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

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended, or the Securities Act. For this purpose, any statements contained in this quarterly report regarding our strategy, future plans or operations, financial position, future revenues, projected costs, prospects, and objectives of management, other than statements of historical facts, may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations expressed or implied in forward-looking statements. There are a number of factors that could cause actual events or results to differ materially from those indicated or implied by such forward-looking statements, many of which are beyond our control, including the factors discussed in Part II - Item 1A under the heading "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, and as referenced in Part II - Item 1A of this report. In addition, the forward-looking statements contained herein represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.

Overview

American Dental Partners, Inc. 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 September 30, 2009, we were affiliated with 26 dental group practices, comprising 542 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 the 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, 80% of basic restorative procedures and 50% of more extensive restorative procedures. In addition, dental insurance often caps benefits at an annual maximum per individual of $1,000 to $1,500. As a result, patients, including those with dental insurance, may be financially responsible for a considerable portion of their dental expenditures. Current economic conditions have caused consumer spending patterns to change. The 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 affect us adversely, although we are unable to predict the likely duration 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 of the dental practices with which we affiliate and enter into a long-term service agreement with those practices. Under our service agreements, we are responsible for providing all services necessary for the administration of the non-clinical aspects of the dental operations, while the affiliated practices are responsible for the provision of dental care. Each of our service agreements is for an initial term of 40 years.

During the third quarter 2009, we did not enter into any platform affiliations or in-market acquisitions.

We are constantly evaluating potential affiliation and acquisition transactions with dental practices and acquisitions of other dental-related companies that would expand our business capabilities. Our senior credit facility, however, restricts amounts that we can borrow to fund affiliations and acquisitions. The number of affiliations and acquisitions in 2009 has been less than historical levels due to our previous debt maturity. With the August 2009 refinancing of our indebtedness, the number of affiliations and acquisitions in future periods could increase.

Litigation Settlement Agreements

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 service agreement with PDG to provide interim management services through September 30, 2008.

Under the transition service agreement, we provided management services to PDG for a period of nine months through September 30, 2008 for $19,000,000, with $10,000,000 recognized as net revenue in 2008 and $9,000,000 recognized as an offset to loss contingency in 2007. We completed the transition service and received the related $19,000,000 payment.

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 that 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 laboratories and revenue earned in 2008 under the transition service agreement with PDG.

The following table provides the components of our net revenue for the three and nine months ended September 30, 2009 and 2008 (in thousands):

                                                       Three Months Ended       Nine Months Ended
                                                         September 30,            September 30,
                                                        2009         2008       2009        2008
Reimbursement of expenses                            $    46,249   $ 47,064   $ 141,480   $ 143,585
Business service fees                                     14,403     13,915      45,141      43,365

Revenue earned under service agreements                   60,652     60,979     186,621     186,950
Other revenue                                              7,334      7,236      21,128      21,352
Revenue earned under transition service agreement
with PDG                                                      -       3,333          -       17,696

Net revenue                                          $    67,986   $ 71,548   $ 207,749   $ 225,998

Revenue earned under service agreements includes 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. We account for net revenue from the reimbursement of expenses on an accrual basis and recognize these expenses when they 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 expense, 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.

Tooth Doctor is a dental group practice which provides dental care primarily to children. Approximately 90% of the group's revenue is derived from PPO health plans that are contracted with the Arizona Health Care Cost Containment System ("AHCCCS"), the state's Medicaid program.

For additional information on components of our net revenue, see Note 7 of "Notes to Interim Consolidated Financial Statements."

Patient Revenue of our Affiliated Practices

We believe it is important to understand patient revenue of our affiliated practices, which other than Tooth Doctor, 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. Patient revenue of the affiliated practices 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 that may affect 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 arrangements, 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 nine months ended September 30, 2009 and 2008:

                                                Nine Months Ended
                                                  September 30,
                                                2009           2008
               Fee-for-service                      16 %         19 %
               PPO and dental referral plans        76 %         70 %
               Capitated managed care plans          8 %         11 %

For the affiliated practices that we do not own and, 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 and nine months ended September 30, 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 (dollars in thousands):

                                          Three Months Ended                   Nine Months Ended
                                            September 30,          %             September 30,         %
                                           2009        2008      Change        2009        2008      Change
Patient revenue of affiliated
practices:
Platform dental group practices
affiliated with us in both periods of
comparison                              $  102,865   $ 103,560     -0.7 %    $ 315,050   $ 315,904     -0.3 %
Platform dental group practices that
affiliated with us during periods of
comparison                                     359          -     100.0 %        1,978         981    101.6 %

Total patient revenue                      103,224     103,560     -0.3 %      317,028     316,885      0.0 %
Patient revenue of Arizona's Tooth
Doctor for Kids                              6,765       6,427      5.3 %       19,163      18,592      3.1 %

Patient revenue of platform dental
group practices affiliated with us by
means of service agreements                 96,459      97,133     -0.7 %      297,865     298,293     -0.1 %
Amounts due to us under service
agreements                                  60,652      60,979     -0.5 %      186,621     186,805     -0.1 %

Amounts retained by platform dental
group practices affiliated with us by
means of service agreements             $   35,807   $  36,154     -1.0 %    $ 111,244   $ 111,488     -0.2 %

Same market patient revenue growth was -0.7% for the three months ended September 30, 2009. Same market patient revenue growth for the three months ended September 30, 2009 excludes platform affiliations that occurred on or after July 1, 2008. Same market patient revenue comprised a 1.2% decrease in provider hours and a 1.4% improvement in provider productivity, offset by 0.8% deterioration in reimbursement rates received from dental benefit insurers. Same market patient revenue growth was -0.3% for the nine months ended September 30, 2009. Same market patient revenue growth for the nine months ended September 30, 2009 excludes platform affiliations that occurred on or after January 1, 2008. Same market patient revenue growth for the nine months ended September 30, 2009 comprised a 0.1% decrease in provider hours and a 1.8% improvement in provider productivity, offset by 2.1% deterioration in reimbursement rates received from dental benefit insurers.

Amounts retained by affiliated practices we do not own decreased 1% to $35,807,000 for the three months ended September 30, 2009 from $36,154,000 for the three months ended September 30, 2008. As a percentage of their patient revenue, amounts retained by affiliated practices decreased to 37.1% for the three months ended September 30, 2009, compared to 37.2% for the three months ended September 30, 2008. Amounts retained by affiliated practices we do not own decreased 0.2% to $111,244,000 for the nine months ended September 30, 2009 from $111,488,000 for the nine months ended September 30, 2008. As a percentage of their patient revenue, amounts retained by affiliated practices were unchanged at 37.4% for the nine months ended September 30, 2009 and 2008.

Results of Operations

The following table sets forth our net revenue and results of operations for the
three and nine months ended September 30, 2009 and 2008 (dollars in thousands):



                                             Three Months Ended          Three Months Ended
                                             September 30, 2009          September 30, 2008
                                                         % of Net                     % of Net        %
                                              Amount     Revenue        Amount        Revenue       Change

Net revenue                                 $   67,986      100.0 %    $  71,548         100.0 %      -5.0 %
Operating Expenses:
Salaries and benefits                           28,745       42.3 %       30,491          42.6 %      -5.7 %
Lab fees and dental supplies                     9,527       14.0 %        9,967          13.9 %      -4.4 %
Office occupancy                                 8,647       12.7 %        8,291          11.6 %       4.3 %
Other operating expenses                         6,871       10.1 %        6,726           9.4 %       2.2 %
General corporate expenses                       3,546        5.2 %        3,055           4.3 %      16.1 %
Depreciation expense                             2,688        4.0 %        2,658           3.7 %       1.1 %
Amortization of intangible assets                2,289        3.4 %        2,409           3.4 %      -5.0 %
Litigation (income) expense                         -         0.0 %           (7 )         0.0 %    -100.0 %

Total operating expenses                        62,313       91.7 %       63,590          88.9 %      -2.0 %

Earnings from operations                         5,673        8.3 %        7,958          11.1 %     -28.7 %
Interest expense                                 2,927        4.3 %        2,390           3.3 %      22.5 %

Earnings before income taxes                     2,746        4.0 %        5,568           7.8 %     -50.7 %
Income taxes                                     1,091        1.6 %        2,118           3.0 %     -48.5 %

Consolidated net earnings                        1,655        2.4 %        3,450           4.8 %     -52.0 %
Noncontrolling interest                            223        0.3 %          140           0.2 %      59.3 %

Net earnings                                $    1,432        2.1 %    $   3,310           4.6 %     -56.7 %


                                              Nine Months Ended           Nine Months Ended
                                             September 30, 2009          September 30, 2008
                                                         % of Net                     % of Net        %
                                              Amount     Revenue        Amount        Revenue       Change

Net revenue                                 $  207,749      100.0 %    $ 225,998         100.0 %      -8.1 %
Operating Expenses:
Salaries and benefits                           87,494       42.1 %       97,347          43.1 %     -10.1 %
Lab fees and dental supplies                    30,141       14.5 %       33,091          14.6 %      -8.9 %
Office occupancy                                25,688       12.4 %       25,784          11.4 %      -0.4 %
Other operating expenses                        19,872        9.6 %       20,206           8.9 %      -1.7 %
General corporate expenses                      10,238        4.9 %       10,150           4.5 %       0.9 %
Depreciation expense                             8,103        3.9 %        8,116           3.6 %      -0.2 %
Amortization of intangible assets                7,138        3.4 %        7,205           3.2 %      -0.9 %
Litigation (income) expense                         -         0.0 %      (30,821 )       -13.6 %    -100.0 %

Total operating expenses                       188,674       90.8 %      171,078          75.7 %      10.3 %

Earnings from operations                        19,075        9.2 %       54,920          24.3 %     -65.3 %
Interest expense                                 8,484        4.1 %        7,264           3.2 %      16.8 %

Earnings before income taxes                    10,591        5.1 %       47,656          21.1 %     -77.8 %
Income taxes                                     4,203        2.0 %       18,417           8.1 %     -77.2 %

Consolidated net earnings                        6,388        3.1 %       29,239          12.9 %     -78.2 %
Noncontrolling interest                            524        0.3 %          431           0.2 %      21.6 %

Net earnings                                $    5,864        2.8 %    $  28,808          12.7 %     -79.6 %

Financial Presentation of Litigation Settlement

On February 29, 2008, under the terms of the settlement agreement referenced above in the Litigation Settlement Agreements, 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 service 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 with PDG as we believe that such pro forma presentation is important to understanding trends of our underlying operations. The pro forma information includes non-GAAP financial measures.

The following table reconciles our actual results of operations to our pro forma results of operations for the three months ended September 30, 2008 (dollars in thousands):

                                                         Three Months Ended September 30, 2008
                                                                 Pro Forma Adjustments
                                           As Reported           Settlement         Management      Pro Forma
                                               2008                Assets            Services         2008
Net revenue                               $       71,548        $         -        $      3,333    $    68,215
Operating Expenses:
Salaries and benefits                             30,491                  -                 246         30,245
Lab fees and dental supplies                       9,967                  -                  -           9,967
Office occupancy expenses                          8,291                  -                  60          8,231
Other operating expenses                           6,726                  -                 108          6,618
General corporate expenses                         3,055                  -                  -           3,055
Depreciation                                       2,658                  -                  14          2,644
Amortization                                       2,409                  -                  -           2,409
Litigation settlement (income)                        (7 )                (7 )               -              -

Total operating expenses                          63,590                  (7 )              428         63,169

Earnings from operations                           7,958                   7              2,905          5,046
Interest expense, net                              2,390                  -                  -           2,390

Earnings before income taxes                       5,568                   7              2,905          2,656
Income taxes                                       2,118                                                   982

Consolidated net earnings                          3,450                                                 1,674
Noncontrolling interest                              140                                                   140

Net earnings                              $        3,310                                           $     1,534

Pro forma adjustments for settlement assets include miscellaneous income and expenses, including professional fees, associated with the PDG litigation.

Pro forma adjustments for management services include revenue earned under the transition service agreement with PDG and estimated expenses to provide those services.

The following table reconciles our actual results of operations to our pro forma results of operations for the nine months ended September 30, 2008 (dollars in thousands):

                                                       Nine Months Ended September 30, 2008
                                                              Pro Forma Adjustments
                                           As Reported        Settlement        Management    Pro Forma
                                              2008              Assets           Services        2008
Net revenue                               $     225,998      $      7,697      $     10,000   $  208,301
Operating expenses:
Salaries and benefits                            97,347             4,717             1,453       91,177
Lab fees and dental supplies                     33,091             1,436                -        31,655
Office occupancy expenses                        25,784             1,092               180       24,512
. . .