agreements and increases in GPO fees and sales data revenue derived from pharmaceutical manufacturers.

Operating Costs

Operating costs include cost of products and services, as well as depreciation and amortization related to our operating assets, and are presented in the tables below:

	Three Months Ended September 30,				Nine Months Ended September 30,
As a percentage of revenue:	2006		2005		2006		2005
Cost of products	61.9	%	61.8	%	61.8	%	60.9	%
Cost of services:
Operating compensation and benefits	16.3		16.6		16.4		16.7
Other operating costs	10.3		9.7		9.8		9.8
Depreciation and amortization	2.5		2.6		2.5		2.7
Total cost of services	29.1		28.9		28.7		29.2
Total cost of products and services	91.0	%	90.7	%	90.5	%	90.1	%

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006		2005		Change		2006		2005		Change
Cost of products	$	432,553	$	400,876	7.9	%	$	1,292,913	$	1,129,637	14.4	%
Cost of services:
Operating compensation and benefits		113,628		107,138	6.1			343,665		310,447	10.7
Other operating costs		71,772		62,920	14.1			204,409		182,070	12.3
Depreciation and amortization		17,578		17,159	2.4			51,497		50,027	2.9
Total cost of services		202,978		187,217	8.4			599,571		542,544	10.5
Total cost of products and services	$	635,531	$	588,093	8.1		$	1,892,484	$	1,672,181	13.2

Cost of Products. Cost of products consists primarily of oncology pharmaceuticals and supplies used in our medical oncology and pharmaceutical services segments and increased 7.9% and 14.4%, respectively, over the three and nine month periods ended September 30, 2005 reflecting revenue growth in the corresponding periods. As a percentage of revenue, cost of products was 61.9% and 61.8% in the three months ended September 30, 2006 and 2005, respectively. As a percentage of revenue, cost of products was 61.8% and 60.9% in the nine months ended September 30, 2006 and 2005, respectively. The increases over the prior year relate to higher pharmaceutical costs which had not yet been reflected in ASP-based reimbursement, which is based on average sales prices effective two quarters prior to establishing the current reimbursement rate. Accordingly, increasing pharmaceutical costs will generally impact our cost of products prior to the corresponding revenue increase.

Cost of Services. Cost of services includes compensation and benefits of our operating-level employees and employees of our affiliated practices other than physicians. Cost of services also includes other operating costs such as rent, utilities, repairs and maintenance, insurance and other direct operating costs. As a percentage of revenue, cost of services was 29.1% and 28.9% in the three months ended September 30, 2006 and 2005, respectively, and reflects increased rent and maintenance costs. As a percentage of revenue, cost of services was 28.7% and 29.2% in the nine months ended September 30, 2006 and 2005, respectively, and reflects economies of scale obtained by our operating segments.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

Corporate Costs and Net Income (US Oncology, Inc.).

Recurring corporate costs include general and administrative expenses, depreciation and amortization related to corporate assets and interest expense. Corporate costs also include certain items that are not attributable to routine operations. The corporate costs of US Oncology, Inc. are summarized in the table below. Incremental corporate costs of US Oncology Holdings, Inc. are addressed in a separate discussion entitled “Corporate Costs and Net Income (US Oncology Holdings, Inc.”).

	Three Months Ended September 30,				Nine Months Ended September 30,
As a percentage of revenue:	2006		2005		2006		2005
General and administrative expense	2.6	%	2.8	%	2.9	%	2.9	%
Compensation expense under long-term incentive plan	—		—		—		0.8
Depreciation and amortization	0.4		0.6		0.5		0.7
Interest expense, net	3.4		3.2		3.3		3.4
Minority interest expense	0.1		—		0.1		0.1

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006		2005		Change		2006		2005		Change
General and administrative expense	$	18,370	$	18,267	0.6	%	$	59,499	$	52,879	12.5	%
Compensation expense under long-term incentive plan		—		—	—			—		14,507	nm	(1)
Depreciation and amortization		2,587		3,783	(31.6	)		10,177		13,105	(22.3	)
Interest expense, net		24,229		20,833	16.3			69,380		62,166	11.6
Minority interest expense		593		149	nm	(1)		1,728		1,047	65.0

(1) Not meaningful.

General and Administrative. General and administrative expense was $18.4 million for the three months ended September 30, 2006 and $18.3 million for the same period in 2005. General and administrative expenses for the quarter ended September 30, 2006 includes a $1.7 million benefit to reduce accrued sales tax liabilities to reflect final settlements with several states. Also, during the quarter ended September 30, 2006, in an effort to streamline certain functions and reduce costs, the Company eliminated several corporate positions. Severance benefits associated with the reduction in force were approximately $0.8 million. General and administrative expense represented 2.6% and 2.8% of revenue, respectively, for the quarters ended September 30, 2006 and 2005.

General and administrative expense was $59.5 million for the nine months ended September 30, 2006 and $52.9 million for the comparable period in the prior year. The increase from the prior year reflects additional costs, including corporate personnel and consulting fees, incurred to support our strategic initiatives, as well as professional fees associated with the separation of a 35 physician net revenue model practice in April, 2006 and responding to a subpoena received from the Department of Justice (see “Legal Proceedings”). General and administrative expense represented 2.9% of revenue for both of the nine month periods ended September 30, 2006 and 2005.

Depreciation and Amortization.Depreciation and amortization expense was $2.6 million for the quarter ended September 30, 2006 and $3.8 million for the same period in 2005. The decrease from the prior year relates primarily to the impact of correcting, during the quarter ended September 30, 2006, an error in the valuation of certain cancer centers under construction at the time of the merger on August 20, 2004 that resulted in an overstatement of property and equipment and, consequently, depreciation expense. In connection with correcting the error, the accumulated depreciation since August 20, 2004 was reversed, which resulted in a reduction to depreciation expense of $0.9 million in the current quarter.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

Compensation Expense Under Long-Term Incentive Plan. We incurred $14.5 million of compensation expense under our long-term cash incentive plan during the nine months ended September 30, 2005 as the result of paying a special dividend to our shareholders. This expense did not recur during the quarter or nine month periods ended September 30, 2006.

Interest. Interest expense, net, increased to $24.2 million in the third quarter of 2006 from $20.8 million in the comparable period of prior year. Interest expense for the nine months ended September 30, 2006 increased to $69.4 million from $62.2 million. The increases over prior year reflect additional borrowings and increasing interest rates related to our variable rate debt instruments that are based on margin paid over LIBOR. The impact of increasing variable rates in 2006 was partially offset by an amendment to our credit facility in November, 2005 that reduced the LIBOR margin paid on our variable rate term loans from 275 basis points to 225 basis points.

Income Taxes. Our effective tax rate was 39.0% for the nine months ended September 30, 2006 and 39.7% for the nine months ended September 30, 2005. The difference between our effective and statutory tax rates is attributable primarily to non-deductible entertainment and public policy costs. During the nine months ended September 30, 2006 our effective tax rate decreased due to the relationship of non-deductible costs to increased income before income taxes generated during the current period. Income tax expense increased $7.1 million associated with an $18.8 million increase in income before income taxes over the comparable nine month period.

Net Income. Net income for the quarter ended September 30, 2006 was $10.6 million, an increase of $34 thousand over the quarter ended September 30, 2005. The increase was attributable to a $3.9 million increase in income from operations which was offset by higher interest and income tax expenses. Net income for the quarter ended September 30, 2006 was increased by approximately $0.5 million which represents the impact, net of tax, of a cumulative adjustment to reduce depreciation expense, as discussed above.

Net income for the nine months ended September 30, 2006 was $34.5 million, an increase of $11.7 million over the same period in 2005. The increase is attributable to a $26.7 million increase in income from operations, resulting in part, from $14.5 million in long-term compensation plan expense incurred during the first quarter of 2005 that did not recur in 2006. Partially offsetting the $26.7 million increase in income from operations was higher interest and income tax expense which collectively increased $14.3 million.

Corporate Costs and Net Income (US Oncology Holdings, Inc.)

The following table summarizes the incremental costs incurred by US Oncology Holdings, Inc. as compared to the costs incurred by US Oncology, Inc.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006		2005		Change		2006		2005		Change
General and administrative expense	$	34	$	114	(70.1	)%	$	193	$	310	(37.7	)%
Interest expense, net		6,140		6,116	0.4			18,161		12,373	46.8

General and Administrative. In addition to the general and administrative expenses incurred by US Oncology, Holdings incurred general and administrative expenses of $34,000 and $0.1 million during the quarter ended September 30, 2006 and 2005, respectively. These costs primarily represent professional fees necessary for Holdings to maintain its corporate existence and comply with the terms of the indenture governing its $250.0 million senior floating rate notes (the “Holdings Notes”).

Interest. In addition to interest expense incurred by US Oncology, Holdings incurred interest related to the Holdings Notes. Incremental interest expense related to these notes was approximately $6.1 million during both the quarter ended September 30, 2006 and 2005. Incremental interest expense was approximately $18.2 million during the nine months ended September 30, 2006 and $12.4 million during the nine months ended September 30, 2005. The increase in incremental interest expense when comparing the nine months ended September 30, 2006 to the same period in 2005 reflects the issuance of the Holdings Notes in late March, 2005 which resulted in incremental expense being incurred primarily during the second and third quarters of the 2005 period. Through March, 2007, interest on the Holdings Notes has been fixed at 9.4% under the terms of a two year interest rate swap agreement resulting in a consistent amount of incremental interest expense during the term of the swap agreement.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

Income Taxes. Holdings effective tax rate was 40.0% for the nine months ended September 30, 2006 and 41.7% for the nine months ended September 30, 2005. The difference between the effective tax rate of Holdings and US Oncology relates to the incremental interest and general and administrative expenses incurred by Holdings which reduce its taxable income and, consequently, increase the impact that non-deductible costs have on its effective tax rate. Income tax expense increased $4.8 million associated with a $13.1 million increase in income before income taxes over the comparable prior year period.

Net Income. Net income for the quarter ended September 30, 2006 was $6.7 million and decreased $0.2 million from the quarter ended September 30, 2005 as a $3.9 million increase in income from operations was offset by higher interest expense (related to borrowings of US Oncology, Inc.) and higher income tax expenses.

Net income for the nine months ended September 30, 2006 was $22.9 million, an increase of $8.3 million from the same period in 2005. The increase is attributable to a $26.8 million increase in income from operations, which includes the effect of $14.5 million in long-term compensation plan expense incurred during the first quarter of 2005 that did not recur in 2006. Partially offsetting the increase in income from operations was higher interest and income tax expenses which collectively increased $17.8 million.

Liquidity and Capital Resources

The following table summarizes the working capital and long-term indebtedness of Holdings and US Oncology as of September 30, 2006.

	Holdings		US Oncology
Current assets	$	761,604	$	761,602
Current liabilities		470,598		482,941
Net working capital	$	291,006	$	278,661
Long-term indebtedness	$	1,316,924	$	1,066,924

The principal difference between the net working capital of Holdings and US Oncology relates to higher income taxes payable reported by US Oncology, Inc., which is a subsidiary of the US Oncology Holdings, Inc. consolidated group for federal income tax reporting purposes. For purposes of its separate financial statements, US Oncology’s provision for income taxes has been computed on the basis that it filed a separate federal income tax return together with its subsidiaries.

The following table summarizes the statement of cash flows of Holdings and US Oncology for the nine months ended September 30, 2006.

	Holdings			US Oncology
Cash flows used in operating activities	$	(36,610	)	$	(12,881	)
Cash flows used in investing activities		(93,933	)		(93,933	)
Cash flows provided by financing activities		93,108			69,378
Decrease in cash and equivalents		(37,435	)		(37,436	)
Cash and equivalents:
December 31, 2005		125,838			125,837
September 30, 2006	$	88,403		$	88,401

Cash Flows from Operating Activities

During the nine months ended September 30, 2006, we used $36.6 million in cash flow from operations compared to generating $89.7 million during the nine months ended September 30, 2005. Cash used in operations during the current period

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

reflects working capital investments primarily for inventory at the distribution center which began distributing a limited number of pharmaceuticals in September of 2005. Also, cash paid for interest and taxes have increased $22.0 million and $14.9 million, respectively, over the nine month period ended September 30, 2005. Interest payments reflect the incremental indebtedness incurred by Holdings in March, 2005 as well as increasing rates on our variable rate debt during 2006. Tax payments increased during the current year when we became a cash taxpayer, after fully utilizing the benefit of our federal net operating loss carryforwards during 2005. Also, during the first nine months of 2005, we received a federal income tax refund related to net operating losses.

The operating cash flow of US Oncology exceeds the operating cash flow of Holdings by $23.7 million. The difference relates to dividends paid during the nine months ended September 30, 2006 by US Oncology to Holdings to enable Holdings to service interest obligations related to its senior floating rate notes. The dividends are considered to be financing transactions by US Oncology as they represent distributions paid to its parent company, which were ultimately used to settle operating costs of Holdings.

Cash Flows from Investing Activities

During the nine months ended September 30, 2006, we used $93.9 million for investing activities. The investments consisted primarily of $57.9 million in capital expenditures, including $24.3 million relating to the development and construction of cancer centers. Also during the same period, we paid $31.4 million, net of cash acquired, for the acquisition of AccessMed in July, 2006.

During the nine months ended September 30, 2005, we used $64.6 million for investing activities. Capital expenditures during the nine months ended September 30, 2005 were $62.8 million, including $40.8 million relating to the development and construction of cancer centers. Capital expenditures for our distribution initiative amounted to $10.9 million and maintenance capital expenditures were $11.1 million.

Cash Flows from Financing Activities

During the nine months ended September, 30, 2006, $93.1 million was provided from financing activities which primarily relates to term loan of $100.0 million proceeds received in July, 2006, partially offset by principal repayments for outstanding indebtedness. Cash flow used by US Oncology for financing activities also includes distributions of $23.7 million to its parent company to finance the payment of interest obligations on the Holdings Notes.

During the nine months ended September 30, 2005, we used $14.9 million in cash from financing activities primarily related to $16.9 million in repayments under our term loan facility. During the nine months ended September 30, 2005, Holdings issued $250.0 million of Senior Floating Rate Notes, due 2015 (“the Holdings Notes”) and used the proceeds to pay a dividend to its common and preferred shareholders.

On July 10, 2006, we amended our senior secured credit facility to, among other things, provide for an additional term loan of $100.0 million to US Oncology (the “2006 Term Loan”). The 2006 Term Loan bears interest at the same rate as the Company’s existing senior secured term loan, based on the London Interbank Offered Rate plus a margin based on a defined formula. Interest is payable semi-annually. The 2006 Term Loan is subject to the same covenants, terms and conditions, and secured by the same collateral, as our Senior Secured Credit Facility.

The payment of interest on the Holdings Notes is financed through receipt of periodic dividends from US Oncology to Holdings. The terms of our existing senior secured credit facility, as well as the indentures governing the senior notes and senior subordinated notes, and certain other agreements, restrict US Oncology and certain subsidiaries from making payments or transferring assets to us, including dividends, loans or other distributions. Such restrictions include prohibition of dividends in an event of default and limitations on the total amount of dividends paid to Holdings. In the event these agreements, or other considerations, do not permit US Oncology to provide us with sufficient distributions to fund interest and principal payments on the Holdings Notes when due, we may default on the notes unless other sources of funding are available. The amount available under the restricted payments provision is based upon a portion of US Oncology’s cumulative net income increased for certain transactions, primarily receipt of equity offering proceeds, and decreased by cumulative dividends paid to Holdings. Amounts available under this restricted payments provision amounted to $76.8 million as of September 30, 2006.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

Earnings before Interest, Taxes, Depreciation and Amortization

“EBITDA” represents earnings before interest and other expense, net, taxes, depreciation, and amortization (including amortization of stock-based compensation). EBITDA is not calculated in accordance with GAAP rather; it is derived from relevant items in the Company’s GAAP-based financial statements. A reconciliation of EBITDA to the Condensed Consolidated Statement of Operations and Comprehensive Income and the Condensed Consolidated Statement of Cash Flows is included in this document.

The Company believes EBITDA is useful to investors in evaluating the value of companies in general, and in evaluating the liquidity of companies with debt service obligations and their ability to service their indebtedness. Management uses EBITDA as a key indicator to evaluate liquidity and financial condition, both with respect to the business as a whole and with respect to individual sites in the US Oncology network. The Company’s senior secured credit facility also requires that we comply on a quarterly basis with certain financial covenants that include EBITDA as a financial measure. As of September 30, 2006 our senior secured credit facility required that we maintain an interest coverage ratio (interest expense divided by EBITDA, as defined by the indenture) of at least 2.10:1 and a leverage ratio (indebtedness divided by EBITDA, as defined by the indenture) of no more than 5.50:1. Both of these covenants become more restrictive over time and, at maturity in 2011, both will be 3.00:1. For more information regarding our use of EBITDA and its limitations, see “Discussion of Non-GAAP Information.”

The following discussion relates to US Oncology Holdings, Inc. whose EBITDA, with the exception of nominal incremental expenses, is substantially identical to the EBITDA of US Oncology, Inc.

EBITDA was $62.5 million for the quarter ended September 30, 2006 compared to $59.8 million for the quarter ended September 30, 2005. Medical oncology services EBITDA was $31.4 million, a decrease of $8.1 million compared to quarter ended September 30, 2005, due primarily to a $4.3 million reduction of the management fees paid by affiliated practices, effective July 1, 2006, to promote their continued support of the operating efficiencies of our pharmaceutical services segment. Also contributing to the medical oncology services EBITDA decline was the separation of our last large net revenue model practice in April, 2006 and reductions to the Medicare Demonstration Project that were effective January 1, 2006. Cancer center services EBITDA was $29.2 million for the quarter ended September 30, 2006, representing an increase of $4.4 million over the quarter ended September 30, 2005, which reflects the clinical acceptance of new technology. Technology-based treatments provided in our integrated cancer centers increased 8.7 percent, on a same-store basis, over the quarter ended September 30, 2005. Pharmaceutical services EBITDA was $20.4 million for the quarter ended September 30, 2006, an increase of $7.6 million over the comparable prior year period, which reflects a full quarter contribution from our pharmaceutical services segment, and in particular, the operation of our distribution center. Corporate costs increased $0.7 million over the quarter ended September 30, 2005.

EBITDA was $190.5 million for the nine months ended September 30, 2006 compared to $165.6 million for the nine months ended September 30, 2005. Medical oncology services EBITDA was $99.2 million, a decrease of $26.1 million compared to the nine months ended September 30, 2005. The decrease is due to the separation of our last large net revenue model practice in April, 2006, reductions to the Medicare Demonstration Project that were effective January 1, 2006, and the reduction of the management fees paid by affiliated practices, effective July 1, 2006, to promote their continued support of the operating efficiencies of our pharmaceutical services segment. Cancer center services EBITDA was $87.1 million for the nine months ended September 30, 2006, representing an increase of $10.1 million over the nine months ended September 30, 2005, which reflects the clinical acceptance of new technology. Pharmaceutical services EBITDA was $62.3 million for the nine months ended September 30 2006, an increase of $31.1 million over the comparable prior year period, which reflects a full period contribution from our distribution center, as well as growth in the number of physicians affiliated under the OPS model and expansion of services offered to pharmaceutical manufacturers. Corporate cost decreased $7.3 million from the nine months ended September 30, 2005 as the long-term incentive plan compensation expense of $14.5 million incurred in 2005 was partially offset by increased costs in support of our strategic initiatives during the current year.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

The following table reconciles net income as shown in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income to EBITDA, and reconciles EBITDA to net cash provided by or used in operating activities as shown in the Company’s Condensed Consolidated Statement of Cash Flows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
US Oncology Holdings, Inc.
Net income	$	6,718		$	6,888		$	22,905		$	14,593
Interest expense, net and other income		30,369			26,949			87,541			74,539
Income tax provision		4,436			4,102			15,272			10,449
Depreciation and amortization		20,165			20,942			61,674			63,132
Amortization of stock-based compensation expense		262			949			1,403			2,862
Minority interest expense		593			—	(1)		1,728			—	(1)
EBITDA		62,543			59,830			190,523			165,575
Compensation expense under long-term incentive plan		—			—			—			14,507
Changes in assets and liabilities		15,856			(24,462	)		(127,328	)		(16,925	)
Minority interest expense		—	(1)		149			—	(1)		1,047
Deferred income tax provision		502			4,102			3,008			10,449
Interest expense, net and other income		(30,369	)		(26,949	)		(87,541	)		(74,539	)
Income tax provision		(4,436	)		(4,102	)		(15,272	)		(10,449	)
Net cash provided by (used in) operating activities	$	44,096		$	8,568		$	(36,610	)	$	89,665

(1) Effective January 1, 2006, minority interest expense was added back to net income for the determination of EBITDA. Had minority interest expense been added back for the three months and nine months ended September 30, 2005, EBITDA would have amounted to $60.0 million and $166.6 million, respectively.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
US Oncology, Inc.
Net income	$	10,597		$	10,563		$	34,484		$	22,749
Interest expense, net and other income		24,229			20,833			69,380			62,166
Income tax provision		6,731			6,657			22,047			14,976
Depreciation and amortization		20,165			20,942			61,674			63,132
Amortization of stock-based compensation expense		262			949			1,403			2,862
Minority interest expense		593			—	(1)		1,728			—	(1)
EBITDA		62,577			59,944			190,716			165,885
Compensation expense under long-term incentive plan		—			—			—			14,507
Changes in assets and liabilities		23,717			(19,457	)		(115,273	)		(19,085	)
Minority interest expense		—	(1)		149			—	(1)		1,047
Deferred income tax provision		594			6,657			3,103			14,976
Interest expense, net and other income		(24,229	)		(20,833	)		(69,380	)		(62,166	)
Income tax provision		(6,731	)		(6,657	)		(22,047	)		(14,976	)
Net cash provided by (used in) operating activities	$	55,928		$	19,803		$	(12,881	)	$	100,188

(1) Effective January 1, 2006, minority interest expense was added back to net income for the determination of EBITDA. Had minority interest expense been added back for the three months and nine months ended September 30, 2005, EBITDA would have amounted to $60.1 million and $166.9 million, respectively.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

Following is the EBITDA for our operating segments for the three and nine months ended September 30, 2006 and 2005 (in thousands):

	Three Months Ended September 30, 2006
	Medical Oncology Services			Cancer Center Services			Pharmaceutical Services			Research/ Other			Corporate Costs			Eliminations(1)			Total
US Oncology, Inc.
Product revenues	$	376,978		$	—		$	502,097		$	—		$	—		$	(420,213	)	$	458,862
Service revenues		134,550			82,448			6,828			15,950			—			—			239,776
Total revenues		511,528			82,448			508,925			15,950			—			(420,213	)		698,638
Operating expenses		(480,088	)		(62,638	)		(489,502	)		(16,556	)		(27,917	)		420,213			(656,488	)
Income (loss) from operations		31,440			19,810			19,423			(606	)		(27,917	)		—			42,150
Add back:
Depreciation and amortization		—			9,388			1,014			216			9,547			—			20,165
Amortization of stock-based compensation expense		—			—			—			—			262			—			262
EBITDA	$	31,440		$	29,198		$	20,437		$	(390	)	$	(18,108	)	$	—		$	62,577
US Oncology Holdings, Inc.
Operating expenses	$	—			—		$	—		$	—		$	(34	)	$	—		$	(34	)
EBITDA	$	31,440		$	29,198		$	20,437		$	(390	)	$	(18,142	)	$	—		$	62,543
	Three Months Ended September 30, 2005
	Medical Oncology Services			Cancer Center Services			Pharmaceutical Services			Research/ Other			Corporate Costs			Eliminations(1)			Total
US Oncology, Inc.
Product revenues	$	350,359		$	—		$	91,589		$	—		$	—		$	(23,224	)	$	418,724
Service revenues		139,390			72,879			5,114			12,238			—			—			229,621
Total revenues		489,749			72,879			96,703			12,238			—			(23,224	)		648,345
Operating expenses		(450,199	)		(58,421	)		(84,352	)		(12,415	)		(27,980	)		23,224			(610,143	)
Income (loss) from operations		39,550			14,458			12,351			(177	)		(27,980	)		—			38,202
Minority interest(2)		—			(149	)		—			—			—			—			(149	)
Add back:
Depreciation and amortization		—			10,446			437			347			9,712			—			20,942
Amortization of stock-based compensation expense		—			—			—			—			949			—			949
EBITDA	$	39,550		$	24,755		$	12,788		$	170		$	(17,319	)	$	—		$	59,944
US Oncology Holdings, Inc.
Operating expenses	$	—		$	—		$	—		$	—		$	(114	)	$	—		$	(114	)
EBITDA	$	39,550		$	24,755		$	12,788		$	170		$	(17,433	)	$	—		$	59,830

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

	Nine Months Ended September 30, 2006
	Medical Oncology Services			Cancer Center Services			Pharmaceutical Services			Research/ Other			Corporate Costs			Eliminations(1)			Total
US Oncology, Inc.
Product revenues	$	1,138,949		$	—		$	1,445,635		$	—		$	—		$	(1,224,627	)	$	1,359,957
Service revenues		417,006			242,055			30,034			40,747			—			—			729,842
Total revenues		1,555,955			242,055			1,475,669			40,747			—			(1,224,627	)		2,089,799
Operating expenses		(1,456,734	)		(183,703	)		(1,416,111	)		(41,139	)		(89,100	)		1,224,627			(1,962,160	)
Income (loss) from operations		99,221			58,352			59,558			(392	)		(89,100	)		—			127,639
Add back:
Depreciation and amortization		—			28,699			2,711			663			29,601			—			61,674
Amortization of stock-based compensation expense		—			—			—			—			1,403			—			1,403
EBITDA	$	99,221		$	87,051		$	62,269		$	271		$	(58,096	)	$	—		$	190,716
US Oncology Holdings, Inc.
Operating expenses	$	—		$	—		$	—		$	—		$	(193	)	$	—		$	(193	)
EBITDA	$	99,221		$	87,051		$	62,269		$	271		$	(58,289	)	$	—		$	190,523
	Nine Months Ended September 30, 2005
	Medical Oncology Services			Cancer Center Services			Pharmaceutical Services			Research/ Other			Corporate Costs			Eliminations(1)			Total
US Oncology, Inc.
Product revenues	$	992,635		$	—		$	212,020		$	—		$	—		$	(23,224	)	$	1,181,431
Service revenues		400,052			217,753			19,263			35,111			—			—			672,179
Total revenues		1,392,687			217,753			231,283			35,111			—			(23,224	)		1,853,610
Operating expenses		(1,266,768	)		(170,200	)		(200,522	)		(38,470	)		(85,429	)		23,224			(1,738,165	)
Compensation expense under long-term incentive plan		—			—			—			—			(14,507	)		—			(14,507	)
Income (loss) from operations		125,919			47,553			30,761			(3,359	)		(99,936	)		—			100,938
Minority interest(2)		(665	)		(382	)		—			—			—			—			(1,047	)
Add back:
Depreciation and amortization		28			29,781			446			1,064			31,813			—			63,132
Amortization of stock-based compensation expense		—			—			—			—			2,862			—			2,862
EBITDA	$	125,282		$	76,952		$	31,207		$	(2,295	)	$	(65,261	)	$	—		$	165,885
US Oncology Holdings, Inc.
Operating expenses	$	—		$	—		$	—		$	—		$	(310	)	$	—		$	(310	)
EBITDA	$	125,282		$	76,952		$	31,207		$	(2,295	)	$	(65,571	)	$	—		$	165,575

(1) Eliminations represent the sale of pharmaceuticals from our distribution center (pharmaceutical services segment) to our practices affiliated under comprehensive service agreements (medical oncology segment). The distribution center began operations on a limited basis, in September of 2005, and accordingly, sales to affiliated practices in the third quarter of 2005 are not comparable to other periods presented.

(2) Prior to the first quarter of 2006, minority interest expense was treated as a reduction of EBITDA.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS-continued

Anticipated Capital Requirements

We currently expect our principal uses of funds in the near future to be the following:

• Payments made for acquisition of assets and additional consideration, if any, in connection with new practice affiliations and business combinations.

• Funding of working capital, including advance purchases of pharmaceuticals to obtain certain rebates and discounts under contracts with volume-based thresholds and the prompt payment of accounts payable to earn prompt-pay discounts offered by these manufacturers. The Company believes its working capital investment in the distribution center achieved normalized levels in the first quarter of 2006 and continues implementing measures designed to improve working capital costs, including providing practices with a financial incentive to adhere to certain distribution efficiency initiatives. Working capital requirements, however, may continue to fluctuate depending upon a number of factors, including the ordering patterns of affiliated practices, decisions to make advance purchases of inventory to obtain favorable pricing, potential additions to the pharmaceuticals handled by the distribution center or changes in payment terms arranged with manufacturers.

• Purchases of real estate and medical equipment for the development of new cancer centers, as well as installation of upgraded and replacement medical equipment at existing centers. We anticipate spending $80 to $90 million for the development of cancer centers, purchase of clinical equipment and investment in information systems in 2006.

• Investments in information systems, including systems related to our electronic medical record product, iKnowMed.

• Debt service requirements on our outstanding indebtedness.

• Payments made for possible acquisitions to support strategic initiatives.

As of November 1, 2006, we had cash and cash equivalents of $148.3 million. As of November 1, 2006, we had $137.2 million available under our $160.0 million revolving credit facility which had been reduced by outstanding letters of credit, totaling $22.8 million. In the event that cash on hand combined with amounts available under the credit facility are insufficient to fund the Company’s anticipated working capital requirements, we may be required to obtain additional financing. There can be no assurance that additional financing, if available, will be made available on terms that are acceptable to the Company.

We expect to fund our current capital needs with (i) cash on hand, and cash flow generated from operations, (ii) borrowings under the $160 million revolving credit facility, (iii) lease or purchase money financing for certain equipment purchases and (iv) indebtedness to physicians in connection with new affiliations. Our success in implementing our capital expenditure plans could be adversely impacted by poor operating performance, resulting in reduced cash flow from operations. In addition, to the extent that poor performance or other factors impact our compliance with financial and other covenants under our revolving credit facility, our ability to borrow under that facility or to find other financing sources could be limited. Furthermore, capital at financing terms satisfactory to management may be limited, due to market conditions or operating performance.

Inflation

The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation and when labor shortages occur in the marketplace. In addition, suppliers pass along rising costs to us in the form of higher prices. We have implemented cost control measures to curtail increases in operating costs and expenses. We cannot predict our ability to cover or offset future cost increases.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

ITEM 4. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. For the purpose of this review, disclosure controls and procedures means controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit is accumulated and communicated to management, including our principal executive officer, principal financial officer and principal accounting officer, as appropriate to allow timely decisions regarding required disclosure.

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

Management previously acknowledged its responsibility for internal controls and seeks to continue to improve those controls. In addition, in order to achieve compliance with Section 404 of the Sarbanes-Oxley Act of 2002 within the prescribed period, we have, since 2003, been engaged in a process to document and evaluate our internal controls over financial reporting. In this regard, management has dedicated internal resources, engaged outside consultants and adopted a detailed project work plan to (i) assess the adequacy of our internal control over financial reporting, (ii) take steps to improve control processes where appropriate, (iii) validate, through testing, that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. During the second quarter of 2004, we commenced testing of internal controls that we had previously documented as part of this process. The Company will first be subject to the requirements of Section 404, including inclusion of management’s report on internal control over financial reporting when it files its annual report on Form 10-K with respect to its fiscal year ending December 31, 2007. The independent registered accounting firm’s assessment of internal controls and its report thereon is first required with respect to the fiscal year ending December 31, 2008.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

PART II – Other Information

Item 1. Legal Proceedings

Professional Liability Claims

The provision of medical services by our affiliated practices entails an inherent risk of professional liability claims. We do not control the practice of medicine by the clinical staff or their compliance with regulatory and other requirements directly applicable to practices. In addition, because the practices purchase and prescribe pharmaceutical products, they face the risk of product liability claims. In addition, because of licensing requirements and affiliated practices’ participation in governmental healthcare programs, we and affiliated practices are, from time to time, subject to governmental audits and investigations, as well as internally initiated audits, some of which may result in refunds to governmental programs. Although we and our practices maintain insurance coverage, successful malpractice, regulatory or product liability claims asserted against us or one of the practices in excess of insurance coverage could have a material adverse effect on us.

U.S. Department of Justice Subpoena

During the fourth quarter of 2005, we received a subpoena from the United States Department of Justice’s Civil Litigation Division (“DOJ”) requesting a broad range of information about us and our business, generally in relation to our contracts and relationships with pharmaceutical manufacturers. We are in the process of responding to the subpoena and are cooperating fully with the DOJ. At the present time, the DOJ has not made any specific allegation of wrongdoing on the part of the Company. We cannot, however, provide assurance that such an allegation or litigation will not result from this investigation. While we believe that we are operating and have operated our business in compliance with the law, including with respect to the matters covered by the subpoena, we cannot provide assurance that the DOJ will not make a determination that wrongdoing has occurred. In addition, we are devoting significant resources to responding to the DOJ subpoena and anticipate that such resources will be required on an ongoing basis to fully respond to the subpoena.

We have also received requests for information relating to class action litigation against pharmaceutical manufacturers relating to alleged manipulation of Average Wholesale Price (“AWP”) and alleged inappropriate marketing practices with respect to AWP and relating to other third party litigation.

Qui Tam Suits

In the past, we and certain of our subsidiaries and affiliated practices have been the subject of qui tam lawsuits (commonly referred to as “whistle-blower” suits) of which we became aware. The United States has determined not to intervene in any of the qui tam suits of which we are aware and all such suits have been dismissed. Because qui tam actions are filed under seal, a possibility exists that we could be the subject of other qui tam actions of which we are unaware. We intend to continue to investigate and vigorously defend ourselves against any and all such claims, and we continue to believe that we conduct our operations in compliance with the law.

Qui tam suits are brought by private individuals, and there is no minimum evidentiary or legal threshold for bringing such a suit. The Department of Justice is legally required to investigate the allegations in these suits. The subject matter of many such claims may relate both to our alleged actions and alleged actions of an affiliated practice. Because the affiliated practices are separate legal entities not controlled by us, such claims necessarily involve a more complicated, higher cost defense, and may adversely impact the relationship between the practices and us. If the individuals who file complaints and/or the United States were to prevail in these claims against us, and the magnitude of the alleged wrongdoing were determined to be significant, the resulting judgment could have a material adverse financial and operational effect on us, including potential limitations in future participation in governmental reimbursement programs. In addition, addressing complaints and government investigations requires us to devote significant financial and other resources to the process, regardless of the ultimate outcome of the claims.

Breach of Contract Claims

We and our network physicians are defendants in a number of lawsuits involving employment and other disputes and breach of contract claims. In addition, we are involved from time to time in disputes with, and claims by, our affiliated practices against us.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

Specifically, we are involved in litigation with one net revenue model practice of 35 physicians. We initiated arbitration proceedings pursuant to a provision in the service agreement providing for contract reformation in certain events. The practice countered with a lawsuit that alleges, among other things, that we have breached the service agreement and that our service agreement is unenforceable as a matter of public policy due to alleged violations of healthcare laws. The practice sought unspecified damages and a termination of the contract. We believe that our service agreement is lawful and enforceable and that we are operating in accordance with applicable law.

As a result of alleged breaches of the service agreement by the practice, we terminated the service agreement in April, 2006. During the first quarter of 2006, the practice represented 4.6% of our consolidated revenue. At September 30, 2006, we had recorded amounts related to this practice of $32.4 million which consisted of a receivable in the amount of $24.3 million and $8.1 million of property, plant and equipment. In October, 2006, we sold, for cash, the property, plant and equipment to the practice for an amount that approximated its net book value at the time of sale. In connection with the purchase price allocation for the merger in August, 2004, no value was assigned to goodwill or our management service agreement with this practice due to the ongoing dispute that existed at that time.

As a result of the ongoing litigation, we have been unable to collect on a timely basis a receivable relating to accounts receivable purchased by us under the service agreement and amounts for reimbursement of expenses paid by us on the practice’s behalf. At September 30, 2006, the total receivable owed to us of $24.3 million is reflected on our balance sheet as other assets. Currently, certain amounts are held in an escrowed bank account into which the practice has been making, and is required to continue to make, monthly deposits. These amounts will be released upon resolution at the litigation. In addition, certain amounts are being held in a bank account that has been frozen pending the outcome of related litigation regarding that account. In addition, we have filed a security lien on the receivables of the practice. We believe that the amounts held in the bank accounts combined with the receivables of the practice in which we have filed a security lien represent adequate collateral to recover the $24.3 million receivable recorded in other assets at September 30, 2006. Accordingly, we expect to realize the amount that we believe to be owed by the practice. However, realization is subject to a successful conclusion to the litigation with the practice, and we cannot assure you as to when the litigation will be finally concluded or as to what the ultimate outcome of the litigation will be. We expect to incur expenses in connection with our litigation with the practice.

We intend to vigorously pursue our claims, including claims for any costs and expenses that we incur as a result of the termination of the service agreement and to defend against the practice’s allegations that we breached the agreement and that the agreement is unenforceable. However, we cannot provide assurance as to what the outcome of the litigation will be, or, even if we prevail in the litigation, whether we will be successful in recovering the full amount, or any, of our costs associated with the litigation and termination of the service agreement.

Assessing the Company’s financial and operational exposure on litigation matters requires the application of substantial subjective judgments and estimates based upon facts and circumstances, resulting in estimates that could change as more information becomes available.

Certificate of Need Regulatory Action

During the third quarter of 2006, one of our affiliated practices in North Carolina lost (through state regulatory action) the ability, currently, to provide radiation services at its cancer center in Asheville. The practice continues to provide medical oncology services, but is not permitted to use the radiation services area of the center (approximately 18% of the square footage of the cancer center). The practice is appealing the regulatory action and is exploring other strategic alternatives with respect to radiation oncology and the cancer center space.

At September 30, 2006, our Condensed Consolidated Balance Sheet included net assets in the amount of $5.9 million related to this practice, which includes equipment in the amount of $1.6 million, a service agreement intangible asset in the amount of $2.7 million and working capital in the amount of $1.6 million. The cancer center used by this practice is accounted for as an operating lease and, as such, is not included on our balance sheet. At September 30, 2006, the lease had a remaining term of 20 years and the net present value of minimum future lease payments is approximately $7.2 million. In the event our appeal of the regulatory action or other efforts are unsuccessful, we may determine certain amounts related to this practice to be impaired. We do not believe the net assets of the cancer center are impaired as of September 30, 2006. Management will continue to monitor this matter.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

Item 1A. Risk Factors

As of the date of this filing, there have been no material changes from the risk factors previously disclosed as “Risk Factors” in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2005. An investment in our company involves various risks and, when contemplating such an investment, you should consider carefully all of these risk factors. These risks and uncertainties are not the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial. All of these could adversely affect our business, financial condition, results of operations and cash flows and, thus, the value of an investment in our company.

Item 4. Submission of Matters to a Vote of Security Holders

None.

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

Item 6. Exhibits

(a) US Oncology Holdings, Inc. Exhibits

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-4 filed July 27, 2005 and incorporated herein by reference.)
3.2	Amended and Restated By-Laws (filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-4 filed July 27, 2005 and incorporated herein by reference.)
4.1	Indenture, dated as of March 29, 2005, between US Oncology Holdings, Inc. and LaSalle Bank National Association as Trustee (filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-4 filed on July 27, 2005 and incorporated herein by reference.)
4.2	Form of Senior Floating Rate Note due 2015 (included in Exhibit 4.1)
4.3	Registration Rights Agreement, dated as of March 15, 2005, among US Oncology Holdings Inc. and Wachovia Capital Markets, LLC, J.P. Morgan Securities Inc., and Citigroup Global Markets Inc., as representatives of the Initial Purchasers (filed as Exhibit 4.3 to the Company’s Registration Statement on Form S-4 filed on July 27, 2005 and incorporated herein by reference.)
4.4	First Supplemental Indenture, dated as of August 20, 2004, among US Oncology, Inc., the Guarantors named therein and JP Morgan Chase Bank as Trustee. (filed as Exhibit 4.3 to the US Oncology, Inc.’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
4.5	Indenture, dated as of August 20, 2004, among Oiler Acquisition Corp. and LaSalle Bank National Association, as Trustee. (filed as Exhibit 4.4 to the US Oncology, Inc’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
4.6	Form of 9% Senior Note due 2012 (included in Exhibit 4.4).
4.7	First Supplemental Indenture, dated as of August 20, 2004, among US Oncology, Inc., the Guarantors named therein and LaSalle Bank National Association, as Trustee. (filed as Exhibit 4.6 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
4.8	Indenture, dated as of August 20, 2004, among Oiler Acquisition Corp. and LaSalle Bank National Association, as Trustee. (filed as Exhibit 4.7 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
4.9	Form of 10 3/4% Senior Note due 2014 (included in Exhibit 4.7).
4.10	First Supplemental Indenture, dated as of August 20, 2004, among US Oncology, Inc., the Guarantors named therein and LaSalle Bank National Association, as Trustee. (filed as Exhibit 4.9 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
4.11	Registration Rights Agreement, dated as of August 4, 2004, among Oiler Acquisition Corp. and Citigroup Global Markets Inc., as representative for the Initial Purchasers. (filed as Exhibit 4.10 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
4.12	Accession Agreement, dated as of August 20, 2004, among the Guarantors listed therein. (filed as Exhibit 4.11 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
10.1	Incremental Facility Amendment and Amendment No. 3 dated as of July 10, 2006, to the Credit Agreement dated as of August 20, 2004, as Amended as of March 17, 2005 and November 15, 2005, among US Oncology Holdings, Inc., a Delaware corporation, US Oncology, Inc., a Delaware corporation, the Lenders

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

	party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Wachovia Bank, National Association, as Syndication Agent, and Citicorp North America, Inc., as Documentation Agent. (filed as Exhibit 10.1 to the Company’s Form 8-K dated July 10, 2006 and incorporated herein by reference.)
31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer
32.1	Certification of Chief Executive Officer
32.2	Certification of Chief Financial Officer

(b) US Oncology, Inc. Exhibits

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-4 filed December 17, 2004 and incorporated herein by reference.)
3.2	Amended and Restated By-Laws (filed as Exhibit 3.2 to the Company’s Form 10-K filed March 21, 2003 and incorporated herein by reference.)
4.1	Indenture, dated as of February 1, 2002, among US Oncology, Inc., the Guarantors named therein and JP Morgan Chase Bank as Trustee (filed as Exhibit 3 to, and incorporated by reference from, the Company’s Form 8-K filed February 5, 2002.)
4.2	Form of 9 5/8% Senior Subordinated Note due 2012 (included in Exhibit 4.1).
4.3	First Supplemental Indenture, dated as of August 20, 2004, among US Oncology, Inc., the Guarantors named therein and JP Morgan Chase Bank as Trustee. (filed as Exhibit 4.3 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
4.4	Indenture, dated as of August 20, 2004, among Oiler Acquisition Corp. and LaSalle Bank National Association, as Trustee. (filed as Exhibit 4.4 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
4.5	Form of 9% Senior Note due 2012 (included in Exhibit 4.4).
4.6	First Supplemental Indenture, dated as of August 20, 2004, among US Oncology, Inc., the Guarantors named therein and LaSalle Bank National Association, as Trustee. (filed as Exhibit 4.6 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
4.7	Indenture, dated as of August 20, 2004, among Oiler Acquisition Corp. and LaSalle Bank National Association, as Trustee. (filed as Exhibit 4.7 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
4.8	Form of 10 3/4% Senior Note due 2014 (included in Exhibit 4.7).
4.9	First Supplemental Indenture, dated as of August 20, 2004, among US Oncology, Inc., the Guarantors named therein and LaSalle Bank National Association, as Trustee. (filed as Exhibit 4.9 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
4.10	Registration Rights Agreement, dated as of August 4, 2004, among Oiler Acquisition Corp. and Citigroup Global Markets Inc., as representative for the Initial Purchasers. (filed as Exhibit 4.10 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

4.11	Accession Agreement, dated as of August 20, 2004, among the Guarantors listed therein. (filed as Exhibit 4.11 to the Company’s Registration Statement on Form S-4 filed December 17, 2004, and incorporated herein by reference.)
10.1	Incremental Facility Amendment and Amendment No. 3 dated as of July 10, 2006, to the Credit Agreement dated as of August 20, 2004, as Amended as of March 17, 2005 and November 15, 2005, among US Oncology Holdings, Inc., a Delaware corporation, US Oncology, Inc., a Delaware corporation, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Wachovia Bank, National Association, as Syndication Agent, and Citicorp North America, Inc., as Documentation Agent. (filed as Exhibit 10.1 to the Company’s Form 8-K dated July 10, 2006 and incorporated herein by reference.)
31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer
32.1	Certification of Chief Executive Officer
32.2	Certification of Chief Financial Officer

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US ONCOLOGY HOLDINGS, INC. AND US ONCOLOGY, INC.

SIGNATURES

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

	US ONCOLOGY HOLDINGS, INC. AND
	US ONCOLOGY, INC.
Date: November 9, 2006:	By:	/s/ Richard P. McCook
		Richard P. McCook,
		Executive Vice President and
		Chief Financial Officer
		(duly authorized signatory and principal financial officer)
Date: November 9, 2006:	By:	/s/ Vicki H. Hitzhusen
		Vicki H. Hitzhusen,
		Chief Accounting Officer
		(principal accounting officer)

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