Overview

American Dental Partners is a leading provider of dental facilities, support staff and business services to multidisciplinary dental group practices in selected markets throughout the United States. We are committed to the success of the affiliated practices, and we make substantial investments to support each affiliated practice's growth. We provide or assist with organizational planning and development; recruiting, retention and training programs; quality assurance initiatives; facilities development and management; employee benefits administration; procurement; information systems and practice technology; marketing and payor relations; and financial planning, reporting and analysis. At December 31, 2008 we were affiliated with 25 dental group practices, comprising 545 full-time equivalent dentists practicing in 241 dental facilities in 18 states.

Our net revenue depends primarily on revenue generated by the affiliated practices. We estimate approximately 85% of the patients of our affiliated practices have dental insurance, and demand for dental care is heavily influenced by dental insurance. In general, dental insurance covers 100% of preventative care, only 80% of basic restorative procedures and 50% of more extensive restorative procedures. In addition, dental insurance often caps benefits at an annual maximum of $1,000 to $1,500. As a result, patients, with or without dental insurance, are financially responsible for a considerable portion of their dental expenditures. With the deteriorating economic conditions initially emanating from consumer indebtedness, consumer spending patterns have changed. Our affiliated practices have observed patients either delaying care or, for those patients with dental insurance, opting for dental procedures that are largely covered by insurance. As are result, revenue growth rates of the affiliated practices have decreased and revenue mix has shifted towards lower cost and lower profitability dental procedures. The effect to us is lower net revenue and lower profit margins. We believe economic conditions will adversely impact us during 2009, although we are unable to predict the likely duration or severity of the current adverse economic conditions or the severity of the effect of those conditions on our business and results of operations.

Acquisition and Affiliation Summary

When affiliating with a dental practice, we customarily acquire selected assets and enter into a long-term service agreement with the affiliated practice. 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 affiliated practice is responsible for the provision of dental care. Each of our service agreements is for an initial term of 40 years.

During 2008, 2007 and 2006, we completed eight, 14 and 13 acquisition and affiliation transactions, respectively. In four of these transactions, we acquired non-clinical assets and entered into long-term service agreements with the affiliated practices. In one of these transactions, we developed de novo dental facilities rather than acquiring non-clinical assets, and we entered into a long-term service agreement with the affiliated practice. In 27 of these transactions, we acquired non-clinical assets, and the practices were combined with one of our existing affiliated practices and became subject to an existing service agreement. In one of these transactions, we acquired the assets of the practice, Arizona's Tooth Doctor for Kids ("Tooth Doctor'), and as permitted by applicable state law, Tooth Doctor employs the dentists thus not necessitating a service agreement between us and the affiliated practice. Finally, in one of these transactions, we acquired 100% of the outstanding capital stock of Metro Dentalcare which owned non-clinical assets, and entered into a long term service agreement with an affiliated practice, Metro Dentalcare, P.L.C. These acquisition and affiliation transactions resulted in the addition of seven affiliated practices, 79 dental facilities and 567 operatories. The 2008, 2007 and 2006 acquisition and affiliation transactions, at the time of the transactions, generated $5 million, $109 million and $38 million of patient revenue on an annualized basis, respectively.

We are constantly evaluating potential acquisition and affiliation transactions with dental practices and acquisitions of other dental-related companies that would expand our business capabilities. We entered into

agreements to amend our revolving credit agreement and our term loan effective October 24, 2008 which limit amounts which can be borrowed to fund affiliations and acquisitions, and as a result the number of new affiliations and acquisitions over the next twelve months will be at levels lower than we achieved in recent years.

Litigation Settlement Agreements

In December 2007, we entered into a settlement agreement in which the service agreement with PDG, P.A. was terminated effective December 31, 2007, and we transferred the operating assets of 25 of the 31 Park Dental facilities and the "Park Dental" trade name to PDG. We retained the remaining six dental facilities which were combined with Metro Dentalcare. We also entered into a transition services agreement with PDG to provide services for a period of nine months through September 30, 2008 for $19,000,000. We completed the transition services, received the related $19 million payment and are completing the final steps in the separation of the companies. As a result of these agreements, our results of operations are not comparable and may not reflect the results of operations to be expected in future periods.

Revenue Overview

Net Revenue

Our net revenue includes management fees earned by us pursuant to the terms of the service agreements with the affiliated practices, as well as reimbursement of clinic expenses paid by us on their behalf, and other revenue which includes patient revenue of Tooth Doctor, fees earned by our dental benefits third party administrator ("TPA"), fees earned by our dental laboratory and other miscellaneous revenue. In 2008, other revenue also includes fees earned under the transition services agreement with PDG.

The following table provides the components of our net revenue for 2008, 2007 and 2006 (in thousands):

                                                   2008        2007        2006
       Reimbursement of expenses                 $ 189,500   $ 187,260   $ 159,932
       Business service fees                        55,971      64,088      51,945

       Revenue earned under service agreements     245,471     251,348     211,877
       Other revenue (1)                            45,637      27,407       6,040

       Net revenue                               $ 291,108   $ 278,755   $ 217,917

(1) 2008 includes $17,697 earned from the transition services agreement with PDG (See "Litigation Settlement Agreements").

Revenues earned from business service fees and reimbursed expenses under the terms of our affiliated dental practice service agreements represented 84%, 90% and 97% of net revenues for the years ended December 31, 2008, 2007 and 2006, respectively. Due to growth in other revenue the declining percentage in 2007 is primarily due to the Tooth Doctor which was acquired in 2006, and the decline in 2008 was due to revenue earned under our transition services agreement with PDG. Both the affiliated dental practices and Company-owned businesses can be affected by changes in the US economy that may influence discretionary spending for dental services not covered by dental benefit plans. The Tooth Doctor business is directly affected by patient services reimbursed by state Medicaid programs.

Fees earned under service agreements include reimbursement of expenses incurred by us on behalf of the affiliated practices in connection with the operation and administration of dental facilities and business service fees charged to the affiliated practices pursuant to the terms of the service agreements for management services provided and capital committed by us. Under certain service agreements, representing 80% of our 2008 business service fees, our business service fee consists of a monthly fee which is based upon a specified percentage of the amount by which the affiliated practice's patient revenue exceeds expenses. Under certain service agreements,

representing 19% of our 2008 business service fees, our business service fee consists entirely of a fixed monthly fee determined by agreement of us and the affiliated practice in a formal planning process. Under certain other service agreements, representing less than 1% of our 2008 business service fees, our business service fee consists of either a fixed monthly fee and an additional performance fee based upon a percentage of the amount by which the affiliated practice's patient revenue exceeds expenses as compared to the planned amount for the current year, a specified percentage of patient revenue or a specified percentage of collections on patient revenue. In all instances, the business service fee is negotiated at fair market value for services provided and capital committed by us to the affiliated practices.

The Company's net revenue from the reimbursement of expenses is accounted for on an accrual basis and is recognized when these expenses are incurred and billed to the affiliated practices. Reimbursement of expenses includes costs incurred by us for the operation and administration of the dental facilities that 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.

Other revenue includes patient revenue from the Tooth Doctor, professional services, dental laboratory fees and other miscellaneous revenue.

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

Patient Revenue of the Affiliated Practices

We believe it is important to understand patient revenue of the affiliated practices. This includes the practices that we do not control, nor own any equity interests in, and are affiliated with us by means of service agreements. We do not consolidate the financial statements of these affiliated practices with ours, and accordingly their patient revenue is not a measure of our financial performance under generally accepted accounting principles because it is not our revenue. It is however, a financial measure we use, along with the patient revenue of Tooth Doctor, to monitor operating performance and to help identify and analyze trends of the affiliated practices which may impact our business. Most of the operating expenses incurred by us, pursuant to service agreements, are on behalf of the affiliated practices in the operation of dental facilities. These expenses are significantly affected by the patient revenue of the affiliated practices.

The affiliated practices generate revenue from providing care to patients and receive payment from patients and dental benefit providers, or payors, under fee-for-service, PPO plans and managed care capitation plans. Patient revenue reflects the amounts billed by an affiliated practice at its established rates reduced by any contractual adjustments and allowances for uncollectible accounts. Contractual adjustments represent discounts off established rates negotiated pursuant to certain dental benefit plan provider contracts with the affiliated practices. While payor mix varies from market to market, the following table provides the aggregate payor mix of all affiliated practices, including Tooth Doctor, for the years ended December 31:

                                            2008         2007         2006
          Fee-for-service                       19 %         28 %         31 %
          PPO and dental referral plans         70 %         60 %         52 %
          Capitated managed care plans          11 %         12 %         17 %

For the affiliated practices that we do not own and are affiliated with us by means of a service agreement, after collection of fees from patients and third-party insurers for the provision of dental care and payment to us of our service fee and reimbursement of clinic expenses incurred by us on their behalf, the amounts remaining are used by these affiliated practices for compensation of dentists and, in certain states, hygienists and/or dental assistants who are employed by these affiliated practices.

The following table sets forth for the years ended December 31, 2008, 2007 and 2006, the patient revenue of all the affiliated practices, patient revenue earned by Tooth Doctor, the amounts due to us under service agreements, and amounts retained by the affiliated practices we do not own for compensation of dentists and, where applicable, other clinical staff (in thousands):

                                 Twelve Months Ended                        Twelve Months Ended
                                    December 31,              %                December 31,               %
                                 2008           2007        Change          2007           2006        Change
Patient revenue of
affiliated practices:
Platform dental group
practices affiliated with
us in both periods of
comparison                    $   322,318     $ 305,249        5.6 %     $   363,508     $ 331,434         9.7 %
Platform dental group
practices that affiliated
with us during periods of
comparison                         93,640       113,222      -17.3 %          54,963         5,967       821.1 %

Total patient revenue             415,958       418,471       -0.6 %         418,471       337,401        24.0 %
Patient revenue of Tooth
Doctor                             24,438        22,426        8.9 %          22,426         1,539     1,357.2 %

Patient revenue of
platform dental group
practices affiliated with
us by means of service
agreements                        391,520       396,045       -1.1 %         396,045       335,862        17.9 %
Amounts due to us under
service agreements                245,471       251,241       -2.3 %         251,241       211,877        18.6 %

Amounts retained by
platform dental group
practices affiliated with
us by means of service
agreements                    $   146,049     $ 144,804        0.9 %     $   144,804     $ 123,985        16.8 %

Same market patient revenue growth was 5.6% for the year ended December 31, 2008 and was comprised of an 8.4% increase in provider hours, 1.5% reduction in provider productivity and the remainder to reduced reimbursement rates received from dental benefit insurers. Same market patient revenue growth for 2008 excludes platform affiliations that occurred after January 1, 2007. Same market patient revenue growth was 9.7% for the year ended December 31, 2007 and was comprised of a 7.0% increase in provider hours, 1.8% improvement in provider productivity and the remainder to improved reimbursement rates. Same market patient revenue growth for 2007 excludes platform affiliations that occurred after January 1, 2006.

Amounts retained by affiliated practices we do not own increased as a percentage of patient revenue of affiliated practices we do not own from 36.6% in 2007 to 37.3% in 2008 primarily due to increased provider compensation. Amounts retained by affiliated practices we do not own decreased as a percentage of patient revenue of affiliated practices we do not own from 36.9% in 2006 to 36.6% in 2007 due to the affiliation with Metro where we employ the clinical staff rather than the affiliated practice.

Results of Operations

The following tables set forth our net revenue and results of operations for the years ended December 31, 2008, 2007 and 2006 (dollars in thousands):

                                             2008                           2007
                                                   % of Net                       % of Net
                                    Amount         Revenue         Amount         Revenue        % Change
Net revenue                        $ 291,108          100.0 %     $ 278,755          100.0 %          4.4 %
Salaries and benefits                125,795           43.2 %       119,411           42.8 %          5.3 %
Lab fees and dental supplies          42,836           14.7 %        43,209           15.5 %         -0.9 %
Office occupancy                      33,878           11.6 %        31,457           11.3 %          7.7 %
Other operating expenses              26,017            8.9 %        23,400            8.4 %         11.2 %
General corporate expenses (1)        12,366            4.2 %        14,427            5.2 %        -14.3 %
Depreciation expense                  11,054            3.8 %         9,422            3.4 %         17.3 %
Amortization of intangible
assets                                 9,634            3.3 %         7,049            2.5 %         36.7 %
Litigation expense (1)               (30,662 )        -10.5 %        36,734           13.2 %       -183.5 %

Total operating expenses             230,918           79.3 %       285,109          102.3 %        -19.0 %

Earnings (losses) from
operations                            60,190           20.7 %        (6,354 )         -2.3 %      -1047.3 %
Interest expense, net                 10,193            3.5 %         5,253            2.0 %         94.0 %
Minority interest                        634            0.2 %           390            0.1 %         62.6 %

Earnings (losses) before
income taxes                          49,363           17.0 %       (11,997 )         -4.3 %       -511.5 %
Income taxes                          19,245            6.6 %        (4,281 )         -1.5 %       -549.5 %

Net earnings (losses)              $  30,118           10.3 %     $  (7,716 )         -2.8 %       -490.3 %


                                             2007                           2006
                                                   % of Net                       % of Net
                                    Amount         Revenue         Amount         Revenue        % Change
Net revenue                        $ 278,755          100.0 %     $ 217,917          100.0 %         27.9 %
Salaries and benefits                119,411           42.8 %        91,282           41.9 %         30.8 %
Lab fees and dental supplies          43,209           15.5 %        35,066           16.1 %         23.2 %
Office occupancy                      31,457           11.3 %        26,404           12.1 %         19.1 %
Other operating expenses              23,400            8.4 %        19,084            8.8 %         22.6 %
General corporate expenses (1)        14,427            5.2 %        11,126            5.1 %         29.7 %
Depreciation expense                   9,422            3.4 %         7,845            3.6 %         20.1 %
Amortization of intangible
assets                                 7,049            2.5 %         5,358            2.5 %         31.6 %
Litigation expense (1)                36,734           13.2 %         1,570            0.7 %      2,239.7 %

Total operating expenses             285,109          102.3 %       197,735           90.7 %         44.2 %

Earnings from operations              (6,354 )         -2.3 %        20,182            9.3 %       -131.5 %
Interest expense, net                  5,253            2.0 %         1,848            0.8 %        184.3 %
Minority interest                        390            0.1 %            54            0.0 %        622.2 %

Earnings before income taxes         (11,997 )         -4.3 %        18,280            8.4 %       -165.6 %
Income taxes                          (4,281 )         -1.5 %         7,146            3.3 %       -159.9 %

Net earnings                       $  (7,716 )         -2.8 %     $  11,134            5.1 %       -169.3 %

(1) Professional fees associated with the litigation with PDG, P.A. of $1,103,000 and $3,371,000 for the years ended December 31, 2008 and 2007, respectively, have been reclassified from general corporate expense to litigation expense.

Financial Presentation of Litigation Settlement

On February 29, 2008, under the terms of a settlement agreement entered into on December 26, 2007 among American Dental Partners, Inc., PDHC, one of our Minnesota subsidiaries, PDG, Dental Specialists of Minnesota, P.A. and Northland Dental Partners, P.L.L.C. to settle outstanding litigation among the parties, we transferred the operating assets of 25 of 31 Park Dental facilities and associated trade names to PDG, forgave

outstanding accounts receivable due from PDG and entered into a transition services agreement with PDG to provide interim management services through September 30, 2008. See "Litigation Expense" for a discussion of how we have accounted for the transactions.

In addition to our actual results, we believe it is necessary to provide a pro forma financial presentation to exclude temporary and non-recurring items related to the litigation settlement as we believe that such pro forma presentation is important to understanding future trends of our underlying and ongoing operations. The pro forma information are non-GAAP financial measures.

The following table reconciles the actual results of operations to our pro forma non-GAAP financial measures for the twelve months ended December 30, 2008 (in thousands except per share amounts):

                                                               Pro Forma Adjustments
                                                           Settlement         Management
                                          Actual             Assets            Services       Pro Forma
Net revenue                            $    291,108       $       7,697       $    10,000     $  273,411
Operating expenses
Salaries and benefits                       125,795               4,717             1,453        119,625
Lab fees and dental supplies                 42,836               1,436                 -         41,400
Office occupancy expenses                    33,878               1,092               180         32,606
Other operating expenses                     26,017                 135               323         25,559
General corporate expenses                   12,366                   -                 -         12,366
Litigation expenses                         (30,662 )           (30,662 )               -              -

EBITDA                                       80,878              30,979             8,044         41,855
Depreciation                                 11,054                 317                42         10,695
Amortization                                  9,634                   -                 -          9,634

Earnings from operations                     60,190              30,662             8,002         21,526
Interest expense, net                        10,193                   -                 -         10,193
Minority interest                               634                   -                 -            634

Earnings before income taxes                 49,363              30,662             8,002         10,699
Income taxes                                 19,245                                                4,171

Net earnings                                 30,118                                                6,528
Amortization of service
agreements, net of tax                        5,456                                                5,455

Cash net earnings                      $     35,574                                           $   11,983


Diluted net earnings per common
share                                  $       2.29                                           $     0.50

Diluted cash net earnings per
common share                           $       2.71                                           $     0.91

Pro forma adjustments for settlement assets include the following items:
(i) revenue due us from PDG for the operating expenses of the 25 dental facilities prior to their transfer to PDG on February 29, 2008 and the operating expenses associated with the PDG doctors who practiced temporarily in the six dental facilities retained by us, (ii) a gain on disposal of assets of $30,763,000, pursuant to Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets,"
(iii) insurance proceeds of $1,002,000 received for professional fees that were partially reimbursable pursuant to insurance coverage and (iv) professional fees and other expenses associated with the litigation of $1,103,000.

Pro forma adjustments for management services include revenue earned under the transition services agreement with PDG and estimated expenses to provide such services, and salaries and benefits expense of management staff, including severance, who have been terminated as a result of realigning the Company's Minnesota based management team.

The following table reconciles the actual results of operations to our pro forma non-GAAP financial measures for the twelve months ended December 31, 2007 (in thousands except per share amounts):

                                                               Pro Forma Adjustments
                                                           Settlement         Management
                                          Actual             Assets            Services       Pro Forma
Net revenue                            $    278,755       $      36,246       $    12,498     $  230,011
Operating expenses
Salaries and benefits                       119,411              20,316             1,995         97,100
Lab fees and dental supplies                 43,209               6,883                 -         36,326
Office occupancy expenses                    31,457               4,611               214         26,632
Other operating expenses                     23,400               3,059               288         20,053
General corporate expenses                   14,427                   -                 -         14,427
Litigation expenses                          36,734              36,734                 -              -

EBITDA                                       10,117             (35,357 )          10,001         35,473
Depreciation                                  9,422               1,377                54          7,991
Amortization                                  7,049                   -                 -          7,049

Earnings from operations                     (6,354 )           (36,734 )           9,947         20,433
Interest expense, net                         5,253                   -                 -          5,253
Minority interest                               390                   -                 -            390
. . .