##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the fiscal year ended December 31, 2004



Commission File Number: 0-23363



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AMERICAN DENTAL PARTNERS, INC.

(Exact name of registrant as specified in our charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 04-3297858                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



American Dental
Partners, Inc.

201 Edgewater Drive, Suite 285

Wakefield, Massachusetts 01880

(Address of principal executive offices, including zip code)



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Registrants telephone number, including area code: (781) 224-0880 / (781) 224-4216 (fax)



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



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  | None                                     



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



Common
Stock, $0.01 par value

(Title of Class)



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



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



Indicate by check mark whether registrant is an accelerated
filer (as defined by Rule 12b-2 of the Act.)  x



The aggregate market value of the registrants voting common stock held by non-affiliates of the registrant was approximately $124,450,520 on June 30, 2004, based on the closing price of such stock, as reported
on the NASDAQ National Market System.



The number of shares of
Common Stock, $0.01 par value, outstanding as of March 7, 2005 was 7,910,677



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrants Definitive 2004 Proxy Statement for our 2005 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated by reference in Part III, Items 10, 11, 12, 13 and
14 of this Annual Report on Form 10-K.



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



INDEX



|                                                 |  |                                                                                                                 |  |     
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|                                                 |  |                                                                                                                 |  | Page
|Information Regarding Forward-looking Statements |  | 3                                                                                                              
|                                                 |  |                                                                                                                
|PART I.                                          |  |                                                                                                                 |  |     
|Item 1.                                          |  | Business                                                                                                        |  | 3   
|Item 2.                                          |  | Properties                                                                                                      |  | 16  
|Item 3.                                          |  | Legal Proceedings                                                                                               |  | 16  
|Item 4.                                          |  | Submission of Matters to a Vote of Security Holders                                                             |  | 16  
|                                                 |  |                                                                                                                
|PART II.                                         |  |                                                                                                                 |  |     
|Item 5.                                          |  | Market for the Registrants Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 17  
|Item 6.                                          |  | Selected Financial Data                                                                                         |  | 18  
|Item 7.                                          |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 19  
|Item 7A.                                         |  | Quantitative and Qualitative Disclosures about Market Risk                                                      |  | 32  
|Item 8.                                          |  | Financial Statements and Supplementary Data                                                                     |  | 33  
|Item 9.                                          |  | Changes in Disagreements with Accountants on Accounting and Financial Disclosure                                |  | 58  
|Item 9A.                                         |  | Controls and Procedures                                                                                         |  | 58  
|Item 9B.                                         |  | Other Information                                                                                               |  | 58  
|                                                 |  |                                                                                                                
|PART III.                                        |  |                                                                                                                 |  |     
|Item 10.                                         |  | Directors and Executive Officers of the Registrant                                                              |  | 59  
|Item 11.                                         |  | Executive Compensation                                                                                          |  | 59  
|Item 12.                                         |  | Security Ownership of Certain Beneficial Owners and Management                                                  |  | 59  
|Item 13.                                         |  | Certain Relationships and Related Transactions                                                                  |  | 59  
|Item 14.                                         |  | Principal Accounting Fees and Services                                                                          |  | 59  
|                                                 |  |                                                                                                                
|PART IV.                                         |  |                                                                                                                 |  |     
|Item 15.                                         |  | Exhibits and Financial Statement Schedules                                                                      |  | 60  



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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS



Some of the information in this Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe,
expect, anticipate, project, and similar expressions, among others, identify forward-looking statements. Forward-looking statements speak only as of the date the statement was made. Such forward-looking statements
are subject to uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied. Certain factors that might cause such a difference include, among others, the Companys risks
associated with overall or regional economic conditions, contracts its affiliated dental group practices have with third-party payors and the impact of any terminations or potential terminations of such contracts, fluctuations in labor markets, the
Companys acquisition and affiliation strategy, dependence upon affiliated dental group practices, dependence upon service agreements and government regulation of the dental industry. Additional risks, uncertainties and other factors are set
forth in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations under the heading Risk Factors.



PART I



ITEM 1. BUSINESS



Overview



American Dental Partners, Inc. (ADPI) is a leading provider of
business services to multi-disciplinary dental group practices in selected markets throughout the United States. We are committed to the growth and success of our affiliated dental group practices, and we make substantial investments to support each
affiliated dental groups growth. We assist our affiliates with organizational planning and development; recruiting, retention and training programs; quality assurance initiatives; facilities development and management; employee benefits
administration; procurement; information systems; marketing and payor relations; and financial planning, reporting and analysis. At December 31, 2004, we were affiliated with 19 dental group practices, comprising 398 dentists practicing in 177
locations in 17 states.



Dental Care Industry



The market for dental care is large, growing and highly fragmented. Based on
Centers for Medicare & Medicaid Services statistics, estimated expenditures for dental care grew 7% annually from 1990 to 2004 reaching $78 billion in 2004, and are expected to be approximately $118 billion by 2012, representing a 5% per annum
growth rate from 2004 to 2012. We believe that the growth in expenditures for dental care will continue to be driven by both increases in costs and increases in demand for services due to:



| |  |  | increased enrollment in dental benefits plans, particularly preferred provider organization (PPO) plans, and to a lesser extent, network referral plans;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | increased demand for dental care as a result of the aging population and a greater percentage of the population retaining its dentition; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | increased demand for aesthetic dental procedures as a result of an increasing awareness of personal appearance and the development of new dental materials and procedures which
address these wants.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe that this growth
will benefit not only dentists, but companies that provide services to the dental care industry, including dental management service organizations. However, the failure of any of these factors to materialize could offset increases in demand for
dental care, and any such increases may not correlate with growth in our business.



Unlike many other sectors of the health care services industry, the dental care profession remains dominated by practices owned and operated by just one dentist. According to the American Dental Association
(ADA), in 2001, approximately 78% of the 156,000 dentists in the United States were solo practitioners. The percentage of



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graduating dentists who initially began their career as an owner of a dental practice fell from 31% in 1989 to 22% in 2001 according to the ADA. We believe a
greater percentage of dentists will practice as partners or associates in group dental practices rather than practicing as a solo practitioner as a result of high educational debt levels and a change in gender profile of graduating dentists.
According to the ADA, dental students in 2002 graduated with an average of $185,000 of debt and 39% were female. Group dental practice provides economic and professional flexibility advantages to graduating dentists as compared to solo practice.



Most dental care performed in the United States is categorized
as general dentistry. According to the ADA, in 2002, approximately 81% of dentists were general dentists. General dentistry includes preventative care, diagnosis and treatment planning, as well as procedures such as fillings, crowns, bridges,
dentures and extractions. Specialty dentistry, which includes orthodontics, periodontics, endodontics, prosthodontics and pediatric dentistry, represented the remaining 19% of practicing dentists.



Historically, dental care was not covered by insurers and consequently was
paid for by patients on a fee-for-service basis. An increasing number of employers have responded to the desire of employees for enhanced benefits by providing coverage from third-party payors for dental care. These third-party payors offer
indemnity insurance plans, PPO plans, capitated managed care plans and dental referral plans. Under an indemnity insurance plan, the dental provider charges a fee for each service provided to the insured patient, which is typically the same as that
charged to a patient not covered by any type of dental insurance. We categorize indemnity insurance plans as fee-for-service plans. Under a PPO plan, the dentist charges a discounted fee for each service provided based on a schedule negotiated with
the dental benefit provider. Under a capitated managed care plan, the dentist receives a fixed monthly fee from the managed care organization for each member covered under the plan who selects that dentist as his or her provider. Capitated managed
care plans also typically require a co-payment by the patient. Dental referral plans are not insurance products but are network-based products that provide access to dental care. Typically, a small monthly fee is paid by an individual or employer
for a list of dentists who have agreed to accept certain negotiated fees or a discount from their normal fees. Under network referral plans, full reimbursement for dental care provided is made directly by a patient to the participating dentist, as
compared to indemnity, PPO and capitation plans in which some level of reimbursement is provided by the payor to the participating dentist.



The National Association of Dental Plans (NADP) and the Delta Dental Plans Association (DDPA) estimated that 159 million people,
or 55% of the population of the United States, were covered by some form of dental benefit plan in 2004. This compares with 133 million people, or 52% of the population, in 1996. Of the 159 million people with coverage, 52% were covered by PPO
plans, 29% by indemnity insurance plans, 12% by capitated managed care plans and 7% by dental referral plans. The NADP and DDPA estimate that nearly 166 million people will be enrolled in a dental benefit plan in 2007 representing a 2% per annum
growth rate from 2004 to 2007. The NADP and DDPA estimate the number of people covered by PPO plans increased from 21 million in 1996 to 82 million in 2004 and will increase to 111 million people in 2007, representing a 16% per annum growth rate
from 1996 to 2007.



Business Objective and Strategy



Our objective is to be the leading business partner to dental group
practices in selected markets throughout the United States. In order to achieve our objective, our strategy is to provide value-added resources and support to each of our affiliated dental group practices in order that they may become the market
leading, high quality dental group of each of their respective communities. We believe the core attributes of such a leading dental group include the following: (i) a common identity and clinical philosophy, (ii) professional recruiting and
mentoring programs, (iii) formalized peer review and quality assurance initiatives, (iv) functional and well-maintained dental facilities, (v) advanced information systems, and (vi) a qualified local management team with well-defined
responsibilities and accountability.



In executing our
strategy, we assist our affiliated dental group practices with organizational planning and development; recruiting, retention and training programs; quality assurance initiatives; facilities development and



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management; employee benefits administration; procurement; information systems; marketing and payor relations; and financial planning, reporting and
analysis. In order to execute our strategy successfully, we are continually enhancing or expanding our capabilities and resources, including vertical integration of ancillary dental activities. As an example, we expanded our procurement capabilities
in 2002 with the acquisition and integration of two dental labs, and in 2005 we plan to introduce a private label patient financing program developed in conjunction with a leading consumer financial institution.



We believe that successful execution of our strategy will result in growth
from the following areas: (i) assisting our current affiliated dental group practices to increase their community presence, (ii) completing additional affiliations with dental group practices in new communities and (iii) adding additional
capabilities or resources to our service offering through the acquisition of related businesses. Our objective is to help our affiliated dental group practices grow their patient revenue 8 to 10% per annum, and to supplement our growth through
completion of additional affiliations in new markets. We are constantly evaluating potential affiliations with dental group practices and potential acquisitions of companies that would expand our business capabilities. Although we have completed
many affiliations and acquisitions since November 1996, there can be no assurance that additional affiliation or acquisition candidates can be identified or that they can be consummated or successfully integrated into our operations. The number of
new affiliations and acquisitions over the next twelve months could be at levels greater or less than we have achieved in recent years.



Affiliation Philosophy



We believe that dental care is an important part of an individuals overall health care. Because the practitioner is best qualified to manage the
clinical aspects of dentistry, the provision of dental care must be centered around the dentist. However, current market trends in health care are increasing the complexity of operating a dental group. In addition, the principals of many dental
group practices are reaching retirement age and are beginning to investigate means for transitioning the non-clinical leadership and management of their dental group practices. Consequently, many dental group practices are engaging professional
consultants to assist with these complexities and challenges, and in certain instances are choosing to affiliate with dental management service organizations that can manage the non-clinical aspects of dentistry and provide the necessary
organizational and operating structure for continued growth and success.



We believe that, similar to other sectors of the health care delivery system, the delivery of dental care is fundamentally a local business. Therefore, we operate our business in a decentralized manner, and each
affiliated dental group maintains its local identity and operating philosophy. In each affiliation, we strive to maintain the local culture of the affiliated dental group, and we encourage it to continue using its name, continue its presence in
community events, maintain its relationship with patients and local dental benefit providers and maintain and strengthen the existing management organization.



Our affiliation model is designed to create a partnership in management between the affiliated dental group practice and us that allows each party to
maximize its strengths and retain its autonomy. Under our affiliation model, the affiliated dentists continue to own their practice and have sole purview over the clinical aspects of the practice while we manage the business aspects of the dental
group. This affiliation model is consistent across all dental group practices and, even where permitted by law, we do not employ practicing dentists.



We believe the core values of a management partnership are shared governance and shared financial objectives and we have structured our affiliation model
to achieve these goals. Shared governance is achieved by the formation of a joint policy board for each affiliated dental group which is comprised of an equal number of representatives from the affiliated dental group practice and us. Together,
members of the joint policy board develop strategies and decide on major business initiatives. Shared financial objectives are achieved through the joint implementation of an annual planning process that establishes the financial performance
standards for the affiliated dental group practice and us.



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Affiliated Dental Group Practices



From November 1996 (the date of our first affiliation) through December 31, 2004, we completed 59 affiliation transactions,
which now comprise 19 dental group practices in 17 states. The following table lists our affiliated dental group practices as of December 31, 2004.



|                                     |  |                |  |                  |  |               |  |                     |  |               |   |              |  |               |  |                 |   |  |  |   |  |  |   |  |  |   | 
|------------------------------------ |  | -------------- |  | ---------------- |  | ------------- |  | ------------------- |  | ------------- | - | ------------ |  | ------------- |  | --------------- | - |  |  | - |  |  | - |  |  | - | 
|Affiliated Dental Group              |  | State          |  | DentalFacilities |  | Operatories   |  | Dental Services (1)
|                                     |  |                |  | General          |  | Endon-dontics |  | OralSurgery         |  | Ortho-dontics |   | Pedo-dontics |  | Perio-dontics |  | Prostho-dontics
|1st Advantage Dental                 |  | Massachusetts  |  | 4                |  | 30            |  | ü                   |  |               |   |              |  |               |  |                 |   |  |  |   |  |  |   |  |  |   | 
|1st Advantage Dental                 |  | New York       |  | 9                |  | 64            |  | ü                   |  |               | ü |              |  | ü             |  |                 | ü |  |  |   |  |  | ü |  |  |   | 
|1st Advantage Dental                 |  | Vermont        |  | 3                |  | 17            |  | ü                   |  |               |   |              |  |               |  |                 |   |  |  |   |  |  |   |  |  |   | 
|American Family Dentistry            |  | Tennessee      |  | 9                |  | 50            |  | ü                   |  |               |   |              |  |               |  |                 | ü |  |  |   |  |  |   |  |  |   | 
|Associated Dental Care Providers (2) |  | Arizona        |  | 9                |  | 81            |  | ü                   |  |               |   |              |  |               |  |                 | ü |  |  |   |  |  |   |  |  |   | 
|Chestnut Hills Dental                |  | Pennsylvania   |  | 8                |  | 57            |  | ü                   |  |               |   |              |  | ü             |  |                 | ü |  |  |   |  |  | ü |  |  |   | 
|Cumberland Dental                    |  | Alabama        |  | 3                |  | 30            |  | ü                   |  |               |   |              |  | ü             |  |                 | ü |  |  |   |  |  | ü |  |  |   | 
|Dental Arts Center                   |  | Virginia       |  | 1                |  | 39            |  | ü                   |  |               | ü |              |  | ü             |  |                 | ü |  |  | ü |  |  | ü |  |  | ü | 
|Greater Maryland Dental Partners     |  | Maryland       |  | 4                |  | 54            |  | ü                   |  |               | ü |              |  | ü             |  |                 | ü |  |  | ü |  |  | ü |  |  |   | 
|Lakeside Dental Care                 |  | Louisiana      |  | 2                |  | 31            |  | ü                   |  |               |   |              |  |               |  |                 | ü |  |  |   |  |  | ü |  |  |   | 
|Longhorn Dental Associates (2)       |  | Texas          |  | 17               |  | 138           |  | ü                   |  |               |   |              |  | ü             |  |                 | ü |  |  |   |  |  |   |  |  |   | 
|Oklahoma Dental Group                |  | Oklahoma       |  | 6                |  | 50            |  | ü                   |  |               |   |              |  |               |  |                 | ü |  |  |   |  |  |   |  |  |   | 
|Orthodontic Care Specialists (2)     |  | Minnesota      |  | 19               |  | 100           |  |                     |  |               |   |              |  |               |  |                 | ü |  |  |   |  |  |   |  |  |   | 
|Park Dental (2)                      |  | Minnesota      |  | 31               |  | 310           |  | ü                   |  |               | ü |              |  | ü             |  |                 |   |  |  | ü |  |  | ü |  |  | ü | 
|Redwood Dental Group                 |  | Michigan       |  | 5                |  | 57            |  | ü                   |  |               |   |              |  |               |  |                 | ü |  |  |   |  |  | ü |  |  |   | 
|Riverside Dental Group               |  | California     |  | 5                |  | 100           |  | ü                   |  |               | ü |              |  | ü             |  |                 | ü |  |  | ü |  |  | ü |  |  |   | 
|University Dental Associates (3)     |  | North Carolina |  | 11               |  | 94            |  | ü                   |  |               |   |              |  | ü             |  |                 | ü |  |  |   |  |  |   |  |  |   | 
|Western New York Dental Group (2)    |  | New York       |  | 9                |  | 57            |  | ü                   |  |               |   |              |  |               |  |                 | ü |  |  |   |  |  | ü |  |  |   | 
|Wisconsin Dental Group (2)           |  | Wisconsin      |  | 22               |  | 224           |  | ü                   |  |               | ü |              |  |               |  |                 | ü |  |  | ü |  |  | ü |  |  |   | 
|                                     |  |                |  |                  |  |               |  |                     |  |               |   |              |  |               |  |                 |   |  |  |   |  |  |   |  |  |   | 
|                                     |  |                |  | 177              |  | 1,583         |  |                     |  |               |   |              |  |               |  |                 |   |  |  |   |  |  |   |  |  |   | 
|                                     |  |                |  |                  |  |               |  |                     |  |               |   |              |  |               |  |                 |   |  |  |   |  |  |   |  |  |   | 

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|(1) | Services provided by specialists who are board-certified or board-eligible.
|--- | ---------------------------------------------------------------------------

|(2) | Accredited by the Accreditation Association for Ambulatory Health Care (AAAHC).
|--- | ---------------------------------------------------------------------------------

|(3) | University Dental Associates dental residency program is accredited by the American Dental Association and Winston-Salem practices are accredited by the AAAHC.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



Operations



Operating Structure



We operate under a decentralized organizational structure. At each dental
practice location, where permitted by applicable state law, we generally employ the hygienists, dental assistants and administrative staff, but all clinical activities are performed under the supervision of the dentists. At each dental practice, a
practice manager typically oversees the day-to-day business operations. The practice manager and administrative staff are responsible for, among other things, facility staffing, patient scheduling, on-site patient billing and ordering office and
dental supplies. Each affiliated dental group has a director of operations who is responsible for supervising multiple practice managers if the affiliated dental group has more than one practice location.



We have regional management teams that support the non-clinical operations of
one or more affiliated dental groups. These teams provide support in areas such as developing and implementing operating policies and procedures; recruiting, hiring and training staff; administering employee benefits and processing payroll;
maintaining information systems; producing accounting and financial reporting information; developing and maintaining facilities; and marketing. As our smaller affiliated dental groups grow in size, they may add local resources and assume some or
all of the support functions provided by regional management teams.



A senior regional operations director is responsible for monitoring the operating performance of multiple affiliated dental groups in multiple markets. Each senior regional operations director participates as a member of the joint policy
board of each of the affiliated dental groups for which he or she has management oversight



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responsibilities. The senior regional operations directors are responsible for overseeing the development of annual operating plans and monitoring actual
results.



On a national level, we support our affiliated dental
groups in several ways. We assist with:



| |  |  | sharing best clinical practices through our National Professional Advisory Forum;
| | - |  | ---------------------------------------------------------------------------------

| |  |  | preparing for survey by the Accreditation Association for Ambulatory Health Care;
| | - |  | ---------------------------------------------------------------------------------

| |  |  | developing training programs for practice managers and administrative staff;
| | - |  | ----------------------------------------------------------------------------

| |  |  | designing, locating and leasing new dental facilities;
| | - |  | ------------------------------------------------------

| |  |  | evaluating capacity, utilization and productivity of dental facilities;
| | - |  | -----------------------------------------------------------------------

| |  |  | evaluating and negotiating dental benefit provider contracts;
| | - |  | -------------------------------------------------------------

| |  |  | evaluating and negotiating local practice affiliations;
| | - |  | -------------------------------------------------------

| |  |  | developing and implementing accounting, financial planning and forecasting systems;
| | - |  | -----------------------------------------------------------------------------------

| |  |  | developing and implementing practice management and other information systems; and
| | - |  | ----------------------------------------------------------------------------------

| |  |  | negotiating and administering employee benefit plans.
| | - |  | -----------------------------------------------------



We also take advantage of economies of scale by contracting for various goods and services. For example, we have arranged for national contracts for the
purchase of dental supplies and equipment, long distance telephone services, professional, casualty and general liability insurance, employee benefits such as a 401(k) plan, flexible spending program, life insurance and disability insurance and
payroll processing.



National Professional Advisory
Forum



We have organized the National Professional
Advisory Forum (NPAF) to facilitate sharing of information by our affiliated dental group practices with respect to the clinical aspects of dentistry. Leading dentists from our affiliated dental group practices are selected to
participate in the NPAF. The NPAF meets on a national basis and a regional basis each year and provides a forum for dentists to share the best clinical practices of their respective dental group practices and an opportunity for them to build
professional relationships with other dental group practices affiliated with us. These dentists, as a result of their affiliation with us, share common long-term goals. This enables the discussion at the NPAF to be more open than it may be with
other professional organizations. While the primary emphasis of the NPAF is on the clinical aspects of dentistry, it also provides our management an opportunity to continue to build strong, mutually beneficial partner relationships with our
affiliated dental group practices.



Accreditation
Association for Ambulatory Health Care



We have selected
the Accreditation Association for Ambulatory Health Care (AAAHC) as means for supporting the quality initiatives of our affiliated dental groups. The AAAHC is a peer-based, not-for-profit organization that is nationally recognized for
conducting extensive evaluations of ambulatory health care organizations. The AAAHC evaluates a number of areas in granting accreditation, such as patients rights, governance, administration, clinical records, professional development, quality
management and improvement and facilities. We work with our affiliated dental groups to achieve accreditation. Depending on the level of development and organization of the affiliate, achieving accreditation can take several years of preparation.
Currently, seven of our affiliated dental groups have achieved accreditation status from the AAAHC.



Training and Development



We believe that quality of care encompasses more than technical dental quality. It also includes the level of service provided to patients. Improving the
level of service provided to patients requires on-going training and development of both clinical and administrative staff. We have devoted significant resources to develop innovative, proprietary training and development programs arranged around
three broad areas, leadership excellence, service excellence and technical excellence. The programs are modular. Modules exist, for example, for improving recruiting skills, developing effective mentoring processes, managing time, improving
telephone



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etiquette and managing customer service. We make these programs available at the local practice level of the affiliated dental groups and at our National
Professional Advisory Forum. At a local level, we assist our affiliated dental groups in selecting a local person who is responsible for implementing and maintaining continuous training and development programs. Once implemented, our affiliated
dental groups have on-going sessions with additional modules as they are developed and with new staff members as they join the dental group.



Payor Relationships and Reimbursement Mix



We believe that our affiliated dental group practices clinical philosophy should not be compromised by economic decisions. We recognize, however,
that the source of payment for services affects operating and financial performance. We assist our affiliated dental group practices in analyzing their revenue and payor mix on an ongoing basis and recommend methods by which they can improve
operating efficiency while not compromising their clinical practice philosophy. As a general rule, we believe that growth in a market is best facilitated where the payor mix of each of our affiliated dental group practices mirrors the payor mix of
its community. We assist each of our affiliated dental group practices in evaluating and negotiating dental benefit provider contracts.



We believe it is advantageous to be affiliated with dental group practices that have successfully provided care to patients under all reimbursement
methodologies. Since a shift is taking place in the dental benefits market from capitated managed care dental plans to PPO plans and dental referral networks, we believe that our affiliates experience in operating under all of these plans
provides them with an advantage as it relates to increasing their community presence. Most of our affiliated dental group practices provide care under traditional fee-for-service plans and non-fee-for-service plans. The following table provides the
aggregate payor mix of our affiliated dental group practices for the years ended December 31:



|                             |  |      |   |  |      |   |  |      |  
|---------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                             |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Fee-for-service              |  | 37   | % |  | 40   | % |  | 45   | %
|PPO plans                    |  | 43   | % |  | 37   | % |  | 29   | %
|Capitated managed care plans |  | 20   | % |  | 23   | % |  | 26   | %



In recent years, many
of our affiliated dental group practices were challenged with both strong patient demand and tight labor markets. This combination can create a challenging practice environment which negatively impacts staff retention. Given these dynamics, in
selected markets, our affiliated dental group practices have been realigning their reimbursement mix away from deeply discounted dental benefit plans which has resulted in a decrease in capitated managed care plans and in increase in PPO plans. This
realignment has largely been accomplished with the cooperation of the dental benefit provider community in general. There can be no assurance, however, that continued shift in reimbursement mix will not result in the termination of certain
third-party payor contracts between our affiliated dental group practices and dental benefit providers that adversely impacts our business, financial condition or results of operations.



Facilities Development and Management



We believe an inviting professional environment is a critical aspect of overall patient satisfaction. Generally, each of our
dental facilities is constructed to be warm, attractive and inviting to patients in addition to being highly functional. Our dental facilities typically have eight to ten operatories and accommodate general and specialty dentists, hygienists and
dental assistants and required support staff. Generally, our facilities are either stand alone or located within a professional office building or medical facility.



We work with each of our affiliated dental groups in analyzing utilization of existing capacity and identifying facility
upgrade and expansion priorities. We also provide our affiliates guidance in the site selection process. We initially construct each facility as appropriate for the market and add or equip additional operatories as necessary based on capacity and
utilization analyses. During 2005, we expect to complete three de novo dental



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facilities using a new investment model. The facilities will be smaller, have a much greater percentage of capital investment that can be readily relocated
and have lease terms that are more flexible. While we believe that this investment model will reduce the risks of de novo facility development, there can be no assuarances that these investments will be successful.



We use architectural design services to improve the facility design process
and to ensure that all new facilities are properly constructed and meet the standards set forth by the Americans with Disabilities Act. To this end, we work with each affiliated dental group to establish a defined set of standards which are
consistent with the desires of the affiliated dental group. We believe such facility standards are necessary to speed the site development process and create consistency across newly developed facilities, leading to enhanced productivity of
dentists, hygienists and support staff.



Financial Planning
and Financial Information System



We assist our affiliated
dental groups with financial planning. In conjunction with each affiliated dental group, we develop on an annual basis an operating plan for the affiliated dental group which sets specific goals for revenue growth, operating expenses and capital
expenditures. Once a plan has been approved by the joint policy board, we measure the financial performance of each affiliated dental group, which includes both the affiliated dental group practice and us, on a monthly basis and compare actual
performance to plan.



Our financial information system enables
us to measure, monitor and compare the financial performance of each affiliated dental group on a standardized basis. The system also allows us to track and control costs and facilitates the accounting and financial reporting process. This financial
system is used with all of our affiliated dental groups.



Practice Management Systems



Our
affiliated dental group practices use various dental practice management software systems to facilitate patient scheduling, to bill patients and insurance companies, to assist with facility staffing and for other practice related activities. In
connection with our affiliation with Park Dental, we acquired the rights to Comdent, a practice management system designed for use by multi-specialty dental groups. Comdent has been used continuously at Park Dental since 1987 and continuously
enhanced by Park Dental and us since 1987. We believe that Comdents scheduling, electronic data interchange and data management features are superior to others that are commercially available. In addition, Comdent is scalable and capable of
accommodating large, multi-site dental groups. We have converted ten of our multi-specialty dental groups to Comdent. Four of our multi-specialty dental groups use Quality Systems, Inc.s commercially available practice management system, and
the remaining four of our multi-specialty dental groups use various other commercially available practice management systems. Orthodontic Care Specialists, our affiliated dental group which exclusively provides orthodontic services, utilizes a
proprietary practice management system designed specifically for the unique requirements of the orthodontics specialty. We have implemented this orthodontic practice management system at a number of our multispecialty dental groups which have a
significant orthodontics practice.



Since October 2002, we have
been developing Improvis, a replacement system to Comdent, for use by our affiliated dental group practices. Improvis is being developed in phases, with the completion of the first phase now scheduled for the second quarter of 2005. When all phases
are complete, Improvis will include expanded clinical, managerial, and financial capabilities. As of December 31, 2004, Improvis had been implemented at three practice locations as part of the first phase of development. Upon completion of the first
phase which is scheduled for 2005, we intend to implement Improvis at several of our affiliated dental group practices. There can be no assurance, however, that all phases of Improvis will be successfully developed, that Improvis will function
satisfactorily in the practice environment on a large scale or that we will successfully implement Improvis at several of our affiliated dental group practices during 2005.



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Affiliation Structure



We have entered into a service agreement with each affiliated dental group practice, or professional corporation (PC), pursuant to which we
perform all administrative, non-clinical aspects of the dental group. We expect that each new affiliated PC will enter into a similar service agreement or become a party to an existing service agreement at the time of affiliation with us. We are
dependent on our service agreements for the vast majority of our operating revenue. Each of our service agreements with Park Dental and Wisconsin Dental Group represented greater than 10% or our consolidated net revenue in 2004. The termination of
one or more of our service agreements could have a material adverse effect on us.



Pursuant to the service agreement, the affiliated PC is responsible for all clinical aspects of the dental operations of the affiliated dental group. These clinical aspects include recruiting and hiring dentists,
other licensed dental personnel and unlicensed dental assistants necessary to provide dental care, providing dental care, implementing and maintaining quality assurance and peer review programs, setting patient fee schedules, entering into dental
benefit plan provider contracts and maintaining professional and comprehensive general liability insurance covering the PC and each of its dentists. We do not assume any authority, responsibility, supervision or control over the provision of dental
care to patients. The service agreement also requires the affiliated PC to abide by non-competition and confidentiality provisions. The non-competition provisions of the service agreement prohibit the affiliated PC from owning or operating a dental
facility, or having any interest in any business which competes with us, within the contractually agreed upon service territory. The affiliated PC is not restricted from owning and operating a dental practice outside of the agreed upon service
territory, including providing for the administrative aspects of that practice.



The service agreement requires the affiliated PC to enter into an employment or independent contractor agreement with each dentist retained by the affiliated PC. The employment agreements with full-time dentists who
are owners of the affiliated PCs at the time of affiliation with us generally are for a specified initial term of up to five years and may not be terminated by the dentists without cause during the initial term. The employment agreements with other
dentists generally are for a term of 12 months, but may have longer terms, and are usually terminable by either the affiliated PC or the dentist upon advance written notice, which in most cases is 90 days, and are terminable by the PC for cause
immediately upon written notice to the dentist. Unless prohibited by state law, these agreements typically contain non-competition provisions which prohibit a dentist from engaging in the practice of dentistry or otherwise performing professional
dental services within a specified geographic area, usually a specified number of miles from the relevant dental facility, following termination. The non-competition restrictions are generally for one to two years following termination.



Pursuant to the service agreement, we are responsible for providing all
services necessary for the administration of the non-clinical aspects of the dental operations of the affiliated dental group. These services include assisting with organizational planning and development; providing recruiting, retention and
training programs; supporting quality assurance initiatives of the affiliated dental group; providing on-going facilities development, maintenance and management; administering employee benefits and payroll; procuring supplies and other necessary
resources; maintaining necessary information systems; assisting with marketing and payor relations; and providing financial planning, reporting and analysis.



As mandated by the service agreement, we and each affiliated PC establish a joint policy board which is responsible for developing and implementing
management and administrative policies for the affiliated dental group. The joint policy board consists of an equal number of representatives designated by us and the affiliated PC. The joint policy board members designated by the affiliated PC must
be licensed dentists employed by the affiliated PC. The joint policy boards responsibilities include the review and approval of the long-term strategic and short-term operational goals, objectives, and plans for the dental facilities, all
annual capital and operating plans, all renovation and expansion plans and capital equipment expenditures with respect to the dental facilities, all advertising and marketing services, and staffing plans regarding provider and support personnel for
the affiliated dental group. The joint policy board also reviews and monitors the financial performance of the affiliated dental group and the affiliated PC with respect to the attainment of the affiliated dental groups and the



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affiliated PCs financial goals. The joint policy board also has the authority to approve or disapprove any merger or combination with, or acquisition
of, any dental practice by the affiliated PC. Finally, the joint policy board reviews and makes recommendations with respect to contractual relationships between the affiliated PC and dental benefit providers and the affiliated PCs patient fee
schedules, although these and all other clinical decisions, as enumerated above, remain the exclusive decision of the affiliated PC through its joint policy board members.



The PC reimburses us for actual expenses incurred on its behalf in connection with the operation and administration of the
dental facilities and pays fees to us for management services and capital provided. Under certain service agreements, our service fee consists entirely of a fixed monthly fee determined by agreement between us and the affiliated PC in a formal
budgeting process. Under certain service agreements, our service fee consists of a monthly fee equal to the prior year service fee and an additional performance fee based upon a percentage of the increase of the amount by which the affiliated dental
group practices adjusted gross revenue exceeds expenses as compared to the prior year. In no event, however, under these service agreements will the total service fee be greater than the affiliated dental group practices adjusted gross
revenue less expenses. Under certain service agreements, our service fee consists of a monthly fee which is based upon a specified percentage of the amount by which the PCs adjusted gross revenue exceeds expenses. Under a certain service
agreement our service fees consists of a fixed monthly fee and an additional performance fee based upon a percentage of the amount by which the PCs adjusted gross revenue exceeds expenses as compared to the budgeted amount for the current
year. The structure of the service fee, whether comprised of variable, fixed and variable or fixed components, is dependent in part on laws of each state in which we operate. The PC is also responsible for provider expenses, which generally consist
of the salaries, benefits, and certain other expenses of the dentists. Pursuant to the terms of the service agreements, we bill patients and third-party payors on behalf of the affiliated PCs. Such funds are applied in the following order of
priority:



| |  |  | reimbursement of expenses incurred in connection with the operation and administration of the dental facilities;
| | - |  | ----------------------------------------------------------------------------------------------------------------

| |  |  | repayment of advances, if any, made by us to the PC;
| | - |  | ----------------------------------------------------

| |  |  | payment of the monthly fee;
| | - |  | ---------------------------

| |  |  | payment of provider expenses; and
| | - |  | ---------------------------------

| |  |  | payment of the additional variable fee, as applicable.
| | - |  | ------------------------------------------------------



Each of our current service agreements is for an initial term of 40 years and automatically renews for successive five-year terms, unless terminated by
notice given at least 120 days prior to the end of the initial term or any renewal term. In addition, the service agreement may be terminated earlier by either party upon the occurrence of certain events involving the other party, such as our
dissolution, bankruptcy, liquidation, or our failure, which continues through the applicable notice and cure period, to perform our material duties and obligations under the service agreement. In the event a service agreement is terminated, the
related affiliated PC is required to reimburse us for unpaid expenses incurred in connection with the operation and administration of the dental facilities, repay advances and pay us for unpaid service fees. In addition, the related affiliated PC is
required, at our option in nearly all instances, to purchase the unamortized balance of intangible assets at the current book value, purchase other assets at the greater of fair market value or book value, and assume our leases and other liabilities
related to the performance of our obligations under the service agreement.



Competition



The dental services industry is
highly competitive. Our affiliated dental group practices compete with other dental group practices and individual dentists in their respective markets. We estimate that we compete with approximately ten companies in our current service areas that
provide business services to dentists and dental group practices through service agreement arrangements. We believe that the principal factors of competition between companies that provide business services to dental group practices are their
affiliation methods and models, the number and reputation of their existing affiliates, their management expertise and experience, the sophistication of their management information, accounting, finance and other systems, their operating methods



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and access to capital. We believe that we compete effectively with other companies that provide business services to dental group practices with respect to
these factors.



Government Regulation



General



The practice of dentistry is highly regulated, and our operations and those
of our affiliated dental group practices are subject to numerous state and federal laws and regulations. Furthermore, we may become subject to additional laws and regulations as we expand into new markets. There can be no assurance that the
regulatory environment in which we and our affiliated dental group practices operate will not change significantly in the future. Our ability to operate profitably will depend, in part, upon us and our affiliated dental group practices obtaining and
maintaining all necessary licenses, certifications and other approvals and operating in compliance with applicable laws. In light of this, our service agreements provide that if there is any change in any law or regulation, or any ruling or
interpretation by any court or governing body, that materially and adversely affects the way in which either party is to perform or be compensated under the service agreement, or which makes the service agreement unlawful, then the parties are
obligated to use their best efforts to revise their relationship in a way that complies with the applicable regulatory development and approximates as closely as possible the economic positions of the parties prior to that development.



State Regulation



Each state imposes licensing and other requirements on dentists. The laws of
almost all states in which we currently operate prohibit, either by specific statutes, case law or as a matter of general public policy, entities not wholly owned or controlled by dentists, such as American Dental Partners, from practicing
dentistry, employing dentists and, in certain circumstances, dental assistants and dental hygienists, exercising control over the provision of dental services, splitting fees or receiving fees for patient referrals. Many states prohibit or restrict
the ability of a person other than a licensed dentist to own, manage or control the assets, equipment or offices used in a dental practice. The laws of some states prohibit the advertising of dental services under a trade or corporate name and
require all advertisements to be in the name of the dentist. A number of states also regulate the content of advertisements of dental services and the use of promotional gift items. These laws and their interpretation vary from state to state and
are enforced by regulatory authorities with broad discretion.



There are certain regulatory issues associated with our role in negotiating and administering managed care contracts. To the extent that we or any affiliated dental group practice contracts with third-party payors, including self-insured
plans, under a capitated or other arrangement which causes us or such affiliated dental group practice to assume a portion of the financial risk of providing dental care, we or such affiliated dental group practice may become subject to state
insurance laws. If we or any affiliated dental group practice is determined to be engaged in the business of insurance, we may be required to change the method of payment from third-party payors or to seek appropriate licensure. Any regulation of us
or our affiliated dental group practices under insurance laws could have a material adverse effect on our business, financial condition and results of operations. Through our role in negotiating and administering managed care and other provider
contracts, we are also subject to regulation in certain states as an administrator and must ensure that our activities comply with relevant regulation.



Many states laws and regulations relating to the practice of dentistry were adopted prior to the emergence of providers of business services to
dental group practices like us. As a result, a number of states, including states in which we currently operate, are in the process of reviewing and/or amending their laws or regulations relating to the practice of dentistry and dentists
business arrangements with unlicensed persons like us. There can be no assurance that any amendments or new laws or regulations, or the interpretation or application of existing or new laws or regulations, will not have a material adverse effect on
our business, financial condition and results of operations.



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Federal Regulation



The dental industry is also regulated at the federal level to the extent that dental services are reimbursed under federal
programs. Participation by the affiliated dental group practices and their dentists in such programs subjects them, and potentially us, to significant regulation regarding the provision of services to beneficiaries, submission of claims and related
matters, including the types of regulations discussed below. Violation of these laws or regulations can result in civil and criminal penalties, including possible exclusion of individuals and entities from participation in federal payment programs.



The federal anti-kickback statutes prohibit, in part, and
subject to certain safe harbors, the payment or receipt of remuneration in return for, or in order to induce, referrals, or arranging for referrals, for items or services which are reimbursable under federal payment programs. Other federal laws
impose significant penalties for false or improper billings or inappropriate coding for dental services regardless of the payor source. The federal self-referral law, or Stark law, prohibits dentists from making referrals for certain
designated health services reimbursable under federal payment programs to entities with which they have financial relationships unless a specific exception applies. The Stark law also prohibits the entity receiving such referrals from submitting a
claim for services provided pursuant to such referral. We may be subject to federal payor rules prohibiting the assignment of the right to receive payment for services rendered unless certain conditions are met. These rules prohibit a billing agent
from receiving a fee based on a percentage of collections and may require payments for the services of the dentists to be made directly to the dentist providing the services or to a lock-box account held in the name of the dentist or his or her
dental group. In addition, these rules provide that accounts receivable from federal payors are not saleable or assignable.



Finally, dental practices are also subject to compliance with federal regulatory standards in the areas of safety, health and access.



Insurance



We maintain insurance coverage that we believe is appropriate for our business, including property-casualty, business
interruption, workers compensation and general liability, among others. In addition, our affiliated dental group practices are required to maintain, or cause to be maintained, professional liability insurance with us as a named insured. While we
believe that our current insurance coverage is adequate for our current operations, it may not be sufficient for all future claims. In addition, the costs, retention levels and availability of certain insurance have fluctuated significantly in
recent years, and there can be no assurance that our current insurance coverages will continue to be available in adequate amounts or at a reasonable cost in the future or that reserve estimates for potential losses below applicable retention levels
under certain insurance coverages will be sufficient.



Employees



As of December 31, 2004, we employed 1,725 people. This
included 735 hygienists and dental assistants and 990 administrative and management personnel located at our dental facilities, local management offices and our corporate office. In addition, we are affiliated with 398 dentists, as well as 341
hygienists and dental assistants located in states which prohibit our employment of dental assistants and/or hygienists, all of whom were employees or independent contractors of their respective affiliated PCs.



Available Information



We make available, free of charge, through our website (www.amdpi.com), our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, current reports on Form 8-K, all amendments to these reports, and other filings with the United States Securities and Exchange Commission (SEC), as soon as reasonably practicable after they are filed with the SEC. The public
can also obtain access to our reports at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SECs web site at www.sec.gov.



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Executive Officers of the Registrant



The following table sets forth information concerning each of our current executive officers:



|                           |  |     |  |                                                                 
|-------------------------- |  | --- |  | ----------------------------------------------------------------
|Name                       |  | Age |  | Position                                                        
|Gregory A. Serrao          |  | 42  |  | Chairman, President and Chief Executive Officer                 
|Breht T. Feigh             |  | 38  |  | Executive Vice President - Chief Financial Officer and Treasurer
|Michael J. Vaughan         |  | 51  |  | Executive Vice President - Chief Operating Officer              
|Frank J. DAllaird, D.D.S. |  | 61  |  | Senior Vice President - Regional Operations                     
|Paul F. Gill               |  | 59  |  | Senior Vice President - Regional Operations                     
|Michael J. Kenneally       |  | 44  |  | Senior Vice President - Regional Operations                     
|Jesely C. Ruff, D.D.S.     |  | 50  |  | Senior Vice President - Chief Professional Officer              
|Ian H. Brock               |  | 35  |  | Vice President - Planning and Investment                        
|Robert A. Duncan           |  | 57  |  | Vice President - Information Sytems                             
|George R. Sullivan         |  | 47  |  | Vice President - Human Resources                                
|Peter G. Swenson           |  | 33  |  | Vice President - Market Development                             
|Mark W. Vargo              |  | 53  |  | Vice President - Chief Accounting Officer                       



|The | executive officers are elected annually by the Board of Directors.
|--- | ------------------------------------------------------------------



Mr. Serrao founded American Dental Partners, Inc. and has served as our President, Chief Executive Officer and a Director since December 1995 and
as Chairman since October 1997. From 1992 through December 1995, Mr. Serrao served as the President of National Specialty Services, Inc., a subsidiary of Cardinal Health, Inc. (Cardinal Health). From 1991 to 1992, Mr. Serrao served as
Vice President - Corporate Development of Cardinal Health. Before joining Cardinal Health, Mr. Serrao was an investment banker at Dean Witter Reynolds Inc. where he co-founded its health care investment banking group and specialized in mergers,
acquisitions and public equity offerings.



Mr. Feigh has
served as our Executive Vice President  Chief Financial Officer and Treasurer since November 2003. Mr. Feigh was Vice President  Chief Financial Officer and Treasurer from January 2001 to October 2003, Vice President  Strategic
Initiatives from January 2000 to December 2000 and was Director  Corporate Development from October 1997 to December 1999. Prior to joining us, Mr. Feigh was employed in various investment banking positions at Dean Witter Reynolds Inc., ING
Barings and Robertson, Stephens & Company from 1989 to 1997.



Mr. Vaughan has served as our Executive Vice President  Chief Operating Officer since November 2003. Mr. Vaughan was Senior Vice President  Chief Operating Officer from October 2001 to October 2003,
Senior Vice President  Regional Operations from January 2001 to September 2001 and Vice President  Operations from January 2000 to December 2000. From 1996 to December 1999, Mr. Vaughan served as Regional Vice President for Cardinal
Distribution, a subsidiary of Cardinal Health. From 1988 to 1995, Mr. Vaughan held the positions of Vice President and General Manager of Cardinal Distributions Knoxville, Tennessee and Zanesville, Ohio facilities and also Vice President of
Strategic Initiatives. Prior to joining Cardinal Health, Mr. Vaughan worked for McKesson HBOC in various sales management positions.



Dr. DAllaird has served as our Senior Vice President  Regional Operations since August 2002. In January 2000, Dr DAllaird founded
1stAdvantage Dental Management, LLC and served as its President and CEO until its acquisition by us in August 2002.
From 1986 to December 1999, Dr. DAllaird served as Dental Director for Community Health Plan and its successor Kaiser Permanente in New York, Massachusetts and Vermont. Dr. DAllaird began his career in dentistry with eight years in
private practice near Albany, New York.



Mr. Gill has
served as our Senior Vice President  Regional Operations since January 2001. From October 1993 to December 2000, Mr. Gill served as Administrator for Riverside Dental Group, one of our affiliated dental group practices. From September 1991 to
September 1993, Mr. Gill served as Community Development



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Director for the City of Moreno Valley, California. Before working for the City of Moreno Valley, Mr. Gill served as a career Air Force officer and pilot.
His last assignment was as Commander of March Air Force Base in Riverside, California.



Mr. Kenneally has served as our Senior Vice President  Regional Operations since February 2005. Mr. Kenneally has also served as Chief Executive Officer of PDHC, Ltd., one of our subsidiaries, since
January 2001. Mr. Kenneally was Chief Operating Officer of PDHC, Ltd. from July 1998 to December 2000, Director of Business Management from 1995 to June 1998, Director of Finance and Information Systems from 1994 to 1995 and Controller from 1988 to
1994.



Dr. Ruffhas served as our Senior Vice President
 Chief Professional Officer since February 2005. Dr. Ruff was Vice President  Chief Professional Officer from January 1999 to February 2005 and has chaired our National Professional Advisory Forum since January 1997. From 1992 to
December 1998, Dr. Ruff served as President of Wisconsin Dental Group, S.C., one of our affiliated dental group practices, where he was employed as a practicing dentist and held a variety of positions since 1985. In 1994, Dr. Ruff served on the
Board of Directors of the National Association of Prepaid Dental Plans. From 1983 to 1991, Dr. Ruff was an Assistant Professor at the Marquette University School of Dentistry and an adjunct faculty member from 1991 to 1996, where he held a variety
of clinical faculty and grant-related positions.



Mr.
Brock has served as our Vice President  Planning and Investment since February 2005. Mr. Brock was Vice President  Finance from October 2001 to January 2005, Vice President  Financial Planning from January 2001 to September
2001, Director  Financial Planning from February 1998 to December 2000 and Assistant Controller from September 1996 to January 1998. Prior to joining us, Mr. Brock worked for American Medical Response, Inc., (AMR) a national
provider of ambulance services, as a corporate financial analyst from 1995 to 1996 and as an accounting manager and financial analyst from 1991 to 1995 with AMR of Connecticut, Inc., one of AMRs four founding subsidiaries.



Mr. Duncanhas served as our Vice President  Information
Services since July 2002. From March 1998 to June 2002, Mr. Duncan served as Vice President of Information Technology Services for National City Bank of Minneapolis N.A. From October 1995 to February 1998, Mr. Duncan served as Manager of Distributed
Computing Services for Alltel Information Services. From 1992 to 1995, Mr. Duncan served as Manager of Technical Support for American Bank, N.A. From 1985 to 1992, Mr. Duncan served as Assistant Vice President of Support Services for First Banks
Systems N.A., now US BancCorp.



Mr. Swenson has served
as our Vice President  Market Development since January 2000. Mr. Swenson was Director  Market Development from January 1998 to December 1999 and Director  Facility Development from January 1997 to December 1997. From 1994 to 1996,
Mr. Swenson was Manager  Facilities Development of Park Dental, one of our affiliated dental group practices. Mr. Swenson is the son of Dr. Gregory Swenson, a former member of our Board of Directors and the current President of Park
Dentals affiliated dental group practice.



Mr.
Sullivan has served as our Vice President  Human Resources since August 2003. From August 2000 to March 2003, Mr. Sullivan was Vice President of Human Resources of Creo Americas, Inc. From May 1998 to August 2000, Mr. Sullivan was Area
Director, Human Resources for The Martin-Brower Company and from 1994 to April 1998 Mr. Sullivan was Director, Human Resources of Cardinal Health.



Mr. Vargohas served as our Vice President  Chief Accounting Officer since May 2003. From May 2000 to August 2002, Mr. Vargo was Vice
President of Finance and Administration for International Garden Products, Inc. (IGP), during which he served as Chief Financial Officer of IGPs Langeveld business unit from October 2001 to August 2002. From January 1999 to
February 2000, Mr. Vargo was Global Controller of EMC, Inc. From 1990 to January 1999, Mr. Vargo served in several senior management positions at Anixter International Inc. including Vice President of Finance of the Structured Cabling Division and
North American Controller. Mr. Vargo is a certified public accountant and began his professional accounting career with a predecessor to KPMG LLP.



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ITEM 2. PROPERTIES



We lease most
of our facilities. Typically, each acquired dental facility is located at the site used by the dental group prior to affiliating with us. As of December 31, 2004, we leased 175 dental facilities, one dental lab facility, 12 local management offices
and our corporate office. We also owned two dental facilities and one dental lab facility. Our corporate office is located at 201 Edgewater Drive, Suite 285, Wakefield, Massachusetts 01880, in approximately 8,300 square feet occupied under a lease
which expires in March 2007. We consider our properties in good condition, well maintained and generally suitable and adequate to carry on our business activities.



In 2004, our dental facilities operated at levels of utilization which varied from affiliate to affiliate, but overall were
satisfactory. The majority of our dental facilities have excess capacity to allow for future growth.



ITEM 3. LEGAL PROCEEDINGS



From
time to time, we may be subject to litigation incidental to our business. We are not presently a party to any material litigation. Our affiliated dental group practices and the dentists and independent contractors employed or retained by them are
from time to time subject to professional liability or other claims. Such claims, if successful, could result in damage awards exceeding applicable insurance coverage which could have a material adverse effect on our business, financial condition
and results of operations.



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



None.



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PART II



ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



Market Information, Holders and Dividends



Our Common Stock is traded on the NASDAQ National Market system under the symbol ADPI. The following table sets forth the range of the
reported high and low sales prices of our Common Stock for the years ended December 31, 2003 and 2004:



|            |  |      |        |     |   |       
|----------- |  | ---- | ------ | --- | - | ------
|2003        |  | High |        | Low
|1st Quarter |  | $    | 10.230 |     | $ | 8.000 
|2nd Quarter |  | $    | 10.000 |     | $ | 8.660 
|3rd Quarter |  | $    | 10.070 |     | $ | 8.150 
|4th Quarter |  | $    | 11.950 |     | $ | 8.590 
|            |  |     
|2004        |  | High |        | Low
|1st Quarter |  | $    | 18.300 |     | $ | 10.620
|2nd Quarter |  | $    | 19.200 |     | $ | 14.750
|3rd Quarter |  | $    | 20.000 |     | $ | 15.600
|4th Quarter |  | $    | 20.090 |     | $ | 15.170



As of March 7, 2005,
there were approximately 25 holders of record of Common Stock, as shown on the records of the transfer agent and registrar of Common Stock. The number of record holders does not bear any relationship to the number of beneficial owners of the Common
Stock.



We have the ability to pay cash dividends on our Common
Stock but have not to date. The terms of our revolving credit facility allow us to pay dividends and repurchase shares of our Common Stock in conjunction with our authorized stock repurchase program without the lenders consent up to certain
maximums and compliance with certain covenants. Our Board of Directors intends for the foreseeable future to retain earnings to finance the continued operations and the expansion of our business.



Summary of Equity Plans



See Item 12 of Part III for a summary of equity plans as of December 31, 2004.



Recent Sales of Unregistered Securities



None.



Recent Share Repurchases



None.



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ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share amounts and statistical data)



The following selected consolidated financial and operating data set forth below with respect to the Companys consolidated statements of
income for fiscal years 2004, 2003 and 2002 and consolidated balance sheets as of December 31, 2004 and 2003 are derived from the Companys Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. Data with
respect to the consolidated statements of income for fiscal years 2001 and 2000 and consolidated balance sheets as of December 31, 2002, 2001 and 2000 are derived from the Companys Consolidated Financial Statements as previously filed. The
data set forth below should be read in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations and the Companys Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-K.



|                                                            |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|----------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - | ---- | - | ------- |  | - | -------
|                                                            |  | Years Ending December 31,
|                                                            |  | 2004                      |         |   | 2003 |   |         | 2002 |  |   | 2001    |   | 2000
|Consolidated Statement of Operations Data:                  |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Net revenue                                                 |  | $                         | 178,554 |   |      | $ | 163,707 |      |  | $ | 146,810 |   |      | $ | 141,552 |  | $ | 137,702
|Operating expenses:                                         |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Salaries and benefits                                       |  |                           | 77,489  |   |      |   | 72,557  |      |  |   | 65,762  |   |      |   | 64,483  |  |   | 62,193 
|Lab fees and dental supplies                                |  |                           | 28,566  |   |      |   | 27,047  |      |  |   | 24,164  |   |      |   | 22,681  |  |   | 21,078 
|Office occupancy                                            |  |                           | 20,956  |   |      |   | 19,999  |      |  |   | 18,314  |   |      |   | 16,669  |  |   | 14,784 
|Other operating expenses                                    |  |                           | 16,643  |   |      |   | 14,638  |      |  |   | 13,163  |   |      |   | 12,530  |  |   | 10,990 
|General corporate expenses                                  |  |                           | 8,856   |   |      |   | 6,871   |      |  |   | 5,859   |   |      |   | 5,660   |  |   | 5,364  
|Depreciation                                                |  |                           | 5,934   |   |      |   | 5,378   |      |  |   | 4,990   |   |      |   | 5,088   |  |   | 4,708  
|Amortization of goodwill and intangible assets              |  |                           | 4,408   |   |      |   | 4,229   |      |  |   | 4,047   |   |      |   | 3,955   |  |   | 3,822  
|Special charges                                             |  |                           |        |   |      |   |        |      |  |   | (26     | ) |      |   | 844     |  |   |       
|                                                            |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Total operating expenses                                    |  |                           | 162,852 |   |      |   | 150,719 |      |  |   | 136,273 |   |      |   | 131,910 |  |   | 122,939
|                                                            |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Earnings from operations                                    |  |                           | 15,702  |   |      |   | 12,988  |      |  |   | 10,537  |   |      |   | 9,642   |  |   | 14,763 
|Interest expense                                            |  |                           | 1,592   |   |      |   | 2,592   |      |  |   | 2,947   |   |      |   | 4,295   |  |   | 4,378  
|                                                            |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Earnings before income taxes                                |  |                           | 14,110  |   |      |   | 10,396  |      |  |   | 7,590   |   |      |   | 5,347   |  |   | 10,385 
|Income taxes                                                |  |                           | 5,591   |   |      |   | 4,215   |      |  |   | 2,883   |   |      |   | 2,076   |  |   | 4,216  
|                                                            |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Net earnings                                                |  | $                         | 8,519   |   |      | $ | 6,181   |      |  | $ | 4,707   |   |      | $ | 3,271   |  | $ | 6,169  
|                                                            |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Net earnings per common share(1):                           |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Basic                                                       |  | $                         | 1.12    |   |      | $ | 0.84    |      |  | $ | 0.65    |   |      | $ | 0.46    |  | $ | 0.87   
|Diluted                                                     |  | $                         | 1.06    |   |      | $ | 0.82    |      |  | $ | 0.63    |   |      | $ | 0.45    |  | $ | 0.84   
|Weighted average common shares outstanding(1):              |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Basic                                                       |  |                           | 7,581   |   |      |   | 7,319   |      |  |   | 7,222   |   |      |   | 7,183   |  |   | 7,119  
|Diluted                                                     |  |                           | 8,068   |   |      |   | 7,572   |      |  |   | 7,451   |   |      |   | 7,343   |  |   | 7,320  
|                                                            | 
|                                                            |  | December 31,             
|                                                            |  | 2004                      |         |   | 2003 |   |         | 2002 |  |   | 2001    |   | 2000
|Consolidated Balance Sheet Data:                            |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Cash and cash equivalents                                   |  | $                         | 1,378   |   |      | $ | 1,895   |      |  | $ | 844     |   |      | $ | 1,540   |  | $ | 472    
|Working capital                                             |  |                           | (2,306  | ) |      |   | 3,916   |      |  |   | 6,344   |   |      |   | 9,123   |  |   | 4,063  
|Total assets                                                |  |                           | 154,147 |   |      |   | 149,072 |      |  |   | 145,015 |   |      |   | 144,335 |  |   | 141,814
|Long-term debt, excluding current maturities                |  |                           | 28,014  |   |      |   | 42,319  |      |  |   | 49,677  |   |      |   | 54,840  |  |   | 55,330 
|Total stockholders equity                                  |  |                           | 87,207  |   |      |   | 73,892  |      |  |   | 66,916  |   |      |   | 61,776  |  |   | 58,486 
|                                                            |  |                           |         |   |     
|Statistical Data (end of period):                           |  |                           |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |        
|Number of states                                            |  |                           | 17      |   |      |   | 17      |      |  |   | 16      |   |      |   | 14      |  |   | 14     
|Number of affiliated dental groups                          |  |                           | 19      |   |      |   | 19      | (2)  |  |   | 22      |   |      |   | 19      |  |   | 19     
|Number of dental facilities                                 |  |                           | 177     |   |      |   | 171     |      |  |   | 168     |   |      |   | 154     |  |   | 156    
|Number of operatories(3)                                    |  |                           | 1,583   |   |      |   | 1,520   |      |  |   | 1,462   |   |      |   | 1,360   |  |   | 1,397  
|Number of affiliated dentists(4)                            |  |                           | 398     |   |      |   | 396     |      |  |   | 372     |   |      |   | 358     |  |   | 373    
|Adjusted gross revenue of affiliated dental group practices |  | $                         | 272,369 |   |      | $ | 245,609 |      |  | $ | 217,020 |   |      | $ | 207,736 |  | $ | 194,572



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---

|(1) | Net earnings per common share are computed on the basis described in Notes 2 and 14 to our Consolidated Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(2) | During 2003, two affiliated dental group practices in Texas merged into one affiliated dental group practice and four affiliated dental group practices in Wisconsin merged into one
affiliated dental group practice, thereby reducing the overall total.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | An operatory is an area where dental care is performed and generally contains a dental chair, a hand piece delivery system and other essential dental equipment.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes full-time equivalent general dentists employed by the PCs and full-time equivalent specialists, some of whom are independent contractors to the affiliated dental group
practices.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Overview



American Dental Partners, Inc. (ADPI) is a leading provider of business services to multi-disciplinary dental group practices in selected
markets throughout the United States. We are committed to the growth and success of our affiliated dental group practices, and we make substantial investments to support each affiliated dental groups growth. We assist our affiliates with
organizational planning and development; recruiting, retention and training programs; quality assurance initiatives; facilities development and management; employee benefits administration; procurement; information systems; marketing and payor
relations; and financial planning, reporting and analysis. At December 31, 2004, we were affiliated with 19 dental group practices, comprising 398 dentists practicing in 177 locations in 17 states.



Affiliation and Acquisition Summary



When affiliating with a dental group, we acquire selected assets and enter
into a long-term service agreement with the affiliated dental group practice or professional corporation (PC). Under our service agreements, we are responsible for providing all services necessary for the administration of the
non-clinical aspects of the dental operations. The PC is responsible for the provision of dental care. Each of our service agreements is for an initial term of 40 years.



During 2004, 2003 and 2002, we completed five, seven and four transactions in which we acquired non-clinical dental assets,
respectively, and simultaneously entered into 40-year service agreements in two of these transactions (the assets of fourteen of the transactions were combined with existing affiliated dental group practices). In total, these sixteen affiliations
resulted in the addition of 28 dental facilities and 204 operatories. In addition during 2002, we acquired the outstanding stock of a dental laboratory and selected assets of a second laboratory. See Note 5 of Notes to Consolidated Financial
Statements for further information on acquisitions and affiliations. We are constantly evaluating potential affiliations with dental group practices and acquisition of companies that would expand our business capabilities. The number of new
affiliations and acquisitions over the next twelve months could be at levels greater or less than we have achieved in recent years.



Revenue Overview



Net Revenue



Net revenue comprises fees earned under service agreements from our affiliated dental group practices, fees received from dental benefit providers related
to the arrangement of the provision of care to patients and dental laboratory fees.



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The following table sets forth for 2004, 2003 and 2002, the components of net revenue in our consolidated
statements of income (in thousands):



|                                            |  |      |         |      |   |         |  |   |        
|------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                            |  | 2004 |         | 2003 |   | 2002   
|Reimbursement of expenses                   |  | $    | 130,746 |      | $ | 121,705 |  | $ | 109,000
|Business service fees                       |  |      | 42,714  |      |   | 35,553  |  |   | 31,049 
|                                            |  |      |         |      |   |         |  |   |        
|Net revenue earned under service agreements |  |      | 173,460 |      |   | 157,258 |  |   | 140,049
|Other revenue                               |  |      | 5,094   |      |   | 6,449   |  |   | 6,761  
|                                            |  |      |         |      |   |         |  |   |        
|Net revenue                                 |  | $    | 178,554 |      | $ | 163,707 |  | $ | 146,810
|                                            |  |      |         |      |   |         |  |   |        



Fees earned under
service agreements include reimbursement of expenses incurred by us on behalf of the affiliated dental group practices in connection with the operation and administration of dental facilities and service fees charged to the affiliated dental group
practices pursuant to the terms of the service agreements for management services and capital provided by us. Under certain service agreements, representing 14.5% of our 2004 service fees, our service fee consists entirely of a fixed monthly fee
determined by agreement of us and the affiliated dental group practice in a formal budgeting process. Under certain service agreements, representing 53.9% of our 2004 service fees, our service fee consists of a monthly fee equal to the prior year
service fee and an additional performance fee based upon a percentage of the increase of the amount by which the affiliated dental group practices adjusted gross revenue exceeds expenses as compared to the prior year. In no event, however,
under these service agreements will the total service fee be greater than the affiliated dental group practices adjusted gross revenue less expenses. Under certain service agreements, representing 31.4% of our 2004 service fees, our service
fee consists of a monthly fee which is based upon a specified percentage of the amount by which the affiliated dental group practices adjusted gross revenue exceeds expenses. Under a certain service agreement, representing 0.2% of our 2004
service fees, our service fee consists of a fixed monthly fee and an additional performance fee based upon a percentage of the amount by which the affiliated dental group practices adjusted gross revenue exceeds expenses as compared to the
budgeted amount for the current year. In all instances, the service fee is negotiated as fair market value for services and capital provided by us to our affiliated dental group practices.



As part of our objective of being the leading provider of services to dental
group practices, we are continually expanding our resources and capabilities, including vertical integration of ancillary dental activities. We work with and receive fees from dental benefit providers on behalf of our affiliates to arrange programs
for the provision of care to their patients. In 2003, we acquired two dental laboratories to expand our procurement capabilities. Although both activities earn revenue from dental practices not affiliated with us, we expect that the growth of both
of these activities will come primarily from the growth of our affiliated dental group practices.



For additional information on components of our net revenue, see Note 3 of Notes of Consolidated Financial Statements.



Adjusted Gross Revenue of the Affiliated Dental Group Practices



Although we do not own or control the affiliated dental
group practices or PCs and, accordingly, do not consolidate the financial statements of the PCs with ours, we believe it is important to understand the revenue of the affiliated dental group practices. The affiliated dental group practices generate
revenue from patients and dental benefit providers under fee-for-service, PPO plans and capitated managed care plans. The affiliated dental group practices record revenue at established rates reduced by contractual adjustments and allowances for
doubtful accounts to arrive at adjusted gross revenue. Contractual adjustments represent the difference between gross billable charges at established rates and the portion of those charges reimbursed pursuant to certain dental benefit plan provider
contracts. After collection of fees from patients and insurers for the provision of dental care and reimbursement of expenses and payment of fees to us, the amounts retained by the affiliated dental group practices are used for compensation of
dentists and in certain states where the affiliated dental group practices must employ dental hygienists and/or dental assistants, compensation of such non-dentist employees.



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The affiliated dental group practices reimburse us for expenses incurred on their behalf in connection
with the operation and administration of the dental facilities and pay fees to us for business services. Expenses incurred for the operation and administration of the dental facilities include salaries and benefits for non-dentist personnel working
at the dental facilities (the administrative staff and, where permitted by law, the dental assistants and hygienists), lab fees, dental supplies, office occupancy costs of the dental facilities, depreciation related to the fixed assets at the dental
facilities and other expenses such as professional fees, marketing costs and general and administrative expenses. (See BusinessOperationsOperating Structure.)



The following table sets forth for 2004, 2003 and 2002 the amounts paid to us under our service agreements, the amounts
retained by the affiliated dental group practices and the adjusted gross revenue generated by the affiliated dental group practices from patients and dental benefit providers (in thousands):



|                                                               |  |      |         |      |   |         |  |   |        
|-------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                               |  | 2004 |         | 2003 |   | 2002   
|Net revenue earned under service agreements                    |  | $    | 173,460 |      | $ | 157,258 |  | $ | 140,049
|Addback: Amounts retained by affiliated dental group practices |  |      | 98,909  |      |   | 88,351  |  |   | 76,971 
|                                                               |  |      |         |      |   |         |  |   |        
|Adjusted gross revenue - affiliated dental group practices     |  | $    | 272,369 |      | $ | 245,609 |  | $ | 217,020
|                                                               |  |      |         |      |   |         |  |   |        



While payor mix varies
from market to market, the following table provides the aggregate payor mix percentages of our affiliated dental group practices for the years ended December 31:



|                             |  |      |   |  |      |   |  |      |  
|---------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                             |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Fee-for-service              |  | 37   | % |  | 40   | % |  | 45   | %
|PPO plans                    |  | 43   | % |  | 37   | % |  | 29   | %
|Capitated managed care plans |  | 20   | % |  | 23   | % |  | 26   | %



Faced with strong
patient demand and tight labor markets, several of our affiliated dental group practices have been realigning their reimbursement mix away from capitated managed care plans that carry significant discounts. Concurrently, the dental industry is
witnessing growth in PPO plans. We anticipate that our affiliated dental group practices will continue to witness growth in PPO plans and potentially a reduction in capitated managed care plans. This change in reimbursement mix has largely been
accomplished with the cooperation of the dental benefit provider community in general. There can be no assurance, however, that the shift in reimbursement mix will not result in the termination of certain third-party payor contracts.



Results of Operations



Net Revenue



Net revenue increased 11.5% from $146,810,000 in 2002 to $163,707,000 in 2003 and 9.1% to $178,554,000 in 2004. During 2003, 6.6% of the increase was
attributable to the current year impact of entering into service agreements in connection with affiliation transactions during 2002 and 2003 and 5.5% of the increase was due to same market net revenue growth from our affiliated dental group
practices, offset by a decrease in other revenue. During 2004, the increase was attributable to a 9.3% increase in same market net revenue growth from our affiliated dental group practices and incremental net revenue earned from our platform
affiliation completed in May 2003, offset by a decrease in other revenue. The decrease in other revenue in 2003 and 2004 is primarily attributable to a decrease in dental laboratory fees as a result of an increasing percentage of fees being earned
from our affiliated dental groups.



Net revenue derived
from our service agreement with Park Dental represented approximately 32%, 31% and 32% of our consolidated net revenue for 2004, 2003 and 2002, respectively. Net revenue from our service agreement with Wisconsin Dental Group represented
approximately 13%, 13% and 15% of our consolidated net revenue for 2004, 2003 and 2002, respectively. No other service agreement or customers accounted for greater than 10% of our consolidated net revenue.



21



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##### Table of Contents

Although we do not own or control our affiliated dental group practices, we believe that it is more
meaningful to analyze our revenue, expenses and margins in terms of total revenue, which includes the adjusted gross revenue of our affiliated dental group practices, the fees we receive from dental benefit providers related to the arrangement of
the provision of care to patients and our dental laboratory fees. Total revenue and adjusted gross revenue are not measures of financial performance under GAAP, but our expenses and business services fees are incurred or earned in support of the
adjusted gross revenue of our affiliated dental group practices. We use these and other non-GAAP financial measures to analyze operating trends and to help manage our business.



The following table sets forth for 2004, 2003 and 2002, the components of total revenue, a reconciliation of total
revenue to net revenue and the percentage of total revenue for items in our consolidated statements of income (in thousands):



|                                                                       |  |      |         |                 |       |   |                   |       |   |   |   |                 |  |       |                   |  |       |   |  |   |                 |   |  |                   |   |  |       |  
|---------------------------------------------------------------------- |  | ---- | ------- | --------------- | ----- | - | ----------------- | ----- | - | - | - | --------------- |  | ----- | ----------------- |  | ----- | - |  | - | --------------- | - |  | ----------------- | - |  | ----- | -
|                                                                       |  | 2004 |         |                 | 2003  |   |                   | 2002  |  
|                                                                       |  | $    |         | % of NetRevenue |       |   | % of TotalRevenue |       |   | $ |   | % of NetRevenue |  |       | % of TotalRevenue |  |       | $ |  |   | % of NetRevenue |   |  | % of TotalRevenue |  
|Adjusted gross revenue - affiliated dental group practices (unaudited) |  | $    | 272,369 |                 |       |   |                   | 98.2  | % |   | $ | 245,609         |  |       |                   |  | 97.4  | % |  | $ | 217,020         |   |  |                   |   |  | 97.0  | %
|Other revenue                                                          |  |      | 5,094   |                 |       |   |                   | 1.8   | % |   |   | 6,449           |  |       |                   |  | 2.6   | % |  |   | 6,761           |   |  |                   |   |  | 3.0   | %
|                                                                       |  |      |         |                 |       |   |                   |       |   |   |   |                 |  |       |                   |  |       |   |  |   |                 |   |  |                   |   |  |       |  
|Total revenue (unaudited)                                              |  |      | 277,463 |                 |       |   |                   | 100.0 | % |   |   | 252,058         |  |       |                   |  | 100.0 | % |  |   | 223,781         |   |  |                   |   |  | 100.0 | %
|Amounts retained by affiliated dental group practices (unaudited)      |  |      | 98,909  |                 |       |   |                   | 35.6  | % |   |   | 88,351          |  |       |                   |  | 35.0  | % |  |   | 76,971          |   |  |                   |   |  | 34.4  | %
|                                                                       |  |      |         |                 |       |   |                   |       |   |   |   |                 |  |       |                   |  |       |   |  |   |                 |   |  |                   |   |  |       |  
|Net revenue                                                            |  |      | 178,554 |                 | 100.0 | % |                   | 64.4  | % |   |   | 163,707         |  | 100.0 | %                 |  | 65.0  | % |  |   | 146,810         |   |  | 100.0             | % |  | 65.6  | %
|Salaries and benefits                                                  |  |      | 77,489  |                 | 43.4  | % |                   | 27.9  | % |   |   | 72,557          |  | 44.3  | %                 |  | 28.8  | % |  |   | 65,762          |   |  | 44.8              | % |  | 29.4  | %
|Lab fees and dental supplies                                           |  |      | 28,566  |                 | 16.0  | % |                   | 10.3  | % |   |   | 27,047          |  | 16.5  | %                 |  | 10.7  | % |  |   | 24,164          |   |  | 16.5              | % |  | 10.8  | %
|Office occupancy                                                       |  |      | 20,956  |                 | 11.7  | % |                   | 7.6   | % |   |   | 19,999          |  | 12.2  | %                 |  | 7.9   | % |  |   | 18,314          |   |  | 12.5              | % |  | 8.2   | %
|Other operating expenses                                               |  |      | 16,643  |                 | 9.3   | % |                   | 6.0   | % |   |   | 14,638          |  | 8.9   | %                 |  | 5.8   | % |  |   | 13,163          |   |  | 9.0               | % |  | 5.9   | %
|General corporate expenses                                             |  |      | 8,856   |                 | 5.0   | % |                   | 3.2   | % |   |   | 6,871           |  | 4.2   | %                 |  | 2.7   | % |  |   | 5,859           |   |  | 4.0               | % |  | 2.6   | %
|Depreciation expense                                                   |  |      | 5,934   |                 | 3.3   | % |                   | 2.1   | % |   |   | 5,378           |  | 3.3   | %                 |  | 2.1   | % |  |   | 4,990           |   |  | 3.4               | % |  | 2.2   | %
|Amortization of intangible assets                                      |  |      | 4,408   |                 | 2.5   | % |                   | 1.6   | % |   |   | 4,229           |  | 2.6   | %                 |  | 1.7   | % |  |   | 4,047           |   |  | 2.8               | % |  | 1.8   | %
|Special charges                                                        |  |      |        |                 | 0.0   | % |                   | 0.0   | % |   |   |                |  | 0.0   | %                 |  | 0.0   | % |  |   | (26             | ) |  | 0.0               | % |  | 0.0   | %
|                                                                       |  |      |         |                 |       |   |                   |       |   |   |   |                 |  |       |                   |  |       |   |  |   |                 |   |  |                   |   |  |       |  
|Total operating expenses                                               |  |      | 162,852 |                 | 91.2  | % |                   | 58.7  | % |   |   | 150,719         |  | 92.1  | %                 |  | 59.8  | % |  |   | 136,273         |   |  | 92.8              | % |  | 60.9  | %
|                                                                       |  |      |         |                 |       |   |                   |       |   |   |   |                 |  |       |                   |  |       |   |  |   |                 |   |  |                   |   |  |       |  
|Earnings from operations                                               |  |      | 15,702  |                 | 8.8   | % |                   | 5.7   | % |   |   | 12,988          |  | 7.9   | %                 |  | 5.2   | % |  |   | 10,537          |   |  | 7.2               | % |  | 4.7   | %
|Interest expense, net                                                  |  |      | 1,592   |                 | 0.9   | % |                   | 0.6   | % |   |   | 2,592           |  | 1.6   | %                 |  | 1.0   | % |  |   | 2,947           |   |  | 2.0               | % |  | 1.3   | %
|                                                                       |  |      |         |                 |       |   |                   |       |   |   |   |                 |  |       |                   |  |       |   |  |   |                 |   |  |                   |   |  |       |  
|Earnings before income taxes                                           |  |      | 14,110  |                 | 7.9   | % |                   | 5.1   | % |   |   | 10,396          |  | 6.4   | %                 |  | 4.1   | % |  |   | 7,590           |   |  | 5.2               | % |  | 3.4   | %
|Income taxes                                                           |  |      | 5,591   |                 | 3.0   | % |                   | 2.0   | % |   |   | 4,215           |  | 2.5   | %                 |  | 1.7   | % |  |   | 2,883           |   |  | 2.0               | % |  | 1.3   | %
|                                                                       |  |      |         |                 |       |   |                   |       |   |   |   |                 |  |       |                   |  |       |   |  |   |                 |   |  |                   |   |  |       |  
|Net earnings                                                           |  | $    | 8,519   |                 | 4.8   | % |                   | 3.1   | % |   | $ | 6,181           |  | 3.8   | %                 |  | 2.5   | % |  | $ | 4,707           |   |  | 3.2               | % |  | 2.1   | %
|                                                                       |  |      |         |                 |       |   |                   |       |   |   |   |                 |  |       |                   |  |       |   |  |   |                 |   |  |                   |   |  |       |  



Total revenue
increased 12.6% from $223,781,000 in 2002 to $252,058,000 in 2003 and 10.1% to $277,463,000 in 2004. The increase in 2003 was primarily the result of new affiliations entered into during 2002 and 2003 along with growth at our existing affiliated
dental group practices. Same market affiliate adjusted gross revenue growth was 5.5% in 2003. The increase in 2004 was primarily the result of growth at our existing affiliated dental group practices. Same market affiliate adjusted gross revenue
growth was 9.8% in 2004. For 2003 and 2004, same market affiliate adjusted gross revenue growth excludes platform affiliations that occurred after January 1, 2002 and January 1, 2003, respectively. Other revenue decreased 4.6% from $6,761,000 in
2002 to $6,449,000 in 2003 and 21.0% to $5,094,000 in 2004. The decrease was driven by an increasing percentage of our laboratory fees being generated from our affiliated dental groups. For 2002, 2003 and 2004, 6.7%, 44.6% and 63.2% of our
laboratory fees were generated from our affiliated dental groups, respectively.



Amounts retained by affiliated dental group practices increased 14.8% from $76,971,000 in 2002 to $88,351,000 in 2003 and 12.0% to $98,909,000 in 2004. The amounts retained by affiliated dental group practices as a
percentage of adjusted gross revenue of our affiliated dental group practices increased from 35.5% in 2002 to 36.0% in 2003 to 36.3% in 2004.



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Since 2002, we have entered into affiliation transactions with a number of dental group practices located
in states where dental hygienists and dental assistants are required to be employed by the affiliated dental group practices. The increase in amounts retained by affiliated dental group practices as a percentage of adjusted gross revenue in 2003 was
mainly attributable to entering into affiliations where dental hygienists and dental assistants are employed by the affiliated dental group practices. Additionally, in 2003, there was an increase in health and workers compensation insurance costs of
$426,000, representing a 22% increase over the prior year. The increase in amounts retained by affiliated dental group practices as a percentage of adjusted gross revenue in 2004 was mainly a result of greater profitability levels at our affiliated
dental group practices.



The following table sets forth for
2004, 2003 and 2002 same market affiliate adjusted gross revenue, percentage change and a reconciliation to net revenue (in thousands):



|                                                                                        |  |                                  |         |          |   |         |                                  |       |          |  |   |         |  |   |         |  |       |  
|--------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | -------- | - | ------- | -------------------------------- | ----- | -------- |  | - | ------- |  | - | ------- |  | ----- | -
|                                                                                        |  | Twelve Months Ended December 31, |         | % Change |   |         | Twelve Months Ended December 31, |       | % Change | 
|                                                                                        |  | 2004                             |         | 2003     |   |         | 2003                             |       | 2002     | 
|Adjusted gross revenue - affiliated dental group practices:                             |  |                                  |         |          |   |         |                                  |       |          |  |   |         |  |   |         |  |       |  
|Dental groups affiliated with the Company in both periods of comparison                 |  | $                                | 261,294 |          | $ | 238,018 |                                  | 9.8   | %        |  | $ | 222,812 |  | $ | 211,234 |  | 5.5   | %
|Dental groups that completed affiliations with the Company during periods of comparison |  |                                  | 11,075  |          |   | 7,591   |                                  | 45.9  | %        |  |   | 22,797  |  |   | 5,786   |  | 294.0 | %
|                                                                                        |  |                                  |         |          |   |         |                                  |       |          |  |   |         |  |   |         |  |       |  
|Total adjusted gross revenue - affiliated dental group practices                        |  |                                  | 272,369 |          |   | 245,609 |                                  | 10.9  | %        |  |   | 245,609 |  |   | 217,020 |  | 13.2  | %
|Other revenue                                                                           |  |                                  | 5,094   |          |   | 6,449   |                                  | -21.0 | %        |  |   | 6,449   |  |   | 6,761   |  | -4.6  | %
|                                                                                        |  |                                  |         |          |   |         |                                  |       |          |  |   |         |  |   |         |  |       |  
|Total revenue                                                                           |  |                                  | 277,463 |          |   | 252,058 |                                  | 10.1  | %        |  |   | 252,058 |  |   | 223,781 |  | 12.6  | %
|Amounts retained by affiliated dental group practices                                   |  |                                  | 98,909  |          |   | 88,351  |                                  | 12.0  | %        |  |   | 88,351  |  |   | 76,971  |  | 14.8  | %
|                                                                                        |  |                                  |         |          |   |         |                                  |       |          |  |   |         |  |   |         |  |       |  
|Net revenue                                                                             |  | $                                | 178,554 |          | $ | 163,707 |                                  | 9.1   | %        |  | $ | 163,707 |  | $ | 146,810 |  | 11.5  | %
|                                                                                        |  |                                  |         |          |   |         |                                  |       |          |  |   |         |  |   |         |  |       |  



Salaries and
Benefits



Salaries and benefits expense includes costs for
personnel working for us at the dental facilities, dental laboratory and regional management. At the facility level, we generally employ the administrative staff and, where permitted by state law, the dental hygienists and dental assistants. The
local and regional operating management teams supervise and support the staff at the dental facilities.



Salaries and benefits expense as a percentage of total revenue decreased from 29.4% in 2002 to 28.8% in 2003 and 27.9% in 2004. The decrease in 2003 was
attributable to entering into affiliations during 2002 and 2003 where the affiliated dental group practices were required to employ the dental hygienists and dental assistants, thereby lowering our salaries and benefits expense in relation to net
revenue earned, in addition to staff productivity increases. These decreases were partially offset by an increase in health insurance costs of $650,000, representing a 20% increase over 2002. The decrease in 2004 was primarily attributable to staff
productivity increases.



Lab Fees and Dental Supplies



Lab fees and dental supplies expense varies from
affiliate to affiliate and is affected by the volume and type of procedures performed. Lab fees and dental supplies expense as a percentage of total revenue was 10.8% in 2002, 10.7% in 2003 and 10.3% in 2004. The decrease as a percentage of total
revenue in 2003 was primarily attributable to a new pricing arrangement negotiated with our primary dental supply vendor as well as continued



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efforts to manage these expenses. The decrease as a percentage of total revenue in 2004 was primarily related to increased utilization of our dental
laboratory by our affiliated dental groups and to a lesser extent our continued focus on managing dental supplies expenses.



Office Occupancy



Office occupancy expense includes rent expense and certain other operating costs, such as utilities, associated with dental facilities, dental laboratory
and the local and regional administrative offices. Such costs vary based on the size of each facility and the market rental rate for dental office space in each particular geographic market.



Office occupancy expense as a percentage of total revenue was 8.2% in 2002,
7.9% in 2003 and 7.6% in 2004. The decreases in 2003 and 2004 were primarily attributable to higher utilization of our dental facilities as evidenced by a higher level of total revenue per facility in 2003 and 2004. In 2002, we added one new dental
facility and relocated and/or expanded ten facilities. In 2003, we relocated and/or expanded sixteen facilities. In 2004, we completed one de novo facility and relocated and/or expanded 19 facilities.



Other Operating Expenses



Other operating expenses include non-employment related insurance expense,
professional fees, marketing costs and other general and administrative expenses. Other operating expenses as a percentage of total revenue were 5.9% in 2002, 5.8% in 2003 and 6.0% in 2004. Other operating expenses as a percentage of total revenue
in 2003 decreased slightly due to our effort to manage these expenses, offset by increased insurance costs of $600,000, representing a 69% increase over 2002. The increase in 2004 was the result of an additional $632,000 of Minnesota Care tax
expense, representing a 52% increase over 2003, due to a rate increase and additional revenues for the affiliated dental group practices in Minnesota. This was partially offset by a $476,000 reduction to professional liability insurance reserves due
to revised actuarial estimates.



General Corporate
Expenses



General corporate expenses consist of
compensation and travel expenses for our corporate personnel and administrative staff, facility and other administrative costs of our corporate office and professional fees, including legal and accounting. General corporate expenses as a percentage
of total revenue were 2.6% in 2002, 2.7% in 2003 and 3.2% in 2004. The increase in 2003 was mainly due to our management incentive compensation plan, the addition of new management positions and increased benefit costs, partially offset by the
favorable impact of a legal settlement during 2003. The increase in 2004 was primarily due to costs for compliance with Section 404 of the Sarbanes-Oxley Act of 2002, new hires at our corporate office, increases in our incentive compensation plan
and the favorable impact of a legal settlement during 2003. External costs to comply with Section 404 were approximately $1,035,000 in 2004. While we cannot currently estimate the expected costs for on-going compliance in future periods, we do
expect them to be significant.



Depreciation



Depreciation expense includes charges related to
leasehold improvements and furniture, fixtures and equipment used to operate the dental facilities, lab facility, local and regional management offices and our corporate office. Depreciation expense as a percentage of total revenue was 2.2% in 2002,
2.1% in 2003 and 2.1% in 2004. The stability in depreciation expense as a percentage of total revenue was the result of higher utilization of our dental facilities as evidenced by a higher level of adjusted gross revenue per facility from year to
year, offset by the relocation/expansion of dental facilities, the completion of a new dental facility in 2004, the relocation of our dental laboratory in 2003 and new affiliations completed over the last two years.



We expect to continue to invest in the development of new dental facilities
and the relocation and/or expansion of existing dental facilities in 2005. Accordingly, depending on the amount and timing of such future capital expenditures, depreciation may increase in 2005 at a rate greater than total revenue.



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Amortization of Intangible Assets



Amortization expense as a percentage of total revenue decreased from 1.8% in 2002 to 1.7% in 2003 and 1.6% in 2004. The
decrease was a result of a greater proportion of our revenue growth coming from existing operations as opposed to entering into additional affiliations over the last two years.



Amortization of intangible assets could increase in the future as a result of definite lived intangibles recorded in
connection with future affiliations, acquisitions and existing affiliation contingent payments.



Special Charges



Special charges of $26,000 in 2002 represent a reversal of the estimated provision for costs associated with reductions in physical capacity at Associated
Dental Care Providers and patient communications at Associated Dental Care Providers and Park Dental as a result of managed care contract terminations in 2001.



Earnings from Operations



Earnings from operations increased 23.3% from $10,537,000, or 4.7% of total revenue, in 2002 to $12,988,000, or 5.2% of total revenue, in 2003 and 20.9%
to $15,702,000, or 5.7% of total revenue, in 2004. Earnings from operations as a percentage of total revenue increased in 2003 and 2004 primarily due to increased productivity and facility utilization as a result of higher same market growth rates
and to a lesser extent improved management of lab fees and dental supplies expenses,. In 2004 this was partially offset by increased general corporate expenses as a result of additional personnel at our corporate offices and accounting fees incurred
to comply with Section 404 of the Sarbanes-Oxley Act of 2002.



Interest Expense



Net interest expense
decreased from $2,947,000 in 2002 to $2,592,000 in 2003 and $1,592,000 in 2004. The decrease in 2003 was due to a lower overall interest rate and a lower average debt balance compared to the prior year. Net interest expense in 2003 was partially
offset by the expensing of $220,000 of unamortized debt issuance costs as part of terminating our existing credit facility and entering into a new credit facility in October 2003. The decrease in 2004 was due to reduced debt levels, a reduction in
borrowing spread over LIBOR and to a lesser extent a lower LIBOR interest rate as compared to the prior year. See the Liquidity and Capital Resources section for more information related to our credit facility.



Income Taxes



Our effective tax rate was approximately 38.0% for 2002, 40.5% in 2003 and
39.6% in 2004. The changes in our effective tax rate from 2002 to 2004 were due to fluctuations in taxable income in various states in which we operate and recording additional expense in 2003.



Net Income



Net income increased 31.3% from $4,707,000, or 2.1% of total revenue, in
2002 to $6,181,000, or 2.5% of total revenue, in 2003 and 37.8% to $8,519,000, or 3.1% of total revenue, in 2004. Net income as a percentage of total revenue in 2003 compared to 2002 increased primarily due to increased earnings from operations, as
discussed above, and reduced borrowing costs, partially offset by an increase in our effective tax rate. Net income as a percentage of total revenue in 2004 compared to 2003 increased primarily due to increased earnings from operations, as discussed
above, reduced borrowing costs and a decrease in our effective tax rate.



Liquidity and Capital Resources



We have
financed our operating and capital needs, including cash used for acquisitions and affiliations, capital expenditures and working capital, from sales of equity securities, borrowings under our revolving line of credit and cash generated from
operations.



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From January 1, 2003 through December 31, 2004, we completed twelve dental practice affiliations for
aggregate consideration of $7,536,000 in cash, $945,000 in subordinated promissory notes and $93,000 in deferred payments.



In 2002, we completed an affiliation which included a future contingent payment based on a multiple of earnings before interest and taxes in excess of a
predetermined threshold for the twelve months ended December 31, 2004 less capital expenditures incurred during the period. The amount of the contingent payment is $4,790,000 and will paid in 2005. In future years, this contingent payment will
result in additional annual amortization expense of $212,000.



For the years ended December 31, 2003 and 2004, cash provided by operating activities amounted to $21,806,000 and $25,405,000, respectively. In 2003, cash from operations primarily resulted from net earnings after adding back non-cash
items, a decrease in receivables due from affiliated dental group practices and increases in accounts payable and accrued expenses and accrued compensation. The decrease in receivables due from affiliated dental group practices, which totaled
$1,014,000, was primarily due to better working capital management and a continued focus on receivables management at our affiliated dental group practices. The days sales outstanding for the patient receivables of our affiliated dental group
practices decreased from 40 days at December 31, 2002 to 36 days at December 31, 2003. In 2004, cash from operations primarily resulted from net earnings after adding back non-cash items and a decrease in receivables due from affiliated dental group
practices. The decrease in receivables due from affiliated dental group practices, which totaled $3,039,000, was primarily due to better working capital management and a continued focus on receivables management at our affiliated dental group
practices. The days sales outstanding for the patient receivables of our affiliated dental group practices decreased from 36 days at December 31, 2003 to 32 days at December 31, 2004. We do not expect the days sales outstanding of our affiliated
dental group practices to decrease in future years to a similar extent as the improvement achieved during the past two years.



For the years ended December 31, 2003 and 2004, cash used in investing activities amounted to $12,336,000 and $13,109,000, respectively. Cash used for
investing activities included cash for affiliations, acquisitions and capital expenditures. Cash used for acquisitions and affiliations, net of cash acquired, was $4,648,000 and $3,239,000 for 2003 and 2004, respectively. Capital expenditures were
$7,381,000 and $9,657,000 for 2003 and 2004, respectively. Capital expenditures for 2003 included costs associated with the relocation and/or expansion of fourteen dental facilities along with combining our two dental laboratories into one new
laboratory facility. Capital expenditures for 2004 included costs associated with adding one dental facility and the relocation and/or expansion of nineteen dental facilities. We expect that capital expenditures in 2005 to be higher than in past
years due to the development of new dental facilities and the relocation and/or expansion of existing dental facilities, our on-going facility maintenance capital expenditure program and investment in several information technology projects.



For the years ended December 31, 2003 and 2004, cash used for
financing activities amounted to $8,419,000 and $12,813,000, respectively. Cash used for financing activities in 2003 resulted from net repayments under our revolving line of credit of $6,905,000, repayment of indebtedness of $1,624,000 and payment
of debt issuance costs as part of entering into a new credit facility of $653,000, offset by proceeds from the issuance of Common Stock from stock option exercises and for our employee stock purchase plan of $544,000 and $219,000, respectively. Cash
used for financing activities in 2004 resulted from net repayments under our revolving line of credit of $12,475,000, repayment of indebtedness of $2,710,000 and payment of debt issuance costs as part of entering into a new credit facility of
$19,000, offset by proceeds from the issuance of Common Stock from stock option exercises and for our employee stock purchase plan of $2,128,000 and $263,000, respectively.



We have a credit facility that is used for general corporate purposes, including working capital, affiliations, acquisitions
and capital expenditures. The credit facility was scheduled to mature in October 2006 and the maximum principal amount is $70,000,000. The credit facility was scheduled to be reduced to $65,000,000 in



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October 2005. Borrowings under the credit facility bear interest at either prime or LIBOR plus a margin, at our option. The margin was based upon our debt
coverage ratio and ranges from 0.25% to 1.00% for prime borrowings and 1.25% to 2.00% for LIBOR borrowings. At December 31, 2004, the LIBOR interest rate under the credit facility, including borrowing margin, was approximately 3.60% and the prime
interest rate under the credit facility was 5.50%. In addition, we pay a commitment fee which ranges from 0.375% to 0.500% of the average daily unused balance of the credit facility line. Borrowings are limited to an availability formula based on
earnings before income taxes, depreciation and amortization, adjusted for certain items. The credit facility is collateralized by a first lien on substantially all of our assets, including a pledge of the stock of our subsidiaries. We are also
required to comply with financial and other covenants. The financial covenants include a minimum net worth, leverage and fixed charge coverage ratios and maximum capital expenditures as defined by the credit facility agreement. We were in compliance
with our covenants as of December 31, 2004. The outstanding balance under this line as of December 31, 2004 was $26,950,000. The unused balance at December 31, 2004 was $43,050,000 and based on borrowing covenants $40,959,000 was available for
borrowing.



On February 22, 2005, we amended our credit
facility as a result of our improved financial position and to take advantage of the favorable credit markets. The amended credit facility matures in February 2008 and the maximum principal is $70,000,000. The amended credit facility will be reduced
to $65,000,000 in February 2007. Other major changes from the original credit facility are a decrease in the margin based upon our debt coverage ratio ranging from 0.00% to 1.00% for prime borrowings and 1.00% to 2.00% for LIBOR borrowings and a
decrease in our commitment fee range to 0.25% to 0.50%.



Our
growth to date has resulted in large measure from our ability to affiliate with additional dental practices. Historically, we have used a combination of cash, subordinated debt and Common Stock as consideration for past affiliations and acquisitions
and plan to use these sources in the future. In recent years, the consideration paid has consisted of cash and subordinated debt. In the event that our Common Stock does not maintain sufficient valuation or if potential affiliation or acquisition
candidates are unwilling to accept our securities as consideration, we will continue to use cash flow from operations and our revolving credit facility for future affiliations and acquisitions. If cash flow from operations is not sufficient or
financing is not available as needed on terms acceptable to us, our affiliation and acquisition strategy will be modified. We are constantly evaluating potential affiliations with dental group practices and acquisition of companies that would expand
our business capabilities. The number of new affiliations and acquisitions over the next twelve months could be at levels greater than we have achieved during each of the past two years.



We believe that cash generated from operations and amounts available under our current revolving credit facility will be
sufficient to fund our anticipated cash needs for working capital, capital expenditures, affiliations and acquisitions for at least the next twelve months. Any excess cash will be used to reduce indebtedness or to repurchase Common Stock through our
previously announced repurchase program, pursuant to which approximately $1,100,000 remains available to repurchase additional shares.



Contractual Obligations



The following table summarizes contractual obligations payable or maturing in the following years as of December 31, 2004 (in thousands):



|                                                                      |  |       |         |      |   |              |  |              |        |            |   |        |  |   |       
|--------------------------------------------------------------------- |  | ----- | ------- | ---- | - | ------------ |  | ------------ | ------ | ---------- | - | ------ |  | - | ------
|                                                                      |  | Total |         | 2005 |   | 2006 and2007 |  | 2008 and2009 |        | Thereafter
|Long-term debt obligations                                            |  | $     | 28,541  |      | $ | 527          |  | $            | 27,906 |            | $ | 72     |  | $ | 36    
|Operating lease obligations                                           |  |       | 76,060  |      |   | 12,296       |  |              | 19,683 |            |   | 14,709 |  |   | 29,372
|                                                                      |  |       |         |      |   |              |  |              |        |            |   |        |  |   |       
|Total gross obligations                                               |  |       | 104,601 |      |   | 12,823       |  |              | 47,589 |            |   | 14,781 |  |   | 29,408
|Operating lease obligations to be reimbursed under service agreements |  |       | 71,005  |      |   | 11,486       |  |              | 18,561 |            |   | 14,086 |  |   | 26,872
|                                                                      |  |       |         |      |   |              |  |              |        |            |   |        |  |   |       
|Total net obligations                                                 |  | $     | 33,596  |      | $ | 1,337        |  | $            | 29,028 |            | $ | 695    |  | $ | 2,536 
|                                                                      |  |       |         |      |   |              |  |              |        |            |   |        |  |   |       



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Critical Accounting Policies and Estimates



The preparation of consolidated financial statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an on-going basis management evaluates its estimates, including those related to the carrying value of receivables due from affiliated dental group practices, goodwill, other
intangible assets and insurance liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



We have identified the policies below as critical to our business operations
and the understanding of our results of operations.



Valuation of Receivables Due From Affiliated Dental Group Practices



The Companys carrying amount of receivables due from affiliated dental group practices requires management to assess the collectibility of our business fees. Our fees are dependent on the economic viability of
the affiliated dental group practices based on actual and expected future financial performance including collectibility of the affiliated dental group practices patient receivables, net of contractual adjustments and allowances for doubtful
accounts.



The affiliated dental group practices record revenue
at established rates reduced by contractual adjustments and allowances for doubtful accounts to arrive at adjusted gross revenue. Contractual adjustments represent the difference between gross billable charges at established rates and the portion of
those charges reimbursed pursuant to certain dental benefit plan provider contracts. For contracts where there is no defined benefit, contractual adjustments are based upon historical collection experience and other relevant factors. The affiliated
dental group practices provision for doubtful accounts is estimated in the period that services are rendered and adjusted in future periods as necessary. The estimates for the provision and related allowance are based on an evaluation of
historical collection experience, the aging profile of the accounts receivable, write-off percentages and other relevant factors. Changes in these factors in future periods could result in increases or decreases in the provision. In the event that
final reimbursement or bad debt experience differs from original estimates, adjustments to the affiliated dental group practices patient receivables would be required which may impact the collectibility of receivables due from affiliated
dental group practices.



To date we have not recorded any
losses related to our receivables due from affiliated dental group practices.



Goodwill and Other Intangible Assets



Our business acquisitions and affiliations typically result in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense that we may incur. The
determination of the value of such goodwill and intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements.



As part of each affiliation and acquisition, we determine the amount of goodwill and intangible assets related to the
transaction. In determining the amount of goodwill or intangible assets we estimate the fair value of the assets acquired and liabilities assumed. In determining fair value, we review the balance sheet of the acquired company to ensure the
reasonableness of the balances, including the collectibility of receivables, value of inventory on hand, replacement value and depreciable lives of property and equipment and appropriate level of accrued liabilities. In determining the amount of
intangible assets related to customer relationships as part of an acquisition, we estimate future discounted cash flows based on many factors, including historical and projected



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revenue streams and operating margins and customer attrition rates. If the facts and circumstances change indicating that the fair value of tangible net
assets or intangible assets should change, future period results could be impacted.



For definite-lived intangible assets related to service agreements, we evaluate the amortization period based on the facts and circumstances of each individual affiliation. Our evaluation includes reviewing historical
and projected operating results, dental benefit plan provider contracts, customer and patient stability and market presence in the geographic area that we are entering, along with other relevant factors. The initial amortization period for
definite-lived intangibles is generally 15 to 25 years. If circumstances change, indicating a shorter estimated period of benefit, future amortization expense could increase.



We perform an impairment test on goodwill on an annual basis or on an interim basis if an event or circumstance indicates
that it is more likely than not that an impairment loss has been incurred. We determine impairment by comparing the fair value to the carrying value of the reporting units. We determine the fair value of each reporting unit based on discounted
future cash flows using a discount reflecting our average cost of funds. If impairment were determined, we would make the appropriate adjustment to goodwill to reduce the assets carrying value.



We perform an impairment test on definite-lived intangibles when facts and
circumstances exist which would suggest that the intangibles may be impaired. We review the undiscounted net cash flows of the asset to the carrying value of the intangible asset and projected revenue streams when performing the impairment test on
intangible assets. If impairment was determined, we would make the appropriate adjustment to the intangible assets to reduce the assets carrying value to fair value.



Insurance



We maintain various insurance coverages for our business, including property-casualty, business interruption, workers compensation and general liability,
among others. In addition, our affiliated dental group practices are required to maintain, or cause to be maintained, professional liability insurance with us as a named insured. Several of these insurance programs have retention levels in which we
are financially obligated for insured losses below certain financial thresholds before the insurer is financially obligated for insured losses. We maintain reserves for losses below retention levels for certain of these programs. Reserves are based
upon estimates provided by third-party actuaries or by individual case-basis valuations. Changes in trends of loss severity or loss frequency may affect the calculation of these estimates and create the need for subsequent adjustments to estimated
loss reserves.



Recent Accounting Pronouncements



In December 2004, the FASB issued Statement No. 123(R), Share-Based
Payment, revising Statement No. 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement No. 123(R) requires companies to measure the cost of employee services received in
exchange for an award of equity instruments and include these costs in the financial statements. Statement No. 123(R) applies to all stock awards granted after the effective date and all outstanding and unvested share-based payment awards as of the
effective date. Statement No. 123(R) is effective as of the beginning of the first interim or annual period that begins after June 15, 2005. The Company is currently evaluating the impact of implementing Statement No. 123(R) on the consolidated
financial statements.



Risk Factors



We are dependent on the performance of our affiliated dental group practices for our
revenue



Our net revenue depends primarily on revenue
generated by dental group practices, or professional corporations, with which we affiliate. We do not employ dentists or control the clinical decisions of the affiliated



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dental group practices. There can be no assurance that affiliated dental group practices will maintain successful operations or that any of the key members
of a particular dental group practice will continue practicing with that practice. Availability of dentists, hygienists or assistants could have a material adverse effect on our business. To the extent permitted by state law, each affiliated dental
group practice has entered into non-competition agreements and other restrictive covenants with dentists under their employ. There can be no assurance that these restrictive covenants are or will be sufficient to protect the interests of the
affiliated dental group practices or that a court would enforce such agreements. Any material loss of revenue by the affiliated dental group practices, whether through the loss of existing dentists, the inability to attract new dentists or
otherwise, could have a material adverse effect on our business, financial condition and results of operations.



We are dependent upon the service agreements we have entered into with each of our affiliated dental group practices for substantially all of our net
revenue. Revenue generated from our service agreement with two of those affiliated dental group practices, Park Dental and Wisconsin Dental Group, represented approximately 32% and 13% of our consolidated net revenue for the year ended December 31,
2004, respectively. The termination of these service agreements would have a material adverse effect on our business, financial condition and results of operations.



Any material loss in revenue by one or more affiliated dental group practice would have a material adverse effect on its
ability to reimburse us for expenses and to pay service fees. The failure to receive such amounts could have a material adverse effect on our business, financial condition and results of operations. Furthermore, in the event of a breach of a service
agreement by an affiliated dental group practice, there can be no assurance that the remedies available to us under the service agreements would be enforceable or would be adequate to compensate us for our damages resulting from such breach.



Our net revenues may be adversely affected by third party payor cost
containment efforts and capitation arrangements



A
significant portion of the payments for dental care that is received by the affiliated dental group practices is paid or reimbursed under insurance programs with third party payors. While payor mix varies from market to market, the aggregate payor
mix percentage of our affiliated group practices for the year ended December 31, 2004 was approximately 37% fee-for-service, 43% PPO plans and 20% capitated managed care plans. Third party payors are continually negotiating the fees charged for
dental care, with a goal of containing reimbursement and utilization rates. Loss of revenue by our affiliated dental group practices caused by third party payor cost containment efforts could have a material adverse effect on our business, financial
condition and results of operations.



Additionally, some
third-party payor contracts are capitated arrangements. Under such contracts, the affiliated dental group practice receives a capitated payment, calculated on a per member per month basis, to provide care to the covered enrollees and generally
receives a co-payment from the patient at the time care is provided. Such payment methods shift a portion of the risk of providing care from the third party payors to the affiliated dental group practice. To the extent that patients covered by such
contracts require more frequent or extensive care than is anticipated, there may be a shortfall between the capitated payments received by the affiliated dental group practice and the costs to provide the contracted services. These shortfalls may
impact us by the possible reduction in expense reimbursement and service fees from the affiliated dental group practice. There can be no assurance that our affiliated dental group practices will be able to negotiate satisfactory third-party payor
arrangements. Insufficient adjusted gross revenue under capitated contracts or other agreements with third party payors or termination of capitated contracts or other insurance programs by third party payors could have a material adverse effect on
our business, financial condition and results of operations.



We operate in
a highly regulated environment



The dental
industry and dental practices are highly regulated at the state and federal levels, as described in the Business  Government Regulation section. At the state level, many of these laws and regulations vary



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widely by state. In addition, these laws and regulations are enforced by federal and state regulatory authorities with broad discretion and our agreements
may be subject to review by these authorities from time to time. For example, regulatory authorities in some states in which we operate have obtained a copy of our service agreement for review in the past, and the North Carolina State Board of
Dental Examiners has recently undertaken an informal review of our service agreement with our North Carolina affiliated dental group practice pursuant to a new rule regarding management arrangements adopted by that board in 2001. We do not, and do
not intend to, control the practice of dentistry by the affiliated dental group practices or their compliance with the regulatory requirements directly applicable to dentists or the practice of dentistry. However, there can be no assurance that any
review of our business relationships, including our relationship with affiliated dental group practices, by courts or other regulatory authorities, will not result in determinations that could have a material adverse effect on our operations.
Similarly, there can be no assurance that the laws and regulatory environment will not change to restrict or limit the enforceability of our service agreements. The laws and regulations of some states in which we currently operate or may seek to
expand may require us to change our contractual relationships with dental group practices in a manner that may restrict our operations in those states or may prevent us from affiliating with dental group practices or providing comprehensive business
services to dental group practices in those states. To the extent that contracts between third party payors and any affiliated dental group practice or us, including self-insured plans, on a capitated or other basis which causes such affiliated
dental group practices or us to assume a portion of the financial risk of providing dental care, we or such affiliated dental group practice may become subject to state insurance laws, in which case our affiliated dental group practice may be
required to change the method of payment from third party payors or seek appropriate licensure. Any regulation of us or our affiliated dental group practices under insurance laws could have a material adverse effect on our business, financial
condition and results of operations.



Our future affiliations may not be
successfully integrated or completed on acceptable terms



Our strategy includes expansion through affiliations with dental group practices in new and existing markets and the expansion of such affiliated practices. Affiliations involve numerous risks, including failure to retain key personnel and
contracts of the affiliated dental group practices and the inability to work successfully with us as a business partner. There can be no assurance that we will be able to complete additional affiliations on acceptable terms and conditions. or that
we will be able to serve successfully as a business partner to additional dental group practices, and this could adversely affect our business, financial condition or results of operations.



We may not realize the expected value of our intangible assets



A significant portion of our total assets is represented by intangible
assets, with the amount expected to increase in connection with future affiliations and acquisitions. In addition, amortization expense associated with the definite lived intangible assets will increase in the future as a result of definite lived
intangibles recorded in connection with affiliations and acquisitions. In the event of any sale or liquidation of us or a portion of our assets, there can be no assurance that the value of our intangible assets will be realized. Management performs
an impairment test on definite lived intangibles when facts and circumstances exist which would suggest that the definite lived intangible assets may be impaired, such as loss of key personnel, change in legal factors or competition. If impairment
were determined, we would make the appropriate adjustment to the intangible asset to reduce the assets carrying value to fair value. Any future determination requiring the write off of a significant portion of unamortized intangible assets
could have a material adverse effect on our business, financial condition and results of operations.



We may not realize the expected value of our goodwill



A portion of our total assets is represented by goodwill, the amount of which could increase in connection with future acquisitions. In the event of any sale or liquidation of us or a portion of our assets, there can
be no assurance that the value of our goodwill would be realized. In addition, management performs an impairment test on goodwill on an annual basis or on an interim basis if an event or circumstance indicates that it is more likely



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than not that an impairment loss has been incurred. If impairment were determined, we would make the appropriate adjustment to goodwill to reduce the
assets carrying value to fair value. Any future determination requiring the write off of a significant portion of goodwill could have a material adverse effect on our business, financial condition and results of operations.



Our operating results may be adversely affected by professional liability claims against
our affiliated dental group practices



Our
affiliated dental group practices could be exposed to the risk of professional liability claims. It is possible that such claims could be asserted against us as well as the affiliated dental group practices. Such claims, if successful, could result
in substantial damages that could exceed the limits of any applicable insurance coverage. We are named as an insured party under the professional liability insurance policy covering our affiliated dental group practices. In addition, we require each
affiliated dental group practice to indemnify us for actions or omissions related to the delivery of dental care by such affiliated dental group practice. However, a successful professional liability claim against an affiliated dental group practice
or us could have a material adverse effect on our business, financial condition and results of operations.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



In the ordinary course of business, we are exposed to interest rate risk. With regard to our revolving credit facility, we are also exposed to variable
rate interest for the banks applicable margins, ranging from 1.25% to 2.00% based upon our debt coverage ratio. For fixed rate debt, interest rate changes affect the fair value but do not impact earnings or cash flow. Conversely, for floating
rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flow. We do not believe a one percentage point change in interest rates would have a material impact on the fair market value of
our fixed rate debt. The pre-tax earnings and cash flow impact for one year based upon the amounts outstanding at December 31, 2004 under our variable rate revolving credit facility for each one percentage point change in interest rates would be
approximately $270,000 per annum. We do not presently undertake any specific actions to cover our exposure to interest rate risk and we are not party to any interest rate risk management transactions.



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



Index to Financial Statements



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Consolidated Financial Statements                                                                    |  |     
|                                                                                                     | 
|Managements Report on Internal Control Over Financial Reporting                                     |  | 34  
|                                                                                                     | 
|Reports of Independent Registered Public Accounting Firms                                            |  | 35  
|                                                                                                     | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                         |  | 38  
|                                                                                                     | 
|Consolidated Statements of Income for the Years Ended December 31, 2004, 2003, and 2002              |  | 39  
|                                                                                                     | 
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2004, 2003 and 2002 |  | 40  
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003, and 2002          |  | 41  
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | 42  
|                                                                                                     | 
|Financial Statement Schedules                                                                        |  |     
|                                                                                                     | 
|Not Applicable.                                                                                      |  |     



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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) under the Securities Exchange Act of 1934. As required by Rule 13a-15(c) under the Exchange Act, the Companys management evaluated the effectiveness of the design and operation of its internal control over financial reporting based
on the framework in Internal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Companys management concluded that the Companys internal
control over financial reporting as of December 31, 2004 was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.



Our managements
assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which
appears herein.



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Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders of American Dental Partners, Inc:



We have completed an integrated audit of American Dental
Partners Incs 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and our audit of its 2003 consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.



Consolidated financial statements



In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of American Dental Partners, Inc. (the Company)at December
31, 2004 and 2003, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2003in conformity with accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statementsbased on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



Internal control over financial reporting



Also, in our opinion, managements assessment, included in Managements Report on Internal Controls Over Financial Reporting appearing in Item
8, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on
Internal ControlIntegrated Framework issued by COSO. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit of internal control
over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating managements
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinions.



A companys internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable



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assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.



Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.





/s/    PricewaterhouseCoopers LLP

Boston, Massachusetts

March 11, 2005



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors

American Dental Partners, Inc.:



We have audited the accompanying consolidated statements of income, stockholders equity and cash flows of American Dental Partners, Inc. (the Company) for the year ended December 31, 2002. These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for
our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the results of operations and cash flows of American Dental Partners, Inc. for the year ended December 31, 2002 in conformity with U.S. generally accepted accounting principles.



/s/    KPMG LLP



Boston, Massachusetts

February 25, 2003



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AMERICAN DENTAL PARTNERS, INC.



CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)



|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                                                     |  | December 31, |        
|                                                                                                                                                                                                                     |  | 2004         |         |   | 2003 |  
|ASSETS                                                                                                                                                                                                               |  |              |         |   |      |   |         |  
|Current assets:                                                                                                                                                                                                      |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                                                            |  | $            | 1,378   |   |      | $ | 1,895   |  
|Receivables due from affiliated dental group practices                                                                                                                                                               |  |              | 13,539  |   |      |   | 16,611  |  
|Inventories                                                                                                                                                                                                          |  |              | 1,789   |   |      |   | 1,901   |  
|Prepaid expenses and other receivables                                                                                                                                                                               |  |              | 3,597   |   |      |   | 2,488   |  
|Deferred income taxes                                                                                                                                                                                                |  |              | 1,271   |   |      |   | 987     |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total current assets                                                                                                                                                                                                 |  |              | 21,574  |   |      |   | 23,882  |  
|                                                                                                                                                                                                                     |  |             
|Property and equipment, net                                                                                                                                                                                          |  |              | 39,252  |   |      |   | 35,216  |  
|                                                                                                                                                                                                                     |  |             
|Non-current assets:                                                                                                                                                                                                  |  |              |         |   |      |   |         |  
|Goodwill                                                                                                                                                                                                             |  |              | 5,095   |   |      |   | 5,095   |  
|Intangible assets, net                                                                                                                                                                                               |  |              | 87,425  |   |      |   | 83,843  |  
|Other assets                                                                                                                                                                                                         |  |              | 801     |   |      |   | 1,036   |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total non-current assets                                                                                                                                                                                             |  |              | 93,321  |   |      |   | 89,974  |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total assets                                                                                                                                                                                                         |  | $            | 154,147 |   |      | $ | 149,072 |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                 |  |              |         |   |      |   |         |  
|Current liabilities:                                                                                                                                                                                                 |  |              |         |   |      |   |         |  
|Accounts payable                                                                                                                                                                                                     |  | $            | 7,506   |   |      | $ | 8,203   |  
|Accrued compensation and benefits                                                                                                                                                                                    |  |              | 5,678   |   |      |   | 5,672   |  
|Accrued expenses                                                                                                                                                                                                     |  |              | 10,169  |   |      |   | 4,684   |  
|Current maturities of debt                                                                                                                                                                                           |  |              | 527     |   |      |   | 1,407   |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total current liabilities                                                                                                                                                                                            |  |              | 23,880  |   |      |   | 19,966  |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Non-current liabilities:                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Long-term debt                                                                                                                                                                                                       |  |              | 28,014  |   |      |   | 42,319  |  
|Deferred income taxes                                                                                                                                                                                                |  |              | 14,840  |   |      |   | 12,692  |  
|Other liabilities                                                                                                                                                                                                    |  |              | 206     |   |      |   | 203     |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total non-current liabilities                                                                                                                                                                                        |  |              | 43,060  |   |      |   | 55,214  |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total liabilities                                                                                                                                                                                                    |  |              | 66,940  |   |      |   | 75,180  |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Commitments and contingencies                                                                                                                                                                                        |  |              |         |   |      |   |         |  
|Stockholders equity:                                                                                                                                                                                                |  |              |         |   |      |   |         |  
|Preferred stock, par value $0.01 per share, 1,000,000 shares authorized, no shares issued or outstanding                                                                                                             |  |              |        |   |      |   |        |  
|Common stock, par value $0.01 per share, 25,000,000 shares authorized, 8,467,587 and 7,934,940 shares issued and 7,885,087 and 7,352,440
shares outstanding at December 31, 2004 and December 31, 2003, respectively |  |              | 85      |   |      |   | 79      |  
|Additional paid-in capital                                                                                                                                                                                           |  |              | 53,623  |   |      |   | 48,833  |  
|Treasury stock, at cost, 582,500 shares                                                                                                                                                                              |  |              | (3,874  | ) |      |   | (3,874  | )
|Retained earnings                                                                                                                                                                                                    |  |              | 37,373  |   |      |   | 28,854  |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                                                                           |  |              | 87,207  |   |      |   | 73,892  |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                           |  | $            | 154,147 |   |      | $ | 149,072 |  
|                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  



See accompanying notes
to consolidated financial statements.



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AMERICAN DENTAL PARTNERS, INC.



CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)



|                                            |  |                          |         |      |   |         |  |   |         |  
|------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | ------- | -
|                                            |  | Years Ended December 31, |        
|                                            |  | 2004                     |         | 2003 |   | 2002    | 
|Net revenue                                 |  | $                        | 178,554 |      | $ | 163,707 |  | $ | 146,810 |  
|Operating expenses:                         |  |                          |         |      |   |         |  |   |         |  
|Salaries and benefits                       |  |                          | 77,489  |      |   | 72,557  |  |   | 65,762  |  
|Lab fees and dental supplies                |  |                          | 28,566  |      |   | 27,047  |  |   | 24,164  |  
|Office occupancy expenses                   |  |                          | 20,956  |      |   | 19,999  |  |   | 18,314  |  
|Other operating expenses                    |  |                          | 16,643  |      |   | 14,638  |  |   | 13,163  |  
|General corporate expenses                  |  |                          | 8,856   |      |   | 6,871   |  |   | 5,859   |  
|Depreciation expense                        |  |                          | 5,934   |      |   | 5,378   |  |   | 4,990   |  
|Amortization of intangible assets           |  |                          | 4,408   |      |   | 4,229   |  |   | 4,047   |  
|Special charges                             |  |                          |        |      |   |        |  |   | (26     | )
|                                            |  |                          |         |      |   |         |  |   |         |  
|Total operating expenses                    |  |                          | 162,852 |      |   | 150,719 |  |   | 136,273 |  
|                                            |  |                          |         |      |   |         |  |   |         |  
|Earnings from operations                    |  |                          | 15,702  |      |   | 12,988  |  |   | 10,537  |  
|Interest expense                            |  |                          | 1,592   |      |   | 2,592   |  |   | 2,947   |  
|                                            |  |                          |         |      |   |         |  |   |         |  
|Earnings before income taxes                |  |                          | 14,110  |      |   | 10,396  |  |   | 7,590   |  
|Income taxes                                |  |                          | 5,591   |      |   | 4,215   |  |   | 2,883   |  
|                                            |  |                          |         |      |   |         |  |   |         |  
|Net earnings                                |  | $                        | 8,519   |      | $ | 6,181   |  | $ | 4,707   |  
|                                            |  |                          |         |      |   |         |  |   |         |  
|Net earnings per common share:              |  |                          |         |      |   |         |  |   |         |  
|Basic                                       |  | $                        | 1.12    |      | $ | 0.84    |  | $ | 0.65    |  
|                                            |  |                          |         |      |   |         |  |   |         |  
|Diluted                                     |  | $                        | 1.06    |      | $ | 0.82    |  | $ | 0.63    |  
|                                            |  |                          |         |      |   |         |  |   |         |  
|Weighted average common shares outstanding: |  |                          |         |      |   |         |  |   |         |  
|Basic                                       |  |                          | 7,581   |      |   | 7,319   |  |   | 7,222   |  
|                                            |  |                          |         |      |   |         |  |   |         |  
|Diluted                                     |  |                          | 8,068   |      |   | 7,572   |  |   | 7,451   |  
|                                            |  |                          |         |      |   |         |  |   |         |  





See accompanying notes to consolidated financial statements.



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AMERICAN DENTAL PARTNERS, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(in thousands)



|                                                                                      |  |                   |  |                        |             |  |                          |    |                  |   |                      |  |   |                          |  |   |        |   |  |   |       
|------------------------------------------------------------------------------------- |  | ----------------- |  | ---------------------- | ----------- |  | ------------------------ | -- | ---------------- | - | -------------------- |  | - | ------------------------ |  | - | ------ | - |  | - | ------
|                                                                                      |  | Number of Shares  |  |                        | CommonStock |  | AdditionalPaid-InCapital |    | RetainedEarnings |   | TreasuryStock atCost |  |   | TotalStockholdersEquity
|                                                                                      |  | CommonStockIssued |  | CommonStock inTreasury |             |  |                          |    |                  |  
|Balance at December 31, 2001                                                          |  | 7,755             |  | (582                   | )           |  | $                        | 78 |                  | $ | 47,606               |  | $ | 17,966                   |  | $ | (3,874 | ) |  | $ | 61,776
|Issuance of common stock for employee stock purchase plan                             |  | 56                |  |                       |             |  |                          |   |                  |   | 239                  |  |   |                         |  |   |       |   |  |   | 239   
|Issuance of common stock for exercised stock options, including tax benefit of $21    |  | 26                |  |                       |             |  |                          |   |                  |   | 194                  |  |   |                         |  |   |       |   |  |   | 194   
|Net earnings                                                                          |  |                  |  |                       |             |  |                          |   |                  |   |                     |  |   | 4,707                    |  |   |       |   |  |   | 4,707 
|                                                                                      |  |                   |  |                        |             |  |                          |    |                  |   |                      |  |   |                          |  |   |        |   |  |   |       
|Balance at December 31, 2002                                                          |  | 7,837             |  | (582                   | )           |  |                          | 78 |                  |   | 48,039               |  |   | 22,673                   |  |   | (3,874 | ) |  |   | 66,916
|Issuance of common stock for employee stock purchase plan                             |  | 28                |  |                       |             |  |                          | 1  |                  |   | 218                  |  |   |                         |  |   |       |   |  |   | 219   
|Issuance of common stock for exercised stock options, including tax benefit of $32    |  | 70                |  |                       |             |  |                          |   |                  |   | 576                  |  |   |                         |  |   |       |   |  |   | 576   
|Net earnings                                                                          |  |                  |  |                       |             |  |                          |   |                  |   |                     |  |   | 6,181                    |  |   |       |   |  |   | 6,181 
|                                                                                      |  |                   |  |                        |             |  |                          |    |                  |   |                      |  |   |                          |  |   |        |   |  |   |       
|Balance at December 31, 2003                                                          |  | 7,935             |  | (582                   | )           |  |                          | 79 |                  |   | 48,833               |  |   | 28,854                   |  |   | (3,874 | ) |  |   | 73,892
|Issuance of common stock for employee stock purchase plan                             |  | 30                |  |                       |             |  |                          | 1  |                  |   | 262                  |  |   |                         |  |   |       |   |  |   | 263   
|Issuance of common stock for exercised stock options, including tax benefit of $2,406 |  | 503               |  |                       |             |  |                          | 5  |                  |   | 4,528                |  |   |                         |  |   |       |   |  |   | 4,533 
|Net earnings                                                                          |  |                  |  |                       |             |  |                          |   |                  |   |                     |  |   | 8,519                    |  |   |       |   |  |   | 8,519 
|                                                                                      |  |                   |  |                        |             |  |                          |    |                  |   |                      |  |   |                          |  |   |        |   |  |   |       
|Balance at December 31, 2004                                                          |  | 8,468             |  | (582                   | )           |  | $                        | 85 |                  | $ | 53,623               |  | $ | 37,373                   |  | $ | (3,874 | ) |  | $ | 87,207
|                                                                                      |  |                   |  |                        |             |  |                          |    |                  |   |                      |  |   |                          |  |   |        |   |  |   |       





See accompanying notes to consolidated financial statements.



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AMERICAN DENTAL PARTNERS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                    |  | Years Ended December 31, |        
|                                                                                    |  | 2004                     |         |   | 2003 |   |         | 2002 | 
|Cash flows from operating activities:                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Net earnings                                                                        |  | $                        | 8,519   |   |      | $ | 6,181   |      |  | $ | 4,707   |  
|Adjustments to reconcile net earnings to net cash provided by operating activities: |  |                          |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                        |  |                          | 5,934   |   |      |   | 5,378   |      |  |   | 4,990   |  
|Amortization of intangible assets                                                   |  |                          | 4,408   |   |      |   | 4,229   |      |  |   | 4,047   |  
|Tax benefit on issuance of common stock for exercise of stock options               |  |                          | 2,406   |   |      |   | 32      |      |  |   | 21      |  
|Other amortization                                                                  |  |                          | 224     |   |      |   | 407     |      |  |   | 232     |  
|Deferred income taxes                                                               |  |                          | 1,807   |   |      |   | 1,841   |      |  |   | 147     |  
|(Gain)/loss on disposal of property and equipment                                   |  |                          | 99      |   |      |   | (61     | )    |  |   | (21     | )
|Changes in assets and liabilities, net of acquisitions and affiliations:            |  |                          |         |   |      |   |         |      |  |   |         |  
|Receivables due from affiliated dental group practices                              |  |                          | 3,039   |   |      |   | 1,014   |      |  |   | 2,055   |  
|Other current assets                                                                |  |                          | 427     |   |      |   | 249     |      |  |   | 21      |  
|Accounts payable and accrued expenses                                               |  |                          | (196    | ) |      |   | 1,126   |      |  |   | (73     | )
|Accrued compensation and benefits                                                   |  |                          | (15     | ) |      |   | 1,414   |      |  |   | 341     |  
|Accrued special charges                                                             |  |                          |        |   |      |   |        |      |  |   | (256    | )
|Income taxes payable and receivable, net                                            |  |                          | (1,313  | ) |      |   | (72     | )    |  |   | 829     |  
|Other                                                                               |  |                          | 66      |   |      |   | 68      |      |  |   | (61     | )
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                           |  |                          | 25,405  |   |      |   | 21,806  |      |  |   | 16,979  |  
|Cash flows from investing activities:                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Acquisitions and affiliations, net of cash acquired                                 |  |                          | (3,239  | ) |      |   | (4,648  | )    |  |   | (6,269  | )
|Capital expenditures, net                                                           |  |                          | (9,657  | ) |      |   | (7,381  | )    |  |   | (5,607  | )
|Proceeds from the sale of property and equipment                                    |  |                          | 36      |   |      |   | 175     |      |  |   |        |  
|Contingent and deferred payments                                                    |  |                          | (163    | ) |      |   | (178    | )    |  |   | (163    | )
|Payment of acquisition costs                                                        |  |                          | (86     | ) |      |   | (304    | )    |  |   | (315    | )
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used for investing activities                                              |  |                          | (13,109 | ) |      |   | (12,336 | )    |  |   | (12,354 | )
|Cash flows from financing activities:                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Repayments under revolving line of credit, net                                      |  |                          | (12,475 | ) |      |   | (6,905  | )    |  |   | (3,827  | )
|Principal payments of debt                                                          |  |                          | (2,710  | ) |      |   | (1,624  | )    |  |   | (1,906  | )
|Common stock issued for the employee stock purchase plan                            |  |                          | 263     |   |      |   | 219     |      |  |   | 239     |  
|Proceeds from issuance of common stock for exercise of stock options                |  |                          | 2,128   |   |      |   | 544     |      |  |   | 173     |  
|Payment of debt issuance costs                                                      |  |                          | (19     | ) |      |   | (653    | )    |  |   |        |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used for financing activities                                              |  |                          | (12,813 | ) |      |   | (8,419  | )    |  |   | (5,321  | )
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Increase (decrease) in cash and cash equivalents                                    |  |                          | (517    | ) |      |   | 1,051   |      |  |   | (696    | )
|Cash and cash equivalents at beginning of period                                    |  |                          | 1,895   |   |      |   | 844     |      |  |   | 1,540   |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of period                                          |  | $                        | 1,378   |   |      | $ | 1,895   |      |  | $ | 844     |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosure of cash flow information                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash paid during the period for interest                                            |  | $                        | 1,558   |   |      | $ | 2,315   |      |  | $ | 2,790   |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash paid during the period for income taxes, net                                   |  | $                        | 2,734   |   |      | $ | 2,415   |      |  | $ | 1,948   |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Non-cash investing activities:                                                      |  |                          |         |   |      |   |         |      |  |   |         |  
|Fair value of intangible asset acquired                                             |  | $                        | 4,790   |   |      | $ |        |      |  | $ |        |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Acquisitions and affiliations:                                                      |  |                          |         |   |      |   |         |      |  |   |         |  
|Assets acquired                                                                     |  | $                        | 3,534   |   |      | $ | 6,030   |      |  | $ | 8,281   |  
|Liabilities assumed                                                                 |  |                          | (295    | ) |      |   | (437    | )    |  |   | (1,295  | )
|Subordinated notes issued                                                           |  |                          |        |   |      |   | (945    | )    |  |   | (556    | )
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash paid                                                                           |  |                          | 3,239   |   |      |   | 4,648   |      |  |   | 6,430   |  
|Less cash acquired                                                                  |  |                          |        |   |      |   |        |      |  |   | (161    | )
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash paid for acquisitions and affiliations                                     |  | $                        | 3,239   |   |      | $ | 4,648   |      |  | $ | 6,269   |  
|                                                                                    |  |                          |         |   |      |   |         |      |  |   |         |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



For the Years Ended December 31, 2004, 2003 and 2002



(1)
Description of Business



American Dental Partners, Inc.
(the Company) is a leading provider of business services to multi-disciplinary dental group practices in selected markets throughout the United States. The Company acquires selected assets of the dental practices with which it affiliates
and enters into long-term service agreements with the affiliated dental group practices or professional corporations (PC). The Company provides all services necessary for the administration of the non-clinical aspects of the dental
operations. Services provided to the affiliated dental group 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; marketing and payor relations; and financial planning, reporting and analysis. The Company operates in one segment.



(2) Summary of Significant Accounting Policies



Basis of Presentation



The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting. The Company does not own any interests in or control the activities of the affiliated dental group practices. Accordingly, the consolidated financial statements of the affiliated dental group practices are not
consolidated with those of the Company.



Certain
reclassifications have been made to the consolidated financial statements for the years ended December 31, 2002 and 2003 in order to conform to the December 31, 2004 presentation.



Principles of Consolidation



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



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 receivables due from affiliated dental group practices requires management to make estimates and assumptions
regarding the collectability of fees from affiliates that affect the consolidated financial statements. The Companys business affiliations and acquisitions 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s liability for future losses for workers compensation and professional liability claims requires management to make estimates and assumptions regarding these costs. There can be no assurance that actual results
will not differ from those estimates.



Cash and Cash
Equivalents



The Company considers all highly liquid
instruments with an original maturity of three months or less to be cash equivalents.



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



Fair Value of Financial Instruments



The Company believes the carrying amount of cash and cash equivalents,
accounts receivable, receivables due from affiliated dental group practices, accounts payable and accrued expenses approximate fair value because of the short-term nature of these items. The carrying amount of long-term debt approximates fair value
because the interest rates approximate rates at which similar types of borrowing arrangements could be obtained by the Company.



Net Revenue



The Companys net revenue represents primarily reimbursement of expenses and fees charged to affiliated dental group practices pursuant to the terms
of the service agreements. Under such agreements, the affiliated dental group practices reimburse the Company for actual expenses incurred on their behalf in connection with the operation and administration of the dental facilities and pay fees to
the Company for its business services. Under certain service agreements, our service fee consists of a variable monthly fee which is based upon a specified percentage of the amount by which the affiliated dental group practices adjusted gross
revenue exceeds expenses incurred in connection with the operation and administration of the dental facilities. Under certain service agreements, our service fees consist of a fixed monthly fee and an additional variable fee. To the extent that
there is operating income after payment of the fixed monthly fee, reimbursement of expenses incurred in connection with the operation and administration of the dental facilities and payment of provider expenses, an additional variable fee is paid to
us. Under certain service agreements, our service fee consists entirely of a fixed monthly fee. The fixed monthly fees are determined by agreement of us and the affiliated dental group practice in a formal budgeting process. In all instances, the
service fee is negotiated as fair market value for services and capital provided by us to our affiliated dental group practices. Additionally, the Companys net revenue includes amounts from dental benefit providers related to the arrangement
of the provision of care to patients and dental laboratory fees.



Inventories



Inventories consist primarily of
dental supplies and are stated at the lower of cost or market, with cost being determined under the weighted average method.



Property and Equipment



Property and equipment are stated at cost. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of
the related assets which are 30-40 years for buildings, 3-12 years for equipment and 5-7 years for furniture and fixtures.



Property and equipment under capital leases are stated at the present value of minimum lease payments at inception of the lease. Equipment held under
capital leases and leasehold improvements are amortized over the shorter of the lease term or estimated useful life of the asset. Amortization of assets subject to capital leases is included in depreciation expense.



Development costs incurred for computer software development or obtained for
internal use are capitalized and amortized in accordance with Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed for Internal Use.



Goodwill and Intangible Assets



Goodwill results from the excess of the purchase price of an acquisition over the estimated fair value of the tangible and
intangible assets acquired and liabilities assumed.



43



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



Prior to 2004, management performed an impairment test on goodwill on an annual basis during the
Companys first quarter or on an interim basis if an event or circumstance indicated that it is more likely than not that an impairment loss had been incurred. During 2004, the Company changed the timing of the annual impairment test to the
fourth quarter and completed an impairment test during the first and fourth quarters. The Company determines impairment by comparing the fair value to the carrying value of the reporting units. The Company determines the fair value of each reporting
unit based on discounted future cash flows using a discount rate reflecting the Companys average cost of funds. If impairment were determined, an appropriate adjustment to goodwill to reduce the assets carrying value would be made. The
Company has not recorded any impairment charges on goodwill as of December 31, 2004.



Identifiable intangible assets result from nineteen service agreements with the affiliated dental group practices and customer relationships from the acquisition of two dental laboratories. The estimated fair value of
the service agreements are the excess of the purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed of dental practices. All intangible assets associated with service agreements are amortized on a
straight-line basis, generally over 15 to 25 years. In the event a service agreement is terminated, the related affiliated dental group practice is required, at the Companys option in nearly all instances, to purchase the remaining unamortized
balance of intangible assets at the current book value, purchase other assets at the greater of fair market value or book value, and assume leases and other liabilities related to the performance of the Companys obligations under the service
agreement. Identifiable intangible assets associated with the acquisition of dental laboratories are amortized on a straight-line basis over 15 years.



Management performs an impairment test on definite lived intangible assets when facts and circumstances exist which would suggest that the intangible
assets may be impaired. The Company compares the undiscounted net cash flows of the asset to the carrying value of the intangible asset when performing the impairment test. If impairment were determined, an appropriate adjustment to the intangible
asset would be made to reduce the assets carrying value to fair value. Fair value is determined by calculating the projected discounted operating net cash flows of the asset using a discount rate reflecting the Companys average cost of
funds. The Company has not recorded any impairment charges or write-downs on definite lived intangibles as of December 31, 2004.



Insurance



The Company maintains various insurance coverages for our business, including property-casualty, business interruption, workers compensation and general
liability, among others. In addition, the Companys affiliated dental group practices are required to maintain, or cause to be maintained, professional liability insurance with the Company as a named insured. Several of these insurance programs
have retention levels in which the Company is financially obligated for insured losses below certain financial thresholds before the insurer is financially obligated for insured losses. The Company maintains reserves for losses below retention
levels for certain of these programs. Reserves are based upon estimates provided by third-party actuaries or by individual case-basis valuations. Changes in trends of loss severity or loss frequency may affect the calculation of these estimates and
create the need for subsequent adjustments to estimated loss reserves.



Income Taxes



Deferred income taxes are
recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the consolidated financial statement carrying amounts and the tax basis of existing assets and
liabilities. The effect on deferred taxes of changes in the tax rate is recognized in operations in the period that includes the enactment date.



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



Stock Option Plans



Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment to FASB Statement No. 123, allows companies to recognize expense for the fair value of stock-based awards
or to continue to apply the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and disclose the effects of SFAS No. 123 as if the fair-value-based method defined
in SFAS No. 123 had been applied. Under APB Opinion No. 25, compensation expense is recognized only if on the measurement date the fair value of the underlying stock exceeds the exercise price. The Company has elected to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFASs No. 123 and No. 148.



The following table shows the Companys pro forma net earnings and earnings per share if the Company had accounted for stock options under SFAS No.
123 for the years ended December 31 (in thousands, except per share amounts):



|                                                                                                                             |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                                                             |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Net earnings, as reported                                                                                                    |  | $    | 8,519 |   |      | $ | 6,181 |      |  | $ | 4,707 |  
|Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects |  |      | (896  | ) |      |   | (787  | )    |  |   | (541  | )
|                                                                                                                             |  |      |       |   |      |   |       |      |  |   |       |  
|Pro forma net earnings                                                                                                       |  | $    | 7,623 |   |      | $ | 5,394 |      |  | $ | 4,166 |  
|                                                                                                                             |  |      |       |   |      |   |       |      |  |   |       |  
|Earnings per share:                                                                                                          |  |      |       |   |      |   |       |      |  |   |       |  
|Basic, as reported                                                                                                           |  | $    | 1.12  |   |      | $ | 0.84  |      |  | $ | 0.65  |  
|                                                                                                                             |  |      |       |   |      |   |       |      |  |   |       |  
|Basic, pro forma                                                                                                             |  | $    | 1.01  |   |      | $ | 0.74  |      |  | $ | 0.58  |  
|                                                                                                                             |  |      |       |   |      |   |       |      |  |   |       |  
|Diluted, as reported                                                                                                         |  | $    | 1.06  |   |      | $ | 0.82  |      |  | $ | 0.63  |  
|                                                                                                                             |  |      |       |   |      |   |       |      |  |   |       |  
|Diluted, pro forma                                                                                                           |  | $    | 0.95  |   |      | $ | 0.72  |      |  | $ | 0.56  |  
|                                                                                                                             |  |      |       |   |      |   |       |      |  |   |       |  



Earnings per Share



Earnings per share are computed based on SFAS No. 128
Earnings per Share. SFAS No. 128 requires presentation of basic earnings per share (Basic EPS) and diluted earnings per share (Diluted EPS) by all entities that have publicly traded common stock or
potential common stock (options, warrants, convertible securities or contingent stock arrangements). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the
period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of Diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an antidilutive effect
on earnings.



Recent Accounting Pronouncements



In December 2004, the FASB issued Statement No. 123(R), Share-Based
Payment, revising Statement No. 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement No. 123(R) requires companies to measure the cost of employee services received in exchange
for an award of equity instruments and include these costs in the financial statements. Statement No. 123(R) applies to all stock awards granted after the effective date and all outstanding and unvested share-based payment awards as of the



45



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



effective date. Statement No. 123 (R) is effective as of the beginning of the first interim or annual period that begins after June 15, 2005. The Company is
currently evaluating the impact of implementing Statement No. 123(R) on its consolidated financial statements.



(3) Receivables Due From Affiliated Dental Group Practices and Net Revenue



Receivables Due From Affiliated Dental Group Practices



Receivables due from affiliated dental group practices represent amounts due pursuant to the terms of the service
agreements.



Net Revenue



For the years ended December 31, 2004, 2003 and 2002, net revenue consisted
of the following (in thousands):



|                                                                                                      |  |      |         |      |   |         |  |   |        
|----------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                                                                      |  | 2004 |         | 2003 |   | 2002   
|Reimbursement of expenses:                                                                            |  |      |         |      |   |         |  |   |        
|Salaries and benefits                                                                                 |  | $    | 63,020  |      | $ | 58,919  |  | $ | 53,184 
|Lab and dental supplies                                                                               |  |      | 30,340  |      |   | 27,793  |  |   | 23,923 
|Office occupancy expenses                                                                             |  |      | 19,326  |      |   | 18,389  |  |   | 16,968 
|Other operating expenses                                                                              |  |      | 13,044  |      |   | 12,096  |  |   | 4,174  
|Depreciation expense                                                                                  |  |      | 5,016   |      |   | 4,508   |  |   | 10,751 
|                                                                                                      |  |      |         |      |   |         |  |   |        
|Total reimbursement of expenses                                                                       |  |      | 130,746 |      |   | 121,705 |  |   | 109,000
|Business service fees                                                                                 |  |      | 42,714  |      |   | 35,553  |  |   | 31,049 
|                                                                                                      |  |      |         |      |   |         |  |   |        
|Business services provided to affiliated dental group practices                                       |  |      | 173,460 |      |   | 157,258 |  |   | 140,049
|Revenue related to arrangement of the provision of care to patients, dental laboratory fees and other |  |      | 5,094   |      |   | 6,449   |  |   | 6,761  
|                                                                                                      |  |      |         |      |   |         |  |   |        
|Net revenue                                                                                           |  | $    | 178,554 |      | $ | 163,707 |  | $ | 146,810
|                                                                                                      |  |      |         |      |   |         |  |   |        



Net revenue derived
from the service agreement with Park Dental represented approximately 32%, 31% and 32% of consolidated net revenue for 2004, 2003 and 2002, respectively. Net revenue from the service agreement with Wisconsin Dental Group represented approximately
13%, 13% and 15% of consolidated net revenue for 2004, 2003 and 2002, respectively. No other service agreement or customers accounted for greater than 10% of consolidated net revenue.



(4) Special Charges



During 2001, the Company recorded $1,004,000 of special charges as a result of actions taken in response to managed care contract terminations received by
three of the Companys affiliated dental groups. During 2002, the remaining unused balance of $26,000 was recognized as income in the Consolidated Statements of Income.



(5) Acquisitions and Affiliations



During the year ended December 31, 2003, the Company entered into a platform affiliation with one dental group practice and
acquired selected assets of six dental practices that joined existing affiliates. All transactions



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



completed in 2003 are referred to as 2003 Transactions. The aggregate purchase price paid in connection with these transactions consisted of
approximately $4,648,000 in cash, $945,000 in subordinated promissory notes and $65,000 in deferred payments.



During the year ended December 31, 2004, the Company acquired selected assets of five dental practices that joined existing affiliates. All transactions
completed in 2004 are referred to as 2004 Transactions. The aggregate purchase price paid in connection with these transactions consisted of approximately $2,888,000 in cash and $28,000 in deferred payments.



The 2003 and 2004 Transactions are as follows:



|               |  |                                   |  |                               
|-------------- |  | --------------------------------- |  | ------------------------------
|Date           |  | Affiliation/Acquisition           |  | Locations                     
|April 2003     |  | Fred D. Archer, D.D.S.            |  | Buffalo, NY                   
|May 2003       |  | Redwood Dental Group, P.C.        |  | Detroit, MI                   
|June 2003      |  | Joel D. Latham, D.D.S.            |  | Piedmont, AL                  
|August 2003    |  | Millennium Dental P.C.            |  | Buffalo, NY                   
|September 2003 |  | Edward A. Kahn, D.D.S.            |  | Hamburg, NY                   
|November 2003  |  | Daniel P. Ratkus, D.M.D.          |  | Robinson Township, PA         
|November 2003  |  | Thomas A. Coleman, D.D.S.         |  | Shaftsbury, VT                
|January 2004   |  | The Dental Office at Saddle Creek |  | Germantown, TN                
|April 2004     |  | Lufborrow Dental Group, L.L.P.    |  | Killeen, Belton and Temple, TX
|April 2004     |  | David W. Zipnock, D.M.D.          |  | Mount Pleasant, PA            
|May 2004       |  | Heidi C. Ritsco, D.D.S.           |  | Amherst, NY                   
|December 2004  |  | William H. Grass, D.D.S.          |  | Hadley, MA                    



The accompanying
consolidated financial statements include the results of operations under the service agreements from the date of affiliation. The excess of the purchase price associated with the 2003 Transactions and 2004 Transactions over the estimated fair value
of net assets acquired and assumed has been recorded as intangible assets which are summarized as follows (in thousands):



|                                                       |  |      |       |      |   |      
|------------------------------------------------------ |  | ---- | ----- | ---- | - | -----
|                                                       |  | 2004 |       | 2003
|Total consideration paid                               |  | $    | 2,916 |      | $ | 5,658
|Fair value of net tangible assets acquired and assumed |  |      | 150   |      |   | 1,083
|                                                       |  |      |       |      |   |      
|Intangible assets                                      |  | $    | 2,766 |      | $ | 4,575
|                                                       |  |      |       |      |   |      



The Company affiliated
with 1stAdvantage Dental Management, L.L.C. (1stAdvantage) in 2002. In connection with the 1stAdvantage transaction, the asset purchase agreement between the Company and 1stAdvantage includes a future contingent payment based on a multiple of earnings before interest and taxes in excess of a predetermined threshold for the year ending December 31, 2004 less capital expenditures incurred during the
period. The amount of the contingent payment is $4,790,000 which was accrued as of December 31, 2004 and will be paid in 2005.



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



(6) Property and Equipment



Property and equipment consisted of the following at December 31 (in thousands):



|                                           |  |      |         |   |      |   |         |  
|------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                           |  | 2004 |         |   | 2003 |  
|Land, buildings and leasehold improvements |  | $    | 33,438  |   |      | $ | 29,768  |  
|Equipment                                  |  |      | 34,820  |   |      |   | 29,516  |  
|Furniture and fixtures                     |  |      | 7,765   |   |      |   | 7,705   |  
|                                           |  |      |         |   |      |   |         |  
|Total property and equipment               |  |      | 76,023  |   |      |   | 66,989  |  
|Less accumulated depreciation              |  |      | (36,771 | ) |      |   | (31,773 | )
|                                           |  |      |         |   |      |   |         |  
|Property and equipment, net                |  | $    | 39,252  |   |      | $ | 35,216  |  
|                                           |  |      |         |   |      |   |         |  



Since 2002,the
Company has been developing Improvis, a replacement system to Comdent, a proprietary practice management system which is currently used by many of the Companys affiliated dental group practices. The first phase of development is expected to be
completed in the second quarter of 2005. Pursuant to Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, the Company capitalized applicable costs beginning in 2003,
with total capitalized costs through December 31, 2004 of $836,000. These costs will be amortized over ten years when the first phase is complete.



The Company is obligated under non-cancelable operating leases for premises and equipment expiring in various years through the year 2021. Rent expense
for the years ended December 31, 2004, 2003 and 2002 amounted to $16,130,000, $15,263,000 and $14,291,000, respectively, of which $14,924,000, $14,204,000 and $13,276,000 were reimbursed under service agreements. The Company has several leases with
stockholders that were assumed in connection with its affiliation transactions. Such amounts are generally reimbursed pursuant to the terms of the service agreements.



Minimum future rental payments under non-cancelable operating leases and amounts to be reimbursed under service agreements
as of December 31, 2004 are as follows (in thousands):



|                             |  |                 |        |                                               |   |           |  |   |      
|---------------------------- |  | --------------- | ------ | --------------------------------------------- | - | --------- |  | - | -----
|                             |  | Total AmountDue |        | Amount to beReimbursedUnder ServiceAgreements |   | NetAmount
|2005                         |  | $               | 12,296 |                                               | $ | 11,486    |  | $ | 810  
|2006                         |  |                 | 10,515 |                                               |   | 9,829     |  |   | 686  
|2007                         |  |                 | 9,168  |                                               |   | 8,732     |  |   | 436  
|2008                         |  |                 | 8,084  |                                               |   | 7,751     |  |   | 333  
|2009                         |  |                 | 6,625  |                                               |   | 6,335     |  |   | 290  
|Thereafter                   |  |                 | 29,372 |                                               |   | 26,872    |  |   | 2,500
|                             |  |                 |        |                                               |   |           |  |   |      
|Total minimum lease payments |  | $               | 76,060 |                                               | $ | 71,005    |  | $ | 5,055
|                             |  |                 |        |                                               |   |           |  |   |      



48



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



(7) Intangible Assets



Intangible assets consisted of the following as of December 31, 2004 and 2003 (in thousands):



|                        |  |                     |         |                         |   |         |                    |  |   |       
|----------------------- |  | ------------------- | ------- | ----------------------- | - | ------- | ------------------ |  | - | ------
|                        |  | GrossCarryingAmount |         | AccumulatedAmortization |   |         | Net CarryingAmount
|December 31, 2004       |  |                     |         |                         |   |         |                    |  |   |       
|Service agreements      |  | $                   | 113,006 |                         | $ | (25,750 | )                  |  | $ | 87,256
|Customer relationships  |  |                     | 205     |                         |   | (36     | )                  |  |   | 169   
|                        |  |                     |         |                         |   |         |                    |  |   |       
|Total intangible assets |  | $                   | 113,211 |                         | $ | (25,786 | )                  |  | $ | 87,425
|                        |  |                     |         |                         |   |         |                    |  |   |       
|December 31, 2003       |  |                     |         |                         |   |         |                    |  |   |       
|Service agreements      |  | $                   | 105,017 |                         | $ | (21,357 | )                  |  | $ | 83,660
|Customer relationships  |  |                     | 205     |                         |   | (22     | )                  |  |   | 183   
|                        |  |                     |         |                         |   |         |                    |  |   |       
|Total intangible assets |  | $                   | 105,222 |                         | $ | (21,379 | )                  |  | $ | 83,843
|                        |  |                     |         |                         |   |         |                    |  |   |       



Intangible asset
amortization expense for 2004, 2003 and 2002 was $4,408,000, $4,229,000 and $4,047,000, respectively. Estimated amortization expense for each of the five succeeding fiscal years is $4,702,000 in 2005, $4,696,000 in 2006 and 2007, $4,693,000 in 2008
and $4,684,000 in 2009.



(8) Income Taxes



Income tax expense for the years ended December 31 consists of the following
(in thousands):



|                   |  |      |       |      |   |       |  |   |      
|------------------ |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                   |  | 2004 |       | 2003 |   | 2002 
|Current:           |  |      |       |      |   |       |  |   |      
|Federal            |  | $    | 2,950 |      | $ | 1,851 |  | $ | 2,270
|State              |  |      | 778   |      |   | 502   |  |   | 467  
|                   |  |      |       |      |   |       |  |   |      
|                   |  |      | 3,728 |      |   | 2,353 |  |   | 2,737
|Deferred:          |  |      |       |      |   |       |  |   |      
|Federal            |  |      | 1,792 |      |   | 1,789 |  |   | 38   
|State              |  |      | 71    |      |   | 73    |  |   | 108  
|                   |  |      |       |      |   |       |  |   |      
|                   |  |      | 1,863 |      |   | 1,862 |  |   | 146  
|                   |  |      |       |      |   |       |  |   |      
|Total income taxes |  | $    | 5,591 |      | $ | 4,215 |  | $ | 2,883
|                   |  |      |       |      |   |       |  |   |      



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



The tax effects of temporary differences that give rise to significant portions of deferred tax
assets and deferred tax liabilities as of December 31 are as follows (in thousands):



|                                       |  |      |         |   |      |   |         |  
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                       |  | 2004 |         |   | 2003 |  
|Deferred tax assets:                   |  |      |         |   |      |   |         |  
|Operating loss and other carryforwards |  | $    | 320     |   |      | $ | 318     |  
|Organization and start-up costs        |  |      | 49      |   |      |   | 89      |  
|Accrued expenses and other liabilities |  |      | 1,238   |   |      |   | 990     |  
|                                       |  |      |         |   |      |   |         |  
|Gross deferred tax assets              |  |      | 1,607   |   |      |   | 1,397   |  
|Net valuation allowance                |  |      | (46     | ) |      |   | (318    | )
|                                       |  |      |         |   |      |   |         |  
|Net deferred tax assets                |  | $    | 1,561   |   |      | $ | 1,079   |  
|                                       |  |      |         |   |      |   |         |  
|Deferred tax liabilities:              |  |      |         |   |      |   |         |  
|Intangibles                            |  | $    | (12,278 | ) |      | $ | (11,866 | )
|Property and equipment                 |  |      | (2,257  | ) |      |   | (788    | )
|Software costs                         |  |      | (327    | ) |      |   | (130    | )
|Other                                  |  |      | (268    | ) |      |   |        |  
|                                       |  |      |         |   |      |   |         |  
|Total deferred tax liabilities         |  |      | (15,130 | ) |      |   | (12,784 | )
|                                       |  |      |         |   |      |   |         |  
|Net deferred tax liabilities           |  | $    | (13,569 | ) |      | $ | (11,705 | )
|                                       |  |      |         |   |      |   |         |  



The Company has a
valuation allowance against its deferred tax assets related to its state tax attributes. Based upon the Companys current structure, it is more likely than not that this deferred tax asset will not be realized. The valuation allowance for
deferred tax assets was $46,000 and $318,000 as of December 31, 2004 and 2003, respectively. The change in the valuation allowance for the years ended December 31, 2004 and 2003 was $(272,000) and $(155,000), respectively.



Tax benefits associated with tax deductions for stock option exercises were
credited to additional paid-in capital in the amounts of $2,406,000 and $32,000 for the years ended December 31, 2004 and 2003, respectively.



The net deferred tax assets and liabilities consisted of the following at December 31 (in thousands):



|                               |  |         |         |   |       |   |        |       |  |   |         |   |  |       |         |   |       |   |        |   |  |   |         |  
|------------------------------ |  | ------- | ------- | - | ----- | - | ------ | ----- |  | - | ------- | - |  | ----- | ------- | - | ----- | - | ------ | - |  | - | ------- | -
|                               |  | 2004    |         |   | 2003  |  
|                               |  | Federal |         |   | State |   |        | Total |  |   | Federal |   |  | State |         |   | Total |  
|Deferred tax assets:           |  |         |         |   |       |   |        |       |  |   |         |   |  |       |         |   |       |   |        |   |  |   |         |  
|Current                        |  | $       | 957     |   |       | $ | 314    |       |  | $ | 1,271   |   |  | $     | 795     |   |       | $ | 192    |   |  | $ | 987     |  
|Non-current                    |  |         | (85     | ) |       |   | 375    |       |  |   | 290     |   |  |       | 74      |   |       |   | 18     |   |  |   | 92      |  
|                               |  |         |         |   |       |   |        |       |  |   |         |   |  |       |         |   |       |   |        |   |  |   |         |  
|Total deferred tax assets      |  |         | 872     |   |       |   | 689    |       |  |   | 1,561   |   |  |       | 869     |   |       |   | 210    |   |  |   | 1,079   |  
|                               |  |         |         |   |       |  
|Deferred tax liabilities:      |  |         |         |   |       |   |        |       |  |   |         |   |  |       |         |   |       |   |        |   |  |   |         |  
|Current                        |  |         |        |   |       |   |       |       |  |   |        |   |  |       |        |   |       |   |       |   |  |   |        |  
|Non-current                    |  |         | (12,427 | ) |       |   | (2,703 | )     |  |   | (15,130 | ) |  |       | (10,632 | ) |       |   | (2,152 | ) |  |   | (12,784 | )
|                               |  |         |         |   |       |   |        |       |  |   |         |   |  |       |         |   |       |   |        |   |  |   |         |  
|Total deferred tax liabilities |  |         | (12,427 | ) |       |   | (2,703 | )     |  |   | (15,130 | ) |  |       | (10,632 | ) |       |   | (2,152 | ) |  |   | (12,784 | )
|                               |  |         |         |   |       |   |        |       |  |   |         |   |  |       |         |   |       |   |        |   |  |   |         |  
|Net deferred tax liabilities   |  | $       | (11,555 | ) |       | $ | (2,014 | )     |  | $ | (13,569 | ) |  | $     | (9,763  | ) |       | $ | (1,942 | ) |  | $ | (11,705 | )
|                               |  |         |         |   |       |   |        |       |  |   |         |   |  |       |         |   |       |   |        |   |  |   |         |  



The Company has net
operating loss carryforwards of $6,397,000 as of December 31, 2004 which expire at various times from 2005 through 2024.



50



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



The following table reconciles the Federal statutory income tax rate to the Companys effective
income tax rate for the years ended December 31:



|                                       |  |      |   |  |      |   |  |      |  
|-------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                       |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Income taxes at Federal statutory rate |  | 35.0 | % |  | 35.0 | % |  | 35.0 | %
|Differential due to graduated rate     |  | (0.7 | ) |  | (0.7 | ) |  | (0.9 | )
|State taxes, net of Federal benefit    |  | 6.4  |   |  | 3.9  |   |  | 4.9  |  
|Other permanent differences            |  | (1.1 | ) |  | 2.3  |   |  | (1.0 | )
|                                       |  |      |   |  |      |   |  |      |  
|Effective income tax rate              |  | 39.6 | % |  | 40.5 | % |  | 38.0 | %
|                                       |  |      |   |  |      |   |  |      |  



The American Jobs
Creation Act of 2004 (the Act) was signed into law on October 22, 2004. The Act contains numerous amendments and additions to the U.S. corporate income tax rules. None of these changes, either individually of in the aggregate, are
expected to have any significant effect on our income tax liability.



(9)
Debt



Long-term debt and capital lease obligations consist
of the following at December 31 (in thousands):



|                                                                                                                                                                           |  |      |        |      |   |       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                                                                                                                                           |  | 2004 |        | 2003
|Revolving line of credit advances, collateralized by substantially all assets of the Company, LIBOR-based and prime interest rates ranging
from approximately 3.5% to 5.5% |  | $    | 26,950 |      | $ | 39,425
|Mortgages payable                                                                                                                                                          |  |      |       |      |   | 278   
|Note payable                                                                                                                                                               |  |      |       |      |   | 8     
|Subordinated notes payable to stockholders and former owners, bearing interest at 7%, maturing through 2010                                                                |  |      | 1,591  |      |   | 3,988 
|Capital lease obligations                                                                                                                                                  |  |      |       |      |   | 27    
|                                                                                                                                                                           |  |      |        |      |   |       
|Total long-term debt and capital lease obligations                                                                                                                         |  |      | 28,541 |      |   | 43,726
|Less current maturities                                                                                                                                                    |  |      | 527    |      |   | 1,407 
|                                                                                                                                                                           |  |      |        |      |   |       
|Long-term debt and capital lease obligations, excluding current maturities                                                                                                 |  | $    | 28,014 |      | $ | 42,319
|                                                                                                                                                                           |  |      |        |      |   |       



Annual
maturities of long-term debt and future minimum lease payments under capital leases as of December 31, 2004 are as follows (in thousands):



|               |  |               |       
|-------------- |  | ------------- | ------
|               |  | Long-termDebt
|2005           |  | $             | 527   
|2006           |  |               | 27,825
|2007           |  |               | 81    
|2008           |  |               | 36    
|2009           |  |               | 36    
|Thereafter     |  |               | 36    
|               |  |               |       
|Total payments |  | $             | 28,541
|               |  |               |       



51



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



Revolving Line of Credit



The Company has a credit facility that is used for general corporate purposes, including working capital, affiliations,
acquisitions and capital expenditures. The credit facility matures in October 2006 and the maximum principal amount is $70,000,000. The credit facility will be reduced to $65,000,000 in October 2005. 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 0.25% to 1.00% for prime borrowings and 1.25% to 2.00% for LIBOR borrowings. At December
31, 2004, the LIBOR interest rate under the credit facility, including borrowing margin, was approximately 3.60% and the prime interest rate under the credit facility was 5.50%. In addition, the Company pays a commitment fee which ranges from 0.375%
to 0.500% of the average daily balance of the unused line. Borrowings are limited to an availability formula based on earnings before income taxes, depreciation and amortization, adjusted for certain items. The credit facility is collateralized by a
first lien on substantially all of the Companys assets, including a pledge of the stock of its subsidiaries. The Company is also required to comply with financial and other covenants. The financial covenants include a minimum net worth,
leverage and fixed charge coverage ratios and maximum capital expenditures as defined by the credit facility agreement. The Company was in compliance with its covenants as of December 31, 2004. The outstanding balance under this line as of December
31, 2004 was $26,950,000. The unused balance at December 31, 2004 was $43,050,000 and based on borrowing covenants $40,959,000 was available for borrowing.



(10) Related Party Transactions



The Company affiliated with PDHC, Ltd. (Park Dental) in 1996. In connection with the Park Dental transaction, the Company entered into a
service agreement with an affiliated dental group practice owned in part by a former director of the Company. The service agreement is on substantially the same terms and conditions as all of the Companys other service agreements. The
aggregate net revenue earned by the subsidiary of the Company under the service agreement with Park Dental in 2004, 2003 and 2002 was $56,746,000, $50,473,000 and $47,086,000, respectively, of which $43,453,000, $39,307,000 and $36,302,000 were
reimbursements for expenses incurred in connection with the operation and administration of dental facilities.



The Company affiliated with 1stAdvantage Dental Management, L.L.C. (1stAdvantage) in 2002. In connection with the
1stAdvantage transaction, the Company entered into a subordinated note agreement with the owners of 1stAdvantage, including an individual who became an executive officer of the Company. During 2004, the executive officers
portion of subordinated note payments made by the Company to 1stAdvantage was $61,000. In addition, the asset
purchase agreement between the Company and 1stAdvantage includes a future contingent payment based on a multiple of
earnings before interest and taxes in excess of a predetermined threshold for the year ending December 31, 2004 less capital expenditures incurred during the period. The amount of the contingent payment is $4,790,000 which was accrued as of December
31, 2004 and will be paid in 2005. Of the total contingent payment, the executive officer is due to receive approximately $714,000. The subordinated note and service agreement are on substantially the same terms and conditions as all of the
Companys other subordinated note and service agreements.



(11)
Stockholders Equity



Preferred
Stock



The Company is authorized to issue up to 1,000,000
shares of Preferred Stock, $0.01 par value.



Preferred Stock
may be issued in one or more series as determined by the Board of Directors without further stockholder approval, and the Board of Directors is authorized to fix and determine the terms, limitations and



52



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



relative rights and preferences of such Preferred Stock, and to fix and determine the variations among series of Preferred Stock. Any new Preferred Stock
issued would have priority over the Common Stock with respect to dividends and other distributions, including the distribution of assets upon liquidation and dissolution. Such Preferred Stock may be subject to repurchase or redemption by the
Company. The Board of Directors, without stockholder approval, could issue Preferred Stock with voting and conversion rights that could adversely affect the voting power of the holders of Common Stock and the issuance of which could be used by the
Board of Directors in defense of a hostile takeover of the Company. As of December 31, 2004 and 2003 there were no shares of Preferred Stock issued or outstanding.



Common Stock



The Company is authorized to issue up to 25,000,000 shares of Common Stock, $0.01 par value. As of December 31, 2004, 8,467,587 shares were issued and
7,885,087 shares were outstanding. As of December 31, 2003, 7,934,940 shares were issued and 7,352,440 shares were outstanding.



Treasury Stock



On December 16, 1999, the Board of Directors authorized the Company to repurchase up to $5,000,000 of its Common Stock in the open market. Under this
plan, the Company has repurchased 582,500 shares of its Common Stock through December 31, 2004 at a cost of $3,874,000.



Dividends



The Company has the ability to pay cash dividends on its Common Stock but has not to date. The terms of the Companys credit facility allow the
Company to pay dividends without the lenders consent up to certain maximums and compliance with certain covenants.



(12) Stock Compensation Plans



1999 Restricted Stock Plan



The Companys 1999 Restricted Stock Plan (the Restricted Stock Plan) provides for the grant of restricted shares of the Companys
Common Stock at a price equal to the par value of such shares ($0.01 per share). Restricted shares may be issued to key employees of the Company and shall be subject to such restrictions as the Board of Directors determines, including, but not
limited to, time and performance restrictions. The maximum number of restricted shares which may be issued under the Restricted Stock Plan is 25,000, and as of December 31, 2004, there were no shares issued or outstanding under this Plan.



1996 Stock Option Plan



The Companys 1996 Stock Option Plan, as amended (the 1996
Plan), provides for the grant of stock options to key employees. The 1996 Plan permits the granting of options that qualify as incentive stock options and non-qualified options. The exercise price of such options is no less than the fair
market value of the Common Stock at the time of grant. Options granted pursuant to the 1996 Plan generally vest over four years and expire ten years after the date of grant. At December 31, 2004, 1,573,246 shares were authorized under the 1996 Plan,
with 1,181,914 shares reserved for issuance and options for 976,763 shares outstanding.



1996 Time Accelerated Restricted Stock Option Plan



The Companys 1996 Time Accelerated Restricted Stock Option Plan, as amended (TARSOP Plan), provides for the grant of stock options to key employees. Only non-qualified options may be granted pursuant
to



53



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



the TARSOP Plan. The exercise price of such options is no less than the fair market value of the Common Stock at the time of grant. Options granted under
this plan vest at the end of the nine years, subject to accelerated vesting based on achievement of certain performance measures, and generally expire after nine and a half years. In February 2003, the Companys Board of Directors approved an
amendment to prohibit future grants under the TARSOP Plan, except for options for 9,369 shares that were granted in July 2003 in connection with the Companys one-time stock option exchange program. At December 31, 2004, options for 38,639
shares were outstanding under this Plan. All outstanding options to purchase such shares became exercisable at the completion of the IPO except for the option granted in July 2003 in connection with the Companys one-time stock option exchange
program.



1996 Affiliate Stock Option Plan



The Companys 1996 Affiliate Stock Option Plan, as
amended (the Affiliate Plan), provides for the grant of stock options to certain persons associated with the affiliated dental group practices. Only non-qualified options may be granted pursuant to the Affiliate Plan. The exercise price
of such options is no less than the fair market value of the Common Stock at the time of grant. Options granted pursuant to the Affiliate Plan generally vests over four years and expire ten years after the date of grant. In February 2003, the
Companys Board of Directors approved an amendment to prohibit future grants under the Affiliate Plan. At December 31, 2004, options for 65,340 shares were outstanding under this Plan.



1996 Directors Stock Option Plan



The Companys 1996 Directors Stock Option Plan, as amended (the
Directors Plan), provides for the granting of options to outside directors. Only non-qualified options may be granted pursuant to the Directors Plan. The exercise price of such options is no less than the fair market value of the Common
Stock at the time of grant. Options granted pursuant to the Directors Plan generally vest over four years and expire ten years after the date of grant. At December 31, 2004, 385,000 shares were authorized under the Directors Plan, with 373,500
shares reserved for issuance and options for 222,750 shares outstanding.



1997 Employee Stock Purchase Plan



The 1997 Employee Stock Purchase Plan, as amended (the Employee Stock Purchase Plan or ESPP), enables eligible employees to purchase shares of Common Stock at a discount on a periodic basis
through payroll deductions and is intended to meet the requirements of Section 423 of the Internal Revenue Code. Purchases occur at the end of option periods, each of six months duration. The purchase price of Common Stock under the ESPP is
85% of the lesser of the value of the Common Stock at the beginning or the end of the option period. Prior to each option period, participants may elect to have from 2% to 10% of their compensation withheld and applied to the purchase of shares at
the end of the option period. The ESPP imposes a maximum of $12,500 on the amount that may be withheld from any participant in any option period. A total of 400,000 shares of Common Stock has been reserved for issuance under the ESPP, of which
291,221 shares have been issued through 2004 and 10,664 shares were committed for issuance as of December 31, 2004.



54



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



Stock Option Activity



A summary of stock option activity under all the Companys stock option plans for the years ended December 31, 2004,
2003 and 2002 follows:



|                                 |  |           |   |      |                               |       |         |           |   |                               |   |         |  |           |                               |  |   |      
|-------------------------------- |  | --------- | - | ---- | ----------------------------- | ----- | ------- | --------- | - | ----------------------------- | - | ------- |  | --------- | ----------------------------- |  | - | -----
|                                 |  | 2004      |   | 2003 |                               | 2002 
|                                 |  | Options   |   |      | WeightedAverageExercise Price |       | Options |           |   | WeightedAverageExercise Price |   | Options |  |           | WeightedAverageExercise Price
|Outstanding at beginning of year |  | 1,679,277 |   |      | $                             | 7.33  |         | 1,563,943 |   |                               | $ | 7.95    |  | 1,412,880 |                               |  | $ | 7.95 
|Granted                          |  | 164,600   |   |      |                               | 13.35 |         | 570,401   |   |                               |   | 9.33    |  | 206,350   |                               |  |   | 8.15 
|Exercised                        |  | (502,176  | ) |      |                               | 4.24  |         | (69,893   | ) |                               |   | 7.80    |  | (25,907   | )                             |  |   | 6.75 
|Cancelled                        |  | (38,209   | ) |      |                               | 9.35  |         | (385,174  | ) |                               |   | 13.00   |  | (29,380   | )                             |  |   | 10.54
|                                 |  |           |   |      |                               |       |         |           |   |                               |   |         |  |           |                               |  |   |      
|Outstanding at end of year       |  | 1,303,492 |   |      | $                             | 9.22  |         | 1,679,277 |   |                               | $ | 7.33    |  | 1,563,943 |                               |  | $ | 7.95 
|                                 |  |           |   |      |                               |       |         |           |   |                               |   |         |  |           |                               |  |   |      
|Exercisable at end of year       |  | 734,506   |   |      | $                             | 8.50  |         | 909,285   |   |                               | $ | 6.14    |  | 1,052,684 |                               |  | $ | 8.10 
|                                 |  |           |   |      |                               |       |         |           |   |                               |   |         |  |           |                               |  |   |      



The following table
summarizes information about stock options outstanding at December 31, 2004:



|                        |  |                     |  |                                                     |  |                                |       |                   |         |                                |   |      
|----------------------- |  | ------------------- |  | --------------------------------------------------- |  | ------------------------------ | ----- | ----------------- | ------- | ------------------------------ | - | -----
|                        |  | Options Outstanding |  | Options Exercisable                                
|Range ofExercise Prices |  | NumberOutstanding   |  | Weighted AverageRemainingContractual Life(in years) |  | Weighted AverageExercise Price |       | NumberExercisable |         | Weighted AverageExercise Price
|$  0.33 - $ 7.125       |  | 225,255             |  | 5.1                                                 |  | $                              | 6.16  |                   | 217,505 |                                | $ | 6.14 
|$  7.25 - $ 8.971       |  | 298,096             |  | 6.3                                                 |  |                                | 7.92  |                   | 186,124 |                                |   | 7.82 
|$  8.98 - $ 8.98        |  | 289,351             |  | 8.5                                                 |  |                                | 8.98  |                   | 128,299 |                                |   | 8.98 
|$  9.00 - $ 10.00       |  | 252,650             |  | 7.8                                                 |  |                                | 9.80  |                   | 120,938 |                                |   | 9.83 
|$12.50 - $ 14.17        |  | 238,140             |  | 6.9                                                 |  |                                | 13.43 |                   | 81,640  |                                |   | 13.58
|                        |  |                     |  |                                                     |  |                                |       |                   |         |                                |   |      
|                        |  | 1,303,492           |  | 7.0                                                 |  | $                              | 9.22  |                   | 734,506 |                                | $ | 8.50 
|                        |  |                     |  |                                                     |  |                                |       |                   |         |                                |   |      



Accounting for
Stock Compensation Plans



The Company accounts for stock
compensation plans in accordance with APB Opinion No. 25. Accordingly, no compensation expense has been recognized in the consolidated financial statements for stock compensation plans. Pro forma information regarding net earnings and earnings per
share is required by SFAS No. 123, as amended by SFAS No. 148, and has been determined as if the Company had accounted for its stock compensation plans under the fair value method. See Note 2 for pro forma information on the Companys stock
compensation plans. The fair value for these options and purchase rights granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the years ended December 31:



|                                                                               |  |              |  |       |  |              |  |       |  |              |  |      
|------------------------------------------------------------------------------ |  | ------------ |  | ----- |  | ------------ |  | ----- |  | ------------ |  | -----
|                                                                               |  | 2004         |  | 2003  |  | 2002        
|                                                                               |  | StockOptions |  | ESPP  |  | StockOptions |  | ESPP  |  | StockOptions |  | ESPP 
|Risk-free interest rate                                                        |  | 2.6%         |  | 1.6%  |  | 1.6%         |  | 1.0%  |  | 4.0%         |  | 1.5% 
|Expected dividend yield                                                        |  | 0.0%         |  | 0.0%  |  | 0.0%         |  | 0.0%  |  | 0.0%         |  | 0.0% 
|Expected volatility                                                            |  | 61%          |  | 43%   |  | 63%          |  | 31%   |  | 72%          |  | 70%  
|Expected life (years)                                                          |  | 4.0          |  | 0.5   |  | 3.0          |  | 0.5   |  | 4.0          |  | 0.5  
|Weighted average fair value of options/purchase rights granted during the year |  | $6.45        |  | $3.34 |  | $3.97        |  | $1.91 |  | $4.61        |  | $2.26



55



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



In January 2003, the Company instituted a one-time stock option exchange program. This allowed
employees to tender certain stock options for replacement options that were to be issued at least six months later at the then current market value at an exchange ratio of 0.9 replacement options for each option tendered. The total number of options
tendered in January 2003 was 276,000 with an average exercise price of $14.05 by 21 employees, and in July 2003 248,000 options with an exercise price of $8.98 were reissued. Under APB 25, the Company did not record compensation expense as a result
of the transaction; however, the effect of this exchange is presented in the pro forma disclosure in accordance with SFAS 123.



(13) Employee Retirement Benefit Plans



The Company has a Savings and Retirement Plan (401(k) Plan), adopted October 1, 1996, which is the Companys principal defined contribution
retirement plan. The plan provides for a match of up to 50% of the first 6% of an employees eligible compensation. Total plan expense for the years ended December 31, 2004, 2003 and 2002 was $995,000, $809,000 and $667,000, respectively.



(14) Earnings Per Share



The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for the years ended December 31 (in thousands, except per share amounts):



|                                              |  |      |       |      |   |       |  |   |      
|--------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                              |  | 2004 |       | 2003 |   | 2002 
|Basic Earnings Per Share:                     |  |      |       |      |   |       |  |   |      
|Net earnings available to common stockholders |  | $    | 8,519 |      | $ | 6,181 |  | $ | 4,707
|                                              |  |      |       |      |   |       |  |   |      
|Weighted average common shares outstanding    |  |      | 7,581 |      |   | 7,319 |  |   | 7,222
|                                              |  |      |       |      |   |       |  |   |      
|Net earnings per share                        |  | $    | 1.12  |      | $ | 0.84  |  | $ | 0.65 
|                                              |  |      |       |      |   |       |  |   |      
|Diluted Earnings Per Share:                   |  |      |       |      |   |       |  |   |      
|Net earnings available to common stockholders |  | $    | 8,519 |      | $ | 6,181 |  | $ | 4,707
|                                              |  |      |       |      |   |       |  |   |      
|Weighted average common shares outstanding    |  |      | 7,581 |      |   | 7,319 |  |   | 7,222
|Add: Dilutive effect of options(1)            |  |      | 487   |      |   | 253   |  |   | 229  
|                                              |  |      |       |      |   |       |  |   |      
|Weighted average common shares as adjusted    |  |      | 8,068 |      |   | 7,572 |  |   | 7,451
|                                              |  |      |       |      |   |       |  |   |      
|Net earnings per share                        |  | $    | 1.06  |      | $ | 0.82  |  | $ | 0.63 
|                                              |  |      |       |      |   |       |  |   |      

---

|(1) | In 2004 no options were excluded from the computation of diluted earnings per share due to their antidilutive effect. In 2003 and 2002, 154,737 and 435,680 options were excluded,
respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



56



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##### Table of Contents

AMERICAN DENTAL PARTNERS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the Years Ended December 31, 2004, 2003 and 2002



(15) Selected Quarterly Operating Results (unaudited)



The following table sets forth summary quarterly results of operations for
the Company for the years ended December 31, 2004 and 2003 (in thousands, except per share amounts):



|                                            |  |              |        |               |   |              |  |               |        |  |   |       
|------------------------------------------- |  | ------------ | ------ | ------------- | - | ------------ |  | ------------- | ------ |  | - | ------
|                                            |  | FirstQuarter |        | SecondQuarter |   | ThirdQuarter |  | FourthQuarter
|2004                                        |  |              |        |               |   |              |  |               |        |  |   |       
|Net revenue                                 |  | $            | 44,064 |               | $ | 45,044       |  | $             | 44,640 |  | $ | 44,806
|Operating expenses                          |  |              | 40,201 |               |   | 40,814       |  |               | 40,960 |  |   | 40,877
|Earnings from operations                    |  |              | 3,863  |               |   | 4,230        |  |               | 3,680  |  |   | 3,929 
|Earnings before income taxes                |  |              | 3,398  |               |   | 3,838        |  |               | 3,294  |  |   | 3,580 
|Income taxes                                |  |              | 1,334  |               |   | 1,519        |  |               | 1,301  |  |   | 1,437 
|Net earnings                                |  | $            | 2,064  |               | $ | 2,319        |  | $             | 1,993  |  | $ | 2,143 
|Net earnings per share(1):                  |  |              |        |               |   |              |  |               |        |  |   |       
|Basic                                       |  | $            | 0.28   |               | $ | 0.31         |  | $             | 0.26   |  | $ | 0.28  
|Diluted                                     |  | $            | 0.26   |               | $ | 0.29         |  | $             | 0.25   |  | $ | 0.26  
|Weighted average common shares outstanding: |  |              |        |               |   |              |  |               |        |  |   |       
|Basic                                       |  |              | 7,391  |               |   | 7,537        |  |               | 7,635  |  |   | 7,760 
|Diluted                                     |  |              | 7,858  |               |   | 8,057        |  |               | 8,130  |  |   | 8,207 
|                                            |  |              |        |              
|2003                                        |  |              |        |               |   |              |  |               |        |  |   |       
|Net revenue                                 |  | $            | 39,032 |               | $ | 41,012       |  | $             | 41,659 |  | $ | 42,004
|Operating expenses                          |  |              | 36,505 |               |   | 37,700       |  |               | 38,356 |  |   | 38,158
|Earnings from operations                    |  |              | 2,527  |               |   | 3,312        |  |               | 3,303  |  |   | 3,846 
|Earnings before income taxes                |  |              | 1,894  |               |   | 2,684        |  |               | 2,675  |  |   | 3,143 
|Income taxes                                |  |              | 723    |               |   | 1,020        |  |               | 1,139  |  |   | 1,333 
|Net earnings                                |  | $            | 1,171  |               | $ | 1,664        |  | $             | 1,536  |  | $ | 1,810 
|Net earnings per share(1):                  |  |              |        |               |   |              |  |               |        |  |   |       
|Basic                                       |  | $            | 0.16   |               | $ | 0.23         |  | $             | 0.21   |  | $ | 0.25  
|Diluted                                     |  | $            | 0.16   |               | $ | 0.22         |  | $             | 0.20   |  | $ | 0.24  
|Weighted average common shares outstanding: |  |              |        |               |   |              |  |               |        |  |   |       
|Basic                                       |  |              | 7,266  |               |   | 7,312        |  |               | 7,345  |  |   | 7,352 
|Diluted                                     |  |              | 7,518  |               |   | 7,557        |  |               | 7,586  |  |   | 7,660 

---

|(1) | The sum of the quarterly earnings per share may not equal the full-year earnings per share as the computations of the weighted average shares outstanding for each quarter and the
full year are made independently.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(16) Subsequent Events



Affiliation



On February 1, 2005, the Company affiliated with Premier Dental Partners, a
group dental practice in St. Louis, Missouri. The Company acquired certain non-clinical assets and entered into a service agreement with the professional corporation. This affiliation resulted in the addition of five dental facilities. The
aggregate purchase price paid in connection with this transaction consisted of $3,736,000 in cash and $350,000 of deferred payments.



Credit Facility



On February 22, 2005, the Company amended its credit facility. The amended credit facility matures in February 2008 with the maximum principal under the
same terms as the original credit facility. Major changes from the original credit facility are a decrease in the margin based upon our debt coverage ratio ranging from 0.00% to 1.00% for prime borrowings and 1.00% to 2.00% for LIBOR borrowings and
a decrease in our commitment fee range to 0.25% to 0.50%. The Company is evaluating the applicability of EITF 98-14, Debtors Accounting for Changes in Line-of-Credit or Revolving Debt Arrangements, and EITF 96-19,
Debtors Accounting for a Modification or Exchange of Debt Instruments, as it relates to $400,000 of capitalized financing costs.



57



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##### Table of Contents

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



Not applicable.



ITEM 9A. CONTROLS AND PROCEDURES



Disclosure Controls and Procedures



An
evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2004. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures timely alert them to material information relating to the Company required to be included in this report and were effective as of December 31, 2004.



Managements Report on Internal Control over Financial Reporting and Report of Independent Registered Public
Accounting Firm



The information required to be furnished
pursuant to this item is set forth under the captions Managements Report on Internal Control over Financial Reporting and Report of Independent Registered Public Accounting Firm included at Item 8. Financial Statements
and Supplementary Data.



Changes in Internal Control over
Financial Reporting



As required by Rule 13a-15(d) under
the Exchange Act, the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the Companys internal control over financial reporting to determine whether any changes occurred
during the fourth fiscal quarter covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change
during the fourth fiscal quarter covered by this annual report.



ITEM 9B. OTHER INFORMATION



None.



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##### Table of Contents

PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Information relating to the executive officers of the Company is included under the caption Executive Officers of the Registrant in Part I of this Report.



The information set forth under the captions Elections of
Directors, Section 16(a) Beneficial Ownership Reporting Compliance and Corporate Governance in the Companys Proxy Statement to be filed with the Commission in connection with the 2005 Annual Meeting of
Stockholders (the Proxy Statement) are incorporated herein by reference.



ITEM 11. EXECUTIVE COMPENSATION



The information set forth under the caption Executive Compensation in the Companys Proxy Statement is incorporated herein by reference.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



A summary of our stockholder approved and non-approved equity plans as of December 31, 2004 (in thousands, except per share amounts):



|                                                                             |  |                                                                                         |  |                                                                |      |                                                                                                                                       |    
|---------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | -------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------- | ---
|                                                                             |  | (a)                                                                                     |  | (b)                                                            |      | (c)                                                                                                                                  
|                                                                             |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstanding optionsand rights |      | Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected incolumn
(a))
|Equity compensation plans approved by security shareholders (excluding ESPP) |  | 1,303                                                                                   |  | $                                                              | 9.22 |                                                                                                                                       | 356
|Equity compensation plans not approved by security holders                   |  |                                                                                        |  |                                                                |     |                                                                                                                                       | 25 
|                                                                             |  |                                                                                         |  |                                                                |      |                                                                                                                                       |    
|Total (excluding ESPP)                                                       |  | 1,303                                                                                   |  | $                                                              | 9.22 |                                                                                                                                       | 381
|Equity compensation plans approved by security shareholders (ESPP only)      |  | N/A                                                                                     |  |                                                                | N/A  |                                                                                                                                       | 109
|Equity compensation plans not approved by security holders (ESPP only)       |  | N/A                                                                                     |  |                                                                | N/A  |                                                                                                                                       |   
|                                                                             |  |                                                                                         |  |                                                                |      |                                                                                                                                       |    
|Total (ESPP only)                                                            |  | N/A                                                                                     |  |                                                                | N/A  |                                                                                                                                       | 109
|                                                                             |  |                                                                                         |  |                                                                |      |                                                                                                                                       |    
|Total all plans                                                              |  | 1,303                                                                                   |  | $                                                              | 9.22 |                                                                                                                                       | 490
|                                                                             |  |                                                                                         |  |                                                                |      |                                                                                                                                       |    



The information set
forth under the caption Principal Stockholders in the Proxy Statement is incorporated herein by reference.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information set forth under the caption Certain Relationships and Related Transactions and the information set forth under the caption Compensation Committee Interlocks in the
Companys Proxy Statement are incorporated herein by reference.



ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES



Information set forth under the caption Independent Public Accountants in the Companys Proxy Statement is incorporated herein by reference.



59



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##### Table of Contents

PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



The following documents are filed as part of this report:



(a)(1) Consolidated Financial Statements(See Item 8)



(a)(2) Financial Statement Schedules



All schedules are omitted as the required information is not applicable or is included in the consolidated
financial statements or related notes.



(a)(3) Exhibits



The exhibits which are filed with this
Form 10-K or which are incorporated herein by reference are set forth in the Exhibit Index which appears in this report beginning at page 60.



60



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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, in the Town of Wakefield, Commonwealth of Massachusetts, on the 11thday of March, 2005.



AMERICAN DENTAL PARTNERS, INC.By:

/S/    GREGORY A. SERRAOGregory A. SerraoChairman, President and Chief Executive Officer




Pursuant to
the requirement of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                                |  |                                                                                                |  |               
|----------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------------
|Signature                                       |  | Capacity In Which Signed                                                                       |  | Date          
|                                                |  |                                                                                               
|/S/    GREGORY A.
SERRAOGregory A.
Serrao       |  | Chairman, President and Chief Executive Officer and Director (principal executive officer)     |  | March 11, 2005
|                                                |  |                                                                                               
|/S/    BREHT T. FEIGHBreht T. Feigh             |  | Executive Vice President  Chief Financial Officer and Treasurer (principal financial officer) |  | March 11, 2005
|                                                |  |                                                                                               
|/S/    MARK W. VARGOMark W. Vargo               |  | Vice President  Chief Accounting Officer (principal accounting officer)                       |  | March 11, 2005
|                                                |  |                                                                                               
|/S/    DR. ROBERT E.
HUNTERDr. Robert E.
Hunter |  | Director                                                                                       |  | March 11, 2005
|                                                |  |                                                                                               
|/S/    JAMES T. KELLYJames T. Kelly             |  | Director                                                                                       |  | March 11, 2005
|                                                |  |                                                                                               
|/S/    MARTIN J.
MANNIONMartin J.
Mannion       |  | Director                                                                                       |  | March 11, 2005
|                                                |  |                                                                                               
|/S/    GERARD M.
MOUFFLETGerard M.
Moufflet     |  | Director                                                                                       |  | March 11, 2005
|                                                |  |                                                                                               
|/S/    DERRILL W.
REEVESDerril W.
Reeves        |  | Director                                                                                       |  | March 11, 2005



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EXHIBIT INDEX



|               |  |                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Description                                                                                                                                                    
|3(a)           |  | Second Amended and Restated Certificate of Incorporation of American Dental Partners, Inc. (1)                                                                         
|               | 
|3(b)           |  | Amended and Restated By-laws of American Dental Partners, Inc. (2)                                                                                                     
|               | 
|4(a)           |  | Form of Stock Certificate (1)                                                                                                                                          
|               | 
|4(b)           |  | Form of Subordinated Promissory Note and Form of Subordination Agreement (3)                                                                                           
|               | 
|10(b)          |  | American Dental Partners, Inc. Amended and Restated 1996 Stock Option Plan, as amended by Amendments No. 1, No. 2, No. 3 and No. 4 (4)                                 
|               | 
|10(d)          |  | Amendment No. 5 to American Dental Partners, Inc. Amended and Restated 1996 Stock Option Plan (5)                                                                      
|               | 
|10(e)          |  | Amendment No. 6 to American Dental Partners, Inc. Amended and Restated 1996 Stock Option Plan (6)                                                                      
|               | 
|10(f)          |  | American Dental Partners, Inc. 1996 Time Accelerated Stock Option Plan, as amended by Amendment No. 1 (2)                                                              
|               | 
|10(g)          |  | American Dental Partners, Inc. Amended and Restated 1996 Affiliate Stock Option Plan, as amended by Amendments No.1, No. 2 and No. 3 (4)                               
|               | 
|10(h)          |  | American Dental Partners, Inc. Amended and Restated 1996 Directors Stock Option Plan, as amended by Amendments No. 1, No. 2, No. 3 and No. 4 (4)                       
|               | 
|10(i)          |  | Amendment No. 5 to Amended and Restated 1996 Directors Stock Option Plan (6)                                                                                           
|               | 
|10(j)          |  | American Dental Partners, Inc. 1999 Restricted Stock Plan (7)                                                                                                          
|               | 
|10(k)          |  | Amendment No. 1 to American Dental Partners, Inc. Amended and Restated 1999 Restricted Stock Plan (5)                                                                  
|               | 
|10(l)          |  | Amended and Restated Employment and Non-Competition Agreement dated January 2, 2001, between American Dental Partners, Inc. and Gregory A. Serrao (8)                  
|               | 
|10(m)          |  | Amended and Restated Employment and Noncompetition Agreement dated May 15, 2001 between PDHC, Ltd. and Gregory T. Swenson, D.D.S. (9)                                  
|               | 
|10(n)          |  | Registration Rights Agreement dated November 11, 1996, among American Dental Partners, Inc. and certain of its stockholders (the former stockholders of PDHC, Ltd.) (2)
|               | 
|10(q)          |  | Registration Rights Agreement dated October 1, 1997, among American Dental Partners, Inc. and Karl H. Biewald, D.D.S. and Terri M. Lawler (2)                          
|               | 
|10(s)          |  | Employment agreement dated August 1, 2002 between American Dental Partners, Inc. and Frank DAllaird, D.D.S. (10)                                                      
|               | 
|10(t)          |  | Amendment No. 6 to American Dental Partners, Inc. Amended and Restated 1996 Stock Option Plan (11)                                                                     
|               | 
|10(u)          |  | Amendment No. 4 to American Dental Partners, Inc. Amended and Restated 1996 Affiliate Stock Option Plan (11)                                                           
|               | 
|10(v)          |  | Amendment No. 2 to American Dental Partners, Inc. 1996 Time Accelerated Stock Option Plan (11)                                                                         
|               | 
|10(w)          |  | Amended Exhibit A-1 to Amended and Restated Service Agreement dated January 1, 2003, between PDHC, Ltd. and PDG, P.A. (12)                                             



62



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##### Table of Contents

|               |  |                                                                                                                                                                             
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Description                                                                                                                                                         
|10(x)          |  | Credit Agreement dated October 16, 2003 among American Dental Partners, Inc., the Lenders Party Hereto and KeyBank National Association as Agent (13)                       
|               | 
|10(y)          |  | Amended Exhibit A-1 to Amended and Restated Service Agreement dated January 1, 2004, between PDHC, Ltd. and PDG, P.A. (14)                                                  
|               | 
|10(z)          |  | Amendment No. 7 to American Dental Partners, Inc. Amended and Restated 1996 Directors Stock Option Plan (14)                                                                
|               | 
|10(aa)         |  | Amendment No. 7 to American Dental Partners, Inc. Amended and Restated 1996 Stock Option Plan (15)                                                                          
|               | 
|10(bb)         |  | Amendment No. 4 to American Dental Partners, Inc. 1997 Employee Stock Purchase Plan (15)                                                                                    
|               | 
|10(cc)         |  | Amendment No. 2 to American Dental Partners, Inc. 1999 Restricted Stock Plan (15)                                                                                           
|               | 
|10(dd)         |  | Amended and Restated Credit Agreement dated February 22, 2005 among American Dental Partners, Inc., the Lenders Named Herein and KeyBank National Association as Agent (16) 
|               | 
|10(ee)         |  | Amended and Restated Subsidiary Guaranty dated February 22, 2005 between The Subsidiaries of American Dental Partners, Inc. and KeyBank National Association (16)           
|               | 
|10(ff)         |  | Amended and Restated Pledge and Security Agreement dated February 22, 2005 between American Dental Partners, Inc. and its subsidiaries and KeyBank National Association (16)
|               | 
|10(gg)         |  | Amended and Restated Service Agreement dated January 1, 1999 between Smileage Dental Care, Inc. and Wisconsin Dental Group, S.C. filed herewith.                            
|               | 
|10(hh)         |  | Amendment No. 1 to Amended and Restated Service Agreement dated October 1, 2000 between Wisconsin Dental Group, S.C. and Northpark Dental Group, Inc., filed herewith.      
|               | 
|10(ii)         |  | Amendment No. 2 to Amended and Restated Service Agreement dated January 1, 2001 between Wisconsin Dental Group, S.C. and Northpark Dental Group, Inc., filed herewith.      
|               | 
|10(jj)         |  | Amendment No. 3 to Amended and Restated Service Agreement dated July 1, 2003 between Wisconsin Dental Group, S.C. and Northpark Dental Group, Inc., filed herewith.         
|               | 
|10(kk)         |  | Amended Exhibit A-1 to Amended and Restated Service Agreement dated January 1, 2004 between Wisconsin Dental Group, S.C. and Northpark Dental Group, Inc., filed herewith.  
|               | 
|14.1           |  | American Dental Partners, Inc. Code of Business Conduct and Ethics (17)                                                                                                     
|               | 
|21             |  | Subsidiaries of American Dental Partners, Inc., filed herewith.                                                                                                             
|               | 
|23             |  | Consent of PricewaterhouseCoopers LLP, filed herewith.                                                                                                                      
|               | 
|23.1           |  | Consent of KPMG LLP, filed herewith.                                                                                                                                        
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                         
|               | 
|31.2           |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                         
|               | 
|32.1           |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                         
|               | 
|32.2           |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                         

---

|(1) | Incorporated by reference to Amendment No. 1 to the Companys Registration Statement on Form S-1 (Registration No. 333-39981) filed on December 31, 1997.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(2) | Incorporated by reference to the Companys Registration Statement on Form S-1 (Registration No. 333-39981) filed on November 12, 1997.
|--- | --------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the Companys Registration Statement on Form S-4 (Registration No. 333-56941) filed on June 16, 1998.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to the Companys Form 10-K filed on March 16, 2000.
|--- | -----------------------------------------------------------------------------

|(5) | Incorporated by reference to the Companys Form 10-Q filed on November 13, 2001.
|--- | --------------------------------------------------------------------------------

|(6) | Incorporated by reference to the Companys Form 10-Q filed on August 12, 2002.
|--- | ------------------------------------------------------------------------------

|(7) | Incorporated by reference to the Companys Form 10-Q filed on November 10, 1999.
|--- | --------------------------------------------------------------------------------

|(8) | Incorporated by reference to the Companys Form 10-K filed on March 23, 2001.
|--- | -----------------------------------------------------------------------------

|(9) | Incorporated by reference to the Companys Form 10-Q filed on August 13, 2001.
|--- | ------------------------------------------------------------------------------

|(10) | Incorporated by reference to the Companys Form 10-K filed on March 20, 2003.
|---- | -----------------------------------------------------------------------------

|(11) | Incorporated by reference to the Companys Form 10-Q filed on May 15, 2003.
|---- | ---------------------------------------------------------------------------

|(12) | Incorporated by reference to the Companys Form 10-Q filed on August 8, 2003.
|---- | -----------------------------------------------------------------------------

|(13) | Incorporated by reference to the Companys Form 10-Q filed on November 5, 2003.
|---- | -------------------------------------------------------------------------------

|(14) | Incorporated by reference to the Companys Form 10-Q filed on May 13, 2004.
|---- | ---------------------------------------------------------------------------

|(15) | Incorporated by reference to the Companys Form 10-Q filed on August 11, 2004.
|---- | ------------------------------------------------------------------------------

|(16) | Incorporated by reference to the Companys Form 8-K filed on February 28, 2005.
|---- | -------------------------------------------------------------------------------

|(17) | Incorporated by reference to the Companys Form 10-K filed on March 17, 2004.
|---- | -----------------------------------------------------------------------------



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