Introduction

The following information should be read in conjunction with the financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

Cautionary Statement Regarding Forward-Looking Statements

Some of the information in this Annual Report on Form 10-Q 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 its ability to refinance its credit facilities on satisfactory terms, overall or regional economic conditions, dependence upon affiliated dental practices, contracts its affiliated practices have with third-party payors, dependence upon service agreements and government regulation of the dental industry, the impact of any terminations or potential terminations of such contracts, and the Company's acquisition and affiliation strategy. Additional risks, uncertainties and other factors are described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview

American Dental Partners is a leading provider of dental facilities, support staff, and business services to multi-disciplinary 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 March 31, 2009, we were affiliated with 26 dental group practices, comprising 542 full-time equivalent dentists practicing in 243 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 a 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 continue to 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.

Affiliation and Acquisition 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 the first quarter 2009, we completed one affiliation which joined an existing affiliated practice, Wisconsin Dental Group, S.C., and became subject to an existing service agreement Cash paid, net of cash acquired, in connection with this transaction amounted to $75,000. In connection with this transaction, we recorded approximately $31,000 in intangibles relating to the service agreements with the affiliated practices, with an amortization period of 25 years.

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. However, our revolving credit agreement and term loan limit amounts which can be borrowed to fund affiliations and acquisitions, and we expect that the number of new affiliations and acquisitions in 2009 will be at levels lower than we achieved in recent years. (see "Liquidity and Capital Resources")

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 $19,000,000 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 Arizona's Tooth Doctor for Kids ("Tooth Doctor"), fees earned by our dental benefits third party administrator ("TPA"), fees earned by our dental laboratory and in 2008 revenue earned under the transition services agreement with PDG.

The following table provides the components of our net revenue for the three months ended March 31, 2009 and 2008 (in thousands):

                                                                Three Months Ended
                                                                    March 31,
                                                                 2009         2008
 Reimbursement of expenses                                    $    47,411   $ 48,162
 Business service fees                                             15,144     14,777

 Revenue earned under service agreements                           62,555     62,939
 Other revenue                                                      6,830      7,116
 Revenue earned under transition service agreement with PDG            -       9,756

 Net revenue                                                  $    69,385   $ 79,811

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. Revenue 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 service fees charged to the affiliated practices pursuant to the terms of the service agreements for management services and capital committed by us. 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 7 of "Notes to Interim 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. 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 three months ended March 31:

                                                Three Months Ended
                                                     March 31,
                                                2009           2008
              Fee-for-service                       17 %           25 %
              PPO and dental referral plans         74 %           65 %
              Capitated managed care plans           9 %           10 %

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 three months ended March 31, 2009 and 2008, 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):

                                                            Three Months Ended
                                                                March 31,               %
                                                            2009          2008        Change
Patient revenue of affiliated practices:
Platform dental group practices affiliated with us
in both periods of comparison                            $  106,271     $ 107,301       -1.0 %
Platform dental group practices that affiliated with
us during periods of comparison                                 486            73      565.8 %

Total patient revenue                                       106,757       107,374       -0.6 %
Patient revenue of Arizona's Tooth Doctor for Kids            6,124         6,122        0.0 %

Patient revenue of platform dental group practices
affiliated with us by means of service agreements           100,633       101,252       -0.6 %
Amounts due to us under service agreements                   62,555        62,795       -0.4 %

Amounts retained by platform dental group practices
affiliated with us by means of service agreements        $   38,078     $  38,457       -1.0 %

Same market patient revenue growth was -1.0% for the three months ended March 31, 2009. Same market patient revenue growth excludes platform affiliations that occurred after January 1, 2008. For the current quarter, same market patient revenue growth was comprised of a 0.4% increase in provider hours and a 0.5% improvement in provider productivity, offset by a 1.9% deterioration related to reimbursement rates received from dental benefit insurers.

Amounts retained by affiliated practices we do not own decreased 1.0% to $38,078,000 for the three months ended March 31, 2009 from $38,457,000 for the three months ended March 31, 2008. As a percentage of their patient revenue, amounts retained by affiliated practices decreased to 37.8% for the three months ended March 31, 2009, compared to 38.0% for the three months ended March 31, 2008 due to reduced provider compensation offset by increased profitability of the affiliated practices and increased salary and benefits of dentists, dental hygienists and/or dental assistants employed by affiliated practices in states where required by law.

Results of Operations

The following table sets forth our net revenue and results of operations for the
three months ended March 31, 2009 and 2008 (in thousands):



                                           Three Months Ended         Three Months Ended
                                             March 31, 2009             March 31, 2008
                                                       % of Net                   % of Net
                                            Amount     Revenue       Amount       Revenue      % Change
Net revenue                               $   69,385      100.0 %   $  79,811        100.0 %      -13.1 %
Salaries and benefits                         29,566       42.6 %      35,501         44.5 %      -16.7 %
Lab fees and dental supplies                  10,293       14.8 %      11,981         15.0 %      -14.1 %
Office occupancy                               8,499       12.2 %       9,013         11.3 %       -5.7 %
Other operating expenses                       6,578        9.5 %       6,772          8.5 %       -2.9 %
General corporate expenses                     3,360        4.8 %       3,630          4.5 %       -7.4 %
Depreciation expense                           2,715        3.9 %       2,774          3.5 %       -2.1 %
Amortization of intangible assets              2,425        3.5 %       2,387          3.0 %        1.6 %
Litigation settlement (gain) expense              -         0.0 %     (30,127 )      -37.7 %     -100.0 %

Total operating expenses                      63,436       91.4 %      41,931         52.5 %       51.3 %

Earnings from operations                       5,949        8.6 %      37,880         47.5 %      -84.3 %
Interest expense                               3,370        4.9 %       2,455          3.1 %       37.3 %
Earnings before income taxes                   2,579        3.7 %      35,425         44.4 %      -92.7 %
Income taxes                                   1,021        1.5 %      13,760         17.2 %      -92.6 %

Consolidated net earnings                      1,558        2.2 %      21,665         27.1 %      -92.8 %
Noncontrolling interest                          137        0.2 %         140          0.2 %       -2.1 %

Net earnings                              $    1,421        2.0 %   $  21,525         27.0 %      -93.4 %

Financial Presentation of Litigation Settlement

On February 29, 2008, under the terms of a settlement agreement effective December 31, 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 tradenames 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.

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 operations. The pro forma information are non-GAAP financial measures.

The following table reconciles the actual results of operations to our pro forma results of operations for the three months ended March 31, 2008 (in thousands):

                                                       Three Months Ended
                                                       March 31, 2008 Pro
                                                       Forma Adjustments
                                 As Reported      Settlement       Management     Pro Forma
                                    2008            Assets          Services        2008
 Net revenue                    $      79,811     $     6,423     $      3,333   $    70,055
 Salaries and benefits                 35,501           3,755              852        30,894
 Lab fees and dental supplies          11,981           1,301               -         10,680
 Office occupancy expenses              9,013             863               60         8,090
 Other operating expenses               6,772             252              108         6,412
 General corporate expenses             3,630              -                -          3,630
 Depreciation                           2,774             252               14         2,508
 Amortization                           2,387              -                -          2,387
 Litigation settlement income         (30,127 )       (30,127 )             -             -

 Total operating expenses              41,931         (23,704 )          1,034        64,601

 Earnings from operations              37,880          30,127            2,299         5,454
 Interest expense, net                  2,455              -                -          2,455

 Earnings before income taxes          35,425          30,127            2,299         2,999
 Income taxes                          13,760                                          1,165

 Consolidated net earnings             21,665                                          1,834
 Noncontrolling interest                  140                                            140

 Net earnings                   $      21,525                                    $     1,694

Pro forma adjustments for settlement assets include the following items:
(i) revenue of $6,423,000 due to 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 temporarily practiced in the six dental facilities we retained, (ii) a non-cash 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" which represents the fair market value of the assets transferred to PDG of $39,968,000 in settlement of the litigation less the book value of the net assets transferred of $9,205,000 and (iii) professional fees and other expenses associated with the litigation of $636,000.

Pro forma adjustments for management services include revenue earned under the transition services agreement with PDG, estimated expenses to provide such services and salaries and benefits, including severance, of those management personnel eliminated as a result of the February 29, 2008 settlement and subsequent realignment of our Minnesota-based management team.

The following table sets forth the percentage change between the actual results of operations for the three months ended March 31, 2009 and the pro forma non-GAAP financial measures for the three months ended March 31, 2008 (in dollars):

                                 Three Months Ended        Three Months Ended
                                   March 31, 2009            March 31, 2008
                                  Actual     % of Net     Pro Forma    % of Net
                                 Amounts     Revenue       Amounts     Revenue      % Change
 Net revenue                    $   69,385      100.0 %   $   70,055      100.0 %       -1.0 %
 Salaries and benefits              29,566       42.6 %       30,894       44.1 %       -4.3 %
 Lab fees and dental supplies       10,293       14.8 %       10,680       15.2 %       -3.6 %
 Office occupancy expenses           8,499       12.2 %        8,090       11.5 %        5.1 %
 Other operating expenses            6,578        9.5 %        6,412        9.2 %        2.6 %
 General corporate expenses          3,360        4.8 %        3,630        5.2 %       -7.4 %
 Depreciation                        2,715        3.9 %        2,508        3.6 %        8.3 %
 Amortization                        2,425        3.5 %        2,387        3.4 %        1.6 %

 Total operating expenses           63,436       91.4 %       64,601       92.2 %       -1.8 %

 Earnings from operations            5,949        8.6 %        5,454        7.8 %        9.1 %
 Interest expense, net               3,370        4.9 %        2,455        3.5 %       37.3 %

 Earnings before income taxes        2,579        3.7 %        2,999        4.3 %      -14.0 %
 Income taxes                        1,021        1.5 %        1,165        1.7 %      -12.4 %

 Consolidated net earnings           1,558        2.2 %        1,834        2.6 %      -15.1 %
 Noncontrolling interest               137        0.2 %          140        0.2 %       -2.1 %

 Net earnings                   $    1,421        2.0 %   $    1,694        2.4 %      -16.1 %

The pro forma financial table above excludes the results of operations, and associated business service fees, of the 25 dental facilities transferred to PDG from 2008 results and temporary and non-recurring items related to the litigation settlement. Management believes that such pro forma presentation provides a better understanding of our results of operations and potential future trends of our underlying operations.

Net Revenue

Net revenue decreased 13% to $69,385,000 for the three months ended March 31, 2009 from $79,811,000 for the three months ended March 31, 2008. Net revenue earned under our transition services agreement with PDG represented approximately 12% of our consolidated net revenue for the three months ended March 31, 2008.

Net revenue decreased 1% to $69,385,000 for the three months ended March 31, 2009 from pro forma net revenue of $70,055,000 for the three months ended March 31, 2008. The decrease over the prior year is attributed to a decline in patient revenue.

Net revenue earned from our service agreement with Metro Dentalcare, P.L.C represented 22% of our consolidated net revenue for the three months ended March 31, 2009 and 22% of pro forma consolidated net revenue for the three months ended March 31, 2008. Net revenue earned from our service agreement with Wisconsin Dental Group, S.C. represented 14% of our consolidated net revenue for the three months ended March 31, 2009 and 13% of pro forma consolidated net revenue for the three months ended March 31, 2008. The termination of either of the Metro Dentalcare, P.L.C or Wisconsin Dental Group, S.C. service agreement could have a material adverse effect on our business, financial condition and results of operations. No other service agreement or customer accounted for more than 10% of consolidated net revenue during the three month periods ended March 31, 2009 and 2008.