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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: September 30, 2010

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 November 15, 2010
was 1,000.









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CRC HEALTH CORPORATION

INDEX



|              |  |                       |    |                                                                                                                 |  |          |    | 
|------------- |  | --------------------- | -- | --------------------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|              |  |                       |    |                                                                                                                 |  | Page No. |   
|Part I.       |  | Financial Information |    |                                                                                                                 |  |         
|              |  | Item 1.               |    | Financial Statements (Unaudited)                                                                                |  |          |    | 
|              |  |                       |    | Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009                            |  |          | 2  | 
|              |  |                       |    | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 |  |          | 3  | 
|              |  |                       |    | Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2010 and 2009    |  |          | 4  | 
|              |  |                       |    | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009           |  |          | 6  | 
|              |  |                       |    | Notes to Condensed Consolidated Financial Statements                                                            |  |          | 7  | 
|              |  | Item 2.               |    | Managements Discussion and Analysis of Financial Condition and Results of
Operations                           |  |          | 30 | 
|              |  | Item 3.               |    | Quantitative and Qualitative Disclosure About Market Risk                                                       |  |          | 39 | 
|              |  | Item 4.               |    | Controls and Procedures                                                                                         |  |          | 39 | 
|Part II.      |  | Other Information     |    |                                                                                                                 |  |         
|              |  | Item 1A.              |    | Risk Factors                                                                                                    |  |          | 40 | 
|              |  | Item 6.               |    | Exhibits                                                                                                        |  |          | 40 | 
|Signature     |  |                       | 41 |                                                                                                                
|Exhibit Index |  |                       | 42 |                                                                                                                

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: 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; 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, 2009 filed on March 24, 2010, 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.



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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

SEPTEMBER 30, 2010 AND
DECEMBER 31, 2009

(In thousands, except share amounts)



|                                                                                                                                        |  |                   |           |   |                  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                        |  | September 30,2010 |           |   | December 31,2009 |  
|ASSETS                                                                                                                                  |  |                   |           |   |                  |   |           |  
|CURRENT ASSETS:                                                                                                                         |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                               |  | $                 | 4,359     |   |                  | $ | 4,982     |  
|Restricted cash                                                                                                                         |  |                   | 715       |   |                  |   | 420       |  
|Accounts receivable, net of allowance for doubtful accounts of $5,624 in 2010 and $5,327 in 2009                                        |  |                   | 34,497    |   |                  |   | 31,558    |  
|Prepaid expenses                                                                                                                        |  |                   | 5,909     |   |                  |   | 7,489     |  
|Other current assets                                                                                                                    |  |                   | 1,382     |   |                  |   | 1,306     |  
|Income taxes receivable                                                                                                                 |  |                   |          |   |                  |   | 676       |  
|Deferred income taxes                                                                                                                   |  |                   | 6,470     |   |                  |   | 6,346     |  
|Current assets of discontinued operations                                                                                               |  |                   | 3,189     |   |                  |   | 1,720     |  
|                                                                                                                                        |  |                   |           |   |                  |   |           |  
|Total current assets                                                                                                                    |  |                   | 56,521    |   |                  |   | 54,497    |  
|PROPERTY AND EQUIPMENT-Net                                                                                                              |  |                   | 123,103   |   |                  |   | 125,215   |  
|GOODWILL                                                                                                                                |  |                   | 521,304   |   |                  |   | 573,594   |  
|INTANGIBLE ASSETS-Net                                                                                                                   |  |                   | 315,743   |   |                  |   | 335,409   |  
|OTHER ASSETS-Net                                                                                                                        |  |                   | 20,080    |   |                  |   | 19,619    |  
|                                                                                                                                        |  |                   |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                                            |  | $                 | 1,036,751 |   |                  | $ | 1,108,334 |  
|                                                                                                                                        |  |                   |           |   |                  |   |           |  
|LIABILITIES AND EQUITY                                                                                                                  |  |                   |           |   |                  |   |           |  
|CURRENT LIABILITIES:                                                                                                                    |  |                   |           |   |                  |   |           |  
|Accounts payable                                                                                                                        |  | $                 | 5,402     |   |                  | $ | 3,011     |  
|Accrued liabilities                                                                                                                     |  |                   | 29,673    |   |                  |   | 29,851    |  
|Income taxes payable                                                                                                                    |  |                   | 6,293     |   |                  |   |          |  
|Current portion of long-term debt                                                                                                       |  |                   | 1,471     |   |                  |   | 8,814     |  
|Other current liabilities                                                                                                               |  |                   | 24,085    |   |                  |   | 25,992    |  
|Current liabilities of discontinued operations                                                                                          |  |                   | 2,180     |   |                  |   | 2,114     |  
|                                                                                                                                        |  |                   |           |   |                  |   |           |  
|Total current liabilities                                                                                                               |  |                   | 69,104    |   |                  |   | 69,782    |  
|LONG-TERM DEBT-Less current portion                                                                                                     |  |                   | 604,498   |   |                  |   | 622,262   |  
|OTHER LONG-TERM LIABILITIES                                                                                                             |  |                   | 8,087     |   |                  |   | 8,735     |  
|LIABILITIES OF DISCONTINUED OPERATIONS                                                                                                  |  |                   | 4,504     |   |                  |   | 1,679     |  
|DEFERRED INCOME TAXES                                                                                                                   |  |                   | 105,143   |   |                  |   | 117,334   |  
|                                                                                                                                        |  |                   |           |   |                  |   |           |  
|Total liabilities                                                                                                                       |  |                   | 791,336   |   |                  |   | 819,792   |  
|                                                                                                                                        |  |                   |           |   |                  |   |           |  
|COMMITMENTS AND CONTINGENCIES (Note 12)                                                                                                 |  |                   |           |   |                  |   |           |  
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY:                                                                                            |  |                   |           |   |                  |   |           |  
|Common stock, $0.001 par value-1,000 shares authorized; 1,000 shares issued and outstanding at September 30, 2010 and
December 31, 2009 |  |                   |          |   |                  |   |          |  
|Additional paid-in capital                                                                                                              |  |                   | 457,990   |   |                  |   | 454,880   |  
|Accumulated deficit                                                                                                                     |  |                   | (209,432  | ) |                  |   | (161,363  | )
|Accumulated other comprehensive loss                                                                                                    |  |                   | (3,143    | ) |                  |   | (4,975    | )
|                                                                                                                                        |  |                   |           |   |                  |   |           |  
|Total CRC Health Corporation stockholders equity                                                                                       |  |                   | 245,415   |   |                  |   | 288,542   |  
|                                                                                                                                        |  |                   |           |   |                  |   |           |  
|NONCONTROLLING INTEREST                                                                                                                 |  |                   |          |   |                  |   |          |  
|                                                                                                                                        |  |                   |           |   |                  |   |           |  
|Total equity                                                                                                                            |  |                   | 245,415   |   |                  |   | 288,542   |  
|                                                                                                                                        |  |                   |           |   |                  |   |           |  
|TOTAL LIABILITIES AND EQUITY                                                                                                            |  | $                 | 1,036,751 |   |                  | $ | 1,108,334 |  
|                                                                                                                                        |  |                   |           |   |                  |   |           |  

See notes to unaudited condensed consolidated financial statements.



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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands)



|                                                                                                                                                                                                                                  |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------- | - | ---------------------------------- | - | ------- | --------------------------------- |  | - | --------------------------------- | - |  | - | ------- | -
|                                                                                                                                                                                                                                  |  | Three MonthsEndedSeptember 30,2010 |         |   | Three MonthsEndedSeptember 30,2009 |   |         | Nine MonthsEndedSeptember 30,2010 |  |   | Nine MonthsEndedSeptember 30,2009 |  
|NET REVENUE:                                                                                                                                                                                                                      |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|Net client service revenue                                                                                                                                                                                                        |  | $                                  | 119,199 |   |                                    | $ | 113,084 |                                   |  | $ | 337,933                           |   |  | $ | 324,855 |  
|                                                                                                                                                                                                                                  |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|OPERATING EXPENSES:                                                                                                                                                                                                               |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|Salaries and benefits                                                                                                                                                                                                             |  |                                    | 54,804  |   |                                    |   | 51,676  |                                   |  |   | 162,541                           |   |  |   | 161,416 |  
|Supplies, facilities and other operating costs                                                                                                                                                                                    |  |                                    | 35,343  |   |                                    |   | 31,686  |                                   |  |   | 98,433                            |   |  |   | 92,797  |  
|Provision for doubtful accounts                                                                                                                                                                                                   |  |                                    | 1,705   |   |                                    |   | 1,551   |                                   |  |   | 5,473                             |   |  |   | 4,563   |  
|Depreciation and amortization                                                                                                                                                                                                     |  |                                    | 5,043   |   |                                    |   | 5,644   |                                   |  |   | 15,920                            |   |  |   | 16,895  |  
|Asset impairment                                                                                                                                                                                                                  |  |                                    | 2,495   |   |                                    |   | 2,257   |                                   |  |   | 20,504                            |   |  |   | 2,257   |  
|Goodwill impairment                                                                                                                                                                                                               |  |                                    | 9,052   |   |                                    |   | 24,919  |                                   |  |   | 52,723                            |   |  |   | 24,919  |  
|                                                                                                                                                                                                                                  |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|Total operating expenses                                                                                                                                                                                                          |  |                                    | 108,442 |   |                                    |   | 117,733 |                                   |  |   | 355,594                           |   |  |   | 302,847 |  
|                                                                                                                                                                                                                                  |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|OPERATING INCOME (LOSS)                                                                                                                                                                                                           |  |                                    | 10,757  |   |                                    |   | (4,649  | )                                 |  |   | (17,661                           | ) |  |   | 22,008  |  
|INTEREST EXPENSE                                                                                                                                                                                                                  |  |                                    | (10,735 | ) |                                    |   | (11,519 | )                                 |  |   | (32,251                           | ) |  |   | (35,338 | )
|OTHER EXPENSE                                                                                                                                                                                                                     |  |                                    |        |   |                                    |   |        |                                   |  |   | (88                               | ) |  |   | (82     | )
|                                                                                                                                                                                                                                  |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                                                                                                                                      |  |                                    | 22      |   |                                    |   | (16,168 | )                                 |  |   | (50,000                           | ) |  |   | (13,412 | )
|INCOME TAX EXPENSE (BENEFIT)                                                                                                                                                                                                      |  |                                    | 1,931   |   |                                    |   | 1,280   |                                   |  |   | (5,005                            | ) |  |   | 1,527   |  
|                                                                                                                                                                                                                                  |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|LOSS FROM CONTINUING OPERATIONS, NET OF TAX                                                                                                                                                                                       |  |                                    | (1,909  | ) |                                    |   | (17,448 | )                                 |  |   | (44,995                           | ) |  |   | (14,939 | )
|LOSS FROM DISCONTINUED OPERATIONS (net of tax benefit of ($1,551) and ($715) in the three months ended September 30,
2010 and 2009, and ($1,865) and ($1,554) in the nine months ended September 30, 2010 and 2009, respectively) |  |                                    | (2,567  | ) |                                    |   | (1,273  | )                                 |  |   | (3,074                            | ) |  |   | (2,764  | )
|                                                                                                                                                                                                                                  |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|NET LOSS                                                                                                                                                                                                                          |  |                                    | (4,476  | ) |                                    |   | (18,721 | )                                 |  |   | (48,069                           | ) |  |   | (17,703 | )
|LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST                                                                                                                                                                      |  |                                    |        |   |                                    |   | 148     |                                   |  |   |                                  |   |  |   | 29      |  
|                                                                                                                                                                                                                                  |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|NET LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION                                                                                                                                                                                   |  | $                                  | (4,476  | ) |                                    | $ | (18,869 | )                                 |  | $ | (48,069                           | ) |  | $ | (17,732 | )
|                                                                                                                                                                                                                                  |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|AMOUNTS ATTRIBUTABLE TO CRC HEALTH CORPORATION:                                                                                                                                                                                   |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|LOSS FROM CONTINUING OPERATIONS, NET OF TAX                                                                                                                                                                                       |  | $                                  | (1,909  | ) |                                    | $ | (17,596 | )                                 |  | $ | (44,995                           | ) |  | $ | (14,972 | )
|DISCONTINUED OPERATIONS, NET OF TAX                                                                                                                                                                                               |  |                                    | (2,567  | ) |                                    |   | (1,273  | )                                 |  |   | (3,074                            | ) |  |   | (2,760  | )
|                                                                                                                                                                                                                                  |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|NET LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION                                                                                                                                                                                   |  | $                                  | (4,476  | ) |                                    | $ | (18,869 | )                                 |  | $ | (48,069                           | ) |  | $ | (17,732 | )
|                                                                                                                                                                                                                                  |  |                                    |         |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  

See notes to unaudited condensed consolidated financial statements.



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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(In thousands, except share amounts)



|                                                          |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 
|--------------------------------------------------------- |  | ----- | ------- | - | -------------------------- | - | ------- | ------------------------------------------- |  | - | --------------------------------- | - |  | ------------ | ------ | - | ------------------------ |  | ----- | ---------------------- |  | - | - |  |  | - | ------- |  |  | - | - | 
|                                                          |  |       |         |   |                            |   |         | CRC Health Corporation Stockholders Equity |  |   |                                   |  
|                                                          |  | Total |         |   | ComprehensiveIncome (Loss) |   |         | AccumulatedDeficit                          |  |   | AccumulatedOtherComprehensiveLoss |   |  | Common Stock |        |   | AdditionalPaid-inCapital |  |       | NoncontrollingInterest | 
|                                                          |  |       |         |   | Shares                     |   |         | Amount                                      |  |   |                                  
|BALANCEDecember 31, 2009                                 |  | $     | 288,542 |   |                            |   |         |                                             |  | $ | (161,363                          | ) |  | $            | (4,975 | ) |                          |  | 1,000 |                        |  | $ |  |  |  | $ | 454,880 |  |  | $ |  | 
|                                                          |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 
|Comprehensive loss:                                       |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 
|Net loss for the nine months ended September 30, 2010     |  |       | (48,069 | ) |                            | $ | (48,069 | )                                           |  |   | (48,069                           | ) |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |  | 
|Other comprehensive income, net of tax:                   |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 
|Unrealized gain on cash flow hedges, net of tax of $1,219 |  |       | 1,832   |   |                            |   | 1,832   |                                             |  |   |                                   |   |  |              | 1,832  |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 
|                                                          |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 
|Other comprehensive income                                |  |       | 1,832   |   |                            |   | 1,832   |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 
|                                                          |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 
|Comprehensive loss                                        |  |       | (46,237 | ) |                            | $ | (46,237 | )                                           |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 
|                                                          |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 
|Capital contributed by Parent, net                        |  |       | 3,110   |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   | 3,110   |  |  |   |   | 
|                                                          |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 
|BALANCESeptember 30, 2010                                |  | $     | 245,415 |   |                            |   |         |                                             |  | $ | (209,432                          | ) |  | $            | (3,143 | ) |                          |  | 1,000 |                        |  | $ |  |  |  | $ | 457,990 |  |  | $ |  | 
|                                                          |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |  |  |   |   | 

See notes to unaudited condensed consolidated financial statements.



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CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009

(In thousands, except share amounts)



|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  
|------------------------------------------------------- |  | ----- | ------- | - | -------------------------- | - | ------- | ------------------------------------------- |  | - | --------------------------------- | - |  | ------------ | ------ | - | ------------------------ |  | ----- | ---------------------- |  | - | - |  |  | - | ------- | - |  | - | --- | -
|                                                        |  |       |         |   |                            |   |         | CRC Health Corporation Stockholders Equity |  |   |                                   |  
|                                                        |  | Total |         |   | ComprehensiveIncome (Loss) |   |         | AccumulatedDeficit                          |  |   | AccumulatedOtherComprehensiveLoss |   |  | Common Stock |        |   | AdditionalPaid-inCapital |  |       | NoncontrollingInterest | 
|                                                        |  |       |         |   | Shares                     |   |         | Amount                                      |  |   |                                  
|BALANCEDecember 31, 2008                               |  | $     | 303,443 |   |                            |   |         |                                             |  | $ | (134,764                          | ) |  | $            | (6,289 | ) |                          |  | 1,000 |                        |  | $ |  |  |  | $ | 444,275 |   |  | $ | 221 |  
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  
|Noncontrolling interest buyout                          |  |       | (89     | ) |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   | (84     | ) |  |   | (5  | )
|Comprehensive loss:                                     |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  
|Net loss for the nine months ended September 30, 2009   |  |       | (17,703 | ) |                            | $ | (17,703 | )                                           |  |   | (17,732                           | ) |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   | 29  |  
|Other comprehensive income, net of tax:                 |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  
|Unrealized gain on cash flow hedges, net of tax of $983 |  |       | 1,428   |   |                            |   | 1,428   |                                             |  |   |                                   |   |  |              | 1,428  |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  
|Other comprehensive income                              |  |       | 1,428   |   |                            |   | 1,428   |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  
|Comprehensive loss                                      |  |       | (16,275 | ) |                            | $ | (16,275 | )                                           |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  
|Capital contributed by Parent, net                      |  |       | 7,387   |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   | 7,387   |   |  |   |     |  
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  
|BALANCESeptember 30, 2009                              |  | $     | 294,466 |   |                            |   |         |                                             |  | $ | (152,496                          | ) |  | $            | (4,861 | ) |                          |  | 1,000 |                        |  | $ |  |  |  | $ | 451,578 |   |  | $ | 245 |  
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |   |                          |  |       |                        |  |   |   |  |  |   |         |   |  |   |     |  

See notes to unaudited condensed consolidated financial statements.



5



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##### Table of Contents



CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands)



|                                                                                         |  |                                     |         |   |                                     |   |         |  
|---------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ----------------------------------- | - | ------- | -
|                                                                                         |  | Nine Months EndedSeptember 30, 2010 |         |   | Nine Months EndedSeptember 30, 2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                                     |         |   |                                     |   |         |  
|Net loss                                                                                 |  | $                                   | (48,069 | ) |                                     | $ | (17,703 | )
|Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |                                     |         |   |                                     |   |         |  
|Depreciation and amortization                                                            |  |                                     | 15,929  |   |                                     |   | 17,148  |  
|Amortization of debt discount and capitalized financing costs                            |  |                                     | 3,179   |   |                                     |   | 3,279   |  
|Gain on interest rate swap agreement                                                     |  |                                     | (292    | ) |                                     |   |        |  
|Asset impairment                                                                         |  |                                     | 20,504  |   |                                     |   | 4,560   |  
|Goodwill impairment                                                                      |  |                                     | 52,723  |   |                                     |   | 24,919  |  
|Write-off of acquisition costs                                                           |  |                                     |        |   |                                     |   | 62      |  
|Loss on disposition of property and equipment                                            |  |                                     | 42      |   |                                     |   | 880     |  
|Gain on sale of discontinued operations                                                  |  |                                     |        |   |                                     |   | (24     | )
|Provision for doubtful accounts                                                          |  |                                     | 5,524   |   |                                     |   | 4,680   |  
|Stock-based compensation                                                                 |  |                                     | 2,178   |   |                                     |   | 4,164   |  
|Deferred income taxes                                                                    |  |                                     | (12,668 | ) |                                     |   | (5,897  | )
|Changes in assets and liabilities:                                                       |  |                                     |         |   |                                     |   |         |  
|Restricted cash                                                                          |  |                                     | (295    | ) |                                     |   | (875    | )
|Accounts receivable                                                                      |  |                                     | (8,324  | ) |                                     |   | (6,438  | )
|Prepaid expenses                                                                         |  |                                     | 1,633   |   |                                     |   | 1,941   |  
|Other current assets                                                                     |  |                                     | 88      |   |                                     |   | 154     |  
|Income taxes receivable and payable                                                      |  |                                     | 4,651   |   |                                     |   | 4,215   |  
|Accounts payable                                                                         |  |                                     | 2,407   |   |                                     |   | (1,548  | )
|Accrued liabilities                                                                      |  |                                     | 172     |   |                                     |   | 1,475   |  
|Other current liabilities                                                                |  |                                     | 1,158   |   |                                     |   | (2,815  | )
|Other assets                                                                             |  |                                     | (3,442  | ) |                                     |   | (2,315  | )
|Other long-term liabilities                                                              |  |                                     | 2,509   |   |                                     |   | (303    | )
|                                                                                         |  |                                     |         |   |                                     |   |         |  
|Net cash provided by operating activities                                                |  |                                     | 39,607  |   |                                     |   | 29,559  |  
|                                                                                         |  |                                     |         |   |                                     |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                                     |         |   |                                     |   |         |  
|Additions of property and equipment                                                      |  |                                     | (14,678 | ) |                                     |   | (7,252  | )
|Proceeds from sale of property and equipment                                             |  |                                     | 41      |   |                                     |   | 141     |  
|Proceeds from sale of discontinued operations                                            |  |                                     |        |   |                                     |   | 475     |  
|Acquisition of business, net of cash acquired                                            |  |                                     | (86     | ) |                                     |   |        |  
|Acquisition adjustments                                                                  |  |                                     |        |   |                                     |   | (59     | )
|Payments made under earnout arrangements                                                 |  |                                     |        |   |                                     |   | (200    | )
|                                                                                         |  |                                     |         |   |                                     |   |         |  
|Net cash used in investing activities                                                    |  |                                     | (14,723 | ) |                                     |   | (6,895  | )
|                                                                                         |  |                                     |         |   |                                     |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                                     |         |   |                                     |   |         |  
|Capital contributed from (distributed to) Parent                                         |  |                                     | 8       |   |                                     |   | (221    | )
|Capitalized financing costs                                                              |  |                                     |        |   |                                     |   | (117    | )
|Noncontrolling interest buyout                                                           |  |                                     |        |   |                                     |   | (89     | )
|Repayment of capital lease obligations                                                   |  |                                     |        |   |                                     |   | (10     | )
|Borrowings under revolving line of credit                                                |  |                                     | 13,500  |   |                                     |   | 9,000   |  
|Repayments under revolving line of credit                                                |  |                                     | (30,000 | ) |                                     |   | (22,000 | )
|Repayments of term loan and seller notes                                                 |  |                                     | (9,015  | ) |                                     |   | (5,313  | )
|                                                                                         |  |                                     |         |   |                                     |   |         |  
|Net cash used in financing activities                                                    |  |                                     | (25,507 | ) |                                     |   | (18,750 | )
|                                                                                         |  |                                     |         |   |                                     |   |         |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                     |  |                                     | (623    | ) |                                     |   | 3,914   |  
|CASH AND CASH EQUIVALENTS-Beginning of period                                            |  |                                     | 4,982   |   |                                     |   | 2,540   |  
|                                                                                         |  |                                     |         |   |                                     |   |         |  
|CASH AND CASH EQUIVALENTS-End of period                                                  |  | $                                   | 4,359   |   |                                     | $ | 6,454   |  
|                                                                                         |  |                                     |         |   |                                     |   |         |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:                                 |  |                                     |         |   |                                     |   |         |  
|Payable related to acquisition                                                           |  | $                                   | 309     |   |                                     | $ |        |  
|                                                                                         |  |                                     |         |   |                                     |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                        |  |                                     |         |   |                                     |   |         |  
|Cash paid for interest                                                                   |  | $                                   | 34,250  |   |                                     | $ | 37,211  |  
|                                                                                         |  |                                     |         |   |                                     |   |         |  
|Cash paid for income taxes, net of refunds                                               |  | $                                   | 1,147   |   |                                     | $ | 1,655   |  
|                                                                                         |  |                                     |         |   |                                     |   |         |  

See notes to unaudited condensed consolidated financial statements.



6



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##### 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, 2009 has been derived from the Companys 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, 2009.

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  During the quarter ended March 31, 2010, the Company adopted updated
authoritative guidance which amends and enhances disclosures about fair value measurements. The updated guidance requires the addition of new disclosure requirements for significant transfers in and out of Level 1 and 2 measurements and to provide a
gross presentation of the activities within the Level 3 roll forward. The amended guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The
adoption of this guidance did not have a material effect on the Companys consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted  In August 2010, the Financial Accounting Standards Board
(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 is 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 adoption of the guidance will not
have a material impact on the Companys 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 is effective for fiscal years beginning after December 15, 2010. Retrospective application and early adoption is permitted. The adoption of the guidance will not have a
material impact on the Companys consolidated financial statements.

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 will be effective for the first interim or annual reporting periods ending on or after
December 15, 2010. However, the disclosures that include information for activity that occurs during a reporting period will be 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 adoption of the new disclosure requirements will not have a material impact on the Companys
consolidated financial statements.



7



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##### Table of Contents

CRC HEALTH CORPORATION

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





3. ACQUISITION

During the three months ended March 31, 2010, the Company completed an acquisition for approximately $0.4 million of purchase
consideration. The purchase consideration will be paid over 3 years. The purchase price was allocated to the assets acquired and liabilities assumed based upon their respective estimated fair values at the acquisition date. The goodwill of $0.4
million arising from this acquisition was allocated to the healthy living division. The acquisition is intended to expand the services of the Companys healthy living division within the respective markets of the acquired facility in
the United States.

4. BALANCE SHEET COMPONENTS

Balance sheet components at September 30, 2010 and December 31, 2009 consist of the following (in thousands):



|                                     |  |                   |        |   |                  |   |        |  
|------------------------------------ |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                     |  | September 30,2010 |        |   | December 31,2009 |  
|Accounts receivable-gross            |  | $                 | 40,121 |   |                  | $ | 36,885 |  
|Less allowance for doubtful accounts |  |                   | (5,624 | ) |                  |   | (5,327 | )
|                                     |  |                   |        |   |                  |   |        |  
|Accounts receivable-net              |  | $                 | 34,497 |   |                  | $ | 31,558 |  
|                                     |  |                   |        |   |                  |   |        |  
|Other assets-net:                    |  |                   |        |   |                  |   |        |  
|Capitalized financing costs-net      |  | $                 | 11,681 |   |                  | $ | 14,663 |  
|Deposits                             |  |                   | 880    |   |                  |   | 925    |  
|Notes receivable                     |  |                   | 7,519  |   |                  |   | 4,031  |  
|                                     |  |                   |        |   |                  |   |        |  
|Total other assets-net               |  | $                 | 20,080 |   |                  | $ | 19,619 |  
|                                     |  |                   |        |   |                  |   |        |  
|Accrued liabilities:                 |  |                   |        |   |                  |   |        |  
|Accrued payroll and related expenses |  | $                 | 14,358 |   |                  | $ | 8,698  |  
|Accrued vacation                     |  |                   | 4,621  |   |                  |   | 4,615  |  
|Accrued interest                     |  |                   | 3,384  |   |                  |   | 8,019  |  
|Accrued expenses                     |  |                   | 7,310  |   |                  |   | 8,519  |  
|                                     |  |                   |        |   |                  |   |        |  
|Total accrued liabilities            |  | $                 | 29,673 |   |                  | $ | 29,851 |  
|                                     |  |                   |        |   |                  |   |        |  
|Other current liabilities:           |  |                   |        |   |                  |   |        |  
|Deferred revenue                     |  | $                 | 11,394 |   |                  | $ | 9,650  |  
|Client deposits                      |  |                   | 3,814  |   |                  |   | 4,130  |  
|Interest rate swap liability         |  |                   | 5,316  |   |                  |   | 8,659  |  
|Other liabilities                    |  |                   | 3,561  |   |                  |   | 3,553  |  
|                                     |  |                   |        |   |                  |   |        |  
|Total other current liabilities      |  | $                 | 24,085 |   |                  | $ | 25,992 |  
|                                     |  |                   |        |   |                  |   |        |  

5. PROPERTY AND EQUIPMENT

Property and equipment at September 30, 2010 and December 31, 2009 consist of the following (in thousands):



|                              |  |                   |         |   |                  |   |         |  
|----------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                              |  | September 30,2010 |         |   | December 31,2009 |  
|Land                          |  | $                 | 21,373  |   |                  | $ | 21,373  |  
|Building and improvements     |  |                   | 78,991  |   |                  |   | 74,551  |  
|Leasehold improvements        |  |                   | 21,357  |   |                  |   | 23,181  |  
|Furniture and fixtures        |  |                   | 12,996  |   |                  |   | 12,404  |  
|Computer equipment            |  |                   | 12,314  |   |                  |   | 10,855  |  
|Computer software             |  |                   | 13,840  |   |                  |   | 11,332  |  
|Motor vehicles                |  |                   | 6,013   |   |                  |   | 5,911   |  
|Field equipment               |  |                   | 2,890   |   |                  |   | 2,782   |  
|Construction in progress      |  |                   | 7,636   |   |                  |   | 6,363   |  
|                              |  |                   |         |   |                  |   |         |  
|                              |  |                   | 177,410 |   |                  |   | 168,752 |  
|Less accumulated depreciation |  |                   | (54,307 | ) |                  |   | (43,537 | )
|                              |  |                   |         |   |                  |   |         |  
|Property and equipment-net    |  | $                 | 123,103 |   |                  | $ | 125,215 |  
|                              |  |                   |         |   |                  |   |         |  

Depreciation expense was $3.5 million and $3.8 million for the three months ended September 30, 2010
and 2009, respectively, and $10.9 million and $11.4 million for the nine months ended September 30, 2010 and 2009, respectively.



8



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##### Table of Contents

CRC HEALTH CORPORATION

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





Asset
impairment

The Company tests its long-lived assets for impairment whenever events and changes in circumstances
indicate that the carrying value of certain of its assets may not be recoverable. The long-lived assets are tested for impairment at the facility level which represents the lowest level at which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. If the undiscounted future cash flows from the assets tested are less than the carrying value, a loss equal to the difference between the carrying value and the fair value of the asset is
recorded. Fair value is determined using discounted cash flow methods. The Companys analysis of its undiscounted cash flows requires judgment with respect to many factors, including future cash flows, success at executing its business
strategy, and future revenue and expense growth rates and determination of the primary asset at the facility level. It is possible that the Companys estimates of undiscounted cash flows may change in the future resulting in the need to
reassess the carrying value of its long-lived assets for impairment.

During the second quarter of 2010, the Company lowered
its view of forecasted future cash flows, compared to a forecast prepared in the fourth quarter of 2009, for the healthy living division. This was based upon the Companys assessment of economic conditions and lack of available credit for
families of potential students of the healthy living division each of which affect both admissions and pricing. This triggering event caused the Company to test the fixed assets within its healthy living division for impairment. For the three months
ended June 30, 2010, the Company recognized a non-cash impairment charge of $4.0 million related to impairment of property and equipment which was included in the condensed consolidated statements of operations as asset impairment.

The operations and enrollment of the Aspen programs within the Companys healthy living division are highest in the summer months.
Additionally, the Aspen programs have limited leading indicators regarding performance. As a result, the Company has more information in late summer and early fall around Aspens performance, which came in below the performance levels expected
in July and August 2010. At the end of the third quarter of 2010, the Company reviewed actual results for graduation, admissions, and average length of stay in the Aspen programs relative to its prior forecast and fiscal year budget. In response to
negative results in these areas, the Company further lowered its view of forecasted future cash flows for the Aspen programs within its healthy living division. This triggering event caused the Company to test the fixed assets within its healthy
living division for impairment. For the three months ended September 30, 2010, the Company recognized a non-cash impairment charge of $1.8 million related to impairment of property and equipment which is included in the condensed consolidated
statements of operations as asset impairment. For the nine months ended September 30, 2010, the Company had recognized non-cash impairment charges of $5.8 million related to the impairment of property and equipment.

6. GOODWILL AND INTANGIBLE ASSETS

Changes to goodwill by reportable segments for the nine months ended September 30, 2010 are as follows (in thousands):



|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|---------------------------------- |  | -------- | ------- | - | -------------- | - | -------- | ----- |  | - | -------- | -
|                                   |  | Recovery |         |   | Healthy Living |   |          | Total | 
|Balance as of January 1, 2010      |  |          |         |   |                |   |          |       |  |   |          |  
|Goodwill                           |  | $        | 502,168 |   |                | $ | 244,785  |       |  | $ | 746,953  |  
|Accumulated impairment losses      |  |          | (624    | ) |                |   | (172,735 | )     |  |   | (173,359 | )
|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|                                   |  |          | 501,544 |   |                |   | 72,050   |       |  |   | 573,594  |  
|Activity during the year:          |  |          |         |   |                |   |          |       |  |   |          |  
|Goodwill addition from acquisition |  |          |        |   |                |   | 433      |       |  |   | 433      |  
|Goodwill impairment                |  |          |        |   |                |   | (52,723  | )     |  |   | (52,723  | )
|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|Balance as of September 30, 2010   |  |          |         |   |                |   |          |       |  |   |          |  
|Goodwill                           |  |          | 502,168 |   |                |   | 245,218  |       |  |   | 747,386  |  
|Accumulated impairment losses      |  |          | (624    | ) |                |   | (225,458 | )     |  |   | (226,082 | )
|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|                                   |  | $        | 501,544 |   |                | $ | 19,760   |       |  | $ | 521,304  |  
|                                   |  |          |         |   |                |   |          |       |  |   |          |  

Goodwill impairment

The Company tests goodwill for impairment annually, at the beginning of its fourth quarter or more frequently if evidence of possible impairment arises. The Company performs a two-step
impairment test on goodwill. In the first step, the Company compares the fair value of the reporting unit, defined as an operating segment or one level below an operating segment, being tested to its carrying value. The goodwill impairment test is
performed based on the reporting units that the Company has in place at the time of the test. The reporting units may change over time as the Companys operating segments change, or the component businesses therein change, due to economic
conditions, acquisitions, restructuring or otherwise. At the time of these events, the Company reevaluates its reporting units using the reporting unit determination guidelines. As necessary, goodwill is reassigned between the affected reporting
units using a relative fair-value approach.



9



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##### Table of Contents

CRC HEALTH CORPORATION

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





As of
September 30, 2010, as a result of the economic conditions and their adverse impact on the Aspen business and its long term growth prospects, the Aspen reporting unit could no longer be aggregated with the weight management reporting unit
within the healthy living division for goodwill impairment test. It was determined that healthy living division had two reporting units within its segment: Aspen and weight management. The Aspen reporting unit encompasses short-term and long term
therapeutic programs for adolescents with behavioral or learning challenges that are interfering with their performance in school and in life such as substance abuse, academic underachievement, anger and aggressive behavior, family conflict, special
learning needs and depression. The weight management reporting unit offers a number of different types of weight management programs for adults and adolescents and a full range of services for anorexia nervosa, bulimia nervosa, binge eating and
related disorders. The Companys three reporting units as of September 30, 2010 are recovery division, Aspen and weight management.

The Company determines the fair value of its reporting units using a combination of the income approach and the market approach. Under the income approach, the Company calculates the fair value of a
reporting unit based on the present value of estimated future cash flows. Under the market approach, the Company estimates fair value based on what investors have paid for similar interests in comparable companies through the development of ratios
of market prices to various earnings indications of comparable companies taking into consideration adjustments for growth prospects, debt levels and overall size. If the fair value of the reporting unit exceeds the carrying value of the net assets
assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the
Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting units goodwill. If the carrying value of a reporting units goodwill exceeds its implied fair value, then the
Company records an impairment loss equal to the difference.

The process of evaluating the potential impairment of goodwill is
subjective and requires significant estimates and assumptions at many points during the analysis. The Companys estimated future cash flows are based on assumptions that are consistent with its annual planning process and include
estimates for revenue and operating margins and future economic and market conditions. Actual future results may differ from those estimates. The Company bases its fair value estimates on assumptions it believes to be reasonable
at the time, but that are unpredictable and inherently uncertain. In addition, the Company makes certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of its reporting units
tested.

During the second quarter of 2010, the Company lowered its view of forecasted future cash flows, compared to a
forecast prepared in the fourth quarter of 2009, for the healthy living division. This was based upon the Companys assessment of economic conditions and lack of available credit for families of potential students of the healthy living division
each of which affect both admissions and pricing. This triggering event caused the Company to test its healthy living division in advance of the annual goodwill impairment test date. The Company recognized a non-cash impairment charge of $43.7
million during the three months ended June 30, 2010.

The operations and enrollment of the Aspen programs within the
Companys healthy living division are highest in the summer months. Additionally, the Aspen programs have limited leading indicators regarding performance. As a result, the Company has more information in late summer and early fall around
Aspens performance, which came in below the performance levels expected in July and August 2010. At the end of the third quarter of 2010, the Company reviewed actual results for graduation, admissions, and average length of stay in the Aspen
programs relative to its prior forecast and fiscal year budget. In response to negative results in these areas, the Company further lowered its view of forecasted future cash flows for the Aspen programs within its healthy living division. This
triggering event caused the Company to test Aspens goodwill for impairment. For the three months ended September 30, 2010, the Company recognized a non-cash impairment charge of $9.1 million related to impairment within the Aspen
reporting unit of healthy living division. For the nine months ended September 30, 2010, the Company had recognized non-cash impairment charges of $52.7 million related to the impairment of goodwill for the healthy living division, including
Aspen. Goodwill impairment charges, recognized by the Company during the three months and nine months ended September 30, 2010 are estimated amounts which are subject to revision as more information becomes available. At September 30,
2010, the Company also tested its weight management reporting unit for possible impairment. The Company determined that the fair value of its weight management reporting unit exceeded its carrying value and the Company determined that the second
step of goodwill impairment testing was not required for its weight management reporting unit.



10



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##### Table of Contents

CRC HEALTH CORPORATION

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





Intangible
Assets

Total intangible assets at September 30, 2010 and December 31, 2009 consist of the following (in
thousands):



|                                                    |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|--------------------------------------------------- |  | ------------------ | -------- |  | ------------------- | - | ------ | ----------------------- |  | - | ----------------- | - |  | ---------- | ------- |  | ------------------- |  | -------- | ----------------------- |  | - | ----------------- |  |  | - | ------- | - |  | - | ------- | 
|                                                    |  | September 30, 2010 |          |  | December 31, 2009   |  
|                                                    |  | UsefulLife         |          |  | GrossCarryingAmount |   |        | AccumulatedAmortization |  |   | NetCarryingAmount |   |  | UsefulLife |         |  | GrossCarryingAmount |  |          | AccumulatedAmortization |  |   | NetCarryingAmount | 
|Intangible assets subject to amortization:          |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Referral network                                    |  |                    | 20 years |  |                     | $ | 20,960 |                         |  | $ | (4,061            | ) |  | $          | 16,899  |  |                     |  | 20 years |                         |  | $ | 29,695            |  |  | $ | (4,632  | ) |  | $ | 25,063  | 
|Accreditations                                      |  |                    | 20 years |  |                     |   | 8,974  |                         |  |   | (1,738            | ) |  |            | 7,236   |  |                     |  | 20 years |                         |  |   | 14,144            |  |  |   | (2,219  | ) |  |   | 11,925  | 
|Curriculum                                          |  |                    | 20 years |  |                     |   | 5,513  |                         |  |   | (1,068            | ) |  |            | 4,445   |  |                     |  | 20 years |                         |  |   | 7,425             |  |  |   | (1,159  | ) |  |   | 6,266   | 
|Government including Medicaid contracts             |  |                    | 15 years |  |                     |   | 34,967 |                         |  |   | (10,879           | ) |  |            | 24,088  |  |                     |  | 15 years |                         |  |   | 34,967            |  |  |   | (9,131  | ) |  |   | 25,836  | 
|Managed care contracts                              |  |                    | 10 years |  |                     |   | 14,400 |                         |  |   | (6,720            | ) |  |            | 7,680   |  |                     |  | 10 years |                         |  |   | 14,400            |  |  |   | (5,640  | ) |  |   | 8,760   | 
|Managed care contracts                              |  |                    | 5 years  |  |                     |   | 100    |                         |  |   | (60               | ) |  |            | 40      |  |                     |  | 5 years  |                         |  |   | 100               |  |  |   | (45     | ) |  |   | 55      | 
|Core developed technology                           |  |                    | 5 years  |  |                     |   | 2,704  |                         |  |   | (2,528            | ) |  |            | 176     |  |                     |  | 5 years  |                         |  |   | 2,704             |  |  |   | (2,122  | ) |  |   | 582     | 
|Covenants not to compete                            |  |                    | 3 years  |  |                     |   | 152    |                         |  |   | (152              | ) |  |            |        |  |                     |  | 3 years  |                         |  |   | 152               |  |  |   | (152    | ) |  |   |        | 
|                                                    |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Total intangible assets subject to amortization     |  |                    |          |  |                     | $ | 87,770 |                         |  | $ | (27,206           | ) |  | $          | 60,564  |  |                     |  |          |                         |  | $ | 103,587           |  |  | $ | (25,100 | ) |  | $ | 78,487  | 
|                                                    |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Intangible assets not subject to amortization:      |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Trademarks and trade names                          |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            | 173,078 |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   | 174,821 | 
|Certificates of need                                |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            | 44,600  |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   | 44,600  | 
|Regulatory licenses                                 |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            | 37,501  |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   | 37,501  | 
|                                                    |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Total intangible assets not subject to amortization |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            | 255,179 |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   | 256,922 | 
|                                                    |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 
|Total intangible assets                             |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  | $          | 315,743 |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  | $ | 335,409 | 
|                                                    |  |                    |          |  |                     |   |        |                         |  |   |                   |   |  |            |         |  |                     |  |          |                         |  |   |                   |  |  |   |         |   |  |   |         | 

Intangible assets subject to amortization

The Company tests its long-lived assets for impairment whenever events and changes in circumstances indicate that the carrying value of
certain of its assets may not be recoverable. The long-lived assets are tested for impairment at the facility level which represents the lowest level at which identifiable cash flows are largely independent of the cash flows of other groups of
assets and liabilities. If the discounted future cash flows from the assets tested are less than the carrying value, a loss equal to the difference between the carrying value and the fair value of the asset is recorded. Fair value is determined
using discounted cash flow methods. The Companys analysis of its undiscounted cash flows requires judgment with respect to many factors, including future cash flows, success at executing its business strategy, and future revenue and expense
growth rates. It is possible that the Companys estimates of undiscounted cash flows may change in the future resulting in the need to reassess the carrying value of its long-lived assets for impairment.



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##### Table of Contents

CRC HEALTH CORPORATION

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



During the second quarter of 2010, the Company lowered its view of forecasted future
cash flows, compared to a forecast prepared in the fourth quarter of 2009, for the healthy living division. This was based upon the Companys assessment of economic conditions and lack of available credit for families of potential students of
the healthy living division each of which affect both admissions and pricing. This triggering event caused the Company to test the finite-lived intangible assets within its healthy living division for impairment. For the three months ended
June 30, 2010, the Company recognized a non-cash impairment charge of $11.0 million related to the finite-lived intangible assets which was included in the condensed consolidated statements of operations as asset impairment.

In addition, during the three months ended June 30, 2010, the Company consolidated programs offered at two of its facilities within
its healthy living division. As a result, the Company recognized anon-cash impairment charge of $1.3 million related to finite-lived intangible assets of one of the programs. These impairment charges are included in the condensed consolidated
statements of operations as asset impairment.

The operations and enrollment of the Aspen programs within the Companys
healthy living division are highest in the summer months. Additionally, the Aspen programs have limited leading indicators regarding performance. As a result, the Company has more information in late summer and early fall around Aspens
performance, which came in below the performance levels expected in July and August 2010. At the end of the third quarter of 2010, the Company reviewed actual results for graduation, admissions, and average length of stay in the Aspen programs
relative to its prior forecast and fiscal year budget. In response to negative results in these areas, the Company further lowered its view of forecasted future cash flows for the Aspen programs within its healthy living division. This triggering
event caused the Company to test the finite-lived intangible assets within its healthy living division for impairment. For the three months ended September 30, 2010, the Company recognized a non-cash impairment charge of $0.7 million related to
impairment of finite-lived intangible assets which is included on the condensed consolidated statements of operations as asset impairment. For the nine months ended September 30, 2010, the Company had recognized non-cash impairment charges of
$13.0 million related to the impairment of finite-lived intangible assets.

Total amortization expense of intangible assets
subject to amortization was $1.5 million and $1.8 million for the three months ended September 30, 2010 and 2009, respectively, and $5.0 million and $5.5 million for the nine months ended September 30, 2010 and 2009, respectively.

Estimated future amortization expense related to the amortizable intangible assets at September 30, 2010 is as follows
(in thousands):



|                              |  |   |        | 
|----------------------------- |  | - | ------ | 
|Fiscal Year                   | 
|2010 (remaining three months) |  | $ | 1,526  | 
|2011                          |  |   | 5,605  | 
|2012                          |  |   | 5,559  | 
|2013                          |  |   | 5,543  | 
|2014                          |  |   | 5,543  | 
|Thereafter                    |  |   | 36,788 | 
|                              |  |   |        | 
|Total                         |  | $ | 60,564 | 
|                              |  |   |        | 

Intangible assets not subject to amortization

The Company tests indefinite lived intangible assets for impairment annually, at the beginning of its fourth quarter or more
frequently if evidence of possible impairment arises. The Company applies a fair value-based impairment test to the net book value of other indefinite lived intangible assets using a combination of income and market approaches.

During the second quarter of 2010, the Company lowered its view of forecasted future cash flows, compared to a forecast prepared in the
fourth quarter of 2009, for the healthy living division. This was based upon the Companys assessment of economic conditions and lack of available credit for families of potential students of the healthy living division each of which affect
both admissions and pricing. Accordingly, the Company determined that certain indefinite-lived intangible assets were impaired and recognized an impairment charge of $1.5 million during the three months ended June 30, 2010. Additionally, the
Company recognized an impairment charge of $0.2 million due to the Companys decision to consolidate programs offered at two of its facilities within its healthy living division. Charges related to impairment of indefinite-lived intangible
assets are included in the Companys condensed consolidated statements of operations as asset impairment.



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CRC HEALTH CORPORATION

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



The operations and enrollment of the Aspen programs within the Companys healthy
living division are highest in the summer months. Additionally, the Aspen programs have limited leading indicators regarding performance. As a result, the Company has more information in late summer and early fall around Aspens performance,
which came in below the performance levels expected in July and August 2010. At the end of the third quarter of 2010, the Company reviewed actual results for graduation, admissions, and average length of stay in the Aspen programs relative to its
prior forecast and fiscal year budget. In response to negative results in these areas, the Company further lowered its view of forecasted future cash flows for the Aspen programs within its healthy living division. Based on the results of a fair
value assessment of the indefinite lived intangible assets at September 30, 2010, no impairment was recognized for them during the three months ended September 30, 2010.

7. 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.

During the three and nine months ended September 30, 2010, the Companys tax expense (benefit) on continuing operations was
$1.9 million and $(5.0) million respectively, representing effective tax rates of 8,777.3% and 10.0%, respectively. The overall effective tax rate on continuing operations differs from the U.S. federal statutory rate of 35% primarily due to certain
discrete items discussed below and state income taxes. Without discrete items, the effective tax rate for the three and nine months ended September 30, 2010 for continuing operations is 43.3% and 42.4%, respectively.

During the nine months ended September 30, 2010, the discrete items primarily consisted of the following items:



|(i) | The Company recorded $0.5 million tax benefit on the release of tax reserve related to transaction costs associated with 2006 Aspen acquisition as a result of the
conclusion of an Internal Revenue Service tax audit for tax years of 2004 to 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(ii) | Upon completion of the filing of the 2009 tax returns, the Company recorded a provision-to-return adjustment. The adjustment resulted in an aggregate increase to the
income tax benefit of $0.8 million.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(iii) | The Company recognized aggregate impairment charges of $73.2 million. For tax purposes, $40.8 million of this impairment that was related to goodwill impairment, was
non-deductible and affected the Companys overall effective tax rate.
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(iv) | The income tax benefit resulting from worthless stock loss related to investment in a legal subsidiary resulted in an income tax benefit of $1.4 million.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

During the three and nine months ended September 30, 2009, the Companys tax expense on continuing
operations was $1.3 million and $1.5 million, respectively, representing an effective tax rate of (7.9)% and (11.4)%, respectively. The effective tax rate on continuing operations differs from the U.S. federal statutory rate of 35% primarily due to
state income taxes and several other discrete items.

The Company files its income tax returns in various jurisdictions,
including United States federal and state filings, and United Kingdom and Canada filings. The Companys income tax returns are currently under examination within certain state jurisdictions. There are different interpretations of tax laws and
regulations and, as a result, significant disputes may arise with 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 exposure associated with its tax filing positions.

During the nine months
ended September 30, 2010, the Company recognized a total of $73.2 million in impairments related to goodwill, intangible assets, and fixed assets. Of this amount, $32.4 million of impairments gave rise to approximately $12.2 million of income
tax benefits in the form of reductions to deferred tax liabilities. All the impairment and the corresponding income tax effects are related to continuing operations.

During the nine months ended September 30, 2010, the Company elected to apply Section 172(b) (1) (H) under Rev. Proc. 2009-52 to extend the five-year carryback period for net operating
losses related to 2009. As a result of this election, the Company expected to receive approximately $1.2 million as an income tax refund during the fourth quarter of 2010. In October 2010, the Company received the entire amount of this refund.



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CRC HEALTH CORPORATION

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





8. LONG-TERM DEBT

Long-term debt at September 30, 2010 and December 31, 2009 consists of the following (in thousands):



|                                                                                |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                |  | September 30,2010 |         |   | December 31,2009 |  
|Term loan                                                                       |  | $                 | 398,305 |   |                  | $ | 405,649 |  
|Revolving line of credit                                                        |  |                   | 30,000  |   |                  |   | 46,500  |  
|Senior subordinated notes, net of discount of $1,408 in 2010 and $1,606 in 2009 |  |                   | 175,888 |   |                  |   | 175,690 |  
|Seller notes                                                                    |  |                   | 1,680   |   |                  |   | 3,116   |  
|Note payable, leasehold improvement                                             |  |                   | 96      |   |                  |   | 121     |  
|                                                                                |  |                   |         |   |                  |   |         |  
|Total debt                                                                      |  |                   | 605,969 |   |                  |   | 631,076 |  
|Less current portion                                                            |  |                   | (1,471  | ) |                  |   | (8,814  | )
|                                                                                |  |                   |         |   |                  |   |         |  
|Long-term debt-less current portion                                             |  | $                 | 604,498 |   |                  | $ | 622,262 |  
|                                                                                |  |                   |         |   |                  |   |         |  

Interest expense on total debt was $10.7 million and $11.5 million for the three months ended
September 30, 2010 and 2009, respectively, and $32.3 million and $35.3 million for the nine months ended September 30, 2010 and 2009, respectively.

9. 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 derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged
forecasted transaction affects earnings. During the three and nine months ending September 30, 2010, 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.

As of September 30, 2010, the Company had
two outstanding interest rate derivatives with a combined $215.0 million notional amounts that were designated as cash flow hedges of interest rate risk. The first derivative (the 2006 Swap) with a maturity date of
March 31, 2011, converts $15.0 million of the Companys floating-rate debt to fixed-rate debt at a rate of 4.99%. The second derivative (the 2008 Swap) with a maturity date of June 30, 2011, converts $200.0 million of
the Companys floating-rate debt to fixed rate debt at a rate of 3.875%.

Amounts reported in accumulated other
comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Companys variable-rate debt. During the next twelve months, the Company estimates that an additional $5.5 million of the
effective portion of its derivatives will be reclassified as an increase to interest expense.

The table below presents the
fair value of the Companys derivative financial instruments at September 30, 2010 and December 31, 2009 (in thousands):



|                                                    |  |                       |                           |  |                   |   |       |                  |  |   |       | 
|--------------------------------------------------- |  | --------------------- | ------------------------- |  | ----------------- | - | ----- | ---------------- |  | - | ----- | 
|                                                    |  | Liability Derivatives |                          
|                                                    |  | Balance SheetLocation |                           |  | Fair Value        |  
|                                                    |  |                       |                           |  | September 30,2010 |   |       | December 31,2009 | 
|Derivatives designated as hedging instruments       |  |                       |                           |  |                   |   |       |                  |  |   |       | 
|Interest Rate Swaps                                 |  |                       | Other current liabilities |  |                   | $ | 5,316 |                  |  | $ | 8,659 | 
|                                                    |  |                       |                           |  |                   |   |       |                  |  |   |       | 
|Total derivatives designated as hedging instruments |  |                       |                           |  |                   | $ | 5,316 |                  |  | $ | 8,659 | 
|                                                    |  |                       |                           |  |                   |   |       |                  |  |   |       | 



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CRC HEALTH CORPORATION

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



The table below presents the before-tax effect of the Companys derivative
financial instruments for the three months ending September 30, 2010 and 2009 (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) |       
|                                |  | Q310                                                                  |      |   | Q309                                                                                   |   |        |                                                                                    |  |  | Q310                                                                                                                    |  |  | Q309                                                                                                                   |        |   |  |   |        | Q310 |  |  | Q309            | 
|Interest Rate Swaps             |  | $                                                                      | (806 | ) |                                                                                         | $ | (2,140 | )                                                                                  |  |  | Interest expense                                                                                                         |  |  | $                                                                                                                       | (1,859 | ) |  | $ | (1,997 | )     |  |  | Interest expense |  |  | $ |  |  |  | $ | (170 | )

The table below presents
the before-tax effect of the Companys derivative financial instruments for the nine months ending September 30, 2010 and 2009 (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) |       
|                                |  | Q310                                                                  |        |   | Q309                                                                                   |   |        |                                                                                    |  |  | Q310                                                                                                                    |  |  | Q309                                                                                                                   |        |   |  |   |        | Q310 |  |  | Q309            | 
|Interest Rate Swaps             |  | $                                                                      | (2,881 | ) |                                                                                         | $ | (2,726 | )                                                                                  |  |  | Interest expense                                                                                                         |  |  | $                                                                                                                       | (5,933 | ) |  | $ | (5,138 | )     |  |  | Interest expense |  |  | $ | (1 | ) |  | $ | (591 | )

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.

As of September 30, 2010, the liability due to counterparties to the derivative agreements is $5.6 million, which
includes accrued interest but excludes any adjustment for nonperformance risk (credit valuation adjustments). As of September 30, 2010, the Company has not posted any collateral related to these agreements. If the Company had
breached any of these provisions at September 30, 2010, it may be required to settle its obligations under the agreements at their termination value of $5.6 million. At September 30, 2010, the Company was in compliance with all
agreements related to its debt and derivatives.



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CRC HEALTH CORPORATION

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





10. 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 September 30, 2010 and December 31, 2009. 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 of healthy living division that were measured and recorded at fair value on a nonrecurring basis as of September 30, 2010 (in thousands):



|                          |  |                                      |        |  |                                        |   |        |         |  |   |         |  |  |         |   |  |  |   |        | 
|------------------------- |  | ------------------------------------ | ------ |  | -------------------------------------- | - | ------ | ------- |  | - | ------- |  |  | ------- | - |  |  | - | ------ | 
|                          |  | Nine Months Ended September 30, 2010 |        |  | Level Used to Determine New Cost Basis |  
|                          |  | ImpairmentCharge                     |        |  | New CostBasis                          |   |        | Level 1 |  |   | Level 2 |  |  | Level 3 |  
|Property and equipment    |  | $                                    | 5,822  |  |                                        | $ | 1,116  |         |  | $ |        |  |  | $       |  |  |  | $ | 1,116  | 
|Trademarks and tradenames |  |                                      | 1,744  |  |                                        |   | 7,046  |         |  |   |        |  |  |         |  |  |  |   | 7,046  | 
|Accreditation             |  |                                      | 4,230  |  |                                        |   | 156    |         |  |   |        |  |  |         |  |  |  |   | 156    | 
|Referral network          |  |                                      | 7,145  |  |                                        |   | 263    |         |  |   |        |  |  |         |  |  |  |   | 263    | 
|Curricula                 |  |                                      | 1,563  |  |                                        |   | 174    |         |  |   |        |  |  |         |  |  |  |   | 174    | 
|Goodwill                  |  |                                      | 52,723 |  |                                        |   | 19,760 |         |  |   |        |  |  |         |  |  |  |   | 19,760 | 
|                          |  |                                      |        |  |                                        |   |        |         |  |   |         |  |  |         |   |  |  |   |        | 
|Total                     |  | $                                    | 73,227 |  |                                        | $ | 28,515 |         |  | $ |        |  |  | $       |  |  |  | $ | 28,515 | 
|                          |  |                                      |        |  |                                        |   |        |         |  |   |         |  |  |         |   |  |  |   |        | 

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 (in thousands):



|                          |  |                    |         |  |                   |   |         |                |  |   |            |  |  |   |         | 
|------------------------- |  | ------------------ | ------- |  | ----------------- | - | ------- | -------------- |  | - | ---------- |  |  | - | ------- | 
|                          |  | September 30, 2010 |         |  | December 31, 2009 |  
|                          |  | CarryingAmount     |         |  | Fair Value        |   |         | CarryingAmount |  |   | Fair Value | 
|Assets                    |  |                    |         |  |                   |   |         |                |  |   |            |  |  |   |         | 
|Loan program notes        |  | $                  | 7,488   |  |                   | $ | 5,542   |                |  | $ | 3,821      |  |  | $ | 3,872   | 
|Liabilities               |  |                    |         |  |                   |   |         |                |  |   |            |  |  |   |         | 
|Senior subordinated notes |  | $                  | 175,888 |  |                   | $ | 169,392 |                |  | $ | 175,690    |  |  | $ | 156,570 | 
|Term loan                 |  | $                  | 398,305 |  |                   | $ | 375,469 |                |  | $ | 405,649    |  |  | $ | 358,568 | 



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CRC HEALTH CORPORATION

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





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 nine months ended September 30, 2010, the estimated fair value of loan program notes, senior subordinated notes and term loans was determined based on Level 3
inputs.

11. 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 and nine months ended
September 30, 2010 and 2009 was as follows (in thousands):



|                                                                                                                                                                                                                        |  |                                    |        |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | - | ---------------------------------- | - | ------- | --------------------------------- |  | - | --------------------------------- | - |  | - | ------- | -
|                                                                                                                                                                                                                        |  | Three MonthsEndedSeptember 30,2010 |        |   | Three MonthsEndedSeptember 30,2009 |   |         | Nine MonthsEndedSeptember 30,2010 |  |   | Nine MonthsEndedSeptember 30,2009 |  
|Net loss                                                                                                                                                                                                                |  | $                                  | (4,476 | ) |                                    | $ | (18,721 | )                                 |  | $ | (48,069                           | ) |  | $ | (17,703 | )
|Other comprehensive income:                                                                                                                                                                                             |  |                                    |        |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|Net change in unrealized gain (loss) on cash flow hedges (net of tax of $419 and ($31) in the three months ended
September 30, 2010 and 2009, and $1,219 and $983 in the nine months ended September 30, 2010 and 2009) |  |                                    | 634    |   |                                    |   | (112    | )                                 |  |   | 1,832                             |   |  |   | 1,428   |  
|                                                                                                                                                                                                                        |  |                                    |        |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|Comprehensive loss                                                                                                                                                                                                      |  | $                                  | (3,842 | ) |                                    | $ | (18,833 | )                                 |  | $ | (46,237                           | ) |  | $ | (16,275 | )
|                                                                                                                                                                                                                        |  |                                    |        |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|Comprehensive income attributable to noncontrolling interest                                                                                                                                                            |  | $                                  |       |   |                                    | $ | 148     |                                   |  | $ |                                  |   |  | $ | 29      |  
|                                                                                                                                                                                                                        |  |                                    |        |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  
|Comprehensive loss attributable to CRC Health Corporation                                                                                                                                                               |  | $                                  | (3,842 | ) |                                    | $ | (18,981 | )                                 |  | $ | (46,237                           | ) |  | $ | (16,304 | )
|                                                                                                                                                                                                                        |  |                                    |        |   |                                    |   |         |                                   |  |   |                                   |   |  |   |         |  

12. 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.

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 Purchase Commitments - Effective April 1, 2009, the Company created a private loan program (the
Loan Program) pursuant to which students and/or clients who meet predetermined credit standards can obtain third-party financing to pay a portion of the cost of participating in certain of its programs. During the three and nine months
ended September 30, 2010, the Company was party to an agreement with an unrelated third party (Lender) to purchase certain amounts of Loan Program notes on a recurring basis. In accordance with the agreement, the Company
can terminate the Loan Program at any time upon a 120 day advance notice of termination to the Lender.



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CRC HEALTH CORPORATION

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





The Company has an
executory commitment to purchase, from the Lender, the notes that meet the predetermined Loan Program criteria not to exceed total loan pool investment amounts authorized by the Companys board of directors. At September 30, 2010, the
Company had Board of Director approval for a loan pool of up to $20.0 million. At September 30, 2010, the Company had purchased or was committed to purchase approximately $9.7 million in Loan Program notes with a weighted average
interest rate of 6.9% and a maximum remaining amortization period of 20 years. Loan Program notes are recorded under other current assets and other assets on the Companys condensed consolidated balance sheets. The Company has the
intent and ability to hold these loan notes to maturity.

13. 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 and nine months ended September 30, the Company recognized stock-based compensation expense of $(0.7)
million and $2.2 million in 2010, respectively, and $1.4 million and $4.2 million in 2009, respectively. The Company adjusts its estimates of expected equity awards forfeitures based upon its review of recent forfeiture activity and expected
future employee turnover. The effect of forfeiture adjustments for the three months ended September 30, 2010 was a reduction in the stock compensation expense of $2.5 million. Stock-based compensation expense is recorded within salaries and
benefits on the condensed consolidated statements of operations. The total income tax benefit (expense) recognized in the condensed consolidated statement of operations for stock-based compensation expense for the three months and nine months ended
September 30 was $(0.3) million and $0.9 million in 2010 and $0.5 million and $1.6 million in 2009, respectively.

During the nine months ended September 30, 2010, the Group granted 63,764 units, which represent 573,876 share options to purchase Class A common stock of the Group
and 63,764 share options to purchase Class L common stock of the Group. At September 30, 2010 and 2009, the Company had 2,665,514 and 3,853,789 unvested option shares with per-share, weighted average grant date fair values of $4.72
and $5.28, respectively. Additionally, 410,782 option shares with a per-share weighted average grant date fair value of $5.26 vested during the nine months ended September 30, 2010.

Activity under the Groups plans for the nine months ended September 30, 2010 is summarized below:



|                                           |  |               |            |   |                                        |   |      |                                     |  |  |                                                     |  |  |  |      | 
|------------------------------------------ |  | ------------- | ---------- | - | -------------------------------------- | - | ---- | ----------------------------------- |  |  | --------------------------------------------------- |  |  |  | ---- | 
|                                           |  | Option Shares |            |   | Weighted-AverageExercisePricePer Share |   |      | Weighted-AverageGrantDate FairValue |  |  | Weighted-AverageRemainingContractual Term(In Years) | 
|Balance at December 31, 2009               |  |               | 6,888,776  |   |                                        | $ | 7.87 |                                     |  |  |                                                     |  |  |  | 6.47 | 
|Granted                                    |  |               | 637,643    |   |                                        |   | 9.00 |                                     |  |  | 2.32                                                |  |  |  | 9.38 | 
|Exercised                                  |  |               | (1,075     | ) |                                        |   |      |                                     |  |  |                                                     |  |  |  |     | 
|Forfeited/cancelled/expired                |  |               | (1,353,685 | ) |                                        |   | 5.90 |                                     |  |  | 4.96                                                |  |  |  |      | 
|                                           |  |               |            |   |                                        |   |      |                                     |  |  |                                                     |  |  |  |      | 
|Outstanding-September 30, 2010             |  |               | 6,171,659  |   |                                        | $ | 7.73 |                                     |  |  |                                                     |  |  |  | 6.01 | 
|                                           |  |               |            |   |                                        |   |      |                                     |  |  |                                                     |  |  |  |      | 
|Exercisable-September 30, 2010             |  |               | 3,506,145  |   |                                        | $ | 6.45 |                                     |  |  |                                                     |  |  |  | 5.53 | 
|                                           |  |               |            |   |                                        |   |      |                                     |  |  |                                                     |  |  |  |      | 
|Exercisable and expected to be exercisable |  |               | 5,863,076  |   |                                        | $ | 7.73 |                                     |  |  |                                                     |  |  |  | 6.01 | 
|                                           |  |               |            |   |                                        |   |      |                                     |  |  |                                                     |  |  |  |      | 



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CRC HEALTH CORPORATION

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





14. CONDENSED CONSOLIDATING
FINANCIAL INFORMATION

As of September 30, 2010, 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 September 30, 2010 and December 31, 2009, the condensed consolidating statements of operations for the three months and nine months ended September 30, 2010 and 2009, and the condensed consolidating statements of cash
flows for the nine months ended September 30, 2010 and 2009.

Condensed Consolidating Balance Sheet as of
September 30, 2010

(In thousands) (Unaudited)



|                                               |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|---------------------------------------------- |  | --------------------- | ------- |  | -------------------- | - | ------- | ------------------------ |  | - | ------------ |  |  | ------------ | -------- | - |  | - | --------- | 
|                                               |  | CRC HealthCorporation |         |  | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |  |  | Consolidated |         
|ASSETS                                         |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|CURRENT ASSETS:                                |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Cash and cash equivalents                      |  | $                     |        |  |                      | $ | 4,130   |                          |  | $ | 229          |  |  | $            |         |   |  | $ | 4,359     | 
|Restricted cash                                |  |                       | 715     |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 715       | 
|Accounts receivable-net of allowance           |  |                       |        |  |                      |   | 34,219  |                          |  |   | 278          |  |  |              |         |   |  |   | 34,497    | 
|Prepaid expenses                               |  |                       | 2,259   |  |                      |   | 3,547   |                          |  |   | 103          |  |  |              |         |   |  |   | 5,909     | 
|Other current assets                           |  |                       | 328     |  |                      |   | 1,053   |                          |  |   | 1            |  |  |              |         |   |  |   | 1,382     | 
|Deferred income taxes                          |  |                       | 6,470   |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 6,470     | 
|Current assets of discontinued operations      |  |                       |        |  |                      |   | 3,189   |                          |  |   |             |  |  |              |         |   |  |   | 3,189     | 
|                                               |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total current assets                           |  |                       | 9,772   |  |                      |   | 46,138  |                          |  |   | 611          |  |  |              |         |   |  |   | 56,521    | 
|PROPERTY AND EQUIPMENT-Net                     |  |                       | 8,313   |  |                      |   | 113,586 |                          |  |   | 1,204        |  |  |              |         |   |  |   | 123,103   | 
|GOODWILL                                       |  |                       |        |  |                      |   | 517,807 |                          |  |   | 3,497        |  |  |              |         |   |  |   | 521,304   | 
|INTANGIBLE ASSETS-Net                          |  |                       |        |  |                      |   | 315,743 |                          |  |   |             |  |  |              |         |   |  |   | 315,743   | 
|OTHER ASSETS-Net                               |  |                       | 19,165  |  |                      |   | 900     |                          |  |   | 15           |  |  |              |         |   |  |   | 20,080    | 
|INVESTMENT IN SUBSIDIARIES                     |  |                       | 951,028 |  |                      |   |        |                          |  |   |             |  |  |              | (951,028 | ) |  |   |          | 
|                                               |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|TOTAL ASSETS                                   |  | $                     | 988,278 |  |                      | $ | 994,174 |                          |  | $ | 5,327        |  |  | $            | (951,028 | ) |  | $ | 1,036,751 | 
|                                               |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|LIABILITIES AND EQUITY                         |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|CURRENT LIABILITIES:                           |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Accounts payable                               |  | $                     | 3,925   |  |                      | $ | 1,433   |                          |  | $ | 44           |  |  | $            |         |   |  | $ | 5,402     | 
|Accrued liabilities                            |  |                       | 14,079  |  |                      |   | 14,799  |                          |  |   | 795          |  |  |              |         |   |  |   | 29,673    | 
|Income tax payable                             |  |                       | 6,293   |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 6,293     | 
|Current portion of long-term debt              |  |                       |        |  |                      |   | 1,471   |                          |  |   |             |  |  |              |         |   |  |   | 1,471     | 
|Other current liabilities                      |  |                       | 8,809   |  |                      |   | 14,038  |                          |  |   | 1,238        |  |  |              |         |   |  |   | 24,085    | 
|Current liabilities of discontinued operations |  |                       |        |  |                      |   | 2,180   |                          |  |   |             |  |  |              |         |   |  |   | 2,180     | 
|                                               |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total current liabilities                      |  |                       | 33,106  |  |                      |   | 33,921  |                          |  |   | 2,077        |  |  |              |         |   |  |   | 69,104    | 
|LONG-TERM DEBT-Less current portion            |  |                       | 604,192 |  |                      |   | 306     |                          |  |   |             |  |  |              |         |   |  |   | 604,498   | 
|OTHER LONG-TERM LIABILITIES                    |  |                       | 422     |  |                      |   | 7,453   |                          |  |   | 212          |  |  |              |         |   |  |   | 8,087     | 
|LIABILITIES OF DISCONTINUED OPERATIONS         |  |                       |        |  |                      |   | 4,504   |                          |  |   |             |  |  |              |         |   |  |   | 4,504     | 
|DEFERRED INCOME TAXES                          |  |                       | 105,143 |  |                      |   |        |                          |  |   |             |  |  |              |         |   |  |   | 105,143   | 
|                                               |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total liabilities                              |  |                       | 742,863 |  |                      |   | 46,184  |                          |  |   | 2,289        |  |  |              |         |   |  |   | 791,336   | 
|EQUITY:                                        |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY    |  |                       | 245,415 |  |                      |   | 947,990 |                          |  |   | 3,038        |  |  |              | (951,028 | ) |  |   | 245,415   | 
|                                               |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|Total equity                                   |  |                       | 245,415 |  |                      |   | 947,990 |                          |  |   | 3,038        |  |  |              | (951,028 | ) |  |   | 245,415   | 
|                                               |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 
|TOTAL LIABILITIES AND EQUITY                   |  | $                     | 988,278 |  |                      | $ | 994,174 |                          |  | $ | 5,327        |  |  | $            | (951,028 | ) |  | $ | 1,036,751 | 
|                                               |  |                       |         |  |                      |   |         |                          |  |   |              |  |  |              |          |   |  |   |           | 



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CRC HEALTH CORPORATION

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





Condensed
Consolidating Balance Sheet as of December 31, 2009

(In thousands)



|                                                           |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|---------------------------------------------------------- |  | --------------------- | --------- |  | -------------------- | - | --------- | ------------------------ |  | - | ------------ |  |  | ------------ | ---------- | - |  | - | --------- | 
|                                                           |  | CRC HealthCorporation |           |  | SubsidiaryGuarantors |   |           | SubsidiaryNon-Guarantors |  |   | Eliminations |  |  | Consolidated |           
|ASSETS                                                     |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|CURRENT ASSETS:                                            |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|Cash and cash equivalents                                  |  | $                     |          |  |                      | $ | 4,745     |                          |  | $ | 237          |  |  | $            |           |   |  | $ | 4,982     | 
|Restricted cash                                            |  |                       | 420       |  |                      |   |          |                          |  |   |             |  |  |              |           |   |  |   | 420       | 
|Accounts receivable-net of allowance for doubtful accounts |  |                       |          |  |                      |   | 31,153    |                          |  |   | 405          |  |  |              |           |   |  |   | 31,558    | 
|Prepaid expenses                                           |  |                       | 4,164     |  |                      |   | 3,217     |                          |  |   | 108          |  |  |              |           |   |  |   | 7,489     | 
|Other current assets                                       |  |                       | 238       |  |                      |   | 1,061     |                          |  |   | 7            |  |  |              |           |   |  |   | 1,306     | 
|Income taxes receivable                                    |  |                       | 676       |  |                      |   |          |                          |  |   |             |  |  |              |           |   |  |   | 676       | 
|Deferred income taxes                                      |  |                       | 6,346     |  |                      |   |          |                          |  |   |             |  |  |              |           |   |  |   | 6,346     | 
|Current assets of discontinued operations                  |  |                       |          |  |                      |   | 1,720     |                          |  |   |             |  |  |              |           |   |  |   | 1,720     | 
|                                                           |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|Total current assets                                       |  |                       | 11,844    |  |                      |   | 41,896    |                          |  |   | 757          |  |  |              |           |   |  |   | 54,497    | 
|PROPERTY AND EQUIPMENT-Net                                 |  |                       | 8,046     |  |                      |   | 115,604   |                          |  |   | 1,565        |  |  |              |           |   |  |   | 125,215   | 
|GOODWILL                                                   |  |                       |          |  |                      |   | 561,796   |                          |  |   | 11,798       |  |  |              |           |   |  |   | 573,594   | 
|INTANGIBLE ASSETS-Net                                      |  |                       |          |  |                      |   | 335,409   |                          |  |   |             |  |  |              |           |   |  |   | 335,409   | 
|OTHER ASSETS-Net                                           |  |                       | 18,645    |  |                      |   | 959       |                          |  |   | 15           |  |  |              |           |   |  |   | 19,619    | 
|INVESTMENT IN SUBSIDIARIES                                 |  |                       | 1,026,293 |  |                      |   |          |                          |  |   |             |  |  |              | (1,026,293 | ) |  |   |          | 
|                                                           |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|TOTAL ASSETS                                               |  | $                     | 1,064,828 |  |                      | $ | 1,055,664 |                          |  | $ | 14,135       |  |  | $            | (1,026,293 | ) |  | $ | 1,108,334 | 
|                                                           |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|LIABILITIES AND EQUITY                                     |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|CURRENT LIABILITIES:                                       |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|Accounts payable                                           |  | $                     | 1,702     |  |                      | $ | 1,236     |                          |  | $ | 73           |  |  | $            |           |   |  | $ | 3,011     | 
|Accrued liabilities                                        |  |                       | 16,603    |  |                      |   | 12,806    |                          |  |   | 442          |  |  |              |           |   |  |   | 29,851    | 
|Current portion of long-term debt                          |  |                       | 7,344     |  |                      |   | 1,470     |                          |  |   |             |  |  |              |           |   |  |   | 8,814     | 
|Other current liabilities                                  |  |                       | 11,826    |  |                      |   | 13,697    |                          |  |   | 469          |  |  |              |           |   |  |   | 25,992    | 
|Current liabilities of discontinued operations             |  |                       |          |  |                      |   | 2,114     |                          |  |   |             |  |  |              |           |   |  |   | 2,114     | 
|                                                           |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|Total current liabilities                                  |  |                       | 37,475    |  |                      |   | 31,323    |                          |  |   | 984          |  |  |              |           |   |  |   | 69,782    | 
|LONG-TERM DEBT-Less current portion                        |  |                       | 620,495   |  |                      |   | 1,767     |                          |  |   |             |  |  |              |           |   |  |   | 622,262   | 
|OTHER LONG-TERM LIABILITIES                                |  |                       | 982       |  |                      |   | 7,723     |                          |  |   | 30           |  |  |              |           |   |  |   | 8,735     | 
|LIABILITIES OF DISCONTINUED OPERATIONS                     |  |                       |          |  |                      |   | 1,679     |                          |  |   |             |  |  |              |           |   |  |   | 1,679     | 
|DEFERRED INCOME TAXES                                      |  |                       | 117,334   |  |                      |   |          |                          |  |   |             |  |  |              |           |   |  |   | 117,334   | 
|                                                           |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|Total liabilities                                          |  |                       | 776,286   |  |                      |   | 42,492    |                          |  |   | 1,014        |  |  |              |           |   |  |   | 819,792   | 
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY                |  |                       | 288,542   |  |                      |   | 1,013,172 |                          |  |   | 13,121       |  |  |              | (1,026,293 | ) |  |   | 288,542   | 
|                                                           |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|Total equity                                               |  |                       | 288,542   |  |                      |   | 1,013,172 |                          |  |   | 13,121       |  |  |              | (1,026,293 | ) |  |   | 288,542   | 
|                                                           |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 
|TOTAL LIABILITIES AND EQUITY                               |  | $                     | 1,064,828 |  |                      | $ | 1,055,664 |                          |  | $ | 14,135       |  |  | $            | (1,026,293 | ) |  | $ | 1,108,334 | 
|                                                           |  |                       |           |  |                      |   |           |                          |  |   |              |  |  |              |            |   |  |   |           | 



20



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##### Table of Contents

CRC HEALTH CORPORATION

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





Condensed
Consolidating Statements of Operations

For the Three Months Ended September 30, 2010

(In thousands) (Unaudited)



|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|----------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                  |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                      |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                        |  | $                     | 52      |   |                      | $ | 111,353 |                          |  | $ | 7,794        |   |  | $            |        |   |  | $ | 119,199 |  
|Management fee revenue                                            |  |                       | 18,910  |   |                      |   |        |                          |  |   |             |   |  |              | (18,910 | ) |  |   |        |  
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                                 |  |                       | 18,962  |   |                      |   | 111,353 |                          |  |   | 7,794        |   |  |              | (18,910 | ) |  |   | 119,199 |  
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                               |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                             |  |                       | 4,505   |   |                      |   | 48,374  |                          |  |   | 1,925        |   |  |              |        |   |  |   | 54,804  |  
|Supplies, facilities and other operating costs                    |  |                       | 2,684   |   |                      |   | 29,188  |                          |  |   | 3,471        |   |  |              |        |   |  |   | 35,343  |  
|Provision for doubtful accounts                                   |  |                       |        |   |                      |   | 1,645   |                          |  |   | 60           |   |  |              |        |   |  |   | 1,705   |  
|Depreciation and amortization                                     |  |                       | 975     |   |                      |   | 3,966   |                          |  |   | 102          |   |  |              |        |   |  |   | 5,043   |  
|Asset impairment                                                  |  |                       |        |   |                      |   | 2,495   |                          |  |   |             |   |  |              |        |   |  |   | 2,495   |  
|Goodwill impairment                                               |  |                       |        |   |                      |   | 9,052   |                          |  |   |             |   |  |              |        |   |  |   | 9,052   |  
|Management fee expense                                            |  |                       |        |   |                      |   | 17,498  |                          |  |   | 1,412        |   |  |              | (18,910 | ) |  |   |        |  
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                          |  |                       | 8,164   |   |                      |   | 112,218 |                          |  |   | 6,970        |   |  |              | (18,910 | ) |  |   | 108,442 |  
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                           |  |                       | 10,798  |   |                      |   | (865    | )                        |  |   | 824          |   |  |              |        |   |  |   | 10,757  |  
|INTEREST (EXPENSE) INCOME                                         |  |                       | (10,652 | ) |                      |   | 512     |                          |  |   | (595         | ) |  |              |        |   |  |   | (10,735 | )
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS)FROM CONTINUING OPERATIONS BEFORE INCOME TAXES       |  |                       | 146     |   |                      |   | (353    | )                        |  |   | 229          |   |  |              |        |   |  |   | 22      |  
|INCOME TAX EXPENSE (BENEFIT)                                      |  |                       | 12,939  |   |                      |   | (31,285 | )                        |  |   | 20,277       |   |  |              |        |   |  |   | 1,931   |  
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS, NET OF TAX              |  |                       | (12,793 | ) |                      |   | 30,932  |                          |  |   | (20,048      | ) |  |              |        |   |  |   | (1,909  | )
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($1,551) |  |                       |        |   |                      |   | (2,567  | )                        |  |   |             |   |  |              |        |   |  |   | (2,567  | )
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                                 |  |                       | (12,793 | ) |                      |   | 28,365  |                          |  |   | (20,048      | ) |  |              |        |   |  |   | (4,476  | )
|EQUITY IN (LOSS) INCOME OF SUBSIDIARIES, NET OF TAX               |  |                       | 8,317   |   |                      |   |        |                          |  |   |             |   |  |              | (8,317  | ) |  |   |        |  
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION          |  | $                     | (4,476  | ) |                      | $ | 28,365  |                          |  | $ | (20,048      | ) |  | $            | (8,317  | ) |  | $ | (4,476  | )
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



21



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##### Table of Contents

CRC HEALTH CORPORATION

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





Condensed
Consolidating Statements of Operations

For the Three Months Ended September 30, 2009

(In thousands) (Unaudited)



|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                      |  | $                     | 60      |   |                      | $ | 106,946 |                          |  | $ | 6,078        |   |  | $            |        |   |  | $ | 113,084 |  
|Management fee revenue                                          |  |                       | 18,605  |   |                      |   |        |                          |  |   |             |   |  |              | (18,605 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                               |  |                       | 18,665  |   |                      |   | 106,946 |                          |  |   | 6,078        |   |  |              | (18,605 | ) |  |   | 113,084 |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                           |  |                       | 4,169   |   |                      |   | 45,890  |                          |  |   | 1,617        |   |  |              |        |   |  |   | 51,676  |  
|Supplies, facilities and other operating costs                  |  |                       | 2,207   |   |                      |   | 26,676  |                          |  |   | 2,803        |   |  |              |        |   |  |   | 31,686  |  
|Provision for doubtful accounts                                 |  |                       | 1       |   |                      |   | 1,511   |                          |  |   | 39           |   |  |              |        |   |  |   | 1,551   |  
|Depreciation and amortization                                   |  |                       | 846     |   |                      |   | 4,675   |                          |  |   | 123          |   |  |              |        |   |  |   | 5,644   |  
|Asset impairment                                                |  |                       |        |   |                      |   | 2,247   |                          |  |   | 10           |   |  |              |        |   |  |   | 2,257   |  
|Goodwill impairment                                             |  |                       |        |   |                      |   | 24,919  |                          |  |   |             |   |  |              |        |   |  |   | 24,919  |  
|Management fee expense                                          |  |                       |        |   |                      |   | 17,822  |                          |  |   | 783          |   |  |              | (18,605 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                        |  |                       | 7,223   |   |                      |   | 123,740 |                          |  |   | 5,375        |   |  |              | (18,605 | ) |  |   | 117,733 |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                         |  |                       | 11,442  |   |                      |   | (16,794 | )                        |  |   | 703          |   |  |              |        |   |  |   | (4,649  | )
|INTEREST EXPENSE                                                |  |                       | (11,407 | ) |                      |   | 359     |                          |  |   | (471         | ) |  |              |        |   |  |   | (11,519 | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES    |  |                       | 35      |   |                      |   | (16,435 | )                        |  |   | 232          |   |  |              |        |   |  |   | (16,168 | )
|INCOME TAX EXPENSE (BENEFIT)                                    |  |                       | (3      | ) |                      |   | 1,301   |                          |  |   | (18          | ) |  |              |        |   |  |   | 1,280   |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX            |  |                       | 38      |   |                      |   | (17,736 | )                        |  |   | 250          |   |  |              |        |   |  |   | (17,448 | )
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($715) |  |                       |        |   |                      |   | (1,273  | )                        |  |   |             |   |  |              |        |   |  |   | (1,273  | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS)                                               |  |                       | 38      |   |                      |   | (19,009 | )                        |  |   | 250          |   |  |              |        |   |  |   | (18,721 | )
|LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST    |  |                       |        |   |                      |   | 70      |                          |  |   | 78           |   |  |              |        |   |  |   | 148     |  
|EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX                      |  |                       | (18,907 | ) |                      |   |        |                          |  |   |             |   |  |              | 18,907  |   |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION        |  | $                     | (18,869 | ) |                      | $ | (19,079 | )                        |  | $ | 172          |   |  | $            | 18,907  |   |  | $ | (18,869 | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



22



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##### Table of Contents

CRC HEALTH CORPORATION

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





Condensed
Consolidating Statements of Operations

For the Nine Months Ended September 30, 2010

(In thousands) (Unaudited)



|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|----------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                  |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                      |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                        |  | $                     | 150     |   |                      | $ | 324,759 |                          |  | $ | 13,024       |   |  | $            |        |   |  | $ | 337,933 |  
|Management fee revenue                                            |  |                       | 56,627  |   |                      |   |        |                          |  |   |             |   |  |              | (56,627 | ) |  |   |        |  
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                                 |  |                       | 56,777  |   |                      |   | 324,759 |                          |  |   | 13,024       |   |  |              | (56,627 | ) |  |   | 337,933 |  
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                               |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                             |  |                       | 14,814  |   |                      |   | 142,823 |                          |  |   | 4,904        |   |  |              |        |   |  |   | 162,541 |  
|Supplies, facilities and other operating costs                    |  |                       | 6,793   |   |                      |   | 84,464  |                          |  |   | 7,176        |   |  |              |        |   |  |   | 98,433  |  
|Provision for doubtful accounts                                   |  |                       |        |   |                      |   | 5,303   |                          |  |   | 170          |   |  |              |        |   |  |   | 5,473   |  
|Depreciation and amortization                                     |  |                       | 2,846   |   |                      |   | 12,731  |                          |  |   | 343          |   |  |              |        |   |  |   | 15,920  |  
|Asset impairment                                                  |  |                       |        |   |                      |   | 20,267  |                          |  |   | 237          |   |  |              |        |   |  |   | 20,504  |  
|Goodwill impairment                                               |  |                       |        |   |                      |   | 43,988  |                          |  |   | 8,735        |   |  |              |        |   |  |   | 52,723  |  
|Management fee expense                                            |  |                       |        |   |                      |   | 54,005  |                          |  |   | 2,622        |   |  |              | (56,627 | ) |  |   |        |  
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                          |  |                       | 24,453  |   |                      |   | 363,581 |                          |  |   | 24,187       |   |  |              | (56,627 | ) |  |   | 355,594 |  
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                           |  |                       | 32,324  |   |                      |   | (38,822 | )                        |  |   | (11,163      | ) |  |              |        |   |  |   | (17,661 | )
|INTEREST (EXPENSE) INCOME                                         |  |                       | (31,974 | ) |                      |   | 777     |                          |  |   | (1,054       | ) |  |              |        |   |  |   | (32,251 | )
|OTHER EXPENSE                                                     |  |                       |        |   |                      |   | (88     | )                        |  |   |             |   |  |              |        |   |  |   | (88     | )
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES      |  |                       | 350     |   |                      |   | (38,133 | )                        |  |   | (12,217      | ) |  |              |        |   |  |   | (50,000 | )
|INCOME TAX EXPENSE (BENEFIT)                                      |  |                       | 35      |   |                      |   | (3,817  | )                        |  |   | (1,223       | ) |  |              |        |   |  |   | (5,005  | )
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX              |  |                       | 315     |   |                      |   | (34,316 | )                        |  |   | (10,994      | ) |  |              |        |   |  |   | (44,995 | )
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($1,865) |  |                       |        |   |                      |   | (3,074  | )                        |  |   |             |   |  |              |        |   |  |   | (3,074  | )
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS)                                                 |  |                       | 315     |   |                      |   | (37,390 | )                        |  |   | (10,994      | ) |  |              |        |   |  |   | (48,069 | )
|EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX                        |  |                       | (48,384 | ) |                      |   |        |                          |  |   |             |   |  |              | 48,384  |   |  |   |        |  
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION                   |  | $                     | (48,069 | ) |                      | $ | (37,390 | )                        |  | $ | (10,994      | ) |  | $            | 48,384  |   |  | $ | (48,069 | )
|                                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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##### Table of Contents

CRC HEALTH CORPORATION

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



Condensed Consolidating Statements of Operations

For the Nine Months Ended September 30, 2009

(In thousands) (Unaudited)



|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                    |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                        |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                          |  | $                     | 186     |   |                      | $ | 313,486 |                          |  | $ | 11,183       |   |  | $            |        |   |  | $ | 324,855 |  
|Management fee revenue                                              |  |                       | 59,073  |   |                      |   |        |                          |  |   |             |   |  |              | (59,073 | ) |  |   |        |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                                   |  |                       | 59,259  |   |                      |   | 313,486 |                          |  |   | 11,183       |   |  |              | (59,073 | ) |  |   | 324,855 |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                                 |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                               |  |                       | 15,199  |   |                      |   | 141,748 |                          |  |   | 4,469        |   |  |              |        |   |  |   | 161,416 |  
|Supplies, facilities and other operating costs                      |  |                       | 6,123   |   |                      |   | 80,205  |                          |  |   | 6,469        |   |  |              |        |   |  |   | 92,797  |  
|Provision for doubtful accounts                                     |  |                       | 2       |   |                      |   | 4,439   |                          |  |   | 122          |   |  |              |        |   |  |   | 4,563   |  
|Depreciation and amortization                                       |  |                       | 2,590   |   |                      |   | 13,934  |                          |  |   | 371          |   |  |              |        |   |  |   | 16,895  |  
|Asset impairment                                                    |  |                       |        |   |                      |   | 2,247   |                          |  |   | 10           |   |  |              |        |   |  |   | 2,257   |  
|Goodwill impairment                                                 |  |                       |        |   |                      |   | 24,919  |                          |  |   |             |   |  |              |        |   |  |   | 24,919  |  
|Management fee expense                                              |  |                       |        |   |                      |   | 59,049  |                          |  |   | 24           |   |  |              | (59,073 | ) |  |   |        |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                            |  |                       | 23,914  |   |                      |   | 326,541 |                          |  |   | 11,465       |   |  |              | (59,073 | ) |  |   | 302,847 |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                             |  |                       | 35,345  |   |                      |   | (13,055 | )                        |  |   | (282         | ) |  |              |        |   |  |   | 22,008  |  
|INTEREST EXPENSE                                                    |  |                       | (34,972 | ) |                      |   | 558     |                          |  |   | (924         | ) |  |              |        |   |  |   | (35,338 | )
|OTHER EXPENSE                                                       |  |                       | (82     | ) |                      |   |        |                          |  |   |             |   |  |              |        |   |  |   | (82     | )
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES        |  |                       | 291     |   |                      |   | (12,497 | )                        |  |   | (1,206       | ) |  |              |        |   |  |   | (13,412 | )
|INCOME TAX (BENEFIT) EXPENSE                                        |  |                       | (33     | ) |                      |   | 1,423   |                          |  |   | 137          |   |  |              |        |   |  |   | 1,527   |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX                |  |                       | 324     |   |                      |   | (13,920 | )                        |  |   | (1,343       | ) |  |              |        |   |  |   | (14,939 | )
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($1,554)   |  |                       |        |   |                      |   | (2,764  | )                        |  |   |             |   |  |              |        |   |  |   | (2,764  | )
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS)                                                   |  |                       | 324     |   |                      |   | (16,684 | )                        |  |   | (1,343       | ) |  |              |        |   |  |   | (17,703 | )
|LESS: NET INCOME (LOSS) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST |  |                       |        |   |                      |   | 85      |                          |  |   | (56          | ) |  |              |        |   |  |   | 29      |  
|EQUITY IN INCOME OF SUBSIDIARIES, NET OF TAX                        |  |                       | (18,056 | ) |                      |   |        |                          |  |   |             |   |  |              | 18,056  |   |  |   |        |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION            |  | $                     | (17,732 | ) |                      | $ | (16,769 | )                        |  | $ | (1,287       | ) |  | $            | 18,056  |   |  | $ | (17,732 | )
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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CRC HEALTH CORPORATION

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



Condensed Consolidating Statements of Cash Flows

For the Nine Months Ended September 30, 2010

(In thousands) (Unaudited)



|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|--------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | - |  |  | - | ------- | -
|                                                    |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|Net cash (used in) provided by operating activities |  | $                     | (2,874  | ) |                      | $ | 42,622  |                          |  | $ | (141         | ) |  | $            |  |  |  | $ | 39,607  |  
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|Additions of property and equipment                 |  |                       | (3,787  | ) |                      |   | (10,805 | )                        |  |   | (86          | ) |  |              |  |  |  |   | (14,678 | )
|Proceeds from sale of property and equipment        |  |                       |        |   |                      |   | 41      |                          |  |   |             |   |  |              |  |  |  |   | 41      |  
|Acquisition of business, net of cash acquired       |  |                       | (86     | ) |                      |   |        |                          |  |   |             |   |  |              |  |  |  |   | (86     | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|Net cash used in investing activities               |  |                       | (3,873  | ) |                      |   | (10,764 | )                        |  |   | (86          | ) |  |              |  |  |  |   | (14,723 | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|Intercompany transfers                              |  |                       | 30,583  |   |                      |   | (30,802 | )                        |  |   | 219          |   |  |              |  |  |  |   |        |  
|Capital contributed from Parent                     |  |                       | 8       |   |                      |   |        |                          |  |   |             |   |  |              |  |  |  |   | 8       |  
|Borrowings under revolving line of credit           |  |                       | 13,500  |   |                      |   |        |                          |  |   |             |   |  |              |  |  |  |   | 13,500  |  
|Repayments under revolving line of credit           |  |                       | (30,000 | ) |                      |   |        |                          |  |   |             |   |  |              |  |  |  |   | (30,000 | )
|Repayments of term loan and seller notes            |  |                       | (7,344  | ) |                      |   | (1,671  | )                        |  |   |             |   |  |              |  |  |  |   | (9,015  | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|Net cash provided by (used in) financing activities |  |                       | 6,747   |   |                      |   | (32,473 | )                        |  |   | 219          |   |  |              |  |  |  |   | (25,507 | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|DECREASE IN CASH AND CASH EQUIVALENTS               |  |                       |        |   |                      |   | (615    | )                        |  |   | (8           | ) |  |              |  |  |  |   | (623    | )
|CASH AND CASH EQUIVALENTS Beginning of period       |  |                       |        |   |                      |   | 4,745   |                          |  |   | 237          |   |  |              |  |  |  |   | 4,982   |  
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|CASH AND CASH EQUIVALENTS End of period             |  | $                     |        |   |                      | $ | 4,130   |                          |  | $ | 229          |   |  | $            |  |  |  | $ | 4,359   |  
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  



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CRC HEALTH CORPORATION

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



Condensed Consolidating Statements of Cash Flows

For the Nine Months Ended September 30, 2009

(In thousands) (Unaudited)



|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|--------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | - |  |  | - | ------- | -
|                                                    |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|Net cash provided by (used in) operating activities |  | $                     | 2,583   |   |                      | $ | 27,597  |                          |  | $ | (621         | ) |  | $            |  |  |  | $ | 29,559  |  
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|Additions of property and equipment-net             |  |                       | (1,729  | ) |                      |   | (5,446  | )                        |  |   | (77          | ) |  |              |  |  |  |   | (7,252  | )
|Proceeds from sale of property and equipment        |  |                       | 110     |   |                      |   | 31      |                          |  |   |             |   |  |              |  |  |  |   | 141     |  
|Proceeds from sale of discontinued operations       |  |                       |        |   |                      |   | 475     |                          |  |   |             |   |  |              |  |  |  |   | 475     |  
|Acquisition adjustments                             |  |                       | (59     | ) |                      |   |        |                          |  |   |             |   |  |              |  |  |  |   | (59     | )
|Payments made under earnout arrangements            |  |                       |        |   |                      |   | (200    | )                        |  |   |             |   |  |              |  |  |  |   | (200    | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|Net cash used in investing activities               |  |                       | (1,678  | ) |                      |   | (5,140  | )                        |  |   | (77          | ) |  |              |  |  |  |   | (6,895  | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|Intercompany transfers                              |  |                       | 17,835  |   |                      |   | (19,117 | )                        |  |   | 1,282        |   |  |              |  |  |  |   |        |  
|Capital distributed to Parent                       |  |                       | (221    | ) |                      |   |        |                          |  |   |             |   |  |              |  |  |  |   | (221    | )
|Capitalized financing costs                         |  |                       | (117    | ) |                      |   |        |                          |  |   |             |   |  |              |  |  |  |   | (117    | )
|Noncontrolling interest buyout                      |  |                       | (89     | ) |                      |   |        |                          |  |   |             |   |  |              |  |  |  |   | (89     | )
|Repayments of capital lease obligations             |  |                       |        |   |                      |   | (10     | )                        |  |   |             |   |  |              |  |  |  |   | (10     | )
|Borrowings under revolver line of credit            |  |                       | 9,000   |   |                      |   |        |                          |  |   |             |   |  |              |  |  |  |   | 9,000   |  
|Repayments under revolver line of credit            |  |                       | (22,000 | ) |                      |   |        |                          |  |   |             |   |  |              |  |  |  |   | (22,000 | )
|Repayments of term loan and seller notes            |  |                       | (5,313  | ) |                      |   |        |                          |  |   |             |   |  |              |  |  |  |   | (5,313  | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|Net cash (used in) provided by financing activities |  |                       | (905    | ) |                      |   | (19,127 | )                        |  |   | 1,282        |   |  |              |  |  |  |   | (18,750 | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|INCREASE IN CASH AND CASH EQUIVALENTS               |  |                       |        |   |                      |   | 3,330   |                          |  |   | 584          |   |  |              |  |  |  |   | 3,914   |  
|CASH AND CASH EQUIVALENTS-Beginning of period       |  |                       |        |   |                      |   | 2,251   |                          |  |   | 289          |   |  |              |  |  |  |   | 2,540   |  
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  
|CASH AND CASH EQUIVALENTS-End of period             |  | $                     |        |   |                      | $ | 5,581   |                          |  | $ | 873          |   |  | $            |  |  |  | $ | 6,454   |  
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |   |  |  |   |         |  

15. RESTRUCTURING

During the three months and nine months ended September 30, 2010, 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.



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CRC HEALTH CORPORATION

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





A summary of
restructuring activity under the FY08 Plan, including facilities classified as discontinued operations, is shown in the table below (in thousands):



|                                                  |  |                    |      |   |                                            |   |       |       |  |   |        |  
|------------------------------------------------- |  | ------------------ | ---- | - | ------------------------------------------ | - | ----- | ----- |  | - | ------ | -
|                                                  |  | WorkforceReduction |      |   | Consolidation and Exit ofExcess Facilities |   |       | Total | 
|Restructuring reserve at December 31, 2009        |  | $                  |     |   |                                            | $ |      |       |  | $ |       |  
|Recovery division                                 |  |                    | 19   |   |                                            |   | 2,107 |       |  |   | 2,126  |  
|Healthy living division                           |  |                    | 592  |   |                                            |   | 875   |       |  |   | 1,467  |  
|Corporate                                         |  |                    |     |   |                                            |   |      |       |  |   |       |  
|                                                  |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Total restructuring reserve at December 31, 2009  |  | $                  | 611  |   |                                            | $ | 2,982 |       |  | $ | 3,593  |  
|                                                  |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Expenses                                          |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Recovery division                                 |  |                    | 3    |   |                                            |   | 533   |       |  |   | 536    |  
|Healthy living division                           |  |                    | (19  | ) |                                            |   | 3,826 |       |  |   | 3,807  |  
|Corporate                                         |  |                    |     |   |                                            |   |      |       |  |   |       |  
|                                                  |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Total expenses                                    |  |                    | (16  | ) |                                            |   | 4,359 |       |  |   | 4,343  |  
|Cash payments                                     |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Recovery division                                 |  |                    | (3   | ) |                                            |   | (514  | )     |  |   | (517   | )
|Healthy living division                           |  |                    | (432 | ) |                                            |   | (470  | )     |  |   | (902   | )
|Corporate                                         |  |                    |     |   |                                            |   |      |       |  |   |       |  
|                                                  |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Total cash payments                               |  |                    | (435 | ) |                                            |   | (984  | )     |  |   | (1,419 | )
|Restructuring reserve at September 30, 2010       |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Recovery division                                 |  |                    | 19   |   |                                            |   | 2,126 |       |  |   | 2,145  |  
|Healthy living division                           |  |                    | 141  |   |                                            |   | 4,231 |       |  |   | 4,372  |  
|Corporate                                         |  |                    |     |   |                                            |   |      |       |  |   |       |  
|                                                  |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Total restructuring reserve at September 30, 2010 |  | $                  | 160  |   |                                            | $ | 6,357 |       |  | $ | 6,517  |  
|                                                  |  |                    |      |   |                                            |   |       |       |  |   |        |  

During the three months ended September 30, 2010, the Company recorded $3.7 million related to
remaining lease costs for one of its facilities which the Company determined had no future benefit.

16. DISCONTINUED OPERATIONS

At September 30, 2010, the Company had closed or sold an aggregate of 15 facilities under discontinued operations
compared to 13 facilities at September 30, 2009.

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 EndedSeptember 30, 2010 |        |   | Three Months EndedSeptember 30, 2009 |   |        | Nine Months EndedSeptember 30, 2010 |  |   | Nine Months EndedSeptember 30, 2009 |  
|Net revenue                       |  | $                                    | 70     |   |                                      | $ | 2,248  |                                     |  | $ | 164                                 |   |  | $ | 9,284  |  
|Operating expenses                |  |                                      | 4,187  |   |                                      |   | 3,329  |                                     |  |   | 5,098                               |   |  |   | 11,246 |  
|Asset impairment                  |  |                                      |       |   |                                      |   | 886    |                                     |  |   |                                    |   |  |   | 2,303  |  
|Interest expense                  |  |                                      | 1      |   |                                      |   | 2      |                                     |  |   | 5                                   |   |  |   | 7      |  
|Loss on disposals                 |  |                                      |       |   |                                      |   | 19     |                                     |  |   |                                    |   |  |   | 46     |  
|Loss before income taxes          |  |                                      | (4,118 | ) |                                      |   | (1,988 | )                                   |  |   | (4,939                              | ) |  |   | (4,318 | )
|Tax benefit                       |  |                                      | (1,551 | ) |                                      |   | (715   | )                                   |  |   | (1,865                              | ) |  |   | (1,554 | )
|                                  |  |                                      |        |   |                                      |   |        |                                     |  |   |                                     |   |  |   |        |  
|Loss from discontinued operations |  | $                                    | (2,567 | ) |                                      | $ | (1,273 | )                                   |  | $ | (3,074                              | ) |  | $ | (2,764 | )
|                                  |  |                                      |        |   |                                      |   |        |                                     |  |   |                                     |   |  |   |        |  



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CRC HEALTH CORPORATION

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





17. 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 September 30, 2010, the recovery segment operates 31 inpatient, 15 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 September 30, 2010, 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 17 weight management facilities. These
facilities are located in 8 states in the United States (15 facilities), in the United Kingdom (1 facility), and in Canada (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.



28



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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 EndedSeptember 30, 2010 |         |   | Three Months EndedSeptember 30, 2009 |   |         | Nine Months EndedSeptember 30, 2010 |  |   | Nine Months EndedSeptember 30, 2009 |  
|Net revenue:                                                                    |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Recovery division                                                               |  | $                                    | 83,267  |   |                                      | $ | 78,531  |                                     |  | $ | 246,387                             |   |  | $ | 231,980   |  
|Healthy living division                                                         |  |                                      | 35,880  |   |                                      |   | 34,493  |                                     |  |   | 91,396                              |   |  |   | 92,689    |  
|Corporate                                                                       |  |                                      | 52      |   |                                      |   | 60      |                                     |  |   | 150                                 |   |  |   | 186       |  
|                                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Total consolidated net revenue                                                  |  | $                                    | 119,199 |   |                                      | $ | 113,084 |                                     |  | $ | 337,933                             |   |  | $ | 324,855   |  
|                                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Operating expenses:                                                             |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Recovery division                                                               |  | $                                    | 55,633  |   |                                      | $ | 52,751  |                                     |  | $ | 163,827                             |   |  | $ | 159,939   |  
|Healthy living division(1)                                                      |  |                                      | 44,645  |   |                                      |   | 57,746  |                                     |  |   | 167,315                             |   |  |   | 118,913   |  
|Corporate                                                                       |  |                                      | 8,164   |   |                                      |   | 7,236   |                                     |  |   | 24,452                              |   |  |   | 23,995    |  
|                                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Total consolidated operating expenses                                           |  | $                                    | 108,442 |   |                                      | $ | 117,733 |                                     |  | $ | 355,594                             |   |  | $ | 302,847   |  
|                                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Operating income (loss):                                                        |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Recovery division                                                               |  | $                                    | 27,634  |   |                                      | $ | 25,780  |                                     |  | $ | 82,560                              |   |  | $ | 72,041    |  
|Healthy living division                                                         |  |                                      | (8,765  | ) |                                      |   | (23,253 | )                                   |  |   | (75,919                             | ) |  |   | (26,224   | )
|Corporate                                                                       |  |                                      | (8,112  | ) |                                      |   | (7,176  | )                                   |  |   | (24,302                             | ) |  |   | (23,809   | )
|                                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Total consolidated operating income (loss)                                      |  |                                      | 10,757  |   |                                      |   | (4,649  | )                                   |  |   | (17,661                             | ) |  |   | 22,008    |  
|Interest expense                                                                |  |                                      | (10,735 | ) |                                      |   | (11,519 | )                                   |  |   | (32,251                             | ) |  |   | (35,338   | )
|Other expense                                                                   |  |                                      |        |   |                                      |   |        |                                     |  |   | (88                                 | ) |  |   | (82       | )
|                                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Total consolidated income (loss) from continuing operations before income taxes |  | $                                    | 22      |   |                                      | $ | (16,168 | )                                   |  | $ | (50,000                             | ) |  | $ | (13,412   | )
|                                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Capital expenditures:                                                           |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Recovery division                                                               |  | $                                    | 3,424   |   |                                      | $ | 1,515   |                                     |  | $ | 8,864                               |   |  | $ | 3,856     |  
|Healthy living division                                                         |  |                                      | 796     |   |                                      |   | 593     |                                     |  |   | 2,027                               |   |  |   | 1,667     |  
|Corporate                                                                       |  |                                      | 1,560   |   |                                      |   | 489     |                                     |  |   | 3,787                               |   |  |   | 1,729     |  
|                                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Total consolidated capital expenditures                                         |  | $                                    | 5,780   |   |                                      | $ | 2,597   |                                     |  | $ | 14,678                              |   |  | $ | 7,252     |  
|                                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|                                                                                |  |                                      |         |  
|                                                                                |  |                                      |         |   |                                      |   |         | September 30,2010                   |  |   | December 31,2009                    |  
|Total assets(2):                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Recovery division                                                               |  |                                      |         |   |                                      |   |         |                                     |  | $ | 900,382                             |   |  | $ | 897,239   |  
|Healthy living division                                                         |  |                                      |         |   |                                      |   |         |                                     |  |   | 94,881                              |   |  |   | 171,580   |  
|Corporate                                                                       |  |                                      |         |   |                                      |   |         |                                     |  |   | 41,488                              |   |  |   | 39,515    |  
|                                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  
|Total consolidated assets                                                       |  |                                      |         |   |                                      |   |         |                                     |  | $ | 1,036,751                           |   |  | $ | 1,108,334 |  
|                                                                                |  |                                      |         |   |                                      |   |         |                                     |  |   |                                     |   |  |   |           |  



|(1) | Healthy living division operating expenses for the three months and nine months ended September 30, 2010 include $2.5 million and $20.5 million, respectively, of
asset impairment and $9.1 million and $52.7 million, respectively, of goodwill impairment.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes amounts related to discontinued operations.
|--- | ----------------------------------------------------



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|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 September 30, 2010, our recovery division, which operates 31 inpatient, 15 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 September 30, 2010, 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 17 weight management facilities. These facilities are located in 8
states in the United States (15 facilities), in the United Kingdom (1 facility), and in Canada (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).

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 September
30, 2010 and 2009, we generated 79.4% and 80.2% of our net revenue from non-governmental sources, including 61.0% and 65.1% from self payors, respectively, and 18.4% and 15.1% from commercial payors, respectively. During the nine months
ended September 30, 2010 and 2009, we generated 80.9% and 80.7% of our net revenue from non-governmental sources, including 62.5% and 65.0% from self payors, respectively, and 18.4% and 15.7% from commercial payors, respectively. Substantially
all of our government program net revenue was received from multiple counties and states under Medicaid and similar programs.

The operations and enrollment of the Aspen programs within our healthy living division are highest in the summer months. Additionally,
the Aspen programs have limited leading indicators regarding performance. As a result, we have more information in late summer and early fall around Aspens performance, which came in below the performance levels expected in July and August
2010. At the end of the third quarter of 2010, we reviewed actual results for graduation, admissions, and average length of stay in the Aspen programs relative to its prior forecast and fiscal year budget. In response to negative results in these
areas, we further lowered our view of forecasted future cash flows for the Aspen programs within our healthy living division. As a result, for the three months ended September 30, 2010, we recognized non-cash charges related to goodwill
impairment and asset impairment for Aspen in the amount of $9.1 million and $2.5 million, respectively. For the nine months ended September 30, 2010, we had recognized non-cash charges related to goodwill and asset impairment of $52.7 million
and $20.5 million, respectively, for the healthy living division including Aspen.



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During the three and
nine months ended September 30, 2010, our consolidated net revenue increased by $6.1 million and $13.1 million, or 5.4% and 4.0%, respectively, when compared to the comparable periods in 2009. Our consolidated operating expenses decreased $9.3
million, or 7.9% during the three months ended September 30, 2010, and increased $52.7 million, or 17.4% during the nine months ended September 30, 2010, when compared to the same periods in 2009. The decrease in our consolidated operating
expenses during the three months ended September 30, 2010 is primarily due to lower non-cash goodwill impairment charges. The increase in our consolidated operating expenses during the nine months ended September 30, 2010 is primarily due
to higher non-cash charges related to goodwill impairment and asset impairment recognized during 2010. During the three and nine months ended September 30, 2010, our consolidated same-facility net revenue increased by $6.7 million and
$14.3 million, or 5.9% and 4.4%, respectively, when compared to the comparable periods in 2009. On a consolidated basis, same-facility operating expenses increased $4.0 million and $23.5 million, or 5.2% and 10.4%, respectively, during the
three and nine months ended September 30, 2010. The increase in our consolidated same-facility operating expenses during the three months ended September 30, 2010 is primarily due to higher salaries and benefits and higher non-cash
goodwill impairment. The increase in our consolidated same-facility operating expenses during the nine months ended September 30, 2010 is primarily due to higher non-cash goodwill impairment and asset impairment. Same-facility means
a comparison over the comparable period of the financial performance of a facility we have operated for at least one year. 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.

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 and nine months ended September 30, 2010 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, 2009 in our Annual Report on Form 10-K.

Recently Adopted Accounting Guidance

During the quarter ended March 31, 2010, we adopted updated authoritative guidance which amends and enhances disclosures about fair value measurements. The updated guidance requires the addition of
new disclosure requirements for significant transfers in and out of Level 1 and 2 measurements and to provide a gross presentation of the activities within the Level 3 roll forward. The amended guidance also clarifies existing fair value disclosures
about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The adoption of this guidance did not have a material effect on our consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

In August 2010, the Financial Accounting Standards Board (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 is 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 adoption of the guidance will not have a material impact on our 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 is effective for fiscal years beginning after December 15, 2010. Retrospective application
and early adoption is permitted. The adoption of the guidance will not have a material impact on our consolidated financial statements.



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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. The new and amended disclosures that relate to information as of the end of a reporting period will be effective for us during the first interim or annual reporting
periods ending on or after December 15, 2010. However, the disclosures that include information for activity that occurs during a reporting period will be 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 adoption of the new disclosure requirements will not have a material impact
on our consolidated financial statements.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

The following table presents our results of operations by segment for the three months ended September 30, 2010 and 2009 (numbers in thousands, except for percentages).



|                                                                                                                                                   |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------- | ------- | - | ---- | - | ------- | --------------------- |  | - | --------------------- | - |  |  | ------ | --
|                                                                                                                                                   |  | Three Months Ended September 30,Total Facility |        
|Statement of Operations Data:                                                                                                                      |  | 2010                                           |         |   | 2009 |   |         | 2010 vs. 2009$ Change |  |   | 2010 vs. 2009% Change |  
|Net revenue:                                                                                                                                       |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division                                                                                                                                  |  | $                                              | 83,267  |   |      | $ | 78,531  |                       |  | $ | 4,736                 |   |  |  | 6.0    | % 
|Healthy living division                                                                                                                            |  |                                                | 35,880  |   |      |   | 34,493  |                       |  |   | 1,387                 |   |  |  | 4.0    | % 
|Corporate                                                                                                                                          |  |                                                | 52      |   |      |   | 60      |                       |  |   | (8                    | ) |  |  | (13.3  | )%
|                                                                                                                                                   |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Total net revenue                                                                                                                                  |  |                                                | 119,199 |   |      |   | 113,084 |                       |  |   | 6,115                 |   |  |  | 5.4    | % 
|Operating expenses:                                                                                                                                |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division                                                                                                                                  |  |                                                | 55,633  |   |      |   | 52,751  |                       |  |   | 2,882                 |   |  |  | 5.5    | % 
|Healthy living division(1)                                                                                                                         |  |                                                | 44,645  |   |      |   | 57,746  |                       |  |   | (13,101               | ) |  |  | (22.7  | )%
|Corporate                                                                                                                                          |  |                                                | 8,164   |   |      |   | 7,236   |                       |  |   | 928                   |   |  |  | 12.8   | % 
|                                                                                                                                                   |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Total operating expenses                                                                                                                           |  |                                                | 108,442 |   |      |   | 117,733 |                       |  |   | (9,291                | ) |  |  | (7.9   | )%
|Operating income (loss):                                                                                                                           |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division                                                                                                                                  |  |                                                | 27,634  |   |      |   | 25,780  |                       |  |   | 1,854                 |   |  |  | 7.2    | % 
|Healthy living division                                                                                                                            |  |                                                | (8,765  | ) |      |   | (23,253 | )                     |  |   | 14,488                |   |  |  | 62.3   | % 
|Corporate                                                                                                                                          |  |                                                | (8,112  | ) |      |   | (7,176  | )                     |  |   | (936                  | ) |  |  | (13.0  | )%
|                                                                                                                                                   |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Total operating income (loss)                                                                                                                      |  |                                                | 10,757  |   |      |   | (4,649  | )                     |  |   | 15,406                |   |  |  | 331.4  | % 
|Interest expense                                                                                                                                   |  |                                                | (10,735 | ) |      |   | (11,519 | )                     |  |   | 784                   |   |  |  | (6.8   | )%
|                                                                                                                                                   |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Income (loss) from continuing operations before income taxes                                                                                       |  |                                                | 22      |   |      |   | (16,168 | )                     |  |   | 16,190                |   |  |  | 100.1  | % 
|Income tax (benefit) expense                                                                                                                       |  |                                                | 1,931   |   |      |   | 1,280   |                       |  |   | 651                   |   |  |  | 50.9   | % 
|                                                                                                                                                   |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Loss from continuing operations, net of tax                                                                                                        |  |                                                | (1,909  | ) |      |   | (17,448 | )                     |  |   | 15,539                |   |  |  | 89.1   | % 
|Loss from discontinued operations, (net of tax benefit of ($1,551) and ($715) in the three months ended September 30, 2010
and 2009, respectively) |  |                                                | (2,567  | ) |      |   | (1,273  | )                     |  |   | (1,294                | ) |  |  | (101.6 | )%
|                                                                                                                                                   |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Net loss                                                                                                                                           |  |                                                | (4,476  | ) |      |   | (18,721 | )                     |  |   | 14,245                |   |  |  | 76.1   | % 
|Less: Net income attributable to the noncontrolling interest                                                                                       |  |                                                |        |   |      |   | 148     |                       |  |   | (148                  | ) |  |  | (100.0 | )%
|                                                                                                                                                   |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Net loss attributable to CRC Health Corporation                                                                                                    |  | $                                              | (4,476  | ) |      | $ | (18,869 | )                     |  | $ | 14,393                |   |  |  | 76.3   | % 
|                                                                                                                                                   |  |                                                |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   



|(1) | Healthy living division operating expenses for the three months ended September 30, 2010 and 2009 include $2.5 million and $2.3 million, respectively, of asset
impairment and $9.1 million and $24.9 million, respectively, of goodwill impairment.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following table
compares key total facility statistics for the three months ended September 30, 2010 and the three months ended September 30, 2009:



|                            |  |                                                |           |  |      |   |           |          |  |  |      |   
|--------------------------- |  | ---------------------------------------------- | --------- |  | ---- | - | --------- | -------- |  |  | ---- | --
|                            |  | Three Months Ended September 30,Total Facility |          
|                            |  | 2010                                           |           |  | 2009 |   |           | % change | 
|Recovery Division           |  |                                                |           |  |      |   |           |          |  |  |      |   
|Residential facilities      |  |                                                |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                              | 53,030    |  |      | $ | 50,109    |          |  |  | 5.8  | % 
|Patient Days                |  |                                                | 148,950   |  |      |   | 142,125   |          |  |  | 4.8  | % 
|Net revenue per patient day |  | $                                              | 356.03    |  |      | $ | 352.57    |          |  |  | 1.0  | % 
|CTCs                        |  |                                                |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                              | 30,237    |  |      | $ | 28,422    |          |  |  | 6.4  | % 
|Patient Days                |  |                                                | 2,440,003 |  |      |   | 2,382,576 |          |  |  | 2.4  | % 
|Net revenue per patient day |  | $                                              | 12.39     |  |      | $ | 11.93     |          |  |  | 3.9  | % 
|                            |  |                                                |          
|Healthy Living Division     |  |                                                |           |  |      |   |           |          |  |  |      |   
|Residential facilities      |  |                                                |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                              | 15,593    |  |      | $ | 16,638    |          |  |  | (6.3 | )%
|Patient Days                |  |                                                | 60,456    |  |      |   | 64,340    |          |  |  | (6.0 | )%
|Net revenue per patient day |  | $                                              | 257.87    |  |      | $ | 258.58    |          |  |  | (0.3 | )%
|Outdoor programs            |  |                                                |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                              | 8,984     |  |      | $ | 8,390     |          |  |  | 7.1  | % 
|Patient Days                |  |                                                | 20,464    |  |      |   | 18,866    |          |  |  | 8.5  | % 
|Net revenue per patient day |  | $                                              | 438.96    |  |      | $ | 444.68    |          |  |  | (1.3 | )%
|Weight management programs  |  |                                                |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                              | 11,303    |  |      | $ | 9,459     |          |  |  | 19.5 | % 
|Patient Days                |  |                                                | 45,375    |  |      |   | 36,671    |          |  |  | 23.7 | % 
|Net revenue per patient day |  | $                                              | 249.09    |  |      | $ | 257.93    |          |  |  | (3.4 | )%

Consolidated net revenue
increased $6.1 million, or 5.4%, to $119.2 million for the three months ended September 30, 2010 from $113.1 million for the three months ended September 30, 2009. Of the total net revenue increase, the recovery division contributed an
increase of $4.7 million and the healthy living division contributed an increase of $1.4 million. The $4.7 million, or 6.0%, increase within the recovery division was driven by increases of $2.9 million and $1.8 million within residential and CTC
facilities, respectively. The $1.4 million, or 4.0%, increase within the healthy living division was driven by increases of $1.9 million and $0.6 million within weight management and outdoor programs, respectively, offset by a decrease of $1.0
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 decreased $9.3 million, or 7.9%, to
$108.4 million for the three months ended September 30, 2010 from $117.7 million in the same period of 2009. The $9.3 million decrease in operating expenses was primarily driven by the lower non-cash goodwill impairment of $9.1 million during
the three months ended September 30, 2010 compared to $24.9 million during the same period in 2009 within the healthy living division. Without considering non-cash goodwill and asset impairment charges, consolidated operating expenses increased
$6.3 million, or 7.0%, over the same period of 2009. Of the $6.3 million increase, the recovery division, the healthy living division and corporate contributed an increase of $2.9 million, $2.5 million and $0.9 million, respectively.

Our consolidated operating margin was 9.0% in the three months ended September 30, 2010 compared to (4.1)% in the same period of
2009. The increase in operating margin resulted from an increase in revenues and lower non-cash goodwill impairment. Without considering non-cash goodwill and asset impairment charges, consolidated operating margin was 18.7% in the three months
ended September 30, 2010 compared to 19.9% in the same period of 2009. Recovery division margins for the three months ended September 30, 2010 were 33.2% compared to 32.8% in the same period of 2009. Healthy living division operating
margin increased to (24.4)% for the three months ended September 30, 2010 compared to operating margin of (67.4)% in the same period of 2009. Without considering non-cash goodwill and asset impairment charges, healthy living division operating
margin was 7.8% for the three months ended September 30, 2010 compared to 11.4% in the same period of 2009.

For the
three months ended September 30, 2010, consolidated net loss from continuing operations decreased by $15.5 million over the same period of 2009 resulting in a loss from continuing operations, net of tax, of $1.9 million compared to $17.4
million in the same period of 2009. The decrease in loss from continuing operations in 2010 compared to 2009 is primarily driven by a decrease in non-cash goodwill impairment charges of $15.9 million and an increase in revenues of $6.1 million
offset by increases in other operating expenses of $6.5 million.



33



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The following table
presents our same-facility results of operations for our recovery division and our healthy living division for the three months ended September 30, 2010 and 2009 (numbers in thousands, except for percentages).



|                              |  |                                               |         |  |      |   |         |                       |  |   |                       |  |  |  |     |  
|----------------------------- |  | --------------------------------------------- | ------- |  | ---- | - | ------- | --------------------- |  | - | --------------------- |  |  |  | --- | -
|                              |  | Three Months Ended September 30,Same Facility |        
|Statement of Operations Data: |  | 2010                                          |         |  | 2009 |   |         | 2010 vs. 2009$ Change |  |   | 2010 vs. 2009% Change | 
|Net revenue:                  |  |                                               |         |  |      |   |         |                       |  |   |                       |  |  |  |     |  
|Recovery division             |  | $                                             | 83,267  |  |      | $ | 78,531  |                       |  | $ | 4,736                 |  |  |  | 6.0 | %
|Healthy living division       |  |                                               | 35,699  |  |      |   | 33,778  |                       |  |   | 1,921                 |  |  |  | 5.7 | %
|                              |  |                                               |         |  |      |   |         |                       |  |   |                       |  |  |  |     |  
|Total net revenue             |  |                                               | 118,966 |  |      |   | 112,309 |                       |  |   | 6,657                 |  |  |  | 5.9 | %
|Operating expenses:           |  |                                               |         |  |      |   |         |                       |  |   |                       |  |  |  |     |  
|Recovery division             |  |                                               | 50,587  |  |      |   | 48,069  |                       |  |   | 2,518                 |  |  |  | 5.2 | %
|Healthy living division(1)    |  |                                               | 31,067  |  |      |   | 29,538  |                       |  |   | 1,529                 |  |  |  | 5.2 | %
|                              |  |                                               |         |  |      |   |         |                       |  |   |                       |  |  |  |     |  
|Total operating expenses      |  |                                               | 81,654  |  |      |   | 77,607  |                       |  |   | 4,047                 |  |  |  | 5.2 | %
|Operating income:             |  |                                               |         |  |      |   |         |                       |  |   |                       |  |  |  |     |  
|Recovery division             |  |                                               | 32,680  |  |      |   | 30,462  |                       |  |   | 2,218                 |  |  |  | 7.3 | %
|Healthy living division       |  |                                               | 4,632   |  |      |   | 4,240   |                       |  |   | 392                   |  |  |  | 9.2 | %
|                              |  |                                               |         |  |      |   |         |                       |  |   |                       |  |  |  |     |  
|Operating income              |  | $                                             | 37,312  |  |      | $ | 34,702  |                       |  | $ | 2,610                 |  |  |  | 7.5 | %
|                              |  |                                               |         |  |      |   |         |                       |  |   |                       |  |  |  |     |  



|(1) | Healthy living division operating expenses for the three months ended September 30, 2010 and 2009 include $1.4 million and $2.3 million of asset impairment,
respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table compares key same facility statistics for the three months ended
September 30, 2010 and the three months ended September 30, 2009:



|                            |  |                                               |           |  |      |   |           |          |  |  |      |   
|--------------------------- |  | --------------------------------------------- | --------- |  | ---- | - | --------- | -------- |  |  | ---- | --
|                            |  | Three Months Ended September 30,Same Facility |          
|                            |  | 2010                                          |           |  | 2009 |   |           | % change | 
|Recovery Division           |  |                                               |           |  |      |   |           |          |  |  |      |   
|Residential facilities      |  |                                               |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                             | 53,030    |  |      | $ | 50,109    |          |  |  | 5.8  | % 
|Patient Days                |  |                                               | 148,950   |  |      |   | 142,125   |          |  |  | 4.8  | % 
|Net revenue per patient day |  | $                                             | 356.03    |  |      | $ | 352.57    |          |  |  | 1.0  | % 
|CTCs                        |  |                                               |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                             | 30,237    |  |      | $ | 28,422    |          |  |  | 6.4  | % 
|Patient Days                |  |                                               | 2,440,003 |  |      |   | 2,382,576 |          |  |  | 2.4  | % 
|Net revenue per patient day |  | $                                             | 12.39     |  |      | $ | 11.93     |          |  |  | 3.9  | % 
|                            |  |                                               |          
|Healthy Living Division     |  |                                               |           |  |      |   |           |          |  |  |      |   
|Residential facilities      |  |                                               |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                             | 15,411    |  |      | $ | 15,932    |          |  |  | (3.3 | )%
|Patient Days                |  |                                               | 59,623    |  |      |   | 60,960    |          |  |  | (2.2 | )%
|Net revenue per patient day |  | $                                             | 258.41    |  |      | $ | 261.33    |          |  |  | (1.1 | )%
|Outdoor programs            |  |                                               |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                             | 8,984     |  |      | $ | 8,390     |          |  |  | 7.1  | % 
|Patient Days                |  |                                               | 20,464    |  |      |   | 18,866    |          |  |  | 8.5  | % 
|Net revenue per patient day |  | $                                             | 438.96    |  |      | $ | 444.68    |          |  |  | (1.3 | )%
|Weight management programs  |  |                                               |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                             | 11,303    |  |      | $ | 9,457     |          |  |  | 19.5 | % 
|Patient Days                |  |                                               | 45,375    |  |      |   | 36,671    |          |  |  | 23.7 | % 
|Net revenue per patient day |  | $                                             | 249.09    |  |      | $ | 257.88    |          |  |  | (3.4 | )%

On a same-facility basis,
recovery division net revenue increased $4.7 million, or 6.0%, to $83.3 million for the three months ended September 30, 2010 from $78.5 million in the same period of 2009. The same-facility increases were due to increases of $2.9 million and
$1.8 million within the residential and CTC facilities, respectively. Healthy living division same-facility revenue increased $1.9 million or 5.7% to $35.7 million for the three months ended September 30, 2010 from $33.8 million in the same
period of 2009. The same-facility revenue increase within the healthy living division was driven by increases of $1.9 million and $0.6 million within weight management and outdoor programs, respectively, offset by a decrease of $0.5 million in
residential facilities.



34



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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 $2.5 million driven by an increase of $1.9 million in
residential facilities and an increase of $0.6 million in CTCs compared to the same period of 2009. Healthy living division same-facility operating expenses increased $1.5 million due to increases in supplies, facilities and other costs of $1.9
million and salaries and benefits of $1.1 million offset by decreases of $0.6 million and $0.9 million in depreciation and amortization and asset impairments, respectively.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

The following table presents our results of operations by segment for the nine months ended September 30, 2010 and 2009 (numbers in thousands, except for percentages).



|                                                                                                                                                    |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | - | ---- | - | ------- | --------------------- |  | - | --------------------- | - |  |  | ------ | --
|                                                                                                                                                    |  | Nine Months Ended September 30,Total Facility |        
|Statement of Operations Data:                                                                                                                       |  | 2010                                          |         |   | 2009 |   |         | 2010 vs. 2009$ Change |  |   | 2010 vs. 2009% Change |  
|Net revenue:                                                                                                                                        |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division                                                                                                                                   |  | $                                             | 246,387 |   |      | $ | 231,980 |                       |  | $ | 14,407                |   |  |  | 6.2    | % 
|Healthy living division                                                                                                                             |  |                                               | 91,396  |   |      |   | 92,689  |                       |  |   | (1,293                | ) |  |  | (1.4   | )%
|Corporate                                                                                                                                           |  |                                               | 150     |   |      |   | 186     |                       |  |   | (36                   | ) |  |  | (19.4  | )%
|                                                                                                                                                    |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Total net revenue                                                                                                                                   |  |                                               | 337,933 |   |      |   | 324,855 |                       |  |   | 13,078                |   |  |  | 4.0    | % 
|Operating expenses:                                                                                                                                 |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division                                                                                                                                   |  |                                               | 163,827 |   |      |   | 159,939 |                       |  |   | 3,888                 |   |  |  | 2.4    | % 
|Healthy living division                                                                                                                             |  |                                               | 167,315 |   |      |   | 118,913 |                       |  |   | 48,402                |   |  |  | 40.7   | % 
|Corporate                                                                                                                                           |  |                                               | 24,452  |   |      |   | 23,995  |                       |  |   | 457                   |   |  |  | 1.9    | % 
|                                                                                                                                                    |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Total operating expenses                                                                                                                            |  |                                               | 355,594 |   |      |   | 302,847 |                       |  |   | 52,747                |   |  |  | 17.4   | % 
|Operating income (loss):                                                                                                                            |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Recovery division                                                                                                                                   |  |                                               | 82,560  |   |      |   | 72,041  |                       |  |   | 10,519                |   |  |  | 14.6   | % 
|Healthy living division(1)                                                                                                                          |  |                                               | (75,919 | ) |      |   | (26,224 | )                     |  |   | (49,695               | ) |  |  | (189.5 | )%
|Corporate                                                                                                                                           |  |                                               | (24,302 | ) |      |   | (23,809 | )                     |  |   | (493                  | ) |  |  | (2.1   | )%
|                                                                                                                                                    |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Operating (loss) income                                                                                                                             |  |                                               | (17,661 | ) |      |   | 22,008  |                       |  |   | (39,669               | ) |  |  | (180.2 | )%
|Interest expense                                                                                                                                    |  |                                               | (32,251 | ) |      |   | (35,338 | )                     |  |   | 3,087                 |   |  |  | (8.7   | )%
|Other expense                                                                                                                                       |  |                                               | (88     | ) |      |   | (82     | )                     |  |   | (6                    | ) |  |  | 7.3    | % 
|                                                                                                                                                    |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Loss from continuing operations before income taxes                                                                                                 |  |                                               | (50,000 | ) |      |   | (13,412 | )                     |  |   | (36,588               | ) |  |  | (272.8 | )%
|Income tax (benefit) expense                                                                                                                        |  |                                               | (5,005  | ) |      |   | 1,527   |                       |  |   | (6,532                | ) |  |  | (427.8 | )%
|                                                                                                                                                    |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Loss from continuing operations, net of tax                                                                                                         |  |                                               | (44,995 | ) |      |   | (14,939 | )                     |  |   | (30,056               | ) |  |  | (201.2 | )%
|Loss from discontinued operations, (net of tax benefit of ($1,865) and ($1,554) in the nine months ended September 30, 2010
and 2009, respectively) |  |                                               | (3,074  | ) |      |   | (2,764  | )                     |  |   | (310                  | ) |  |  | (11.2  | )%
|                                                                                                                                                    |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Net loss                                                                                                                                            |  |                                               | (48,069 | ) |      |   | (17,703 | )                     |  |   | (30,366               | ) |  |  | (171.5 | )%
|Less: Net income attributable to the noncontrolling interest                                                                                        |  |                                               |        |   |      |   | 29      |                       |  |   | (29                   | ) |  |  | (100   | )%
|                                                                                                                                                    |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   
|Net loss attributable to CRC Health Corporation                                                                                                     |  | $                                             | (48,069 | ) |      | $ | (17,732 | )                     |  | $ | (30,337               | ) |  |  | (171.1 | )%
|                                                                                                                                                    |  |                                               |         |   |      |   |         |                       |  |   |                       |   |  |  |        |   



|(1) | Healthy living division operating expenses for the nine months ended September 30, 2010 and 2009 include $20.5 million and $2.3 million, respectively of asset
impairment and $52.7 million and $24.9 million, respectively of goodwill impairment.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



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##### Table of Contents



The following table
compares key total facility statistics for the nine months ended September 30, 2010 and the nine months ended September 30, 2009:



|                            |  |                                               |           |  |      |   |           |          |  |  |      |   
|--------------------------- |  | --------------------------------------------- | --------- |  | ---- | - | --------- | -------- |  |  | ---- | --
|                            |  | Nine Months Ended
September 30,Total Facility |          
|                            |  | 2010                                          |           |  | 2009 |   |           | % change | 
|Recovery Division           |  |                                               |           |  |      |   |           |          |  |  |      |   
|Residential facilities      |  |                                               |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                             | 157,699   |  |      | $ | 148,103   |          |  |  | 6.5  | % 
|Patient Days                |  |                                               | 434,344   |  |      |   | 416,355   |          |  |  | 4.3  | % 
|Net revenue per patient day |  | $                                             | 363.07    |  |      | $ | 355.71    |          |  |  | 2.1  | % 
|CTCs                        |  |                                               |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                             | 88,688    |  |      | $ | 83,878    |          |  |  | 5.7  | % 
|Patient Days                |  |                                               | 7,195,258 |  |      |   | 7,041,552 |          |  |  | 2.2  | % 
|Net revenue per patient day |  | $                                             | 12.33     |  |      | $ | 11.91     |          |  |  | 3.5  | % 
|Healthy Living Division     |  |                                               |           |  |      |   |           |          |  |  |      |   
|Residential facilities      |  |                                               |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                             | 47,032    |  |      | $ | 51,392    |          |  |  | (8.5 | )%
|Patient Days                |  |                                               | 188,431   |  |      |   | 201,403   |          |  |  | (6.4 | )%
|Net revenue per patient day |  | $                                             | 249.55    |  |      | $ | 255.17    |          |  |  | (2.2 | )%
|Outdoor programs            |  |                                               |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                             | 20,651    |  |      | $ | 20,872    |          |  |  | (1.1 | )%
|Patient Days                |  |                                               | 47,269    |  |      |   | 45,446    |          |  |  | 4.0  | % 
|Net revenue per patient day |  | $                                             | 436.82    |  |      | $ | 459.25    |          |  |  | (4.9 | )%
|Weight management programs  |  |                                               |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                             | 23,696    |  |      | $ | 20,396    |          |  |  | 16.2 | % 
|Patient Days                |  |                                               | 84,190    |  |      |   | 70,901    |          |  |  | 18.7 | % 
|Net revenue per patient day |  | $                                             | 281.45    |  |      | $ | 287.67    |          |  |  | (2.2 | )%

Consolidated net revenue
increased $13.1 million, or 4.0%, to $337.9 million for the nine months ended September 30, 2010 from $324.9 million for the nine months ended September 30, 2009. Of the total net revenue increase, the recovery division contributed an
increase of $14.4 million which was partially offset by a decrease within the healthy living division of $1.3 million. The $14.4 million, or 6.2%, increase within the recovery division was driven by increases of $9.5 million and $4.8 million within
residential facilities and CTCs, respectively. The $1.3 million, or 1.4%, decrease within the healthy living division was driven by decreases of $4.4 million and $0.2 million within residential facilities and outdoor facilities, respectively, offset
by an increase of $3.3 million in weight management programs.

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 $52.7
million, or 17.4%, to $355.6 million for the nine months ended September 30, 2010 from $302.8 million in the same period of 2009. The $52.7 million increase in operating expenses was primarily driven by increases in non-cash goodwill and asset
impairment charges of $27.8 million and $18.2 million, respectively, within the healthy living division. Without considering non-cash goodwill and asset impairment charges, consolidated operating expenses increased $6.7 million or 2.4% over the same
period of 2009.

Our consolidated operating margin was (5.2)% during the nine months ended September 30, 2010 compared to
6.8% during the same period of 2009. The decrease in operating margin resulted from non-cash goodwill and asset impairment charges in the healthy living division. Without considering non-cash goodwill and asset impairment charges, consolidated
operating margin was 16.4% in the nine months ended September 30, 2010 compared to 15.1% in the same period of 2009. Recovery division margins for the nine months ended September 30, 2010 were 33.5% compared to 31.1% in the prior year
period. Healthy living division operating margin decreased to (83.1)% for the nine months ended September 30, 2010 compared to operating margin of (28.3)% in the same period of 2009. Without considering non-cash goodwill and asset impairment
charges, healthy living division operating margin was (2.9)% for the nine months ended September 30, 2010 compared to 1.0% in the same period of 2009.

For the nine months ended September 30, 2010, consolidated net loss from continuing operations increased by $30.1 million over the prior year period to $45.0 million from $14.9 million in the same
period of 2009. The increase in loss from continuing operations in 2010 compared to 2009 is primarily driven by an increase in non-cash goodwill and asset impairment charges of $27.8 million and $18.2 million, respectively, offset by an increase in
revenue of $13.1 million, an increase in tax benefit of $6.5 million and decrease of $3.1 million in interest expense.



36



---

##### Table of Contents



The following table
presents our same-facility results of operations for our recovery division and our healthy living division for the nine months ended September 30, 2010 and 2009 (numbers in thousands, except for percentages).



|                           |  |                                              |         |   |      |   |         |                        |  |   |                       |   |  |  |        |   
|-------------------------- |  | -------------------------------------------- | ------- | - | ---- | - | ------- | ---------------------- |  | - | --------------------- | - |  |  | ------ | --
|                           |  | Nine Months Ended September
30,Same Facility |        
|Statement of Income Data:  |  | 2010                                         |         |   | 2009 |   |         | 2010 vs. 2009$ 
Change |  |   | 2010 vs. 2009%
Change |  
|Net revenue:               |  |                                              |         |   |      |   |         |                        |  |   |                       |   |  |  |        |   
|Recovery division          |  | $                                            | 246,387 |   |      | $ | 231,981 |                        |  | $ | 14,406                |   |  |  | 6.2    | % 
|Healthy living division    |  |                                              | 89,924  |   |      |   | 90,004  |                        |  |   | (80                   | ) |  |  | (0.1   | )%
|                           |  |                                              |         |   |      |   |         |                        |  |   |                       |   |  |  |        |   
|Total net revenue          |  |                                              | 336,311 |   |      |   | 321,985 |                        |  |   | 14,326                |   |  |  | 4.4    | % 
|Operating expenses:        |  |                                              |         |   |      |   |         |                        |  |   |                       |   |  |  |        |   
|Recovery division          |  |                                              | 148,387 |   |      |   | 143,839 |                        |  |   | 4,548                 |   |  |  | 3.2    | % 
|Healthy living division(1) |  |                                              | 100,041 |   |      |   | 81,102  |                        |  |   | 18,939                |   |  |  | 23.4   | % 
|                           |  |                                              |         |   |      |   |         |                        |  |   |                       |   |  |  |        |   
|Total operating expenses   |  |                                              | 248,428 |   |      |   | 224,941 |                        |  |   | 23,487                |   |  |  | 10.4   | % 
|Operating income (loss):   |  |                                              |         |   |      |   |         |                        |  |   |                       |   |  |  |        |   
|Recovery division          |  |                                              | 98,000  |   |      |   | 88,142  |                        |  |   | 9,858                 |   |  |  | 11.2   | % 
|Healthy living division    |  |                                              | (10,117 | ) |      |   | 8,902   |                        |  |   | (19,019               | ) |  |  | (213.6 | )%
|                           |  |                                              |         |   |      |   |         |                        |  |   |                       |   |  |  |        |   
|Operating income           |  | $                                            | 87,883  |   |      | $ | 97,044  |                        |  | $ | (9,161                | ) |  |  | (9.4   | )%
|                           |  |                                              |         |   |      |   |         |                        |  |   |                       |   |  |  |        |   



|(1) | Healthy living division operating expenses for the nine months ended September 30, 2010 and 2009 include $17.8 million and $2.3 million of asset impairment,
respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table compares key same facility statistics for the nine months ended
September 30, 2010 and the nine months ended September 30, 2009:



|                            |  |                                              |           |  |      |   |           |          |  |  |      |   
|--------------------------- |  | -------------------------------------------- | --------- |  | ---- | - | --------- | -------- |  |  | ---- | --
|                            |  | Nine Months Ended
September 30,Same Facility |          
|                            |  | 2010                                         |           |  | 2009 |   |           | % change | 
|Recovery Division           |  |                                              |           |  |      |   |           |          |  |  |      |   
|Residential facilities      |  |                                              |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                            | 157,699   |  |      | $ | 148,103   |          |  |  | 6.5  | % 
|Patient Days                |  |                                              | 434,344   |  |      |   | 416,355   |          |  |  | 4.3  | % 
|Net revenue per patient day |  | $                                            | 363.07    |  |      | $ | 355.71    |          |  |  | 2.1  | % 
|CTCs                        |  |                                              |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                            | 88,688    |  |      | $ | 83,878    |          |  |  | 5.7  | % 
|Patient Days                |  |                                              | 7,195,258 |  |      |   | 7,041,552 |          |  |  | 2.2  | % 
|Net revenue per patient day |  | $                                            | 12.33     |  |      | $ | 11.91     |          |  |  | 3.5  | % 
|Healthy Living Division     |  |                                              |           |  |      |   |           |          |  |  |      |   
|Residential facilities      |  |                                              |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                            | 45,577    |  |      | $ | 48,807    |          |  |  | (6.6 | )%
|Patient Days                |  |                                              | 181,920   |  |      |   | 188,958   |          |  |  | (3.7 | )%
|Net revenue per patient day |  | $                                            | 250.48    |  |      | $ | 258.29    |          |  |  | (3.0 | )%
|Outdoor programs            |  |                                              |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                            | 20,651    |  |      | $ | 20,872    |          |  |  | (1.1 | )%
|Patient Days                |  |                                              | 47,269    |  |      |   | 45,446    |          |  |  | 4.0  | % 
|Net revenue per patient day |  | $                                            | 436.82    |  |      | $ | 459.25    |          |  |  | (4.9 | )%
|Weight management programs  |  |                                              |           |  |      |   |           |          |  |  |      |   
|Revenue (in thousands)      |  | $                                            | 23,696    |  |      | $ | 20,326    |          |  |  | 16.6 | % 
|Patient Days                |  |                                              | 84,190    |  |      |   | 70,901    |          |  |  | 18.7 | % 
|Net revenue per patient day |  | $                                            | 281.45    |  |      | $ | 286.68    |          |  |  | (1.8 | )%

On a same-facility basis,
recovery division net revenue increased $14.4 million, or 6.2%, to $246.4 million from $232.0 million in the same period of 2009. This was due to increase in revenues of $9.5 million and $4.8 million within residential facilities and CTCs,
respectively. Healthy living division same-facility revenue decreased $0.1 million, or 0.1%, to $89.9 million from $90.0 million in the same period of 2009. This was due to decrease in revenue of $3.2 million and $0.2 million within the residential
facilities and outdoor programs, offset by increase in revenue of $2.9 million and $0.5 million within the weight management and eating disorders programs.



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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 $4.5 million due to an increase of $3.5 million and $1.0 million
within residential facilities and CTCs, respectively. Healthy living division same-facility operating expenses increased $18.9 million due to higher asset impairment of $15.6 million. The remaining increase is mainly due to increase in supplies,
facilities and other costs, and salary and benefits of $3.1 million and $1.3 million, respectively, offset by decrease in depreciation and amortization of $1.1 million.

Working Capital

Working capital is defined as total current assets,
including cash and cash equivalents, less total current liabilities, including the current portion of long-term debt.

We had
negative working capital of $12.6 million at September 30, 2010 compared to negative working capital of $15.3 million at December 31, 2009. The increase of $2.7 million in working capital was attributable to a reduction in the
current portion of long-term debt of $7.3 million due to a prepayment in 2010, an increase in accounts receivable of $2.9 million, a decrease in the interest rate swap liability of $3.4 million, a decrease in accrued interest of $4.6 million and a
decrease of accrued expenses of $1.2 million. These were offset by an increase in accounts payable of $2.4 million related to payment timing; an increase of deferred revenue of $1.7 million; an increase of accrued payroll of $5.7 million
related primarily to timing and a net increase in taxes payable of $6.3 million.

Sources and Uses of Cash



|                                          |                |                                |         |      |  |   |         |  
|----------------------------------------- | -------------- | ------------------------------ | ------- | ---- |  | - | ------- | -
|                                          |                | Nine Months
EndedSeptember 30, |        
|                                          | 2010           |                                |         | 2009 | 
|                                          | (In thousands) |                               
|Net cash provided by operating activities |                | $                              | 39,607  |      |  | $ | 29,559  |  
|Net cash used in investing activities     |                |                                | (14,723 | )    |  |   | (6,895  | )
|Net cash used in financing activities     |                |                                | (25,507 | )    |  |   | (18,750 | )
|                                          |                |                                |         |      |  |   |         |  
|Net (decrease) increase in cash           |                | $                              | (623    | )    |  | $ | 3,914   |  
|                                          |                |                                |         |      |  |   |         |  

Cash provided by operating activities was $39.6 million for the nine months ended September 30, 2010
compared to cash provided by operating activities of $29.6 million during the same period of 2009. The increase of $10.0 million in cash flows from operating was primarily the result of cash provided by improved operating results offset by
an increase of $1.2 million in loan program note purchases.

Cash used in investing activities was $14.7 million for
the nine months ended September 30, 2010 compared to $6.9 million in the same period of 2009. The increase in cash used in investing activities primarily relates to an increase in the additions of property and equipment during
the nine months ended September 30, 2010 compared to September 30, 2009.

Cash used in financing activities was
$25.5 million for the nine months ended September 30, 2010 compared to cash used in financing activities of $18.8 million for the same period of 2009. The increase in cash used in financing activities is primarily due to an increase of
$3.7 million in repayment of the term loan and seller notes and the increase of $3.5 million in the net repayments of the revolving line of credit, offset by $0.5 million decrease in other financing activities.

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
September 30, 2010, 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 September 30, 2010, the revolving credit facility had $60.1
million available for borrowing, $30.0 million outstanding and classified on our balance sheet as long term debt, and $9.9 million of letters of credit issued and outstanding. At September 30, 2010, 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.



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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 September 30, 2010, 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.



|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, 2009. As of September 30, 2010, our exposure to market risk has not changed materially since December 31, 2009.



|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.

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.



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PART II. OTHER
INFORMATION



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

As
of September 30, 2010, 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, 2009.



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

The Exhibit
Index beginning on page 42 of this report sets forth a list of exhibits.



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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: November 15, 2010



CRC HEALTH CORPORATION(Registrant)By

/S/    KEVIN
HOGGEKevin Hogge,Chief Financial Officer(Principal Financial Officer and Principal
Accounting Officer and duly authorized signatory)




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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.
|- | -------------------



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