ADPI American Dental Partners, Inc. (MM)

AMERICAN DENTAL PARTNERS, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Description of Business

American Dental Partners, Inc. (the “Company”) is a leading provider of dental facilities and business services to multidisciplinary dental group practices in selected markets throughout the United States. The Company customarily acquires selected assets of the dental practices with which it affiliates and enters into long-term service agreements with professional corporations, professional associations or service corporations which are not owned by the Company. The Company is responsible for providing the dental facilities and all services necessary for the administration of the non-clinical aspects of the dental operations, while the affiliated dental practices are responsible for providing dental care to patients. Services provided to the affiliated practices include providing assistance with organizational planning and development; recruiting, retention and training programs; quality assurance initiatives; facilities development and management; employee benefits administration; procurement; information systems and practice technology; marketing and payor relations; and financial planning, reporting and analysis. The Company operates in one segment.

(2) Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of American Dental Partners, Inc., its wholly-owned subsidiaries and its subsidiaries in which it holds a majority interest. All material intercompany balances and transactions have been eliminated in consolidation. Management has determined that, based on the provisions of its service agreements, the Company is not required to consolidate the financial statements of the affiliated practices, which are affiliated with the Company by means of a long-term service agreement, with its own financial statements.

The accompanying interim consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. In the opinion of management, all adjustments, which consist only of normal and recurring adjustments, necessary for a fair presentation of financial position and results of operations, have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. A reclassification has been made to the interim 2006 consolidated financial statements to conform to current period presentation. Accounts receivable, net of the Company’s dental laboratory and dental benefits third-party administrator has been reclassified to accounts receivable, net from prepaids and other current assets. As a result, the consolidated statement of cash flows for the period ended September 30, 2006 reflects a reclassification of $91,000 in operating cash flows between accounts receivable and other current assets.

(3) Use of Estimates

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company’s carrying amount of accounts receivable requires management to make estimates and assumptions regarding the collectability of fees from affiliates that affect the consolidated financial statements. The Company’s affiliation and acquisition transactions typically result in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense that the Company will incur. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect the consolidated financial statements. The Company and the affiliated practices maintain insurance coverage for various business activities. Certain of the coverages have retentions which require the Company to make estimates and assumptions regarding losses below applicable retention levels. There can be no assurance that actual results will not differ from those estimates.

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AMERICAN DENTAL PARTNERS, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(4) Recent Affiliations & Acquisitions

During the third quarter 2007, the Company completed affiliations with four dental practices, all of which joined the existing affiliated practices in Missouri, New York and Wisconsin, and became subject to existing service agreements. Aggregate consideration paid by the Company in connection with these transactions amounted to approximately $19,800,000 in cash and assumed liabilities. The terms of these affiliations provide for contingent payments based on future financial performance, with payments due in 2008, 2009 and 2010 that in total cannot exceed $270,000. The Company records contingent payments in the period they are resolved. In connection with these transactions, the Company recorded approximately $18,100,000 in intangible assets relating to the service agreements with the affiliated practices, with an amortization period of 25 years.

In September 2007, the Company recorded an accrued expense of $100,000 for a contingent payment earned as a result of a prior affiliation, which was paid in October 2007.

On September 25, 2007, the Company acquired 100% of the outstanding capital stock of Minnesota-based Metropolitan Dental Holdings, Inc. In connection with the acquisition, a subsidiary of Metropolitan Dental Holdings, Inc. entered into a 40-year service agreement with an affiliated professional limited liability company (collectively with Metropolitan Dental Holdings, Inc. and its subsidiaries, “Metro Dentalcare”). The purchase price paid in connection with the acquisition was approximately $87,044,000 in cash, and a contingent earn-out of up to $10,000,000 payable in 2008 based on Metro Dentalcare’s earnings before interest, taxes, depreciation and amortization for the fiscal year ended December 31, 2007. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

In connection with this acquisition, the Company recorded $48,700,000 of intangible assets relating to the service agreement with the affiliated practice, which is not expected to be deductible for tax purposes and will be amortized over 25 years, and $2,760,000 of intangible assets classified as a trade name intangible, which is not expected to be deductible for tax purposes and will be amortized over five years. Goodwill of $43,172,000 is not expected to be deductible for tax purposes. The Company also incurred approximately $530,000 in transaction costs in connection with the acquisition. The Company is obtaining a third-party valuation of certain intangible assets, and therefore, the allocation of the purchase price is subject to adjustment.

The following unaudited pro forma financial information presents results as if the Metro Dentalcare acquisition had occurred at the beginning of 2006, for the three and nine months ended September 30, 2007 and 2006 (in thousands):

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AMERICAN DENTAL PARTNERS, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

On December 1, 2006, the Company completed an acquisition of the assets of Arizona’s Tooth Doctor for Kids. The assets were contributed to a newly created subsidiary that is 85% owned by the Company. The Company continues to complete its asset allocation analysis. As a result, the Company recorded reclassifications of goodwill to inventory of approximately $155,000 and allowance for doubtful accounts of approximately $11,000.

In 2006 and 2007, the Company entered into three platform affiliations in which its subsidiaries have minority owners. In addition to the Arizona’s Tooth Doctor for Kids acquisition, in two platform affiliations the Company acquired a 90% ownership interest, with the remaining 10% investment from a third party.

(5) Intangible Assets

Intangible assets consisted of the following as of September 30, 2007 and December 31, 2006 (in thousands):

Intangible amortization expense for the three and nine months ended September 30, 2007 was $1,723,000 and $4,648,000, respectively. Intangible amortization expense for the three and nine months ended September 30, 2006 was $1,340,000 and $3,989,000, respectively. Estimated annual amortization expense for each of the next five fiscal years is approximately $8,800,000. The weighted average amortization period for service agreements, customer relationships and trade name intangibles is 25, eight and five years, respectively. The weighted average remaining amortization period for all intangibles is 20 years.

Based on litigation developments between the Company, its Minnesota subsidiary PDHC, Ltd and PDG, P.A., the affiliated practice at Park Dental (the “PDG Litigation”) subsequent to September 30, 2007 (see footnote 14), the Company is assessing whether there is any potential impairment associated with the PDG, P.A. service agreement intangible asset, which has a carrying value of approximately $3,500,000 at September 30, 2007.

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AMERICAN DENTAL PARTNERS, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(6) Stock-based Compensation

Options granted under the Company’s stock option plans generally have a ten-year term and generally have a vesting period of four years, except for the 2007 annual grants under the 2005 Director’s Stock Option Plan that vest over three years. At September 30, 2007, options for 1,136,480 shares were vested and 358,350 shares were available for future grants under the 2005 Equity Incentive Plan and the 2005 Directors Stock Option Plan. The Company issues new shares upon stock option exercises. No restricted shares have been awarded. The Company grants employee stock purchase rights under its 1997 Employee Stock Purchase Plan (“ESPP”). A total of 389,090 shares have been purchased under the ESPP and 160,910 shares are available for purchase as of September 30, 2007. The Company issues new shares for ESPP purchases.

The Company recognizes stock-based compensation in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (R), “ Share Based Payment.” The Company recognized stock-based compensation expense of $490,068 and $341,443 during the three months ended September 30, 2007 and 2006, respectively. The Company recognized stock-based compensation expense of $1,434,922 and $1,018,912 during the nine months ended September 30, 2007 and 2006, respectively. Stock-based compensation expense was recorded within general corporate expenses on the Company’s consolidated statement of income. In addition, the Company recorded a deferred tax benefit associated with stock-based compensation of $175,411 and $112,551 during the three months ended September 30, 2007 and 2006, respectively, and no amounts were capitalized. The Company recorded a deferred tax benefit associated with stock-based compensation of $507,324 and $333,501 during the nine months ended September 30, 2007 and 2006, respectively, and no amounts were capitalized. The remaining unrecognized stock-based compensation expense for unvested stock option awards at September 30, 2007, was approximately $4,700,000 and the weighted average period of time over which this cost will be recognized is 3.4 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants issued in the first nine months of 2007 and 2006:

The Company calculated the volatility assumption for stock options using a blend of a historical volatility rate for a period equal to the expected term and an expected volatility rate based on more recent activity. The Company estimated the expected life of its stock options using the simplified method for determining the expected term as prescribed by the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, “ Share-based Payment.” The Company calculated the volatility assumption for ESPP purchases using an expected volatility rate based on recent activity. The expected life of ESPP purchases is six months.

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AMERICAN DENTAL PARTNERS, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

The following table summarizes the stock option transactions during the first nine months of 2007:

Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during the first nine months of 2007 and 2006 are provided in the following table (in thousands):

Accounts Receivable, net

Accounts receivable, net, reflects receivables due from affiliated dental practices that represent amounts due pursuant to the terms of the service agreements, and other receivables, net of any allowances for doubtful accounts, associated with the Company’s affiliated dental practice, captive insurance subsidiary, dental labs and dental benefits third party administrator (“TPA”). The following table lists receivables due from affiliated practices and other receivables as of September 30, 2007 and December 31, 2006 (in thousands):

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AMERICAN DENTAL PARTNERS, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

At September 30, 2007 and December 31, 2006, the Company had accounts receivable due from PDG, P.A. of approximately $3,000,000 and $2,100,000, respectively. As a result of PDG Litigation developments subsequent to September 30, 2007 (see footnote 14), while the Company must assess the collectability of these amounts, the Company intends to pursue their collection.

Net Revenue

The Company’s net revenue represents reimbursement of expenses and fees charged to affiliated practices pursuant to the terms of the service agreements. Additionally, the Company’s net revenue includes patient revenue of its Arizona’s Tooth Doctor for Kids (“Tooth Doctor”) subsidiary, which is owned 85% by the Company, and fees earned by the Company’s TPA and dental laboratory. Net revenue consisted of the following for the three and nine months ended September 30, 2007 and 2006 (in thousands):

Net revenue from the Company’s service agreement with PDG, P.A., the affiliated practice at Park Dental, represented approximately 22% and 28% of its consolidated net revenue for the three months ended September 30, 2007 and 2006, respectively, and represented approximately 24% and 29% of its consolidated net revenue for the nine months ended September 30, 2007 and 2006, respectively. Net revenue from the Company’s service agreement with Wisconsin Dental Group, S.C., the affiliated practice at Forward Dental, represented approximately 12% and 13% of the Company’s consolidated net revenue for the three months ended September 30, 2007 and 2006, respectively, and represented approximately 12% and 13% of the Company’s consolidated net revenue for the nine months ended September 30, 2007 and 2006, respectively. No other service agreement or customer accounted for more than 10% of consolidated net revenue.

(8) Debt

During the quarter ended September 30, 2007 the Company increased the capacity under its revolving credit facility from $75,000,000 to $130,000,000, and extended the maturity from February 2012 to September 2012. The Company uses this facility for general corporate purposes, including working capital, acquisitions and affiliations and capital expenditures. Borrowings under the credit facility bear interest at either prime or LIBOR plus a margin, at the Company’s option. The margin is based upon the Company’s debt coverage ratio and ranges from 0.0% to 0.875% for prime borrowings and 0.875% to 1.750% for LIBOR borrowings. At September 30, 2007, the LIBOR interest rate under the credit facility, including borrowing margin, was approximately 6.52% and the prime interest rate under the credit facility was 8.25%. As discussed in footnote 12, on May 9, 2007 the Company entered into an interest rate swap to hedge $20,000,000 of borrowings under the credit facility. Under this arrangement, the Company has effectively converted its 3-month, floating LIBOR interest rate exposure, plus a credit spread, to fixed 5.0%, plus a credit spread, until February 2012. The Company also pays a commitment fee on the unused balance of its credit facility ranging from 0.175% to 0.375%. Borrowings are limited to an availability formula based on earnings before income taxes, depreciation and amortization, adjusted for certain items, and are secured by a first lien on substantially all of our assets, including a pledge of the stock of its subsidiaries. The Company is also required to comply with financial and other covenants, including minimum net worth, leverage and fixed charge

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AMERICAN DENTAL PARTNERS, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

coverage ratios and maximum capital expenditures as defined by the credit agreement. The Company is in compliance with its covenants as of September 30, 2007. The outstanding balance under this line as of September 30, 2007 was $42,500,000, and the Company had a stand-by letter of credit of approximately $1,950,000 at September 30, 2007. The unused balance under this line as of September 30, 2007 was $87,500,000 and based on borrowing covenants, reduced by the stand-by letter of credit, $72,290,000 was available for borrowing.

During the quarter ended September 30, 2007, the Company entered into a Term Loan Agreement in the amount of $100,000,000. The Term Loan was used to finance the Metro Dentalcare acquisition and pay down a portion of the Company’s outstanding balance under its revolving credit facility. The maturity date of the Term Loan is September 24, 2008, but the Company has the ability and expects to refinance prior to its maturity. Interest on the Term Loan is at either Prime or LIBOR plus a margin, at the Company’s option. The margin for the first 90 days is 125 basis points, and increases 50 basis points each 90 days thereafter. At September 30, 2007, the LIBOR interest rate, including the margin, was 6.39%, and the Prime rate was 7.75%. All of the obligations under the Term Loan rank pari passu in right of payment to all of the obligations of the Company’s revolving credit facility. The Company is required to comply with financial and other covenants, including minimum net worth, leverage and fixed charge coverage ratios and maximum capital expenditures as defined by the Term Loan Agreement, and is in compliance with its covenants as of September 30, 2007.

(9) Earnings Per Share

Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options using the “treasury stock” method. The computation of diluted earnings per share does not include the effect of outstanding stock options that would be antidilutive.

The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation for the three and nine months ended September 30, 2007 and 2006 (in thousands):

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AMERICAN DENTAL PARTNERS, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(10) Internal Use Software

Since 2002 , the Company has been developing and implementing Improvis, a proprietary practice management system which replaces Comdent, the system currently used by many of the affiliated practices. Improvis has been designed to include expanded clinical, managerial and financial capabilities. As of September 30, 2007, 12 affiliated practices, ten of which are completely converted, comprising 80 dental facilities, were using Improvis. The Company has recorded aggregate capitalized software costs amounting to $1,957,000, which includes approximately $146,000 in capitalized interest, in connection with this project as of September 30, 2007, of which $898,000 relates to the first development phase. The Company began to amortize costs associated with the first development phase in October 2005 and has recognized approximately $180,000 in amortization costs as of September 30, 2007. These costs will be amortized over ten years.

(11) Income taxes

The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes– an interpretation of FASB Statement 109” on January 1, 2007. As a result of the implementation of FIN No. 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, the Company had $169,000 of unrecognized income tax benefits, all of which would affect the Company’s effective tax rate if recognized. Unrecognized income tax benefits decreased to $119,000 due to the resolution of previously uncertain tax positions during the three months ended September 30, 2007.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. As of September 30, 2007, the Company has approximately $27,000 of accrued interest and penalties related to uncertain tax positions.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. In the normal course of business, the Company is subject to examination by U.S. federal and state taxing authorities. The tax years 2002-2006 remain open to examination by taxing jurisdictions to which the Company is subject.

(12) Interest Rate Swap

On May 9, 2007, the Company entered into an interest rate swap arrangement to fix the interest rate on $20,000,000 of its long term debt borrowings as a cash flow hedging instrument that matures in February 2012. The terms of this agreement provide that the Company exchange its variable rate 3-month LIBOR payment, plus a credit spread, for a fixed rate of 5%, plus a credit spread. The Company expects the arrangement to be highly effective in offsetting its variable interest rate exposure. Accordingly, interest expense associated with the hedge reflects the fixed rate, and the change in the fair value of the hedge as of September 30, 2007, of approximately $209,000, is included in other non-current liabilities, with an offset to other comprehensive income on the Company’s consolidated balance sheet.

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AMERICAN DENTAL PARTNERS, INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(unaudited)

(13) Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a single authoritative definition of fair value, sets out framework for measuring fair value and expands on required disclosures about fair value measurements. SFAS 157 is effective for the Company on January 1, 2008 and will be applied prospectively. The Company is assessing the impact of this Statement on its financial condition and results of operations though it believes SFAS 157 will not have a significant effect on its future consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). This Standard allows companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. SFAS 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. The Company is assessing the impact of this Statement on its financial condition and results of operations though it believes SFAS 159 will not have a significant effect on its future consolidated financial statements.

(14) Subsequent Events

Based on PDG Litigation developments subsequent to September 30, 2007, the Company is proceeding on the basis that PDHC, Ltd. will no longer be providing dental facilities and business services after December 31, 2007 to PDG, P.A. pursuant to the Service Agreement between the two parties. Accordingly, the Company is assessing the potential impairment of the intangible asset associated with the Service Agreement between PDHC and PDG. At September 30, 2007, the book value of this intangible asset was approximately $3,500,000. At September 30, 2007, the Company also had accounts receivable due from PDG, P.A. of approximately $3,000,000. The Company has entered into a new affiliation with a Minnesota professional limited liability company. The Company intends to continue to operate its Park Dental business with this Minnesota affiliated practice effective January 1, 2008.

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AMERICAN DENTAL PARTNERS, INC.