##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended: March 31, 2011

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 333-135172





CRC HEALTH CORPORATION

(Exact name of registrant as specified in its charter)







|                                                                |  |                                     
|--------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                        |  | 73-1650429                          
|(State or other jurisdiction of
incorporation or organization)  |  | (I.R.S. Employer Identification No.)
|                                                                | 
|20400 Stevens Creek Boulevard,
Suite 600, Cupertino, California |  | 95014                               
|(Address of principal executive offices)                        |  | (Zip code)                          

(877)
272-8668

(Registrants telephone number, including area code)





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.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  | x |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

The total number of shares of the registrants common stock, par value of $0.001 per share, outstanding as of May 12, 2011 was
1,000.









---

##### Table of Contents

CRC HEALTH CORPORATION

INDEX



|              |  |                       |    |                                                                                                    |  |          |    | 
|------------- |  | --------------------- | -- | -------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|              |  |                       |    |                                                                                                    |  | Page No. |   
|Part I.       |  | Financial Information |    |                                                                                                    |  |         
|              |  | Item 1.               |    | Financial Statements (Unaudited)                                                                   |  |          |    | 
|              |  |                       |    | Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010                   |  |          | 2  | 
|              |  |                       |    | Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 |  |          | 3  | 
|              |  |                       |    | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 |  |          | 4  | 
|              |  |                       |    | Notes to Condensed Consolidated Financial Statements                                               |  |          | 5  | 
|              |  | Item 2.               |    | Managements Discussion and Analysis of Financial Condition and Results of
Operations              |  |          | 26 | 
|              |  | Item 3.               |    | Quantitative and Qualitative Disclosure About Market Risk                                          |  |          | 33 | 
|              |  | Item 4.               |    | Controls and Procedures                                                                            |  |          | 33 | 
|Part II.      |  | Other Information     |    |                                                                                                    |  |         
|              |  | Item 1A.              |    | Risk Factors                                                                                       |  |          | 34 | 
|              |  | Item 6.               |    | Exhibits                                                                                           |  |          | 34 | 
|Signature     |  |                       | 35 |                                                                                                   
|Exhibit Index |  |                       | 36 |                                                                                                   

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of Financial Condition
and Results of Operations in Item 2 of Part I of this Quarterly Report, includes or may include forward-looking statements. All statements included herein, other than statements of historical fact, may constitute
forward-looking statements. In some cases you can identify forward-looking statements by terminology such as may, should or could. Generally, the words anticipates, believes,
expects, intends, estimates, projects, plans and similar expressions identify forward-looking statements. Although CRC Health Corporation (CRC) believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by such
forward-looking statements include, among others, the following factors: effect of healthcare reform and other changes in government reimbursement for CRCs services; reductions in the availability of governmental and private financial aid for
CRCs youth treatment programs; CRCs substantial indebtedness; changes in applicable regulations or a government investigation or assertion that CRC has violated applicable regulations; attempts by local residents to force the closure or
relocation of CRCs facilities; the potentially difficult, unsuccessful or costly integration of acquired operations and future acquisitions; the potentially difficult, unsuccessful or costly opening and operating of new treatment programs;
implementation of the strategic plan for improving performance of the Aspen business may not be successful; the possibility that commercial payors for CRCs services may undertake future cost containment initiatives; the limited number of
national suppliers of methadone used in CRCs outpatient treatment clinics; the failure to maintain established relationships or cultivate new relationships with patient referral sources; shortages in qualified healthcare workers; natural
disasters such as hurricanes, earthquakes and floods; competition that limits CRCs ability to grow; the potentially costly implementation of new information systems to comply with federal and state initiatives relating to patient privacy,
security of medical information and electronic transactions; the potentially costly implementation of accounting and other management systems and resources in response to financial reporting and other requirements; the loss of key members of
CRCs management; claims asserted against CRC or lack of adequate available insurance; and certain restrictive covenants in CRCs debt documents and other risks that are described herein, including but not limited to the items discussed in
Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 30, 2011, and that are otherwise described from time to time in CRCs Securities and Exchange
Commission filings after this Quarterly Report. CRC assumes no obligation and does not intend to update these forward-looking statements.



1



---

##### Table of Contents

CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

MARCH 31, 2011 AND DECEMBER 31, 2010

(In thousands, except share amounts)



|                                                                                                                       |  |               |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                       |  | March 31,2011 |           |   | December 31,2010 |  
|ASSETS                                                                                                                 |  |               |           |   |                  |   |           |  
|CURRENT ASSETS:                                                                                                        |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                              |  | $             | 6,894     |   |                  | $ | 7,111     |  
|Restricted cash                                                                                                        |  |               | 897       |   |                  |   | 546       |  
|Accounts receivable, net of allowance for doubtful accounts of $4,910 in 2011 and $5,044 in 2010                       |  |               | 37,001    |   |                  |   | 32,706    |  
|Prepaid expenses                                                                                                       |  |               | 7,728     |   |                  |   | 8,623     |  
|Other current assets                                                                                                   |  |               | 2,085     |   |                  |   | 1,921     |  
|Income taxes receivable                                                                                                |  |               | 654       |   |                  |   | 259       |  
|Deferred income taxes                                                                                                  |  |               | 6,547     |   |                  |   | 6,547     |  
|Current assets of discontinued operations                                                                              |  |               | 1,409     |   |                  |   | 1,635     |  
|                                                                                                                       |  |               |           |   |                  |   |           |  
|Total current assets                                                                                                   |  |               | 63,215    |   |                  |   | 59,348    |  
|PROPERTY AND EQUIPMENT-Net                                                                                             |  |               | 125,832   |   |                  |   | 125,626   |  
|GOODWILL                                                                                                               |  |               | 521,807   |   |                  |   | 521,807   |  
|INTANGIBLE ASSETS-Net                                                                                                  |  |               | 308,549   |   |                  |   | 314,032   |  
|OTHER ASSETS-Net                                                                                                       |  |               | 22,081    |   |                  |   | 19,411    |  
|                                                                                                                       |  |               |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                           |  | $             | 1,041,484 |   |                  | $ | 1,040,224 |  
|                                                                                                                       |  |               |           |   |                  |   |           |  
|LIABILITIES AND EQUITY                                                                                                 |  |               |           |   |                  |   |           |  
|CURRENT LIABILITIES:                                                                                                   |  |               |           |   |                  |   |           |  
|Accounts payable                                                                                                       |  | $             | 4,503     |   |                  | $ | 4,957     |  
|Accrued liabilities                                                                                                    |  |               | 30,789    |   |                  |   | 30,292    |  
|Current portion of long-term debt                                                                                      |  |               | 23,502    |   |                  |   | 11,111    |  
|Other current liabilities                                                                                              |  |               | 18,245    |   |                  |   | 18,305    |  
|Current liabilities of discontinued operations                                                                         |  |               | 2,764     |   |                  |   | 3,619     |  
|                                                                                                                       |  |               |           |   |                  |   |           |  
|Total current liabilities                                                                                              |  |               | 79,803    |   |                  |   | 68,284    |  
|LONG-TERM DEBT-Less current portion                                                                                    |  |               | 587,967   |   |                  |   | 598,915   |  
|OTHER LONG-TERM LIABILITIES                                                                                            |  |               | 8,605     |   |                  |   | 8,786     |  
|LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS                                                                       |  |               | 3,077     |   |                  |   | 3,142     |  
|DEFERRED INCOME TAXES                                                                                                  |  |               | 105,700   |   |                  |   | 105,256   |  
|                                                                                                                       |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                      |  |               | 785,152   |   |                  |   | 784,383   |  
|                                                                                                                       |  |               |           |   |                  |   |           |  
|COMMITMENTS AND CONTINGENCIES (Note 11)                                                                                |  |               |           |   |                  |   |           |  
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY:                                                                           |  |               |           |   |                  |   |           |  
|Common stock, $0.001 par value-1,000 shares authorized, issued and outstanding at March 31, 2011 and December 31,
2010 |  |               |          |   |                  |   |          |  
|Additional paid-in capital                                                                                             |  |               | 463,163   |   |                  |   | 462,970   |  
|Accumulated deficit                                                                                                    |  |               | (205,776  | ) |                  |   | (205,023  | )
|Accumulated other comprehensive loss                                                                                   |  |               | (1,055    | ) |                  |   | (2,106    | )
|                                                                                                                       |  |               |           |   |                  |   |           |  
|Total CRC Health Corporation stockholders equity                                                                      |  |               | 256,332   |   |                  |   | 255,841   |  
|                                                                                                                       |  |               |           |   |                  |   |           |  
|Total equity                                                                                                           |  |               | 256,332   |   |                  |   | 255,841   |  
|                                                                                                                       |  |               |           |   |                  |   |           |  
|TOTAL LIABILITIES AND EQUITY                                                                                           |  | $             | 1,041,484 |   |                  | $ | 1,040,224 |  
|                                                                                                                       |  |               |           |   |                  |   |           |  

See notes to unaudited condensed consolidated financial statements.



2



---

##### Table of Contents

CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(In thousands)



|                                                                                                                                                           |  |                                 |         |   |                                 |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------- | - | ------- | -
|                                                                                                                                                           |  | Three MonthsEnded March 31,2011 |         |   | Three MonthsEnded March 31,2010 |  
|NET REVENUE:                                                                                                                                               |  |                                 |         |   |                                 |   |         |  
|Net client service revenue                                                                                                                                 |  | $                               | 111,861 |   |                                 | $ | 103,577 |  
|                                                                                                                                                           |  |                                 |         |   |                                 |   |         |  
|OPERATING EXPENSES:                                                                                                                                        |  |                                 |         |   |                                 |   |         |  
|Salaries and benefits                                                                                                                                      |  |                                 | 57,347  |   |                                 |   | 53,403  |  
|Supplies, facilities and other operating costs                                                                                                             |  |                                 | 33,206  |   |                                 |   | 29,841  |  
|Provision for doubtful accounts                                                                                                                            |  |                                 | 1,671   |   |                                 |   | 1,820   |  
|Depreciation and amortization                                                                                                                              |  |                                 | 4,902   |   |                                 |   | 5,553   |  
|Asset impairment                                                                                                                                           |  |                                 | 4,401   |   |                                 |   |        |  
|                                                                                                                                                           |  |                                 |         |   |                                 |   |         |  
|Total operating expenses                                                                                                                                   |  |                                 | 101,527 |   |                                 |   | 90,617  |  
|                                                                                                                                                           |  |                                 |         |   |                                 |   |         |  
|OPERATING INCOME                                                                                                                                           |  |                                 | 10,334  |   |                                 |   | 12,960  |  
|INTEREST EXPENSE -Net                                                                                                                                      |  |                                 | (11,756 | ) |                                 |   | (10,805 | )
|OTHER INCOME                                                                                                                                               |  |                                 | 31      |   |                                 |   |        |  
|                                                                                                                                                           |  |                                 |         |   |                                 |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                                                               |  |                                 | (1,391  | ) |                                 |   | 2,155   |  
|INCOME TAX (BENEFIT) EXPENSE                                                                                                                               |  |                                 | (604    | ) |                                 |   | 934     |  
|                                                                                                                                                           |  |                                 |         |   |                                 |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS, NET OF TAX                                                                                                       |  |                                 | (787    | ) |                                 |   | 1,221   |  
|INCOME (LOSS) FROM DISCONTINUED OPERATIONS (net of tax expense(benefit) of $26 and ($227) in the three months ended
March 31, 2011 and 2010, respectively) |  |                                 | 34      |   |                                 |   | (360    | )
|                                                                                                                                                           |  |                                 |         |   |                                 |   |         |  
|NET (LOSS) INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION                                                                                                   |  | $                               | (753    | ) |                                 | $ | 861     |  
|                                                                                                                                                           |  |                                 |         |   |                                 |   |         |  

See notes to unaudited condensed consolidated financial statements.



3



---

##### Table of Contents

CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(In thousands)



|                                                                                              |  |                                  |        |   |                                  |   |        |  
|--------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | -------------------------------- | - | ------ | -
|                                                                                              |  | Three Months EndedMarch 31, 2011 |        |   | Three Months EndedMarch 31, 2010 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                         |  |                                  |        |   |                                  |   |        |  
|Net (loss) income                                                                             |  | $                                | (753   | ) |                                  | $ | 861    |  
|Adjustments to reconcile net income(loss) to net cash provided by operating activities:       |  |                                  |        |   |                                  |   |        |  
|Depreciation and amortization                                                                 |  |                                  | 4,903  |   |                                  |   | 5,562  |  
|Amortization of debt discount and capitalized financing costs                                 |  |                                  | 1,016  |   |                                  |   | 1,053  |  
|Asset impairment                                                                              |  |                                  | 4,401  |   |                                  |   |       |  
|Gain on interest rate swap agreement                                                          |  |                                  | (38    | ) |                                  |   | (118   | )
|Gain on disposition of property and equipment                                                 |  |                                  | (29    | ) |                                  |   | (5     | )
|Provision for doubtful accounts                                                               |  |                                  | 1,685  |   |                                  |   | 1,871  |  
|Stock-based compensation                                                                      |  |                                  | 736    |   |                                  |   | 1,427  |  
|Changes in assets and liabilities:                                                            |  |                                  |        |   |                                  |   |        |  
|Restricted cash                                                                               |  |                                  | (351   | ) |                                  |   | (724   | )
|Accounts receivable                                                                           |  |                                  | (5,935 | ) |                                  |   | (2,714 | )
|Prepaid expenses                                                                              |  |                                  | 948    |   |                                  |   | 4      |  
|Other current assets                                                                          |  |                                  | (164   | ) |                                  |   | 105    |  
|Income taxes receivable and payable                                                           |  |                                  | (626   | ) |                                  |   | 693    |  
|Accounts payable                                                                              |  |                                  | (446   | ) |                                  |   | 1,665  |  
|Accrued liabilities                                                                           |  |                                  | 220    |   |                                  |   | (1,730 | )
|Other current liabilities                                                                     |  |                                  | 1,678  |   |                                  |   | (453   | )
|Other assets                                                                                  |  |                                  | (366   | ) |                                  |   | (1,083 | )
|Other long term liabilities                                                                   |  |                                  | (563   | ) |                                  |   | (188   | )
|                                                                                              |  |                                  |        |   |                                  |   |        |  
|Net cash provided by operating activities                                                     |  |                                  | 6,316  |   |                                  |   | 6,226  |  
|                                                                                              |  |                                  |        |   |                                  |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                         |  |                                  |        |   |                                  |   |        |  
|Additions of property and equipment                                                           |  |                                  | (3,996 | ) |                                  |   | (2,875 | )
|Proceeds from sale of property and equipment                                                  |  |                                  | 42     |   |                                  |   | 14     |  
|Acquisition of business, net of cash acquired                                                 |  |                                  | (28    | ) |                                  |   | (30    | )
|                                                                                              |  |                                  |        |   |                                  |   |        |  
|Net cash used in investing activities                                                         |  |                                  | (3,982 | ) |                                  |   | (2,891 | )
|                                                                                              |  |                                  |        |   |                                  |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                         |  |                                  |        |   |                                  |   |        |  
|Capital (distributed to) contributed from Parent                                              |  |                                  | (543   | ) |                                  |   | 8      |  
|Capitalized financing costs related to refinancing of term loans and revolving line of credit |  |                                  | (3,196 | ) |                                  |   |       |  
|Borrowings under revolving line of credit                                                     |  |                                  | 2,500  |   |                                  |   | 5,000  |  
|Repayments under revolving line of credit                                                     |  |                                  |       |   |                                  |   | (2,500 | )
|Repayments of term loan and seller notes                                                      |  |                                  | (1,312 | ) |                                  |   | (8,656 | )
|Net cash used in financing activities                                                         |  |                                  | (2,551 | ) |                                  |   | (6,148 | )
|                                                                                              |  |                                  |        |   |                                  |   |        |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                     |  |                                  | (217   | ) |                                  |   | (2,813 | )
|CASH AND CASH EQUIVALENTS-Beginning of period                                                 |  |                                  | 7,111  |   |                                  |   | 4,982  |  
|                                                                                              |  |                                  |        |   |                                  |   |        |  
|CASH AND CASH EQUIVALENTS-End of period                                                       |  | $                                | 6,894  |   |                                  | $ | 2,169  |  
|                                                                                              |  |                                  |        |   |                                  |   |        |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                             |  |                                  |        |   |                                  |   |        |  
|Cash paid for interest (net of capitalized interest)                                          |  | $                                | 15,790 |   |                                  | $ | 13,545 |  
|                                                                                              |  |                                  |        |   |                                  |   |        |  
|Cash paid for income taxes, net of refunds                                                    |  | $                                | 49     |   |                                  | $ | 13     |  
|                                                                                              |  |                                  |        |   |                                  |   |        |  
|Payable related to acquisition                                                                |  | $                                | 246    |   |                                  | $ | 365    |  
|                                                                                              |  |                                  |        |   |                                  |   |        |  

See notes to unaudited condensed consolidated financial statements.



4



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND OVERVIEW

CRC Health Corporation (the
Company) is a wholly owned subsidiary of CRC Health Group, Inc., referred to as the Group or the Parent. The Company is headquartered in Cupertino, California and through its wholly owned subsidiaries provides substance
abuse treatment services and youth treatment services in the United States. The Company also provides treatment services for other addiction diseases and behavioral disorders such as eating disorders.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, without audit. Accordingly, they do not include all of the information required by accounting
principles generally accepted in the United States of America for annual financial statements. The unaudited condensed consolidated balance sheet as of December 31, 2010 has been derived from our audited financial statements.

In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments, consisting
of normal recurring adjustments, necessary to present fairly the financial position of the Company, its results of operations, and its cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with
the audited financial statements and the notes thereto for the year ended December 31, 2010.

2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Principles of Consolidation  The Companys condensed consolidated financial statements
include the accounts of CRC Health Corporation and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates  Preparation of financial statements in accordance with generally accepted accounting principles in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the amounts reported in the Companys condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Recently Adopted Accounting Guidance  In December 2010, the Financial Accounting Standards Board (FASB)
issued changes to the testing of goodwill for impairment. These changes require an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill
impairment exists based on qualitative factors, resulting in the elimination of an entitys ability to assert that such a reporting units goodwill is not impaired and additional testing is not necessary despite the existence of
qualitative factors that indicate otherwise. This guidance was effective for fiscal years (and interim periods within those years) that began after December 15, 2010. The Company adopted this guidance on January 1, 2011 and its adoption
did not have any material impact on the condensed consolidated financial statements.

In December 2010, the FASB issued
changes to the disclosure of pro forma information for business combinations. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though
the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma disclosures were expanded to include a description of the
nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance was effective for business combinations consummated in periods
beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. The Company adopted this guidance on January 1, 2011 and its adoption did not have any material impact on the condensed consolidated
financial statements.

In August 2010, the FASB issued updated authoritative guidance which clarifies that health care
entities should not net insurance recoveries against a related claim liability. Further, such entities should determine the claim liability without considering insurance recoveries. The guidance was effective for fiscal years (and interim periods
within those fiscal years) beginning after December 15, 2010. A cumulative-effect adjustment should be recognized in opening retained earnings in the period of adoption if a difference exists between any liabilities and insurance receivables
recorded as a result of applying the amendments in this guidance. Retrospective application and early adoption is permitted. The Company adopted this guidance on January 1, 2011 and its adoption did not have any material impact on the condensed
consolidated financial statements.

In August 2010, the FASB issued updated authoritative guidance which requires that health
care entities use costs as a measurement basis for charity care disclosures and that they identify those costs as the direct and indirect costs of providing the charity care. The guidance also requires disclosure of the method used to identify the
costs. The guidance was effective for fiscal years beginning after December 15, 2010. Retrospective application and early adoption is permitted. The Company adopted this guidance on January 1, 2011 and its adoption did not have any
material impact on the condensed consolidated financial statements.



5



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



In July 2010, the FASB issued updated authoritative guidance which requires more robust
and disaggregated disclosures about the credit quality of an entitys financing receivables and its allowance for credit losses. The objective of enhancing these disclosures is to improve financial statement users understanding of
(1) the nature of an entitys credit risk associated with its financing receivables and (2) the entitys assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons
for those changes. For the Company, the new and amended disclosures that relate to information as of the end of a reporting period were effective for the first interim or annual reporting periods ending on or after December 15, 2010. The
disclosures that include information for activity that occurs during a reporting period was effective for the first interim or annual periods beginning after December 15, 2010. Those disclosures include (1) the activity in the allowance
for credit losses for each period and (2) disclosures about modifications of financing receivables. The Companys adoption of this guidance did not have any material impact on the condensed consolidated financial statements.

In January 2010, the FASB issued updated authoritative guidance, which, among other things, requires entities to separately present
purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and which clarifies existing disclosure requirements regarding the
level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy. The updated guidance was effective for interim and annual periods
beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements (which were effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years). The Companys adoption of this guidance did not have any material impact on the condensed consolidated financial statements.

3. BALANCE SHEET COMPONENTS

Balance sheet components at March 31, 2011 and December 31, 2010 consist of the following (in thousands):



|                                     |  |               |        |   |                  |   |        |  
|------------------------------------ |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                                     |  | March 31,2011 |        |   | December 31,2010 |  
|Accounts receivable-gross            |  | $             | 41,911 |   |                  | $ | 37,750 |  
|Less allowance for doubtful accounts |  |               | (4,910 | ) |                  |   | (5,044 | )
|                                     |  |               |        |   |                  |   |        |  
|Accounts receivable-net              |  | $             | 37,001 |   |                  | $ | 32,706 |  
|                                     |  |               |        |   |                  |   |        |  
|Other assets-net:                    |  |               |        |   |                  |   |        |  
|Capitalized financing costs-net      |  | $             | 13,022 |   |                  | $ | 10,776 |  
|Deposits                             |  |               | 644    |   |                  |   | 662    |  
|Note receivable                      |  |               | 8,415  |   |                  |   | 7,973  |  
|                                     |  |               |        |   |                  |   |        |  
|Total other assets-net               |  | $             | 22,081 |   |                  | $ | 19,411 |  
|                                     |  |               |        |   |                  |   |        |  
|Accrued liabilities:                 |  |               |        |   |                  |   |        |  
|Accrued payroll and related expenses |  | $             | 14,057 |   |                  | $ | 10,796 |  
|Accrued vacation                     |  |               | 4,711  |   |                  |   | 4,596  |  
|Accrued interest                     |  |               | 3,350  |   |                  |   | 8,153  |  
|Accrued expenses                     |  |               | 8,671  |   |                  |   | 6,747  |  
|                                     |  |               |        |   |                  |   |        |  
|Total accrued liabilities            |  | $             | 30,789 |   |                  | $ | 30,292 |  
|                                     |  |               |        |   |                  |   |        |  
|Other current liabilities:           |  |               |        |   |                  |   |        |  
|Deferred revenue                     |  | $             | 11,770 |   |                  | $ | 10,600 |  
|Client deposits                      |  |               | 4,170  |   |                  |   | 3,604  |  
|Interest rate swap liability         |  |               | 1,744  |   |                  |   | 3,535  |  
|Other liabilities                    |  |               | 561    |   |                  |   | 566    |  
|                                     |  |               |        |   |                  |   |        |  
|Total other current liabilities      |  | $             | 18,245 |   |                  | $ | 18,305 |  
|                                     |  |               |        |   |                  |   |        |  

Loan program-The Companys Loan Program allows students and/or patients (the
Borrowers) who meet certain predetermined credit and underwriting standards such as high FICO scores, full documentation, verification and certain cosigning requirements, to obtain third-party financing to pay a portion of the cost of
participating in certain of the Companys programs. The balance of the loan program (net of reserves) was $8.4 million and $7.9 million at March 31, 2011 and December 31, 2010, respectively.



6



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



The Company has established a loan loss reserve to account for non-performing Loan
Program notes. The Company has utilized a variety of data from the consumer and education loan industry to establish its initial loan loss reserve. On a periodic basis, the Company evaluates the adequacy of the allowance based on the
Companys past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying collateral and current economic
conditions. The following schedule reflects activity associated with the Companys loan loss reserve for the three months ended March 31, 2011 and 2010 (in thousands):



|                                    |  |                                   |       |  |                                   |   |     | 
|----------------------------------- |  | --------------------------------- | ----- |  | --------------------------------- | - | --- | 
|                                    |  | Three Months EndedMarch 
31, 2011 |       |  | Three Months EndedMarch 
31, 2010 |  
|Loan Loss Reserve Account           |  |                                   |       |  |                                   |   |     | 
|Balancebeginning of the period     |  | $                                 | 916   |  |                                   | $ | 219 | 
|Loan loss expense                   |  |                                   | 149   |  |                                   |   | 160 | 
|Write-off of uncollectible accounts |  |                                   |      |  |                                   |   |    | 
|                                    |  |                                   |       |  |                                   |   |     | 
|Balanceend of the period           |  | $                                 | 1,065 |  |                                   | $ | 379 | 
|                                    |  |                                   |       |  |                                   |   |     | 



7



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



4. PROPERTY AND EQUIPMENT

Property and equipment at March 31, 2011 and December 31, 2010 consist of the following (in thousands):



|                              |  |               |         |   |                  |   |         |  
|----------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                              |  | March 31,2011 |         |   | December 31,2010 |  
|Land                          |  | $             | 21,373  |   |                  | $ | 21,373  |  
|Building and improvements     |  |               | 84,307  |   |                  |   | 79,860  |  
|Leasehold improvements        |  |               | 17,468  |   |                  |   | 19,203  |  
|Furniture and fixtures        |  |               | 12,608  |   |                  |   | 12,639  |  
|Computer equipment            |  |               | 12,717  |   |                  |   | 12,369  |  
|Computer software             |  |               | 17,693  |   |                  |   | 17,472  |  
|Motor vehicles                |  |               | 5,492   |   |                  |   | 5,660   |  
|Field equipment               |  |               | 2,388   |   |                  |   | 2,634   |  
|Construction in progress      |  |               | 6,409   |   |                  |   | 8,370   |  
|                              |  |               |         |   |                  |   |         |  
|                              |  |               | 180,455 |   |                  |   | 179,580 |  
|Less accumulated depreciation |  |               | (54,623 | ) |                  |   | (53,954 | )
|                              |  |               |         |   |                  |   |         |  
|Property and equipment-net    |  | $             | 125,832 |   |                  | $ | 125,626 |  
|                              |  |               |         |   |                  |   |         |  

Depreciation expense was $3.5 million and $3.8 million for the three months ended March 31, 2011 and
2010, respectively.

As a result of the Companys strategic plan to transition the services provided by the Aspen
business within its healthy living division (see Note 14), the Company tested its long-lived assets at the eight affected facilities for impairment at March 31, 2011. The Company recognized a non-cash impairment charge of $0.3 million related
to impairment of property and equipment which was included in the condensed consolidated statement of operations as asset impairment.

5.
GOODWILL AND INTANGIBLE ASSETS

Changes to goodwill by reportable segments for the three months ended March 31,
2011 are as follows (in thousands):



|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|---------------------------------- |  | -------- | ------- | - | -------------- | - | -------- | ----- |  | - | -------- | -
|                                   |  | Recovery |         |   | Healthy Living |   |          | Total | 
|Balance as of January 1, 2011      |  |          |         |   |                |   |          |       |  |   |          |  
|Goodwill                           |  | $        | 502,671 |   |                | $ | 245,218  |       |  | $ | 747,889  |  
|Accumulated impairment losses      |  |          | (624    | ) |                |   | (225,458 | )     |  |   | (226,082 | )
|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|                                   |  |          | 502,047 |   |                |   | 19,760   |       |  |   | 521,807  |  
|Activity during the year:          |  |          |         |   |                |   |          |       |  |   |          |  
|Goodwill addition from acquisition |  |          |        |   |                |   |         |       |  |   |         |  
|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|Balance as of March 31, 2011       |  |          |         |   |                |   |          |       |  |   |          |  
|Goodwill                           |  |          | 502,671 |   |                |   | 245,218  |       |  |   | 747,889  |  
|Accumulated impairment losses      |  |          | (624    | ) |                |   | (225,458 | )     |  |   | (226,082 | )
|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|                                   |  | $        | 502,047 |   |                | $ | 19,760   |       |  | $ | 521,807  |  
|                                   |  |          |         |   |                |   |          |       |  |   |          |  



8



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Intangible Assets

Total intangible assets at March 31, 2011 and December 31, 2010 consist of the following (in thousands):



|                                                    |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|--------------------------------------------------- |  | -------------- | -------- |  | ------------------- | - | ------ | ----------------------- |  | - | ----------------- | - |  | ---------- | ------- |  | ------------------- |  | -------- | ----------------------- |  | - | ----------------- |  |  | - | ------- | - |  | - | ------- | 
|                                                    |  | March 31, 2011 |          |  | December 31, 2010   |  
|                                                    |  | UsefulLife     |          |  | GrossCarryingAmount |   |        | AccumulatedAmortization |  |   | NetCarryingAmount |   |  | UsefulLife |         |  | GrossCarryingAmount |  |          | AccumulatedAmortization |  |   | NetCarryingAmount | 
|Intangible assets subject to amortization:          |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Referral network                                    |  |                | 20 years |  |                     | $ | 19,231 |                         |  | $ | (4,207            | ) |  | $          | 15,024  |  |                     |  | 20 years |                         |  | $ | 20,834            |  |  | $ | (4,297  | ) |  | $ | 16,537  | 
|Accreditations                                      |  |                | 20 years |  |                     |   | 8,358  |                         |  |   | (1,828            | ) |  |            | 6,530   |  |                     |  | 20 years |                         |  |   | 8,899             |  |  |   | (1,835  | ) |  |   | 7,064   | 
|Curriculum                                          |  |                | 20 years |  |                     |   | 4,915  |                         |  |   | (1,075            | ) |  |            | 3,840   |  |                     |  | 20 years |                         |  |   | 5,483             |  |  |   | (1,131  | ) |  |   | 4,352   | 
|Government including Medicaid contracts             |  |                | 15 years |  |                     |   | 34,967 |                         |  |   | (12,044           | ) |  |            | 22,923  |  |                     |  | 15 years |                         |  |   | 34,967            |  |  |   | (11,463 | ) |  |   | 23,504  | 
|Managed care contracts                              |  |                | 10 years |  |                     |   | 14,400 |                         |  |   | (7,440            | ) |  |            | 6,960   |  |                     |  | 10 years |                         |  |   | 14,400            |  |  |   | (7,080  | ) |  |   | 7,320   | 
|Managed care contracts                              |  |                | 5 years  |  |                     |   | 100    |                         |  |   | (70               | ) |  |            | 30      |  |                     |  | 5 years  |                         |  |   | 100               |  |  |   | (65     | ) |  |   | 35      | 
|Core developed technology                           |  |                | 5 years  |  |                     |   | 2,704  |                         |  |   | (2,695            | ) |  |            | 9       |  |                     |  | 5 years  |                         |  |   | 2,704             |  |  |   | (2,663  | ) |  |   | 41      | 
|Covenants not to compete                            |  |                | 3 years  |  |                     |   | 152    |                         |  |   | (152              | ) |  |            |        |  |                     |  | 3 years  |                         |  |   | 152               |  |  |   | (152    | ) |  |   |        | 
|                                                    |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Total intangible assets subject to amortization     |  |                |          |  |                     | $ | 84,827 |                         |  | $ | (29,511           | ) |  | $          | 55,316  |  |                     |  |          |                         |  | $ | 87,539            |  |  | $ | (28,686 | ) |  | $ | 58,853  | 
|                                                    |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Intangible assets not subject to amortization:      |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Trademarks and trade names                          |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            | 171,132 |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   | 173,078 | 
|Certificates of need                                |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            | 44,600  |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   | 44,600  | 
|Regulatory licenses                                 |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            | 37,501  |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   | 37,501  | 
|                                                    |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Total intangible assets not subject to amortization |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            | 253,233 |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   | 255,179 | 
|                                                    |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Total intangible assets                             |  |                |          |  |                     |   |        |                         |  |   |                   |   |  | $          | 308,549 |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  | $ | 314,032 | 
|                                                    |  |                |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 

As a result of the Companys strategic plan to transition the services provided by the Aspen business
within its healthy living division (see Note 14), the Company tested its finite-lived and infinite-lived intangible assets at the eight affected facilities for impairment at March 31, 2011. The Company recognized non-cash impairment charges of
$2.1 million and $1.9 million related to the finite-lived and indefinite-lived intangible assets, respectively, which were included in the condensed consolidated statement of operations as asset impairment.

Total amortization expense of intangible assets subject to amortization was $1.4 million and $1.7 million for the three months ended
March 31, 2011 and 2010, respectively.

Estimated future amortization expense related to the amortizable intangible
assets at March 31, 2011 is as follows (in thousands):



|                             |  |   |        | 
|---------------------------- |  | - | ------ | 
|Fiscal Year                  |  |   |       
|2011 (remaining nine months) |  | $ | 4,072  | 
|2012                         |  |   | 5,411  | 
|2013                         |  |   | 5,396  | 
|2014                         |  |   | 5,396  | 
|2015                         |  |   | 5,396  | 
|Thereafter                   |  |   | 29,645 | 
|                             |  |   |        | 
|Total                        |  | $ | 55,316 | 
|                             |  |   |        | 



9



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



6. INCOME TAXES

The Company calculates its income tax expense for interim periods by applying the full years estimated effective tax rate in its financial statements for interim periods.

For the three months ended March 31, 2011, the Companys tax benefit on continuing operations is $0.6 million,
representing an effective tax rate of 43.4%. The effective tax rate differs from the U.S. federal statutory rate of 35.0% primarily because of state income taxes. For the three months ended March 31, 2010, the Companys tax expense on
continuing operations was $0.9 million, representing an effective tax rate of 43.3% on continuing operation.

There is no
significant change on uncertain tax positions for the three months ended March 31, 2011. The Company files its income tax returns in various jurisdictions, including United State federal and state filings, United Kingdom and Canada filings. The
Company is currently under examination by various state jurisdictions. There are different interpretations of tax laws and regulations and, as a result, significant disputes may arise with these tax authorities involving issues of the timing and
amount of deductions and allocations of income among various tax jurisdictions. While the Company believes its positions comply with applicable laws, it periodically evaluates its exposures associated with its tax filing positions.

7. LONG-TERM DEBT

Long-term debt at March 31, 2011 and December 31, 2010 consists of the following (in thousands):



|                                                                                |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                |  | March 31,2011 |         |   | December 31,2010 |  
|Term loan                                                                       |  | $             | 398,305 |   |                  | $ | 398,305 |  
|Revolving line of credit                                                        |  |               | 36,500  |   |                  |   | 34,000  |  
|Senior subordinated notes, net of discount of $1,276 in 2011 and $1,342 in 2010 |  |               | 176,020 |   |                  |   | 175,954 |  
|Seller notes                                                                    |  |               | 566     |   |                  |   | 1,680   |  
|Note payable, leasehold improvement                                             |  |               | 78      |   |                  |   | 87      |  
|                                                                                |  |               |         |   |                  |   |         |  
|Total debt                                                                      |  |               | 611,469 |   |                  |   | 610,026 |  
|Less current portion                                                            |  |               | (23,502 | ) |                  |   | (11,111 | )
|                                                                                |  |               |         |   |                  |   |         |  
|Long-term debt-less current portion                                             |  | $             | 587,967 |   |                  | $ | 598,915 |  
|                                                                                |  |               |         |   |                  |   |         |  

Term Loans and Revolving Line of Credit  On January 20, 2011, the Company entered
into an amendment agreement and further amended and restated the Amended and Restated Credit Agreement (Second Amended and Restated Credit Agreement) to extend the maturity of a substantial portion of the Term Loans and revolving line of
credit and provide the Company with greater flexibility to amend and refinance its Term Loans and revolving line of credit in the future. Certain financial covenants were also amended. The amendment was recognized as modification of debts.

Term Loans Key provisions of the Term Loans that were extended pursuant to the Second Amended and
Restated Credit Agreement (Extended Term Loans) and those that were not (Non-Extended Term Loans) are summarized below.

Non-Extended Term Loans: Of the aggregate amount of $89.3 million outstanding at March 31, 2011, the Company paid $9.6 million in April 2011 and the remainder is payable on February 6,
2013. Interest was payable quarterly at (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 2.25% , subject to reduction to 2.00%
contingent upon the Company achieving a corporate family rating of at least B1 (with stable or better outlook) from Moodys and (ii) for base rate loans, a rate per annum equal to the greater of (x) the prime rate of the
administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 1.25% subject to reduction to 1.00% contingent upon the Company achieving a corporate family rating of at least B1 (with stable or better
outlook) from Moodys. At March 31, 2011, the entire amount of Non-Extended Term Loans consisted of LIBOR loans and the interest rate thereon was 2.553%.



10



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Extended Term Loans: The aggregate amount of $309.0 million is payable in
quarterly principal installments of $0.9 million over the payment period March 31, 2013 through September 30, 2015, with the remainder due on the maturity date of November 16, 2015. Interest is payable quarterly and rates are based on
(i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 4.50% and (ii) for base rate loans, a rate per annum equal to the greater of
(x) the prime rate of the administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 3.50%. At March 31, 2011, the entire amount of the Non-Extended Term Loans consisted of LIBOR loans and
the interest rate thereon was 4.803%.

The Company is required to apply a certain portion of excess cash to the principal
amount of the Term Loan. Excess cash under the Second Amended and Restated Credit Agreement is defined as net income attributable to the Company adjusted for certain cash and non-cash items. The Company made a pre-payment of $9.6 million in April
2011 related to excess cash flows as defined in the Second Amended and Restated Credit Agreement.

Revolving Line of
Credit  Key provisions of the revolving line of credit commitments that were extended pursuant to the Second Amended and Restated Credit Agreement (Extended Revolving Line of Credit) and those that were not extended
(Non-Extended Revolving Line of Credit) are summarized below.

Non-Extended Revolving Line of Credit: The
aggregate commitments of $37.0 million mature on February 6, 2012. Interest was payable at (i) for LIBOR loans of any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable
margin of 2.50%, 2.25%, 2.00% or 1.75%, based upon the Companys leverage ratio being within certain defined ranges, and (ii) for base rate loans, a rate per annum equal to the greater of (x) the prime rate of the administrative agent
and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 1.50%, 1.25%, 1.00% or 0.75%, based upon the Companys leverage ratio being within certain defined ranges. At March 31, 2011, the amount outstanding
under Non-Extended Revolving Line of Credit was $13.5 million.

Extended Revolving Line of Credit: The aggregate
commitments of $63.0 million mature on August 16, 2015 provided that if any Non-Extended Term Loans have not been repaid or refinanced in full by January 6, 2013 or have not been subsequently extended to the maturity date of the Extended
Term Loans (November 16, 2015), then the maturity date of the Extended Revolving Line of Credit commitments will be January 6, 2013. Interest is payable quarterly at (i) for LIBOR loans for any interest period, a rate per annum equal to
the LIBOR rate as determined by the administrative agent, plus an applicable margin of 4.00%, 3.75%, 3.50% or 3.25%, based upon the Companys leverage ratio being within certain defined ranges, and (ii) for base rate loans, a rate per
annum equal to the greater of (x) the prime rate of the administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 3.00%, 2.75%, 2.50% or 2.25%, based upon the Companys leverage ratio
being within certain defined ranges. Commitment fees are payable quarterly at a rate equal to 0.625% per annum. At March 31, 2011, the amount outstanding under Extended Revolving Line of Credit was $23.0 million.

Interest expense (gross) on total debt was $12.1 million and $11.0 million for the three months ended March 31, 2011 and 2010.

8. DERIVATIVES

The Company uses interest rate swaps to manage risk related to fluctuations in interest rates and does not engage in speculation or trading activities with its interest rate swaps.

The effective portion of changes in the fair value of interest rate swaps designated and that qualify as cash flow hedges is recorded in
accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2011, such derivatives were used to
hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.



11



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



As of March 31, 2011, the Company had one remaining outstanding interest rate
derivative with a $200.0 million notional amount that was designated as a cash flow hedge of interest rate risk. Under the terms of this derivative, (the 2008 Swap), the Company receives an interest rate equal to 3-month LIBOR
and in exchange pays a fixed rate of 3.875% on the $200.0 million notional amount. The 2008 Swap has a maturity date of June 30, 2011. The Companys other interest rate derivative (the 2006 Swap), which converted $10.0 million
of its floating-rate debt at 4.99%, matured on March 31, 2011.

Amounts reported in accumulated other comprehensive
income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Companys variable-rate debt. During the remaining term of the 2008 Swap, the Company estimates that an additional $1.7 million
of the effective portion of this derivative will be reclassified as an increase to interest expense.

The table below presents
the fair value of the Companys derivative financial instruments at March 31, 2011 and December 31, 2010 (in thousands):



|                                                    |                       |                       |                           |               |  |   |                  |  |  |   |       | 
|--------------------------------------------------- | --------------------- | --------------------- | ------------------------- | ------------- |  | - | ---------------- |  |  | - | ----- | 
|                                                    |                       | Liability Derivatives |                          
|                                                    | Balance SheetLocation |                       |                           | Fair Value    | 
|                                                    |                       |                       |                           | March 31,2011 |  |   | December 31,2010 | 
|Derivatives designated as hedging instruments       |                       |                       |                           |               |  |   |                  |  |  |   |       | 
|Interest Rate Swaps                                 |                       |                       | Other current liabilities |               |  | $ | 1,744            |  |  | $ | 3,535 | 
|                                                    |                       |                       |                           |               |  |   |                  |  |  |   |       | 
|Total derivatives designated as hedging instruments |                       |                       |                           |               |  | $ | 1,744            |  |  | $ | 3,535 | 
|                                                    |                       |                       |                           |               |  |   |                  |  |  |   |       | 

The table below presents the before-tax effect of the Companys derivative financial instruments
for the three months ending March 31, 2011 and 2010 (in thousands):



|                                |  |                                                                        |      |   |                                                                                         |   |        |                                                                                    |  |  |                                                                                                                          |  |  |                                                                                                                         |        |   |  |   |        |       |  |  |                      |  |  |   |   |  |  |   |    |  
|------------------------------- |  | ---------------------------------------------------------------------- | ---- | - | --------------------------------------------------------------------------------------- | - | ------ | ---------------------------------------------------------------------------------- |  |  | ------------------------------------------------------------------------------------------------------------------------ |  |  | ----------------------------------------------------------------------------------------------------------------------- | ------ | - |  | - | ------ | ----- |  |  | -------------------- |  |  | - | - |  |  | - | -- | -
|Cash
Flow Hedging Relationships |  | Amount ofGain or (Loss)Recognized inOCI
onDerivative(EffectivePortion) |      |   | Location of Gainor (Loss)Reclassified fromAccumulated OCIinto Income(Effective
Portion) |   |        | Amount ofGain or (Loss)ReclassifiedfromAccumulatedOCI
intoIncome(EffectivePortion) |  |  | Location of Gainor(Loss) Recognizedin Income
onDerivative(IneffectivePortionand AmountExcluded fromEffectivenessTesting) |  |  | Amount of Gainor (Loss)Recognized inIncome onDerivative(IneffectivePortion
andAmount Excludedfrom EffectivenessTesting) |       
|                                |  | Q111                                                                  |      |   | Q110                                                                                   |   |        |                                                                                    |  |  | Q111                                                                                                                    |  |  | Q110                                                                                                                   |        |   |  |   |        | Q111 |  |  | Q110                | 
|Interest Rate Swaps             |  | $                                                                      | (112 | ) |                                                                                         | $ | (1,797 | )                                                                                  |  |  | Interest expense-net                                                                                                     |  |  | $                                                                                                                       | (1,865 | ) |  | $ | (2,063 | )     |  |  | Interest expense-net |  |  | $ | 1 |  |  | $ | (1 | )

Credit-risk-related
Contingent Features

The Company has agreements with one of its derivative counterparties that contain a provision
where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.



12



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



As of March 31, 2011, the liability due to counterparties to the derivative
agreements is $1.8 million, which includes accrued interest but excludes any adjustment for nonperformance risk (credit valuation adjustments). As of March 31, 2011, the Company has not posted any collateral related to these
agreements. If the Company had breached any of these provisions at March 31, 2010, it may be required to settle its obligations under the agreements at their termination value of $1.8 million. At March 31, 2011, the Company was
in compliance with all agreements related to its debt and derivatives.

9. FAIR VALUE MEASUREMENTS

The Company accounts for certain assets and liabilities at fair value. As defined in the authoritative guidance on fair value
measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. An asset or liabilitys level is based on the lowest level of input that is significant to the fair value measurement. The statement requires that assets and liabilities
carried at fair value be classified and disclosed in one of the following three categories:



|         |  |                                                                                                                                                                                                    
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1: |  | Quoted prices (unadjusted) in active markets for identical assets or liabilities;                                                                                                                  
|         | 
|Level 2: |  | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;                                                                                         
|         | 
|Level 3: |  | Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants
would use in pricing.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company values its interest rate swaps using terminal values which are derived using proprietary models based upon
well-recognized financial principles and reasonable estimates about relevant future market conditions at March 31, 2011 and December 31, 2010. These instruments are allocated to Level 2 on the fair value hierarchy because the
critical inputs into these models, including the relevant yield curves and the known contractual terms of the instrument, are readily available. Refer to Note 9 for disclosure of fair value measurements and impact of unrealized gain or
loss on earnings.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company measures, on a non-recurring basis, its long-lived assets and indefinite-lived intangible assets at fair value when performing
impairment assessments under the relevant accounting guidance. Nonfinancial liabilities for facility exit activities are also measured at fair value on a non-recurring basis.

The following table presents the non-financial assets that were measured and recorded at fair value on a non-recurring basis during the three months ended March 31, 2011 (in thousands):



|                           |  |                                   |       |  |                                        |   |       |         |  |   |         |  |  |         |   |  |  |   |       | 
|-------------------------- |  | --------------------------------- | ----- |  | -------------------------------------- | - | ----- | ------- |  | - | ------- |  |  | ------- | - |  |  | - | ----- | 
|                           |  | Three Months Ended March 31, 2011 |       |  | Level Used to Determine New Cost Basis |  
|                           |  | ImpairmentCharge                  |       |  | New CostBasis                          |   |       | Level 1 |  |   | Level 2 |  |  | Level 3 |  
|Property and equipment     |  | $                                 | 337   |  |                                        | $ |      |         |  | $ |        |  |  | $       |  |  |  | $ |      | 
|Referral network           |  |                                   | 1,251 |  |                                        |   |      |         |  |   |        |  |  |         |  |  |  |   |      | 
|Accreditation              |  |                                   | 423   |  |                                        |   |      |         |  |   |        |  |  |         |  |  |  |   |      | 
|Curriculum                 |  |                                   | 444   |  |                                        |   |      |         |  |   |        |  |  |         |  |  |  |   |      | 
|Trademarks and trade names |  |                                   | 1,946 |  |                                        |   | 5,100 |         |  |   |        |  |  |         |  |  |  |   | 5,100 | 
|                           |  |                                   |       |  |                                        |   |       |         |  |   |         |  |  |         |   |  |  |   |       | 
|Total                      |  | $                                 | 4,401 |  |                                        |   | 5,100 |         |  | $ |        |  |  | $       |  |  |  | $ | 5,100 | 
|                           |  |                                   |       |  |                                        |   |       |         |  |   |         |  |  |         |   |  |  |   |       | 

For the three months ended March 31, 2011, the estimated fair value of the assets was determined based
on level 3 inputs.



13



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Fair Value of Financial Instruments

Financial instruments not measured on a recurring basis include cash, restricted cash, accounts receivable, accounts payable, loan program
notes and long-term debt. With the exception of financial instruments noted in the following table, the fair value of the Companys financial instruments approximate carrying value due to their short maturities.

The estimated fair value of financial instruments with long-term maturities is as follows:



|                          |                |                |         |            |                   |   |                |  |  |            |         |  |  |   |         | 
|------------------------- | -------------- | -------------- | ------- | ---------- | ----------------- | - | -------------- |  |  | ---------- | ------- |  |  | - | ------- | 
|                          |                | March 31, 2011 |         |            | December 31, 2010 |  
|                          | (in thousands) |               
|                          | CarryingAmount |                |         | Fair Value |                   |   | CarryingAmount |  |  | Fair Value |        
|Assets                    |                |                |         |            |                   |   |                |  |  |            |         |  |  |   |         | 
|Loan program notes        |                | $              | 8,432   |            |                   | $ | 6,458          |  |  | $          | 7,949   |  |  | $ | 6,028   | 
|Liabilities               |                |                |         |            |                   |   |                |  |  |            |         |  |  |   |         | 
|Senior subordinated notes |                | $              | 176,020 |            |                   | $ | 183,797        |  |  | $          | 175,954 |  |  | $ | 187,232 | 
|Term loan                 |                | $              | 398,305 |            |                   | $ | 384,861        |  |  | $          | 398,305 |  |  | $ | 377,778 | 

Loan program notes
are measured at their estimated fair market value measured primarily based on securitization market conditions for similar loans. The Companys senior subordinated notes are measured at fair value based on bond-yield data from market trading
activity as well as U.S. Treasury rates with similar maturities as the senior subordinated notes. The Companys term loans are measured at fair value based on present value methods using credit spreads derived from market data to discount the
projected interest and principal payments on the Companys term loans. For the three months ended March 31, 2011, the estimated fair value of loan program notes, senior subordinated notes and term loans was determined based on Level 3
inputs.

10. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes other gains and losses affecting equity that are excluded from net income. The components of accumulated other comprehensive income (loss) consist of changes in the
fair value of derivative financial instruments.

Comprehensive income (loss) for the three months ended March 31,
2011 and 2010 was as follows (in thousands):



|                                                                                                 |  |                                 |       |   |                                 |   |       | 
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | ----- | - | ------------------------------- | - | ----- | 
|                                                                                                 |  | Three MonthsEnded March 31,2011 |       |   | Three MonthsEnded March 31,2010 |  
|Net (loss) income                                                                                |  | $                               | (753  | ) |                                 | $ | 861   | 
|Other comprehensive income:                                                                      |  |                                 |       |   |                                 |   |       | 
|Net change in unrealized gain on cash flow hedges (net of tax of $702 in 2011, and $106 in 2010) |  |                                 | 1,051 |   |                                 |   | 160   | 
|                                                                                                 |  |                                 |       |   |                                 |   |       | 
|Comprehensive income attributable to CRC Health Corporation                                      |  | $                               | 298   |   |                                 | $ | 1,021 | 
|                                                                                                 |  |                                 |       |   |                                 |   |       | 

11. COMMITMENTS AND CONTINGENCIES

Indemnifications - The Company provides for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, bylaws,
articles of association or similar organizational documents, as the case may be. The Company maintains directors and officers insurance which should enable the Company to recover a portion of any future amounts paid should they occur.

In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in
contracts in connection with business dispositions and acquisitions and also provides indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or
in certain other circumstances relating to such sales or acquisitions.

While the Companys future obligations under
certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the
conditional nature of the Companys obligations and the unique facts and circumstances involved.



14



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Litigation - The Company is involved in litigation and regulatory
investigations arising in the course of business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on the Companys future financial position or results from
operations and cash flows.

Loan Program - As of March 31, 2011, the Company had purchased
approximately $12.0 million in Loan Program notes with a weighted average interest rate of 6.8% and a maximum remaining amortization period of 20 years. At March 31, 2011, the Company had $0.8 million of outstanding loan purchase
commitments related to its Loan Program.

12. STOCK-BASED COMPENSATION

Stock-based equity awards are made by the Group to certain employees of the Company. The Company incurs stock-based compensation
expense related to the equity awards made by the Group to employees and consultants of the Company. For the three months ended March 31, 2011 and 2010, the Company recognized stock-based compensation expense of $0.7
million and $1.4 million, respectively. Stock-based compensation expense is recorded within salaries and benefits on the condensed consolidated statements of operations. The total income tax benefit recognized in the condensed consolidated
statement of operations for stock-based compensation expense was $0.3 million and $0.6 million for the three months ended March 31, 2011 and 2010, respectively.

During the three months ended March 31, 2011, the Group granted 154,986 units, which represent 1,394,874 share options to purchase Class A common stock of the Group
and 154,986 share options to purchase Class L common stock of the Group. At March 31, 2011 and 2010, the Company had 3,577,393 and 3,738,382 unvested option shares with per-share, weighted average grant date fair values of $3.56 and
$3.63, respectively. Additionally, 383,855 option shares with a per-share weighted average grant date fair value of $5.20 vested during the three months ended March 31, 2011.

Activity under the Groups Plans for the three months ended March 31, 2011 is summarized below:



|                                           |  |               |           |   |                                        |   |      |                                     |  |  |                                                     |  |  |  |      | 
|------------------------------------------ |  | ------------- | --------- | - | -------------------------------------- | - | ---- | ----------------------------------- |  |  | --------------------------------------------------- |  |  |  | ---- | 
|                                           |  | Option Shares |           |   | Weighted-AverageExercisePricePer Share |   |      | Weighted-AverageGrantDate FairValue |  |  | Weighted-AverageRemainingContractual Term(In Years) | 
|Balance at December 31, 2010               |  |               | 6,002,738 |   |                                        | $ | 7.77 |                                     |  |  |                                                     |  |  |  | 5.77 | 
|Granted                                    |  |               | 1,549,860 |   |                                        |   | 7.25 |                                     |  |  | 2.00                                                |  |  |  | 9.92 | 
|Exercised                                  |  |               |          |   |                                        |   |      |                                     |  |  |                                                     |  |  |  |     | 
|Forfeited/cancelled/expired                |  |               | (177,188  | ) |                                        |   | 9.29 |                                     |  |  | 3.94                                                |  |  |  |      | 
|                                           |  |               |           |   |                                        |   |      |                                     |  |  |                                                     |  |  |  |      | 
|Outstanding-March 31, 2011                 |  |               | 7,375,410 |   |                                        | $ | 7.62 |                                     |  |  |                                                     |  |  |  | 6.41 | 
|                                           |  |               |           |   |                                        |   |      |                                     |  |  |                                                     |  |  |  |      | 
|Exercisable-March 31, 2011                 |  |               | 3,798,018 |   |                                        | $ | 6.79 |                                     |  |  |                                                     |  |  |  | 5.08 | 
|                                           |  |               |           |   |                                        |   |      |                                     |  |  |                                                     |  |  |  |      | 
|Exercisable and expected to be exercisable |  |               | 7,006,639 |   |                                        | $ | 7.62 |                                     |  |  |                                                     |  |  |  | 6.41 | 
|                                           |  |               |           |   |                                        |   |      |                                     |  |  |                                                     |  |  |  |      | 

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As of March 31, 2011, the Company had $177.3 million aggregate principal amount of the 10.75% Senior Subordinated Notes due 2016
(the Notes) outstanding. The Notes are fully and unconditionally guaranteed, jointly and severally on an unsecured senior subordinated basis, by the Companys wholly owned subsidiaries.

The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors as of
March 31, 2011 and December 31, 2010, the condensed consolidating statements of operations for the three months ended March 31, 2011 and 2010, and the condensed consolidating statements of cash flows for the three months ended
March 31, 2011 and 2010.



15



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Condensed Consolidating Balance Sheet as of March 31, 2011

(In thousands) (Unaudited)



|                                                 |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|------------------------------------------------ |  | --------------------- | ------- |  | -------------------- | - | ------- | ------------------------ |  | - | ------------ |  |  | ------------ | -------- | - |  | - | --------- | 
|                                                 |  | CRC HealthCorporation |         |  | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |  |  | Consolidated |         
|ASSETS                                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|CURRENT ASSETS:                                  |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Cash and cash equivalents                        |  | $                     |        |  |                      | $ | 6,524   |                          |  | $ | 370          |  |  | $            |         |   |  | $ | 6,894     | 
|Restricted cash                                  |  |                       | 897     |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 897       | 
|Accounts receivable-net of allowance             |  |                       |        |  |                      |   | 36,874  |                          |  |   | 127          |  |  |              |         |   |  |   | 37,001    | 
|Prepaid expenses                                 |  |                       | 4,064   |  |                      |   | 3,502   |                          |  |   | 162          |  |  |              |         |   |  |   | 7,728     | 
|Other current assets                             |  |                       | 485     |  |                      |   | 1,489   |                          |  |   | 111          |  |  |              |         |   |  |   | 2,085     | 
|Income taxes receivable                          |  |                       | 654     |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 654       | 
|Deferred income taxes                            |  |                       | 6,547   |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 6,547     | 
|Current assets of discontinued operations        |  |                       |        |  |                      |   | 1,409   |                          |  |   |             |  |  |              |         |   |  |   | 1,409     | 
|                                                 |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total current assets                             |  |                       | 12,647  |  |                      |   | 49,798  |                          |  |   | 770          |  |  |              |         |   |  |   | 63,215    | 
|PROPERTY AND EQUIPMENT-Net                       |  |                       | 9,428   |  |                      |   | 115,330 |                          |  |   | 1,074        |  |  |              |         |   |  |   | 125,832   | 
|GOODWILL                                         |  |                       |        |  |                      |   | 518,310 |                          |  |   | 3,497        |  |  |              |         |   |  |   | 521,807   | 
|INTANGIBLE ASSETS-Net                            |  |                       |        |  |                      |   | 308,549 |                          |  |   |             |  |  |              |         |   |  |   | 308,549   | 
|OTHER ASSETS-Net                                 |  |                       | 21,431  |  |                      |   | 636     |                          |  |   | 14           |  |  |              |         |   |  |   | 22,081    | 
|INVESTMENT IN SUBSIDIARIES                       |  |                       | 949,850 |  |                      |   |        |                          |  |   |             |  |  |              | (949,850 | ) |  |   |          | 
|                                                 |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|TOTAL ASSETS                                     |  | $                     | 993,356 |  |                      | $ | 992,623 |                          |  | $ | 5,355        |  |  | $            | (949,850 | ) |  | $ | 1,041,484 | 
|                                                 |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|LIABILITIES AND EQUITY                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|CURRENT LIABILITIES:                             |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Accounts payable                                 |  | $                     | 3,384   |  |                      | $ | 1,090   |                          |  | $ | 29           |  |  | $            |         |   |  | $ | 4,503     | 
|Accrued liabilities                              |  |                       | 13,716  |  |                      |   | 16,485  |                          |  |   | 588          |  |  |              |         |   |  |   | 30,789    | 
|Current portion of long-term debt                |  |                       | 23,146  |  |                      |   | 356     |                          |  |   |             |  |  |              |         |   |  |   | 23,502    | 
|Other current liabilities                        |  |                       | 2,404   |  |                      |   | 14,764  |                          |  |   | 1,077        |  |  |              |         |   |  |   | 18,245    | 
|Current liabilities of discontinued operations   |  |                       |        |  |                      |   | 2,764   |                          |  |   |             |  |  |              |         |   |  |   | 2,764     | 
|                                                 |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total current liabilities                        |  |                       | 42,650  |  |                      |   | 35,459  |                          |  |   | 1,694        |  |  |              |         |   |  |   | 79,803    | 
|LONG-TERM DEBT-Less current portion              |  |                       | 587,679 |  |                      |   | 288     |                          |  |   |             |  |  |              |         |   |  |   | 587,967   | 
|OTHER LONG-TERM LIABILITIES                      |  |                       | 995     |  |                      |   | 7,469   |                          |  |   | 141          |  |  |              |         |   |  |   | 8,605     | 
|LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS |  |                       |        |  |                      |   | 3,077   |                          |  |   |             |  |  |              |         |   |  |   | 3,077     | 
|DEFERRED INCOME TAXES                            |  |                       | 105,700 |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 105,700   | 
|                                                 |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total liabilities                                |  |                       | 737,024 |  |                      |   | 46,293  |                          |  |   | 1,835        |  |  |              |         |   |  |   | 785,152   | 
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY      |  |                       | 256,332 |  |                      |   | 946,330 |                          |  |   | 3,520        |  |  |              | (949,850 | ) |  |   | 256,332   | 
|                                                 |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total equity                                     |  |                       | 256,332 |  |                      |   | 946,330 |                          |  |   | 3,520        |  |  |              | (949,850 | ) |  |   | 256,332   | 
|                                                 |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|TOTAL LIABILITIES AND EQUITY                     |  | $                     | 993,356 |  |                      | $ | 992,623 |                          |  | $ | 5,355        |  |  | $            | (949,850 | ) |  | $ | 1,041,484 | 
|                                                 |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 



16



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Condensed Consolidating Balance Sheet as of December 31, 2010

(In thousands) (Unaudited)



|                                                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|---------------------------------------------------------- |  | --------------------- | ------- |  | -------------------- | - | ------- | ------------------------ |  | - | ------------ |  |  | ------------ | -------- | - |  | - | --------- | 
|                                                           |  | CRC HealthCorporation |         |  | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |  |  | Consolidated |         
|ASSETS                                                     |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|CURRENT ASSETS:                                            |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Cash and cash equivalents                                  |  | $                     |        |  |                      | $ | 6,826   |                          |  | $ | 285          |  |  | $            |         |   |  | $ | 7,111     | 
|Restricted cash                                            |  |                       | 546     |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 546       | 
|Accounts receivable-net of allowance for doubtful accounts |  |                       |        |  |                      |   | 32,474  |                          |  |   | 232          |  |  |              |         |   |  |   | 32,706    | 
|Prepaid expenses                                           |  |                       | 4,488   |  |                      |   | 3,955   |                          |  |   | 180          |  |  |              |         |   |  |   | 8,623     | 
|Other current assets                                       |  |                       | 585     |  |                      |   | 1,333   |                          |  |   | 3            |  |  |              |         |   |  |   | 1,921     | 
|Income taxes receivable                                    |  |                       | 259     |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 259       | 
|Deferred income taxes                                      |  |                       | 6,547   |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 6,547     | 
|Current assets of discontinued operations                  |  |                       |        |  |                      |   | 1,635   |                          |  |   |             |  |  |              |         |   |  |   | 1,635     | 
|                                                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total current assets                                       |  |                       | 12,425  |  |                      |   | 46,223  |                          |  |   | 700          |  |  |              |         |   |  |   | 59,348    | 
|PROPERTY AND EQUIPMENT-Net                                 |  |                       | 9,515   |  |                      |   | 115,023 |                          |  |   | 1,088        |  |  |              |         |   |  |   | 125,626   | 
|GOODWILL                                                   |  |                       |        |  |                      |   | 518,310 |                          |  |   | 3,497        |  |  |              |         |   |  |   | 521,807   | 
|INTANGIBLE ASSETS-Net                                      |  |                       |        |  |                      |   | 314,032 |                          |  |   |             |  |  |              |         |   |  |   | 314,032   | 
|OTHER ASSETS-Net                                           |  |                       | 18,728  |  |                      |   | 669     |                          |  |   | 14           |  |  |              |         |   |  |   | 19,411    | 
|INVESTMENT IN SUBSIDIARIES                                 |  |                       | 955,058 |  |                      |   |        |                          |  |   |             |  |  |              | (955,058 | ) |  |   |          | 
|                                                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|TOTAL ASSETS                                               |  | $                     | 995,726 |  |                      | $ | 994,257 |                          |  | $ | 5,299        |  |  | $            | (955,058 | ) |  | $ | 1,040,224 | 
|                                                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|LIABILITIES AND EQUITY                                     |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|CURRENT LIABILITIES:                                       |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Accounts payable                                           |  | $                     | 3,850   |  |                      | $ | 1,066   |                          |  | $ | 41           |  |  | $            |         |   |  | $ | 4,957     | 
|Accrued liabilities                                        |  |                       | 17,397  |  |                      |   | 12,231  |                          |  |   | 664          |  |  |              |         |   |  |   | 30,292    | 
|Current portion of long-term debt                          |  |                       | 9,641   |  |                      |   | 1,470   |                          |  |   |             |  |  |              |         |   |  |   | 11,111    | 
|Other current liabilities                                  |  |                       | 4,127   |  |                      |   | 13,128  |                          |  |   | 1,050        |  |  |              |         |   |  |   | 18,305    | 
|Current liabilities of discontinued operations             |  |                       |        |  |                      |   | 3,619   |                          |  |   |             |  |  |              |         |   |  |   | 3,619     | 
|                                                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total current liabilities                                  |  |                       | 35,015  |  |                      |   | 31,514  |                          |  |   | 1,755        |  |  |              |         |   |  |   | 68,284    | 
|LONG-TERM DEBT-Less current portion                        |  |                       | 598,618 |  |                      |   | 297     |                          |  |   |             |  |  |              |         |   |  |   | 598,915   | 
|OTHER LONG-TERM LIABILITIES                                |  |                       | 996     |  |                      |   | 7,613   |                          |  |   | 177          |  |  |              |         |   |  |   | 8,786     | 
|LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS           |  |                       |        |  |                      |   | 3,142   |                          |  |   |             |  |  |              |         |   |  |   | 3,142     | 
|DEFERRED INCOME TAXES                                      |  |                       | 105,256 |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 105,256   | 
|                                                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total liabilities                                          |  |                       | 739,885 |  |                      |   | 42,566  |                          |  |   | 1,932        |  |  |              |         |   |  |   | 784,383   | 
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY                |  |                       | 255,841 |  |                      |   | 951,691 |                          |  |   | 3,367        |  |  |              | (955,058 | ) |  |   | 255,841   | 
|                                                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total equity                                               |  |                       | 255,841 |  |                      |   | 951,691 |                          |  |   | 3,367        |  |  |              | (955,058 | ) |  |   | 255,841   | 
|                                                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|TOTAL LIABILITIES AND EQUITY                               |  | $                     | 995,726 |  |                      | $ | 994,257 |                          |  | $ | 5,299        |  |  | $            | (955,058 | ) |  | $ | 1,040,224 | 
|                                                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 



17



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Condensed Consolidating Statements of Operations

For the Three Months Ended March 31, 2011

(In thousands) (Unaudited)



|                                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------ |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                             |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                 |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                   |  | $                     | 43      |   |                      | $ | 109,412 |                          |  | $ | 2,406        |   |  | $            |        |   |  | $ | 111,861 |  
|Management fee revenue                                       |  |                       | 21,049  |   |                      |   |        |                          |  |   |             |   |  |              | (21,049 | ) |  |   |        |  
|                                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                            |  |                       | 21,092  |   |                      |   | 109,412 |                          |  |   | 2,406        |   |  |              | (21,049 | ) |  |   | 111,861 |  
|                                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                          |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                        |  |                       | 5,330   |   |                      |   | 50,911  |                          |  |   | 1,106        |   |  |              |        |   |  |   | 57,347  |  
|Supplies, facilities and other operating costs               |  |                       | 2,886   |   |                      |   | 29,117  |                          |  |   | 1,203        |   |  |              |        |   |  |   | 33,206  |  
|Provision for doubtful accounts                              |  |                       |        |   |                      |   | 1,657   |                          |  |   | 14           |   |  |              |        |   |  |   | 1,671   |  
|Depreciation and amortization                                |  |                       | 1,053   |   |                      |   | 3,755   |                          |  |   | 94           |   |  |              |        |   |  |   | 4,902   |  
|Asset impairments                                            |  |                       |        |   |                      |   | 4,401   |                          |  |   |             |   |  |              |        |   |  |   | 4,401   |  
|Management fee expense                                       |  |                       |        |   |                      |   | 20,298  |                          |  |   | 751          |   |  |              | (21,049 | ) |  |   |        |  
|                                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                     |  |                       | 9,269   |   |                      |   | 110,139 |                          |  |   | 3,168        |   |  |              | (21,049 | ) |  |   | 101,527 |  
|                                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                      |  |                       | 11,823  |   |                      |   | (727    | )                        |  |   | (762         | ) |  |              |        |   |  |   | 10,334  |  
|INTEREST EXPENSE-NET                                         |  |                       | (11,686 | ) |                      |   | (70     | )                        |  |   |             |   |  |              |        |   |  |   | (11,756 | )
|OTHER INCOME                                                 |  |                       | 31      |   |                      |   |        |                          |  |   |             |   |  |              |        |   |  |   | 31      |  
|                                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |  |                       | 168     |   |                      |   | (797    | )                        |  |   | (762         | ) |  |              |        |   |  |   | (1,391  | )
|INCOME TAX EXPENSE (BENEFIT)                                 |  |                       | 73      |   |                      |   | (346    | )                        |  |   | (331         | ) |  |              |        |   |  |   | (604    | )
|                                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX         |  |                       | 95      |   |                      |   | (451    | )                        |  |   | (431         | ) |  |              |        |   |  |   | (787    | )
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX EXPENSE OF $26 |  |                       |        |   |                      |   | 34      |                          |  |   |             |   |  |              |        |   |  |   | 34      |  
|                                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS)                                            |  |                       | 95      |   |                      |   | (417    | )                        |  |   | (431         | ) |  |              |        |   |  |   | (753    | )
|EQUITY IN INCOME OF SUBSIDIARIES, NET OF TAX                 |  |                       | (848    | ) |                      |   |        |                          |  |   |             |   |  |              | 848     |   |  |   |        |  
|                                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION     |  | $                     | (753    | ) |                      | $ | (417    | )                        |  | $ | (431         | ) |  | $            | 848     |   |  | $ | (753    | )
|                                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



18



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Condensed Consolidating Statements of Operations

For the Three Months Ended March 31, 2010

(In thousands) (Unaudited)



|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                      |  | $                     | 50      |   |                      | $ | 101,778 |                          |  | $ | 1,749        |   |  | $            |        |   |  | $ | 103,577 |  
|Management fee revenue                                          |  |                       | 19,106  |   |                      |   |        |                          |  |   |             |   |  |              | (19,106 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                               |  |                       | 19,156  |   |                      |   | 101,778 |                          |  |   | 1,749        |   |  |              | (19,106 | ) |  |   | 103,577 |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                           |  |                       | 5,302   |   |                      |   | 46,854  |                          |  |   | 1,247        |   |  |              |        |   |  |   | 53,403  |  
|Supplies, facilities and other operating costs                  |  |                       | 2,147   |   |                      |   | 26,304  |                          |  |   | 1,390        |   |  |              |        |   |  |   | 29,841  |  
|Provision for doubtful accounts                                 |  |                       |        |   |                      |   | 1,727   |                          |  |   | 93           |   |  |              |        |   |  |   | 1,820   |  
|Depreciation and amortization                                   |  |                       | 928     |   |                      |   | 4,504   |                          |  |   | 121          |   |  |              |        |   |  |   | 5,553   |  
|Management fee expense                                          |  |                       |        |   |                      |   | 18,598  |                          |  |   | 508          |   |  |              | (19,106 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                        |  |                       | 8,377   |   |                      |   | 97,987  |                          |  |   | 3,359        |   |  |              | (19,106 | ) |  |   | 90,617  |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                         |  |                       | 10,779  |   |                      |   | 3,791   |                          |  |   | (1,610       | ) |  |              |        |   |  |   | 12,960  |  
|INTEREST EXPENSE-NET                                            |  |                       | (10,704 | ) |                      |   | 169     |                          |  |   | (270         | ) |  |              |        |   |  |   | (10,805 | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES    |  |                       | 75      |   |                      |   | 3,960   |                          |  |   | (1,880       | ) |  |              |        |   |  |   | 2,155   |  
|INCOME TAX EXPENSE (BENEFIT)                                    |  |                       | 33      |   |                      |   | 1,716   |                          |  |   | (815         | ) |  |              |        |   |  |   | 934     |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX            |  |                       | 42      |   |                      |   | 2,244   |                          |  |   | (1,065       | ) |  |              |        |   |  |   | 1,221   |  
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($227) |  |                       |        |   |                      |   | (360    | )                        |  |   |             |   |  |              |        |   |  |   | (360    | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS)                                               |  |                       | 42      |   |                      |   | 1,884   |                          |  |   | (1,065       | ) |  |              |        |   |  |   | 861     |  
|EQUITY IN INCOME OF SUBSIDIARIES, NET OF TAX                    |  |                       | 819     |   |                      |   |        |                          |  |   |             |   |  |              | (819    | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS) ATTRIBUTABLE TO CRC HEALTH CORPORATION        |  | $                     | 861     |   |                      | $ | 1,884   |                          |  | $ | (1,065       | ) |  | $            | (819    | ) |  | $ | 861     |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



19



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2011

(In thousands) (Unaudited)



|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|--------------------------------------------------- |  | --------------------- | ------ | - | -------------------- | - | ------ | ------------------------ |  | - | ------------ | - |  | ------------ | - |  |  | - | ------ | -
|                                                    |  | CRC HealthCorporation |        |   | SubsidiaryGuarantors |   |        | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|Net cash (used in) provided by operating activities |  | $                     | (2,130 | ) |                      | $ | 8,650  |                          |  | $ | (204         | ) |  | $            |  |  |  | $ | 6,316  |  
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|Additions of property and equipment                 |  |                       | (1,453 | ) |                      |   | (2,463 | )                        |  |   | (80          | ) |  |              |  |  |  |   | (3,996 | )
|Proceeds from sale of property and equipment        |  |                       |       |   |                      |   | 42     |                          |  |   |             |   |  |              |  |  |  |   | 42     |  
|Acquisition of business, net of cash acquired       |  |                       | (28    | ) |                      |   |       |                          |  |   |             |   |  |              |  |  |  |   | (28    | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|Net cash used in investing activities               |  |                       | (1,481 | ) |                      |   | (2,421 | )                        |  |   | (80          | ) |  |              |  |  |  |   | (3,982 | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|Intercompany transfers                              |  |                       | 4,868  |   |                      |   | (5,237 | )                        |  |   | 369          |   |  |              |  |  |  |   |       |  
|Capital distributed to Parent                       |  |                       | (543   | ) |                      |   |       |                          |  |   |             |   |  |              |  |  |  |   | (543   | )
|Capitalized financing costs                         |  |                       | (3,196 | ) |                      |   |       |                          |  |   |             |   |  |              |  |  |  |   | (3,196 | )
|Borrowings under revolving line of credit           |  |                       | 2,500  |   |                      |   |       |                          |  |   |             |   |  |              |  |  |  |   | 2,500  |  
|Repayments of seller notes                          |  |                       | (18    | ) |                      |   | (1,294 | )                        |  |   |             |   |  |              |  |  |  |   | (1,312 | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|Net cash provided by (used in) financing activities |  |                       | 3,611  |   |                      |   | (6,531 | )                        |  |   | 369          |   |  |              |  |  |  |   | (2,551 | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS    |  |                       |       |   |                      |   | (302   | )                        |  |   | 85           |   |  |              |  |  |  |   | (217   | )
|CASH AND CASH EQUIVALENTS Beginning of period       |  |                       |       |   |                      |   | 6,826  |                          |  |   | 285          |   |  |              |  |  |  |   | 7,111  |  
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|CASH AND CASH EQUIVALENTS End of period             |  | $                     |       |   |                      | $ | 6,524  |                          |  | $ | 370          |   |  | $            |  |  |  | $ | 6,894  |  
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  



20



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2010

(In thousands) (Unaudited)



|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|--------------------------------------------------- |  | --------------------- | ------ | - | -------------------- | - | ------ | ------------------------ |  | - | ------------ | - |  | ------------ | - |  |  | - | ------ | -
|                                                    |  | CRC HealthCorporation |        |   | SubsidiaryGuarantors |   |        | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|Net cash (used in) provided by operating activities |  | $                     | (2,403 | ) |                      | $ | 8,431  |                          |  | $ | 198          |   |  | $            |  |  |  | $ | 6,226  |  
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|Additions of property and equipment                 |  |                       | (1,001 | ) |                      |   | (1,843 | )                        |  |   | (31          | ) |  |              |  |  |  |   | (2,875 | )
|Proceeds from sale of property and equipment        |  |                       |       |   |                      |   | 14     |                          |  |   |             |   |  |              |  |  |  |   | 14     |  
|Acquisition of business, net of cash acquired       |  |                       | (30    | ) |                      |   |       |                          |  |   |             |   |  |              |  |  |  |   | (30    | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|Net cash used in investing activities               |  |                       | (1,031 | ) |                      |   | (1,829 | )                        |  |   | (31          | ) |  |              |  |  |  |   | (2,891 | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|Intercompany transfers                              |  |                       | 9,582  |   |                      |   | (9,422 | )                        |  |   | (160         | ) |  |              |  |  |  |   |       |  
|Capital contributed from Parent                     |  |                       | 8      |   |                      |   |       |                          |  |   |             |   |  |              |  |  |  |   | 8      |  
|Borrowings under revolving line of credit           |  |                       | 5,000  |   |                      |   |       |                          |  |   |             |   |  |              |  |  |  |   | 5,000  |  
|Repayments under revolving line of credit           |  |                       | (2,500 | ) |                      |   |       |                          |  |   |             |   |  |              |  |  |  |   | (2,500 | )
|Repayments of term loan and seller notes            |  |                       | (8,656 | ) |                      |   |       |                          |  |   |             |   |  |              |  |  |  |   | (8,656 | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|Net cash provided by (used in) financing activities |  |                       | 3,434  |   |                      |   | (9,422 | )                        |  |   | (160         | ) |  |              |  |  |  |   | (6,148 | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS    |  |                       |       |   |                      |   | (2,820 | )                        |  |   | 7            |   |  |              |  |  |  |   | (2,813 | )
|CASH AND CASH EQUIVALENTS Beginning of period       |  |                       |       |   |                      |   | 4,745  |                          |  |   | 237          |   |  |              |  |  |  |   | 4,982  |  
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  
|CASH AND CASH EQUIVALENTS End of period             |  | $                     |       |   |                      | $ | 1,925  |                          |  | $ | 244          |   |  | $            |  |  |  | $ | 2,169  |  
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |  |              |   |  |  |   |        |  



21



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



14. RESTRUCTURING

In the second half of fiscal 2008, management initiated a restructuring plan (the FY08 Plan) to align the Companys resources with its strategic business plan by initiating facility
consolidations, facility exit actions and certain workforce reductions. During the three months ended March 31, 2011, the Company continued its activity under the FY08 plan related to employee severance payments and long-term lease commitments
resulting from prior period employee terminations and facility closures. During the three months ended March 31, 2011, the Company reached settlements on contract terminations related to rental leases at some of the facilities affected by the
FY08 plan. This resulted in reversals of expenses recognized previously.

A summary of restructuring activity under the FY08
plan, including those classified as discontinued operations, is shown in the table below:



|                                                 |  |                    |     |   |                                            |   |       |       |  |   |       |  
|------------------------------------------------ |  | ------------------ | --- | - | ------------------------------------------ | - | ----- | ----- |  | - | ----- | -
|                                                 |  | WorkforceReduction |     |   | Consolidation and Exit ofExcess Facilities |   |       | Total | 
|                                                 |  | (in thousands)     |    
|Restructuring reserve at December 31, 2010       |  |                    |     |   |                                            |   |       |       |  |   |       |  
|Recovery division                                |  |                    | 42  |   |                                            |   | 2,178 |       |  |   | 2,220 |  
|Healthy living division                          |  |                    | (8  | ) |                                            |   | 4,046 |       |  |   | 4,038 |  
|Corporate                                        |  |                    |    |   |                                            |   |      |       |  |   |      |  
|                                                 |  |                    |     |   |                                            |   |       |       |  |   |       |  
|Total restructuring reserve at December 31, 2010 |  | $                  | 34  |   |                                            | $ | 6,224 |       |  | $ | 6,258 |  
|                                                 |  |                    |     |   |                                            |   |       |       |  |   |       |  
|Expenses                                         |  |                    |     |   |                                            |   |       |       |  |   |       |  
|Recovery division                                |  |                    |    |   |                                            |   | (443  | )     |  |   | (443  | )
|Healthy living division                          |  |                    |    |   |                                            |   | 61    |       |  |   | 61    |  
|Corporate                                        |  |                    |    |   |                                            |   |      |       |  |   |      |  
|                                                 |  |                    |     |   |                                            |   |       |       |  |   |       |  
|Total expenses                                   |  |                    |    |   |                                            |   | (382  | )     |  |   | (382  | )
|Cash (payments) receipts                         |  |                    |     |   |                                            |   |       |       |  |   |       |  
|Recovery division                                |  |                    | (46 | ) |                                            |   | (71   | )     |  |   | (117  | )
|Healthy living division                          |  |                    | (7  | ) |                                            |   | (210  | )     |  |   | (217  | )
|Corporate                                        |  |                    |    |   |                                            |   |      |       |  |   |      |  
|                                                 |  |                    |     |   |                                            |   |       |       |  |   |       |  
|Total cash (payments) receipts                   |  |                    | (53 | ) |                                            |   | (281  | )     |  |   | (334  | )
|Restructuring reserve at March 31, 2011          |  |                    |     |   |                                            |   |       |       |  |   |       |  
|Recovery division                                |  |                    | (4  | ) |                                            |   | 1,664 |       |  |   | 1,660 |  
|Healthy living division                          |  |                    | (15 | ) |                                            |   | 3,897 |       |  |   | 3,882 |  
|Corporate                                        |  |                    |    |   |                                            |   |      |       |  |   |      |  
|                                                 |  |                    |     |   |                                            |   |       |       |  |   |       |  
|Total restructuring reserve at March 31, 2011    |  | $                  | (19 | ) |                                            | $ | 5,561 |       |  | $ | 5,542 |  
|                                                 |  |                    |     |   |                                            |   |       |       |  |   |       |  

On March 24, 2011, the Company announced a strategic plan (the FY11 plan) to transition the
services provided by its Aspen business within its healthy living division to a more focused national network of services. This smaller network will allow the Company to apply its resources where there are the greatest needs and assure the best
possible service for its students and families. In 2010, this business experienced difficulties as a result of declining economic conditions and the inability of families to access credit markets to fund tuition. As part of this strategic plan, the
Company will be terminating operations at five facilities and consolidating services at three other facilities. The plan is intended to maximize the number of affected students who will be able to complete treatment and/or graduate and is expected
to be implemented over a period of up to 6 months. In connection with this plan, the Company recognized employee termination costs of approximately $1.8 million during the three months ended March 31, 2011. The Company expects to recognize
additional employee termination costs of approximately $1.1 million during the second and third quarters of 2011. The amount of additional costs associated with this plan may vary materially based on various factors including actual employee
terminations, any contract termination payments, and the success of student transition plans.



22



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



A summary of restructuring activity under the FY11 plan, including those classified as
discontinued operations, is shown in the table below:



|                                                 |  |                    |       |   |                                            |   |     |       |  |   |       |  
|------------------------------------------------ |  | ------------------ | ----- | - | ------------------------------------------ | - | --- | ----- |  | - | ----- | -
|                                                 |  | WorkforceReduction |       |   | Consolidation and Exit ofExcess Facilities |   |     | Total | 
|                                                 |  | (in thousands)     |      
|Restructuring reserve at December 31, 2010       |  |                    |       |   |                                            |   |     |       |  |   |       |  
|Recovery division                                |  |                    |      |   |                                            |   |    |       |  |   |      |  
|Healthy living division                          |  |                    |      |   |                                            |   |    |       |  |   |      |  
|Corporate                                        |  |                    |      |   |                                            |   |    |       |  |   |      |  
|                                                 |  |                    |       |   |                                            |   |     |       |  |   |       |  
|Total restructuring reserve at December 31, 2010 |  | $                  |      |   |                                            | $ |    |       |  | $ |      |  
|                                                 |  |                    |       |   |                                            |   |     |       |  |   |       |  
|Expenses                                         |  |                    |       |   |                                            |   |     |       |  |   |       |  
|Recovery division                                |  |                    |      |   |                                            |   |    |       |  |   |      |  
|Healthy living division                          |  |                    | 1,808 |   |                                            |   |    |       |  |   | 1,808 |  
|Corporate                                        |  |                    | 479   |   |                                            |   |    |       |  |   | 479   |  
|                                                 |  |                    |       |   |                                            |   |     |       |  |   |       |  
|Total expenses                                   |  |                    | 2,287 |   |                                            |   |    |       |  |   | 2,287 |  
|Cash (payments) receipts                         |  |                    |       |   |                                            |   |     |       |  |   |       |  
|Recovery division                                |  |                    |      |   |                                            |   |    |       |  |   |      |  
|Healthy living division                          |  |                    |      |   |                                            |   | (14 | )     |  |   | (14   | )
|Corporate                                        |  |                    | (224  | ) |                                            |   |    |       |  |   | (224  | )
|                                                 |  |                    |       |   |                                            |   |     |       |  |   |       |  
|Total cash (payments) receipts                   |  |                    | (224  | ) |                                            |   | (14 | )     |  |   | (238  | )
|Restructuring reserve at March 31, 2011          |  |                    |       |   |                                            |   |     |       |  |   |       |  
|Recovery division                                |  |                    |      |   |                                            |   |    |       |  |   |      |  
|Healthy living division                          |  |                    | 1,808 |   |                                            |   | (14 | )     |  |   | 1,794 |  
|Corporate                                        |  |                    | 255   |   |                                            |   |    |       |  |   | 255   |  
|                                                 |  |                    |       |   |                                            |   |     |       |  |   |       |  
|Total restructuring reserve at March 31, 2011    |  | $                  | 2,063 |   |                                            | $ | (14 | )     |  | $ | 2,049 |  
|                                                 |  |                    |       |   |                                            |   |     |       |  |   |       |  

15. DISCONTINUED OPERATIONS

At March 31, 2011, the Company had closed or sold 16 facilities under discontinued operations compared to 15 facilities at March 31, 2010.

Activities related to discontinued operations are recognized in the Companys condensed consolidated statements of
operations under discontinued operations for all periods presented.

The results of operations for those facilities
classified as discontinued operations are summarized below (in thousands):



|                                           |  |                                  |     |   |                                  |   |       |  
|------------------------------------------ |  | -------------------------------- | --- | - | -------------------------------- | - | ----- | -
|                                           |  | Three Months EndedMarch 31, 2011 |     |   | Three Months EndedMarch 31, 2010 |  
|Net revenue                                |  | $                                |    |   |                                  |   | 503   |  
|Operating expenses                         |  |                                  | (61 | ) |                                  |   | 1,088 |  
|Interest expense                           |  |                                  | 1   |   |                                  |   | 2     |  
|Income (loss) before income taxes          |  |                                  | 60  |   |                                  |   | (587  | )
|Tax expense (benefit)                      |  |                                  | 26  |   |                                  |   | (227  | )
|                                           |  |                                  |     |   |                                  |   |       |  
|Income (loss) from discontinued operations |  | $                                | 34  |   |                                  | $ | (360  | )
|                                           |  |                                  |     |   |                                  |   |       |  



23



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



16. SEGMENT INFORMATION

The Company has two identified operating segments under its organizational structure, which are also its reportable segments: recovery division and healthy living division.

Reportable segments are based upon the Companys internal organizational structure, the manner in which the operations are managed
and on the level at which the Companys chief operating decision-maker allocates resources. The Companys chief operating decision-maker is its Chief Executive Officer.

A summary of the Companys reportable segments are as follows:

Recovery - The recovery segment specializes in the treatment of chemical dependency and other behavioral health disorders both on
an inpatient residential basis and on an outpatient basis. Services offered in this segment include: inpatient/residential care, partial/day treatment, intensive outpatient groups, therapeutic living/half-way house environments, aftercare centers
and detoxification. As of March 31, 2011, the recovery segment operates 30 inpatient, 21 outpatient facilities, and 54 comprehensive treatment centers (CTCs) in 21 states.

Healthy Living - The healthy living segment provides a wide variety of adolescent therapeutic programs through settings and
solutions that match individual needs with the appropriate learning and therapeutic environment. Its offerings include boarding schools, experiential outdoor education programs and summer camps as well as weight management and eating disorder
services. Weight management and eating disorder services within the healthy living segment provide adult and adolescent treatment services for eating disorders and obesity, each a related behavioral disorder that may be effectively treated through a
combination of medical, psychological and social treatment programs.

As of March 31, 2011, the healthy living segment
operates 24 adolescent and young adult programs in 8 states which provide a wide variety of therapeutic educational programs for underachieving young people. The healthy living segment also operates 18 weight management facilities. These facilities
are located in 8 states in the United States (17 facilities), and in the United Kingdom (1 facility), with a focus on providing treatment services for eating disorders and weight management.

Corporate - In addition to the two reportable segments as described above, the Company has activities classified as corporate
which represent revenue and expenses associated with eGetgoing, an online internet treatment option, certain corporate-level operating general and administrative costs (i.e., expenses associated with the corporate offices in Cupertino, California,
which provides management, financial, human resources and information system support), and stock-based compensation expense that are not allocated to the segments.

Major Customers - No single customer represented 10% or more of the Companys total net revenue in any period presented.

Geographic Information - The Companys business operations are primarily in the United States.



24



---

##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Selected segment financial information for the Companys reportable segments was as
follows (in thousands):



|                                                                                |  |                                  |           |   |                                  |   |           |  
|------------------------------------------------------------------------------- |  | -------------------------------- | --------- | - | -------------------------------- | - | --------- | -
|                                                                                |  | Three Months EndedMarch 31, 2011 |           |   | Three Months EndedMarch 31, 2010 |  
|Net revenue:                                                                    |  |                                  |           |   |                                  |   |           |  
|Recovery division                                                               |  | $                                | 86,139    |   |                                  | $ | 78,607    |  
|Healthy living division                                                         |  |                                  | 25,679    |   |                                  |   | 24,920    |  
|Corporate                                                                       |  |                                  | 43        |   |                                  |   | 50        |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated net revenue                                                  |  | $                                | 111,861   |   |                                  | $ | 103,577   |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Operating expenses:                                                             |  |                                  |           |   |                                  |   |           |  
|Recovery division                                                               |  | $                                | 57,730    |   |                                  | $ | 53,178    |  
|Healthy living division                                                         |  |                                  | 34,529    |   |                                  |   | 29,061    |  
|Corporate                                                                       |  |                                  | 9,268     |   |                                  |   | 8,378     |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated operating expenses                                           |  | $                                | 101,527   |   |                                  | $ | 90,617    |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Operating income (loss):                                                        |  |                                  |           |   |                                  |   |           |  
|Recovery division                                                               |  | $                                | 28,409    |   |                                  | $ | 25,429    |  
|Healthy living division                                                         |  |                                  | (8,850    | ) |                                  |   | (4,141    | )
|Corporate                                                                       |  |                                  | (9,225    | ) |                                  |   | (8,328    | )
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated operating income                                             |  |                                  | 10,334    |   |                                  |   | 12,960    |  
|Interest expense-net                                                            |  |                                  | (11,756   | ) |                                  |   | (10,805   | )
|Other income                                                                    |  |                                  | 31        |   |                                  |   |          |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated (loss) income from continuing operations before income taxes |  | $                                | (1,391    | ) |                                  | $ | 2,155     |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Capital expenditures:                                                           |  |                                  |           |   |                                  |   |           |  
|Recovery division                                                               |  | $                                | 2,042     |   |                                  | $ | 1,457     |  
|Healthy living division                                                         |  |                                  | 501       |   |                                  |   | 417       |  
|Corporate                                                                       |  |                                  | 1,453     |   |                                  |   | 1,001     |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated capital expenditures                                         |  | $                                | 3,996     |   |                                  | $ | 2,875     |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|                                                                                |  |                                 
|                                                                                |  | March 31,2011                    |           |   | December 31,2010                 |  
|Total assets(1):                                                                |  |                                  |           |   |                                  |   |           |  
|Recovery division                                                               |  | $                                | 904,238   |   |                                  | $ | 902,337   |  
|Healthy living division                                                         |  |                                  | 91,516    |   |                                  |   | 94,516    |  
|Corporate                                                                       |  |                                  | 45,730    |   |                                  |   | 43,371    |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated assets                                                       |  | $                                | 1,041,484 |   |                                  | $ | 1,040,224 |  
|                                                                                |  |                                  |           |   |                                  |   |           |  



|(1) | Includes amounts related to discontinued operations
|--- | ---------------------------------------------------



25



---

##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the related
notes that appear elsewhere in this Quarterly Report.

Unless the context otherwise requires, in this managements
discussion and analysis of financial condition and results of operations, the terms our company, we, us, the Company and our refer to CRC Health Corporation and its consolidated
subsidiaries.

OVERVIEW

We are a leading provider of substance abuse treatment services and youth treatment services in the United States. We also provide treatment services for other addiction diseases and behavioral disorders
such as eating disorders.

We deliver our services through our two divisions, the recovery division and the healthy
living division. Our recovery division provides substance abuse and behavioral disorder treatment services through our residential treatment facilities and outpatient treatment clinics. Our healthy living division provides therapeutic
educational programs to underachieving young people through residential schools and wilderness programs. Our healthy living division also provides treatment services through adolescent and adult weight management programs as well as
eating disorder facilities. Our healthy living division and our recovery division are also our two reportable segments.

We
have two operating segments: recovery division and healthy living division. As of March 31, 2011, our recovery division, which operates 30 inpatient, 21 outpatient facilities, and 54 comprehensive treatment centers (CTCs)
in 21 states, provides treatment services to patients suffering from chronic addiction related diseases and related behavioral disorders. As of March 31, 2011, our healthy living division, which operates 24 adolescent and young adult
programs in 8 states, provides a wide variety of therapeutic educational programs for underachieving young people. The healthy living segment also operates 18 weight management facilities. These facilities are located in 8 states in the United
States (17 facilities), and in the United Kingdom (1 facility), with a focus on providing treatment services for eating disorders and weight management. Other activities classified as corporate represent revenue and expenses associated with
eGetgoing, an online internet treatment option, and general and administrative expenses (i.e., expenses associated with our corporate offices in Cupertino, California, which provides management, financial, human resource and information system
support).



26



---

##### Table of Contents

EXECUTIVE SUMMARY

We generate revenue by providing substance abuse treatment services and youth treatment services. We also generate revenue by providing treatment services for other specialized behavioral disorders such
as eating disorders. Revenue is recognized when rehabilitation and treatment services are provided to a client. Client service revenue is reported at the estimated net realizable amounts from clients, third-party payors and others for services
rendered. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided for in the period the related services are rendered and adjusted in future
periods as final settlements are determined. Revenue for educational services provided to youth consists primarily of tuition, enrollment fees, alumni services and ancillary charges. Tuition revenue and ancillary charges are recognized based on
contracted monthly/daily rates as services are rendered. The enrollment fees for service contracts that are charged upfront are deferred and recognized over the average student length of stay, approximately nine months. Alumni fee revenue represents
non-refundable upfront fees for post graduation services and these fees are deferred and recognized systematically over the contracted life. During the three months ended March 31, 2011 and 2010, we generated 78.7% and 78.9% of our net revenue
from non-governmental sources, including 56.5% and 61.5% from self payors, respectively, and 22.2% and 17.4% from commercial payors, respectively. Substantially all of our government program net revenue was received from multiple counties and states
under Medicaid and similar programs.

On March 24, 2011, we announced a strategic plan to transition the services
provided by our Aspen business within our healthy living division to a more focused national network of services. This smaller network will allow us to apply our resources where there are the greatest needs and assure the best possible service for
our students and families. In 2010, this business experienced difficulties as a result of declining economic conditions and the inability of families to access credit markets to fund tuition. As part of this strategic plan, we will be terminating
operations at five facilities and consolidating services at three other facilities. The plan is intended to maximize the number of affected students who will be able to complete treatment and/or graduate and is expected to be implemented over a
period of up to 6 months. In connection with this plan, we have recognized employee termination costs of $1.8 million during the three months ended March 31, 2011. We expect to recognize additional employee termination costs of approximately
$1.1 million during the second and third quarters of 2011. The amount of additional costs associated with this plan may vary materially based on various factors including actual employee terminations, any contract termination payments, and the
success of student transition plans.

During the three months ended March 31, 2011, our consolidated same-facility net
revenue increased by $8.2 million or 8.0% respectively, when compared to the comparable periods in 2010. On a consolidated basis, same-facility operating expenses increased $7.9 million or 10.8%, respectively, during the three months
ended March 31, 2011. Same-facility means a comparison over the comparable period of the financial performance of a facility we have operated for at least one year. Total-facility means a comparison over the comparable
period of the financial performance of a facility that we have operated for any duration of time. Both the total-facility and same-facility represent facilities that are a part of the continuing operations. Our operating expenses include salaries
and benefits, supplies, facilities and other operating costs, provision for doubtful accounts, depreciation and amortization, asset impairment, and goodwill impairment. Operating expenses for our recovery and healthy living divisions exclude
corporate level general and administrative costs (i.e., expenses associated with our corporate offices in Cupertino, California, which provide management, financial, human resources and information systems support), stock-based compensation expense
and expenses associated with eGetgoing. Goodwill impairment is not included in the same-facility analysis.

CRITICAL ACCOUNTING POLICIES
AND ESTIMATES

General

The accompanying discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance
with Generally Accepted Accounting Principles of the United States (U.S. GAAP). The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets,
liabilities, net revenue and expenses. We have based our 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
the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has reviewed our critical accounting policies and their application in the preparation of our financial statements and related
disclosures and discussed the development, selection and disclosure of significant estimates. To the extent that actual results differ from those estimates, our future results of operations may be affected. We believe that there have not been any
significant changes during the three months ended March 31, 2011 to the items that we have previously reported in our critical accounting policies in managements discussion and analysis of financial condition and results of operations for
the year ended December 31, 2010 in our Annual Report on Form 10-K.



27



---

##### Table of Contents

Recent Accounting Guidance

For a summary of recently adopted and recently issued accounting guidance, please see Note 2 to the condensed consolidated financial statements, as
included herein.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

The following table presents our results of operations by segment for the three months ended March 31, 2011 and 2010 (numbers in thousands, except for percentages).



|                                                                                                                                                            |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | - | ---- | - | ------- | --------------------- |  | - | --------------------- | - |  |  | ------ | --
|                                                                                                                                                            |  | Three Months Ended March 31,Total Facility |        
|Statement of Operations Data:                                                                                                                               |  | 2011                                       |         |   | 2010 |   |         | 2011 vs. 2010$ Change |  |   | 2011 vs. 2010% Change |  
|Net revenue:                                                                                                                                                |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division                                                                                                                                           |  | $                                          | 86,139  |   |      | $ | 78,607  |                       |  | $ | 7,532                 |   |  |  | 9.6    | % 
|Healthy living division                                                                                                                                     |  |                                            | 25,679  |   |      |   | 24,920  |                       |  |   | 759                   |   |  |  | 3.0    | % 
|Corporate                                                                                                                                                   |  |                                            | 43      |   |      |   | 50      |                       |  |   | (7                    | ) |  |  | (14.0  | )%
|                                                                                                                                                            |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Total net revenue                                                                                                                                           |  |                                            | 111,861 |   |      |   | 103,577 |                       |  |   | 8,284                 |   |  |  | 8.0    | % 
|Operating expenses:                                                                                                                                         |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division                                                                                                                                           |  |                                            | 57,730  |   |      |   | 53,178  |                       |  |   | 4,552                 |   |  |  | 8.6    | % 
|Healthy living division(1)                                                                                                                                  |  |                                            | 34,529  |   |      |   | 29,061  |                       |  |   | 5,468                 |   |  |  | 18.8   | % 
|Corporate                                                                                                                                                   |  |                                            | 9,268   |   |      |   | 8,378   |                       |  |   | 890                   |   |  |  | 10.6   | % 
|                                                                                                                                                            |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Total operating expenses                                                                                                                                    |  |                                            | 101,527 |   |      |   | 90,617  |                       |  |   | 10,910                |   |  |  | 12.0   | % 
|Operating income (loss):                                                                                                                                    |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division                                                                                                                                           |  |                                            | 28,409  |   |      |   | 25,429  |                       |  |   | 2,980                 |   |  |  | 11.7   | % 
|Healthy living division                                                                                                                                     |  |                                            | (8,850  | ) |      |   | (4,141  | )                     |  |   | (4,709                | ) |  |  | (113.7 | )%
|Corporate                                                                                                                                                   |  |                                            | (9,225  | ) |      |   | (8,328  | )                     |  |   | (897                  | ) |  |  | (10.8  | )%
|                                                                                                                                                            |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Total operating income                                                                                                                                      |  |                                            | 10,334  |   |      |   | 12,960  |                       |  |   | (2,626                | ) |  |  | (20.3  | )%
|Interest expense-net                                                                                                                                        |  |                                            | (11,756 | ) |      |   | (10,805 | )                     |  |   | (951                  | ) |  |  | (8.8   | )%
|Other income                                                                                                                                                |  |                                            | 31      |   |      |   |        |                       |  |   | 31                    |   |  |  | n/a    |   
|                                                                                                                                                            |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|(Loss) income from continuing operations before income taxes                                                                                                |  |                                            | (1,391  | ) |      |   | 2,155   |                       |  |   | (3,546                | ) |  |  | (164.5 | )%
|Income tax (benefit) expense                                                                                                                                |  |                                            | (604    | ) |      |   | 934     |                       |  |   | (1,538                | ) |  |  | 164.7  | % 
|                                                                                                                                                            |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|(Loss) income from continuing operations, net of tax                                                                                                        |  |                                            | (787    | ) |      |   | 1,221   |                       |  |   | (2,008                | ) |  |  | (164.5 | )%
|Income(loss) from discontinued operations, (net of tax expense (benefit) of $26 and ($227) in the three months ended
March 31, 2011 and 2010, respectively) |  |                                            | 34      |   |      |   | (360    | )                     |  |   | 394                   |   |  |  | 109.4  | % 
|                                                                                                                                                            |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Net (loss) income attributable to CRC Health Corporation                                                                                                    |  | $                                          | (753    | ) |      | $ | 861     |                       |  | $ | (1,614                | ) |  |  | (187.5 | )%
|                                                                                                                                                            |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   



|(1) | Healthy living division operating expenses for the three months ended March 31, 2011 include $4.4 million of asset impairment.
|--- | ------------------------------------------------------------------------------------------------------------------------------



28



---

##### Table of Contents

The following table compares key total facility statistics for the three months ended
March 31, 2011 and 2010:



|                            |  |                                            |           |  |      |   |           |          |  |  |       |   
|--------------------------- |  | ------------------------------------------ | --------- |  | ---- | - | --------- | -------- |  |  | ----- | --
|                            |  | Three Months Ended March 31,Total Facility |          
|                            |  | 2011                                       |           |  | 2010 |   |           | % change | 
|Recovery Division           |  |                                            |           |  |      |   |           |          |  |  |       |   
|Residential facilities      |  |                                            |           |  |      |   |           |          |  |  |       |   
|Revenue (in thousands)      |  | $                                          | 56,359    |  |      | $ | 50,178    |          |  |  | 12.3  | % 
|Patient Days                |  |                                            | 150,210   |  |      |   | 139,532   |          |  |  | 7.7   | % 
|Net revenue per patient day |  | $                                          | 375.20    |  |      | $ | 359.62    |          |  |  | 4.3   | % 
|CTCs                        |  |                                            |           |  |      |   |           |          |  |  |       |   
|Revenue (in thousands)      |  | $                                          | 29,780    |  |      | $ | 28,429    |          |  |  | 4.8   | % 
|Patient Days                |  |                                            | 2,377,284 |  |      |   | 2,345,490 |          |  |  | 1.4   | % 
|Net revenue per patient day |  | $                                          | 12.53     |  |      | $ | 12.12     |          |  |  | 3.4   | % 
|                            |  |                                            |          
|Healthy Living Division     |  |                                            |           |  |      |   |           |          |  |  |       |   
|Residential facilities      |  |                                            |           |  |      |   |           |          |  |  |       |   
|Revenue (in thousands)      |  | $                                          | 14,160    |  |      | $ | 15,119    |          |  |  | (6.3  | )%
|Patient Days                |  |                                            | 53,643    |  |      |   | 62,173    |          |  |  | (13.7 | )%
|Net revenue per patient day |  | $                                          | 263.97    |  |      | $ | 243.18    |          |  |  | 8.5   | % 
|Outdoor programs            |  |                                            |           |  |      |   |           |          |  |  |       |   
|Revenue (in thousands)      |  | $                                          | 5,391     |  |      | $ | 4,780     |          |  |  | 12.8  | % 
|Patient Days                |  |                                            | 11,766    |  |      |   | 11,052    |          |  |  | 6.5   | % 
|Net revenue per patient day |  | $                                          | 458.18    |  |      | $ | 432.50    |          |  |  | 5.9   | % 
|Weight management programs  |  |                                            |           |  |      |   |           |          |  |  |       |   
|Revenue (in thousands)      |  | $                                          | 6,124     |  |      | $ | 5,015     |          |  |  | 22.1  | % 
|Patient Days                |  |                                            | 15,735    |  |      |   | 15,284    |          |  |  | 3.0   | % 
|Net revenue per patient day |  | $                                          | 389.20    |  |      | $ | 328.12    |          |  |  | 18.6  | % 

Consolidated net revenue
increased $8.3 million, or 8.0%, to $111.9 million for the three months ended March 31, 2011 from $103.6 million for the three months ended March 31, 2010. Of the total net revenue increase, the recovery division contributed an increase of
$7.5 million and the healthy living division contributed an increase of $0.8 million. The $7.5 million, or 9.6%, increase within the recovery division was driven by increases of $6.1 million and $1.4 million within residential and CTC facilities,
respectively. The $0.8 million, or 3.0%, increase within the healthy living division was driven by increases of $1.1 million and $0.6 million within weight management and outdoor programs, respectively, offset by a decrease of $0.9 million in
residential facilities.

See facility statistics table above for explanation of changes in revenue utilizing metrics for
patient days and revenue per patient day.

Consolidated operating expenses increased $10.9 million, or 12.0%, to $101.5
million for the three months ended March 31, 2011 from $90.6 million in the same period of 2010. The $10.9 million increase in operating expenses was primarily driven by the non-cash asset impairments of $4.4 million during the three months
ended March 31, 2011 within the healthy living division. Without considering non-cash asset impairment charges, consolidated operating expenses increased $6.5 million, or 7.2%, over the same period of 2010. Of the $6.5 million increase, the
recovery division, the healthy living division and corporate contributed an increase of $4.6 million, $1.1 million and $0.8 million, respectively.

Our consolidated operating margin was 9.2% in the three months ended March 31, 2011 compared to 12.5% in the same period of 2010. The decrease in operating margin resulted from the increase in
non-cash asset impairments and other operating costs offset by an increase in revenues. Without considering non-cash asset impairment charges, consolidated operating margin was 13.2% in the three months ended March 31, 2011 compared to 12.5% in
the same period of 2010. Recovery division margins for the three months ended March 31, 2011 were 33.0% compared to 32.3% in the same period of 2010. Healthy living division operating margin decreased to (34.5)% for the three months ended
March 31, 2011 compared to operating margin of (16.6)% in the same period of 2010. Without considering non-cash asset impairment charges, healthy living division operating margin was (17.3)% for the three months ended March 31, 2011
compared to (16.6)% in the same period of 2010.



29



---

##### Table of Contents

For the three months ended March 31, 2011, consolidated net income from continuing
operations decreased by $2.0 million over the same period of 2010 resulting in a loss from continuing operations, net of tax, of $0.8 million compared to an income from continuing operations, net of tax, of $1.2 million in the same period of 2010.
The decrease in income from continuing operations in 2011 compared to 2010 is primarily driven by increases in non-cash asset impairment charge of $4.4 million and other operating expenses of $6.5 million offset by an increase in revenues of $8.3
million.

The following table presents our same-facility results of operations for our recovery division and our healthy
living division for the three months ended March 31, 2011 and 2010 (numbers in thousands, except for percentages).



|                              |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|----------------------------- |  | ----------------------------------------- | ------- | - | ---- | - | ------- | --------------------- |  | - | --------------------- | - |  |  | ------ | --
|                              |  | Three Months Ended March 31,Same Facility |        
|Statement of Operations Data: |  | 2011                                      |         |   | 2010 |   |         | 2011 vs. 2010$ Change |  |   | 2011 vs. 2010% Change |  
|Net revenue:                  |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division             |  | $                                         | 85,876  |   |      | $ | 78,607  |                       |  | $ | 7,269                 |   |  |  | 9.2    | % 
|Healthy living division       |  |                                           | 25,226  |   |      |   | 24,251  |                       |  |   | 975                   |   |  |  | 4.0    | % 
|                              |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Total net revenue             |  |                                           | 111,102 |   |      |   | 102,858 |                       |  |   | 8,244                 |   |  |  | 8.0    | % 
|Operating expenses:           |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division             |  |                                           | 52,087  |   |      |   | 47,934  |                       |  |   | 4,153                 |   |  |  | 8.7    | % 
|Healthy living division       |  |                                           | 28,727  |   |      |   | 24,980  |                       |  |   | 3,747                 |   |  |  | 15.0   | % 
|                              |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Total operating expenses      |  |                                           | 80,814  |   |      |   | 72,914  |                       |  |   | 7,900                 |   |  |  | 10.8   | % 
|Operating income (loss):      |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division             |  |                                           | 33,789  |   |      |   | 30,673  |                       |  |   | 3,116                 |   |  |  | 10.2   | % 
|Healthy living division       |  |                                           | (3,501  | ) |      |   | (729    | )                     |  |   | (2,772                | ) |  |  | (380.2 | )%
|                              |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Operating income              |  |                                           | 30,288  |   |      |   | 29,944  |                       |  |   | 344                   |   |  |  | 1.1    | % 

The following table
compares key same facility statistics for the three months ended March 31, 2011 and 2010:



|                            |  |                                           |           |  |      |   |           |          |  |  |       |   
|--------------------------- |  | ----------------------------------------- | --------- |  | ---- | - | --------- | -------- |  |  | ----- | --
|                            |  | Three Months Ended March 31,Same Facility |          
|                            |  | 2011                                      |           |  | 2010 |   |           | % change | 
|Recovery Division           |  |                                           |           |  |      |   |           |          |  |  |       |   
|Residential facilities      |  |                                           |           |  |      |   |           |          |  |  |       |   
|Revenue (in thousands)      |  | $                                         | 56,096    |  |      | $ | 50,178    |          |  |  | 11.8  | % 
|Patient Days                |  |                                           | 150,210   |  |      |   | 139,532   |          |  |  | 7.7   | % 
|Net revenue per patient day |  | $                                         | 373.45    |  |      | $ | 359.62    |          |  |  | 3.8   | % 
|CTCs                        |  |                                           |           |  |      |   |           |          |  |  |       |   
|Revenue (in thousands)      |  | $                                         | 29,780    |  |      | $ | 28,429    |          |  |  | 4.8   | % 
|Patient Days                |  |                                           | 2,377,284 |  |      |   | 2,345,490 |          |  |  | 1.4   | % 
|Net revenue per patient day |  | $                                         | 12.53     |  |      | $ | 12.12     |          |  |  | 3.4   | % 
|                            |  |                                           |          
|Healthy Living Division     |  |                                           |           |  |      |   |           |          |  |  |       |   
|Residential facilities      |  |                                           |           |  |      |   |           |          |  |  |       |   
|Revenue (in thousands)      |  | $                                         | 13,711    |  |      | $ | 14,456    |          |  |  | (5.2  | )%
|Patient Days                |  |                                           | 51,527    |  |      |   | 59,134    |          |  |  | (12.9 | )%
|Net revenue per patient day |  | $                                         | 266.09    |  |      | $ | 244.46    |          |  |  | 8.8   | % 
|Outdoor programs            |  |                                           |           |  |      |   |           |          |  |  |       |   
|Revenue (in thousands)      |  | $                                         | 5,391     |  |      | $ | 4,780     |          |  |  | 12.8  | % 
|Patient Days                |  |                                           | 11,766    |  |      |   | 11,052    |          |  |  | 6.5   | % 
|Net revenue per patient day |  | $                                         | 458.18    |  |      | $ | 432.50    |          |  |  | 5.9   | % 
|Weight management programs  |  |                                           |           |  |      |   |           |          |  |  |       |   
|Revenue (in thousands)      |  | $                                         | 6,124     |  |      | $ | 5,015     |          |  |  | 22.1  | % 
|Patient Days                |  |                                           | 15,735    |  |      |   | 15,284    |          |  |  | 3.0   | % 
|Net revenue per patient day |  | $                                         | 389.20    |  |      | $ | 328.12    |          |  |  | 18.6  | % 



30



---

##### Table of Contents

On a same-facility basis, recovery division net revenue increased $7.3 million, or 9.2%, to
$85.9 million for the three months ended March 31, 2011 from $78.6 million in the same period of 2010. The same-facility revenue increases were due to increases of $5.9 million and $1.4 million within the residential and CTC facilities,
respectively. Healthy living division same-facility revenue increased $1.0 million or 4.0% to $25.2 million for the three months ended March 31, 2011 from $24.2 million in the same period of 2010. The same-facility revenue increase within the
healthy living division was driven by increases of $1.1 million and $0.6 million within weight management and outdoor programs, respectively, offset by a decrease of $0.7 million in residential facilities.

See facility statistics table above for explanation of changes in revenue utilizing metrics for patient days and revenue per patient day.

On a same-facility basis, recovery division operating expenses increased $4.2 million driven by an increase of $3.1 million
in residential facilities and an increase of $1.1 million in CTCs compared to the same period of 2010. Healthy living division same-facility operating expenses increased $3.7 million due to increases in asset impairment charges of $2.5 million, an
increase in salaries and benefits of $1.8 million and an increase in supplies, facilities and other costs of $0.3 million, offset by decreases of $0.6 million and $0.3 million in depreciation and amortization and provision for doubtful accounts,
respectively.

Sources and Uses of Cash



|                                          |                |                             |        |      |  |   |        |  
|----------------------------------------- | -------------- | --------------------------- | ------ | ---- |  | - | ------ | -
|                                          |                | Three Months EndedMarch 31, |       
|                                          | 2011           |                             |        | 2010 | 
|                                          | (In thousands) |                            
|Net cash provided by operating activities |                | $                           | 6,316  |      |  | $ | 6,226  |  
|Net cash used in investing activities     |                |                             | (3,982 | )    |  |   | (2,891 | )
|Net cash used in financing activities     |                |                             | (2,551 | )    |  |   | (6,148 | )
|                                          |                |                             |        |      |  |   |        |  
|Net decrease in cash                      |                | $                           | (217   | )    |  | $ | (2,813 | )
|                                          |                |                             |        |      |  |   |        |  

Cash provided by operating activities was $6.3 million for the three months ended March 31, 2011
which was similar when compared to cash provided by operating activities of $6.2 million during the same period in 2010.

Cash used in investing activities was $4.0 million for the three months ended March 31, 2011 compared to $2.9 million in the
same period of 2010. The increase in cash used in investing activities primarily relates to an increase in the additions of property and equipment during the three months ended March 31, 2011.

Cash used in financing activities was $2.6 million for the three months ended March 31, 2011 compared to cash used in financing
activities of $6.1 million for the same period in 2010. The decrease in cash used in financing activities is primarily due to lower repayments of debt of $9.8 million offset by lower borrowings of $2.5 million and higher outflows related to
financing costs of $3.7 million, during the three months ended March 31, 2011.

Financing and Liquidity

We fund our ongoing operations through cash generated by operations, funds available under the revolving portion of
our senior secured credit facility and existing cash and cash equivalents. As of March 31, 2011, our senior secured credit facility was comprised of a $398.3 million senior secured term loan facility and a $100.0 million revolving credit
facility. At March 31, 2011, the revolving credit facility had $54.5 million available for borrowing, $36.5 million outstanding and $9.0 million of letters of credit issued and outstanding. Of the $398.3 million of term loans outstanding
at March 31, 2011, $309.0 million (Extended Term Loans) is payable in quarterly principal installments of $0.9 million over the payment period of March 31, 2013 through September 30, 2015, with the remainder due on the
maturity date of November 16, 2015. Out of the remaining $89.3 million (Non-Extended Term Loans) of term loans outstanding at March 31, 2011, we made a payment of $9.6 million in April 2011 and the remainder is payable on
February 6, 2013. Aggregate commitments of $37.0 million (Non-Extended Revolving Line of Credit) under the revolving credit facility mature on February 6, 2012. The remaining $63.0 million (Extended Revolving Line of
Credit) mature on August 16, 2015 provided that if any of the Non-Extended Term Loans have not been repaid or refinanced in full by January 6, 2013 or have not been subsequently extended to the maturity date of the Extended Term
Loans (November 16, 2015), then the maturity date of the Extended Revolving Line of Credit commitments will be January 6, 2013. Of the $36.5 million outstanding at March 31, 2011 under the revolving credit facility, $13.5 million was
classified on our balance sheet as current portion of long term debt. At March 31, 2011, we had $177.3 million in aggregate principal amount of 10.75% senior subordinated notes due 2016. We anticipate that cash generated by operations, the
remaining funds available under the revolving portion of our senior secured credit facility and existing cash and cash equivalents will be sufficient to meet working capital requirements, service our debt and finance capital expenditures over the
next 12 months.



31



---

##### Table of Contents

We may expand existing recovery and healthy living facilities and build or acquire new
facilities. Management continually assesses our capital needs and may seek additional financing, including debt or equity, to fund potential acquisitions or for other corporate purposes. We have historically made and currently intend to make
payments to reduce borrowing under the revolving line of credit from operating cash flow. In addition, if future financings are executed, we expect that such financings will serve not only to partially fund acquisitions but also to repay all or
part of any outstanding revolving line of credit balances then outstanding. In negotiating such financing, there can be no assurance that we will be able to raise additional capital on terms satisfactory to us. Failure to obtain additional financing
on reasonable terms could have a negative effect on our plans to acquire additional treatment facilities.

Under the terms of
our borrowing arrangements, we are required to comply with various covenants, including the maintenance of certain financial ratios. As of March 31, 2011, we were in compliance with all such covenants. A breach of these could result in a
default under our credit facilities and in our being unable to borrow additional amounts under our revolving credit facility. If an event of default occurs, the lenders could elect to declare all amounts borrowed under our credit facilities to be
immediately due and payable and the lenders under our term loans and revolving credit facility could proceed against the collateral securing the indebtedness.



32



---

##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosure about Market Risk
|------- | ---------------------------------------------------------

For quantitative and qualitative disclosures about market risk affecting us, see Quantitative and Qualitative Disclosure about Market Risk in Item 7A of Part II of our Annual Report on
Form 10-K for the year ended December 31, 2010. As of March 31, 2011, our exposure to market risk has not changed materially since December 31, 2010.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this Quarterly Report.
Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that material information required to be disclosed by us in reports that we
file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period covered by this Quarterly Report that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



33



---

##### Table of Contents

Inherent Limitations on Effectiveness of Controls

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our
internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will
be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.

PART II. OTHER INFORMATION



|Item 1A. | Risk Factors
|-------- | ------------

As
of March 31, 2011, there have been no material changes to the factors disclosed in Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010.



|Item 6. | Exhibits
|------- | --------

The Exhibit
Index beginning on page 36 of this report sets forth a list of exhibits.



34



---

##### Table of Contents

SIGNATURE

Pursuant to the requirements 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.

Date: May 12, 2011



CRC HEALTH CORPORATION (Registrant)By

/s/    GARY
CAMPANELLAGary Campanella,Interim Chief Financial Officer(Principal Financial Officer and Principal
Accounting Officer and duly authorized signatory)




35



---

##### Table of Contents

CRC HEALTH CORPORATION

EXHIBIT INDEX



|     |  |                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer                                  
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer and Principal Accounting Officer 
|     | 
|32.1 |  | Section 1350 Certification of Principal Executive Officer                                              
|     | 
|32.2 |  | Section 1350 Certification of Principal Financial Officer and Principal Accounting Officer             



| | Filed herewith.
|- | ---------------

| | Furnished herewith.
|- | -------------------



36