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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: March 31, 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 May 14, 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 March 31, 2010 and December 31, 2009                          |  | 2 
|              |  |                       |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009        |  | 3 
|              |  |                       |  | Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2010 and 2009 |  | 4 
|              |  |                       |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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                     |  | 25
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosure About Market Risk                                                 |  | 30
|              |  | Item 4.               |  | Controls and Procedures                                                                                   |  | 30
|Part II.      |  | Other Information     |  |                                                                                                          
|              |  | Item 1A.              |  | Risk Factors                                                                                              |  | 31
|              |  | Item 6.               |  | Exhibits                                                                                                  |  | 31
|Signature     |  | 32                   
|Exhibit Index |  | 33                   

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)

MARCH 31, 2010 AND DECEMBER 31, 2009

(In thousands, except share amounts)



|                                                                                                                                    |  |               |           |   |                  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                    |  | March 31,2010 |           |   | December 31,2009 |  
|ASSETS                                                                                                                              |  |               |           |   |                  |   |           |  
|CURRENT ASSETS:                                                                                                                     |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                           |  | $             | 2,169     |   |                  | $ | 4,982     |  
|Restricted cash                                                                                                                     |  |               | 1,144     |   |                  |   | 420       |  
|Accounts receivable, net of allowance for doubtful accounts of $5,450 in 2010 and $5,327 in 2009                                    |  |               | 32,440    |   |                  |   | 31,558    |  
|Prepaid expenses                                                                                                                    |  |               | 7,529     |   |                  |   | 7,489     |  
|Other current assets                                                                                                                |  |               | 1,264     |   |                  |   | 1,306     |  
|Income taxes receivable                                                                                                             |  |               |          |   |                  |   | 676       |  
|Deferred income taxes                                                                                                               |  |               | 6,346     |   |                  |   | 6,346     |  
|Current assets of discontinued operations                                                                                           |  |               | 1,568     |   |                  |   | 1,720     |  
|                                                                                                                                    |  |               |           |   |                  |   |           |  
|Total current assets                                                                                                                |  |               | 52,460    |   |                  |   | 54,497    |  
|PROPERTY AND EQUIPMENT-Net                                                                                                          |  |               | 124,281   |   |                  |   | 125,215   |  
|GOODWILL                                                                                                                            |  |               | 574,027   |   |                  |   | 573,594   |  
|INTANGIBLE ASSETS-Net                                                                                                               |  |               | 333,685   |   |                  |   | 335,409   |  
|OTHER ASSETS-Net                                                                                                                    |  |               | 19,716    |   |                  |   | 19,619    |  
|                                                                                                                                    |  |               |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                                        |  | $             | 1,104,169 |   |                  | $ | 1,108,334 |  
|                                                                                                                                    |  |               |           |   |                  |   |           |  
|LIABILITIES AND EQUITY                                                                                                              |  |               |           |   |                  |   |           |  
|CURRENT LIABILITIES:                                                                                                                |  |               |           |   |                  |   |           |  
|Accounts payable                                                                                                                    |  | $             | 4,670     |   |                  | $ | 3,011     |  
|Accrued liabilities                                                                                                                 |  |               | 28,497    |   |                  |   | 29,851    |  
|Income taxes payable                                                                                                                |  |               | 749       |   |                  |   |          |  
|Current portion of long-term debt                                                                                                   |  |               | 1,471     |   |                  |   | 8,814     |  
|Other current liabilities                                                                                                           |  |               | 25,328    |   |                  |   | 25,992    |  
|Current liabilities of discontinued operations                                                                                      |  |               | 1,412     |   |                  |   | 2,114     |  
|                                                                                                                                    |  |               |           |   |                  |   |           |  
|Total current liabilities                                                                                                           |  |               | 62,127    |   |                  |   | 69,782    |  
|LONG-TERM DEBT-Less current portion                                                                                                 |  |               | 623,705   |   |                  |   | 622,262   |  
|OTHER LONG-TERM LIABILITIES                                                                                                         |  |               | 8,855     |   |                  |   | 8,735     |  
|LIABILITIES OF DISCONTINUED OPERATIONS                                                                                              |  |               | 1,620     |   |                  |   | 1,679     |  
|DEFERRED INCOME TAXES                                                                                                               |  |               | 116,871   |   |                  |   | 117,334   |  
|                                                                                                                                    |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                                   |  |               | 813,178   |   |                  |   | 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 March 31, 2010 and
December 31, 2009 |  |               |          |   |                  |   |          |  
|Additional paid-in capital                                                                                                          |  |               | 456,308   |   |                  |   | 454,880   |  
|Accumulated deficit                                                                                                                 |  |               | (160,502  | ) |                  |   | (161,363  | )
|Accumulated other comprehensive loss                                                                                                |  |               | (4,815    | ) |                  |   | (4,975    | )
|                                                                                                                                    |  |               |           |   |                  |   |           |  
|Total CRC Health Corporation stockholders equity                                                                                   |  |               | 290,991   |   |                  |   | 288,542   |  
|                                                                                                                                    |  |               |           |   |                  |   |           |  
|NONCONTROLLING INTEREST                                                                                                             |  |               |          |   |                  |   |          |  
|                                                                                                                                    |  |               |           |   |                  |   |           |  
|Total equity                                                                                                                        |  |               | 290,991   |   |                  |   | 288,542   |  
|                                                                                                                                    |  |               |           |   |                  |   |           |  
|TOTAL LIABILITIES AND EQUITY                                                                                                        |  | $             | 1,104,169 |   |                  | $ | 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 MONTHS ENDED MARCH 31, 2010 AND 2009

(In thousands)



|                                                                                                                                            |  |                                  |         |   |                                 |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | ------- | -
|                                                                                                                                            |  | Three MonthsEnded March 
31,2010 |         |   | Three MonthsEnded March 31,2009 |  
|NET REVENUE:                                                                                                                                |  |                                  |         |   |                                 |   |         |  
|Net client service revenue                                                                                                                  |  | $                                | 104,018 |   |                                 | $ | 102,842 |  
|                                                                                                                                            |  |                                  |         |   |                                 |   |         |  
|OPERATING EXPENSES:                                                                                                                         |  |                                  |         |   |                                 |   |         |  
|Salaries and benefits                                                                                                                       |  |                                  | 53,636  |   |                                 |   | 55,669  |  
|Supplies, facilities and other operating costs                                                                                              |  |                                  | 30,141  |   |                                 |   | 30,550  |  
|Provision for doubtful accounts                                                                                                             |  |                                  | 1,844   |   |                                 |   | 1,483   |  
|Depreciation and amortization                                                                                                               |  |                                  | 5,558   |   |                                 |   | 5,675   |  
|                                                                                                                                            |  |                                  |         |   |                                 |   |         |  
|Total operating expenses                                                                                                                    |  |                                  | 91,179  |   |                                 |   | 93,377  |  
|                                                                                                                                            |  |                                  |         |   |                                 |   |         |  
|OPERATING INCOME                                                                                                                            |  |                                  | 12,839  |   |                                 |   | 9,465   |  
|INTEREST EXPENSE                                                                                                                            |  |                                  | (10,805 | ) |                                 |   | (11,952 | )
|OTHER EXPENSE                                                                                                                               |  |                                  |        |   |                                 |   | (82     | )
|                                                                                                                                            |  |                                  |         |   |                                 |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                                                |  |                                  | 2,034   |   |                                 |   | (2,569  | )
|INCOME TAX EXPENSE (BENEFIT)                                                                                                                |  |                                  | 869     |   |                                 |   | (2,272  | )
|                                                                                                                                            |  |                                  |         |   |                                 |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX                                                                                        |  |                                  | 1,165   |   |                                 |   | (297    | )
|LOSS FROM DISCONTINUED OPERATIONS (net of tax benefit of ($162) and ($571) in the three months ended March 31, 2010 and
2009, respectively) |  |                                  | (304    | ) |                                 |   | (1,016  | )
|                                                                                                                                            |  |                                  |         |   |                                 |   |         |  
|NET INCOME (LOSS)                                                                                                                           |  |                                  | 861     |   |                                 |   | (1,313  | )
|LESS: NET LOSS ATTRIBUTABLE TO THE NONCONTROLLING INTEREST                                                                                  |  |                                  |        |   |                                 |   | (128    | )
|                                                                                                                                            |  |                                  |         |   |                                 |   |         |  
|NET INCOME (LOSS) ATTRIBUTABLE TO CRC HEALTH CORPORATION                                                                                    |  | $                                | 861     |   |                                 | $ | (1,185  | )
|                                                                                                                                            |  |                                  |         |   |                                 |   |         |  
|AMOUNTS ATTRIBUTABLE TO CRC HEALTH CORPORATION:                                                                                             |  |                                  |         |   |                                 |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX                                                                                        |  | $                                | 1,165   |   |                                 | $ | (173    | )
|DISCONTINUED OPERATIONS, NET OF TAX                                                                                                         |  |                                  | (304    | ) |                                 |   | (1,012  | )
|                                                                                                                                            |  |                                  |         |   |                                 |   |         |  
|NET INCOME (LOSS) ATTRIBUTABLE TO CRC HEALTH CORPORATION                                                                                    |  | $                                | 861     |   |                                 | $ | (1,185  | )
|                                                                                                                                            |  |                                  |         |   |                                 |   |         |  

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 THREE MONTHS ENDED MARCH 31, 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 income:                                   |  |       |         |                            |        |                                             |        |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|Net income for the quarter ended March 31, 2010         |  |       | 861     |                            |        | 861                                         |        |   | 861                               |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   | 
|Other comprehensive income, net of tax:                 |  |       |         |                            |        |                                             |        |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|Unrealized gain on cash flow hedges, net of tax of $106 |  |       | 160     |                            |        | 160                                         |        |   |                                   |   |  |              | 160    |                          |  |                        |  |   |   |  |   |         |  |   |  
|                                                        |  |       |         |                            |        |                                             |        |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|Other comprehensive income                              |  |       | 160     |                            |        | 160                                         |        |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|                                                        |  |       |         |                            |        |                                             |        |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|Comprehensive income                                    |  |       | 1,021   |                            | $      | 1,021                                       |        |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|                                                        |  |       |         |                            |        |                                             |        |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|Capital contributed by Parent, net                      |  |       | 1,428   |                            |        |                                             |        |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   | 1,428   |  |   |  
|                                                        |  |       |         |                            |        |                                             |        |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|BALANCEMarch 31, 2010                                  |  | $     | 290,991 |                            |        |                                             |        | $ | (160,502                          | ) |  | $            | (4,815 | )                        |  | 1,000                  |  | $ |  |  | $ | 456,308 |  | $ | 
|                                                        |  |       |         |                            |        |                                             |        |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  

See notes to unaudited condensed consolidated financial
statements.



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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 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                          |  |       | (5      | ) |                            |   |        |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   | (5   | )
|Comprehensive loss:                                     |  |       |         |   |                            |   |        |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |      |  
|Net loss for the quarter ended March 31, 2009           |  |       | (1,313  | ) |                            |   | (1,313 | )                                           |  |   | (1,185                            | ) |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   | (128 | )
|Other comprehensive income, net of tax:                 |  |       |         |   |                            |   |        |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |      |  
|Unrealized gain on cash flow hedges, net of tax of $716 |  |       | 1,065   |   |                            |   | 1,065  |                                             |  |   |                                   |   |  |              | 1,065  |                          |  |                        |  |   |   |  |   |         |  |   |      |  
|                                                        |  |       |         |   |                            |   |        |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |      |  
|Other comprehensive loss                                |  |       | 1,065   |   |                            |   | 1,065  |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |      |  
|                                                        |  |       |         |   |                            |   |        |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |      |  
|Comprehensive loss                                      |  |       | (248    | ) |                            | $ | (248   | )                                           |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |      |  
|                                                        |  |       |         |   |                            |   |        |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |      |  
|Capital contributed by Parent, net                      |  |       | 2,209   |   |                            |   |        |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   | 2,209   |  |   |      |  
|                                                        |  |       |         |   |                            |   |        |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |      |  
|BALANCEMarch 31, 2009                                  |  | $     | 305,399 |   |                            |   |        |                                             |  | $ | (135,949                          | ) |  | $            | (5,224 | )                        |  | 1,000                  |  | $ |  |  | $ | 446,484 |  | $ | 88   |  
|                                                        |  |       |         |   |                            |   |        |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |      |  



|. | 
|- | 

See notes to unaudited
condensed consolidated financial statements.



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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(In thousands)



|                                                                                        |  |                                  |        |   |                                  |   |        |  
|--------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | -------------------------------- | - | ------ | -
|                                                                                        |  | Three Months EndedMarch 31, 2010 |        |   | Three Months EndedMarch 31, 2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |  |                                  |        |   |                                  |   |        |  
|Net income (loss)                                                                       |  | $                                | 861    |   |                                  | $ | (1,313 | )
|Adjustments to reconcile net income(loss) to net cash provided by operating activities: |  |                                  |        |   |                                  |   |        |  
|Depreciation and amortization                                                           |  |                                  | 5,562  |   |                                  |   | 5,771  |  
|Amortization of debt discount and capitalized financing costs                           |  |                                  | 1,053  |   |                                  |   | 1,078  |  
|Gain on interest rate swap agreement                                                    |  |                                  | (118   | ) |                                  |   |       |  
|Asset impairment                                                                        |  |                                  |       |   |                                  |   | 1,417  |  
|(Gain)/loss on disposition of property and equipment                                    |  |                                  | (5     | ) |                                  |   | 294    |  
|Provision for doubtful accounts                                                         |  |                                  | 1,871  |   |                                  |   | 1,559  |  
|Stock-based compensation                                                                |  |                                  | 1,427  |   |                                  |   | 1,395  |  
|Deferred income taxes                                                                   |  |                                  |       |   |                                  |   | (555   | )
|Changes in assets and liabilities:                                                      |  |                                  |        |   |                                  |   |        |  
|Restricted cash                                                                         |  |                                  | (724   | ) |                                  |   |       |  
|Accounts receivable                                                                     |  |                                  | (2,714 | ) |                                  |   | (2,841 | )
|Prepaid expenses                                                                        |  |                                  | 4      |   |                                  |   | (21    | )
|Other current assets                                                                    |  |                                  | 105    |   |                                  |   | 343    |  
|Income taxes receivable                                                                 |  |                                  | 107    |   |                                  |   | (597   | )
|Accounts payable                                                                        |  |                                  | 1,665  |   |                                  |   | (413   | )
|Accrued liabilities                                                                     |  |                                  | (1,730 | ) |                                  |   | (1,152 | )
|Income taxes payable                                                                    |  |                                  | 586    |   |                                  |   | (1,201 | )
|Other current liabilities                                                               |  |                                  | (453   | ) |                                  |   | (1,101 | )
|Other assets                                                                            |  |                                  | (1,083 | ) |                                  |   | (17    | )
|Other long term liabilities                                                             |  |                                  | (188   | ) |                                  |   | 45     |  
|                                                                                        |  |                                  |        |   |                                  |   |        |  
|Net cash provided by operating activities                                               |  |                                  | 6,226  |   |                                  |   | 2,691  |  
|                                                                                        |  |                                  |        |   |                                  |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |  |                                  |        |   |                                  |   |        |  
|Additions of property and equipment                                                     |  |                                  | (2,875 | ) |                                  |   | (2,314 | )
|Proceeds from sale of property and equipment                                            |  |                                  | 14     |   |                                  |   | 126    |  
|Acquisition of business, net of cash acquired                                           |  |                                  | (30    | ) |                                  |   |       |  
|Acquisition adjustments                                                                 |  |                                  |       |   |                                  |   | (59    | )
|                                                                                        |  |                                  |        |   |                                  |   |        |  
|Net cash used in investing activities                                                   |  |                                  | (2,891 | ) |                                  |   | (2,247 | )
|                                                                                        |  |                                  |        |   |                                  |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   |  |                                  |        |   |                                  |   |        |  
|Capital contributed from (distributed to) Parent                                        |  |                                  | 8      |   |                                  |   | (12    | )
|Capitalized financing costs                                                             |  |                                  |       |   |                                  |   | (40    | )
|Noncontrolling interest buyout                                                          |  |                                  |       |   |                                  |   | (89    | )
|Repayment of capital lease obligations                                                  |  |                                  |       |   |                                  |   | (4     | )
|Borrowings under revolving line of credit                                               |  |                                  | 5,000  |   |                                  |   | 7,000  |  
|Repayments under revolving line of credit                                               |  |                                  | (2,500 | ) |                                  |   | (7,000 | )
|Repayments of term loan and seller notes                                                |  |                                  | (8,656 | ) |                                  |   | (2,309 | )
|                                                                                        |  |                                  |        |   |                                  |   |        |  
|Net cash used in financing activities                                                   |  |                                  | (6,148 | ) |                                  |   | (2,454 | )
|                                                                                        |  |                                  |        |   |                                  |   |        |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                               |  |                                  | (2,813 | ) |                                  |   | (2,010 | )
|CASH AND CASH EQUIVALENTS-Beginning of period                                           |  |                                  | 4,982  |   |                                  |   | 2,540  |  
|                                                                                        |  |                                  |        |   |                                  |   |        |  
|CASH AND CASH EQUIVALENTS-End of period                                                 |  | $                                | 2,169  |   |                                  | $ | 530    |  
|                                                                                        |  |                                  |        |   |                                  |   |        |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                       |  |                                  |        |   |                                  |   |        |  
|Cash paid for interest                                                                  |  | $                                | 13,545 |   |                                  | $ | 15,023 |  
|                                                                                        |  |                                  |        |   |                                  |   |        |  
|Cash paid for income taxes, net of refunds                                              |  | $                                | 13     |   |                                  | $ | (490   | )
|                                                                                        |  |                                  |        |   |                                  |   |        |  
|Payable related to acquisition                                                          |  | $                                | 365    |   |                                  | $ |       |  
|                                                                                        |  |                                  |        |   |                                  |   |        |  

See notes to unaudited condensed consolidated financial statements.



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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 our audited financial statements.

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



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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 reporting unit. 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 March 31, 2010 and December 31, 2009 consist of the following (in thousands):



|                                     |  |               |        |   |                  |   |        |  
|------------------------------------ |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                                     |  | March 31,2010 |        |   | December 31,2009 |  
|Accounts receivable-gross            |  | $             | 37,890 |   |                  | $ | 36,885 |  
|Less allowance for doubtful accounts |  |               | (5,450 | ) |                  |   | (5,327 | )
|                                     |  |               |        |   |                  |   |        |  
|Accounts receivable-net              |  | $             | 32,440 |   |                  | $ | 31,558 |  
|                                     |  |               |        |   |                  |   |        |  
|Other assets-net:                    |  |               |        |   |                  |   |        |  
|Capitalized financing costs-net      |  | $             | 13,676 |   |                  | $ | 14,663 |  
|Deposits                             |  |               | 913    |   |                  |   | 925    |  
|Note receivable                      |  |               | 5,127  |   |                  |   | 4,031  |  
|                                     |  |               |        |   |                  |   |        |  
|Total other assets-net               |  | $             | 19,716 |   |                  | $ | 19,619 |  
|                                     |  |               |        |   |                  |   |        |  
|Accrued liabilities:                 |  |               |        |   |                  |   |        |  
|Accrued payroll and related expenses |  | $             | 12,969 |   |                  | $ | 8,698  |  
|Accrued vacation                     |  |               | 4,806  |   |                  |   | 4,615  |  
|Accrued interest                     |  |               | 4,415  |   |                  |   | 8,019  |  
|Accrued expenses                     |  |               | 6,307  |   |                  |   | 8,519  |  
|                                     |  |               |        |   |                  |   |        |  
|Total accrued liabilities            |  | $             | 28,497 |   |                  | $ | 29,851 |  
|                                     |  |               |        |   |                  |   |        |  
|Other current liabilities:           |  |               |        |   |                  |   |        |  
|Deferred revenue                     |  | $             | 11,173 |   |                  | $ | 9,650  |  
|Client deposits                      |  |               | 5,216  |   |                  |   | 4,130  |  
|Interest rate swap liability         |  |               | 8,275  |   |                  |   | 8,659  |  
|Other liabilities                    |  |               | 664    |   |                  |   | 3,553  |  
|                                     |  |               |        |   |                  |   |        |  
|Total other current liabilities      |  | $             | 25,328 |   |                  | $ | 25,992 |  
|                                     |  |               |        |   |                  |   |        |  



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##### Table of Contents

CRC HEALTH CORPORATION

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



5. PROPERTY AND EQUIPMENT

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



|                              |  |               |         |   |                  |   |         |  
|----------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                              |  | March 31,2010 |         |   | December 31,2009 |  
|Land                          |  | $             | 21,373  |   |                  | $ | 21,373  |  
|Building and improvements     |  |               | 75,414  |   |                  |   | 74,551  |  
|Leasehold improvements        |  |               | 23,529  |   |                  |   | 23,181  |  
|Furniture and fixtures        |  |               | 12,702  |   |                  |   | 12,404  |  
|Computer equipment            |  |               | 11,427  |   |                  |   | 10,855  |  
|Computer software             |  |               | 13,374  |   |                  |   | 11,332  |  
|Motor vehicles                |  |               | 6,050   |   |                  |   | 5,911   |  
|Field equipment               |  |               | 2,895   |   |                  |   | 2,782   |  
|Construction in progress      |  |               | 4,867   |   |                  |   | 6,363   |  
|                              |  |               |         |   |                  |   |         |  
|                              |  |               | 171,631 |   |                  |   | 168,752 |  
|Less accumulated depreciation |  |               | (47,350 | ) |                  |   | (43,537 | )
|                              |  |               |         |   |                  |   |         |  
|Property and equipment-net    |  | $             | 124,281 |   |                  | $ | 125,215 |  
|                              |  |               |         |   |                  |   |         |  

Depreciation expense was $3.8 million and $3.8 million for the three months ended March 31, 2010 and
2009, respectively.

6. GOODWILL AND INTANGIBLE ASSETS

Changes to goodwill by reportable segments for the three months ended March 31, 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      |  
|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|Balance as of March 31, 2010       |  |          |         |   |                |   |          |       |  |   |          |  
|Goodwill                           |  |          | 502,168 |   |                |   | 245,218  |       |  |   | 747,386  |  
|Accumulated impairment losses      |  |          | (624    | ) |                |   | (172,735 | )     |  |   | (173,359 | )
|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|                                   |  | $        | 501,544 |   |                | $ | 72,483   |       |  | $ | 574,027  |  
|                                   |  |          |         |   |                |   |          |       |  |   |          |  



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##### Table of Contents

CRC HEALTH CORPORATION

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



Intangible Assets

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



|                                                    |  |                |  |                     |         |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|--------------------------------------------------- |  | -------------- |  | ------------------- | ------- | ----------------------- | - | ------- | ----------------- |  | ---------- | ------- | ------------------- | -------- | ----------------------- | - | ------- | ----------------- | - | ------- | - |  | - | -------
|                                                    |  | March 31, 2010 |  | December 31, 2009  
|                                                    |  | UsefulLife     |  | GrossCarryingAmount |         | AccumulatedAmortization |   |         | NetCarryingAmount |  | UsefulLife |         | GrossCarryingAmount |          | AccumulatedAmortization |   |         | NetCarryingAmount
|Intangible assets subject to amortization:          |  |                |  |                     |         |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|Referral network                                    |  | 20 years       |  | $                   | 29,695  |                         | $ | (5,003  | )                 |  | $          | 24,692  |                     | 20 years |                         | $ | 29,695  |                   | $ | (4,632  | ) |  | $ | 25,063 
|Accreditations                                      |  | 20 years       |  |                     | 14,144  |                         |   | (2,396  | )                 |  |            | 11,748  |                     | 20 years |                         |   | 14,144  |                   |   | (2,219  | ) |  |   | 11,925 
|Curriculum                                          |  | 20 years       |  |                     | 7,425   |                         |   | (1,252  | )                 |  |            | 6,173   |                     | 20 years |                         |   | 7,425   |                   |   | (1,159  | ) |  |   | 6,266  
|Government including Medicaid contracts             |  | 15 years       |  |                     | 34,967  |                         |   | (9,713  | )                 |  |            | 25,254  |                     | 15 years |                         |   | 34,967  |                   |   | (9,131  | ) |  |   | 25,836 
|Managed care contracts                              |  | 10 years       |  |                     | 14,400  |                         |   | (6,000  | )                 |  |            | 8,400   |                     | 10 years |                         |   | 14,400  |                   |   | (5,640  | ) |  |   | 8,760  
|Managed care contracts                              |  | 5 years        |  |                     | 100     |                         |   | (50     | )                 |  |            | 50      |                     | 5 years  |                         |   | 100     |                   |   | (45     | ) |  |   | 55     
|Core developed technology                           |  | 5 years        |  |                     | 2,704   |                         |   | (2,258  | )                 |  |            | 446     |                     | 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     |  |                |  | $                   | 103,587 |                         | $ | (26,824 | )                 |  | $          | 76,763  |                     |          |                         | $ | 103,587 |                   | $ | (25,100 | ) |  | $ | 78,487 
|                                                    |  |                |  |                     |         |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|Intangible assets not subject to amortization:      |  |                |  |                     |         |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|Trademarks and trade names                          |  |                |  |                     |         |                         |   |         |                   |  |            | 174,821 |                     |          |                         |   |         |                   |   |         |   |  |   | 174,821
|Certificates of need                                |  |                |  |                     |         |                         |   |         |                   |  |            | 44,600  |                     |          |                         |   |         |                   |   |         |   |  |   | 44,600 
|Regulatory licenses                                 |  |                |  |                     |         |                         |   |         |                   |  |            | 37,501  |                     |          |                         |   |         |                   |   |         |   |  |   | 37,501 
|                                                    |  |                |  |                     |         |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|Total intangible assets not subject to amortization |  |                |  |                     |         |                         |   |         |                   |  |            | 256,922 |                     |          |                         |   |         |                   |   |         |   |  |   | 256,922
|                                                    |  |                |  |                     |         |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|Total intangible assets                             |  |                |  |                     |         |                         |   |         |                   |  | $          | 333,685 |                     |          |                         |   |         |                   |   |         |   |  | $ | 335,409
|                                                    |  |                |  |                     |         |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        

Total amortization expense of intangible assets
subject to amortization was $1.7 million and $1.8 million for the three months ended March 31, 2010 and 2009, respectively.

Estimated future amortization expense related to the amortizable intangible assets at March 31, 2010 is as follows
(in thousands):



|                             |  |   |       
|---------------------------- |  | - | ------
|Fiscal Year                  |  |  
|2010 (remaining nine months) |  | $ | 5,171 
|2011                         |  |   | 6,395 
|2012                         |  |   | 6,349 
|2013                         |  |   | 6,334 
|2014                         |  |   | 6,334 
|Thereafter                   |  |   | 46,180
|                             |  |   |       
|Total                        |  | $ | 76,763
|                             |  |   |       



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##### Table of Contents

CRC HEALTH CORPORATION

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



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.

For the three months ended March 31, 2010, the Companys tax expense
on continuing operations is $0.9 million, representing an effective tax rate of 42.7% which differs from the U.S. federal statutory rate of 35% primarily because of state income taxes. For the three months ended March 31, 2009, the
Companys tax benefit on continuing operations was $2.3 million, representing an effective tax rate of 88.4% which differs from the U.S. federal statutory rate of 35% because of a discrete item of $1.1 million due to a significant California
tax law change and state income taxes.

There is no significant change in uncertain tax positions for the three months ended
March 31, 2010; however, subsequent to the balance sheet date, the Company received a letter from the Internal Revenue Service that the tax audit for 2004 to 2006 tax years has been concluded. As a result, the Company will release a tax reserve
of $0.5 million in the second quarter of 2010.

The Company files its income tax returns in various jurisdictions, including
United States federal and state filings, United Kingdom and Canada filings. The Company is currently under examination by various state jurisdictions. There are different interpretations of tax laws and regulations and, as a result, significant
disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. While the Company believes its positions comply with applicable laws, it periodically
evaluates its exposures associated with its tax filing positions.

8. LONG-TERM DEBT

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



|                                                                                |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                |  | March 31,2010 |         |   | December 31,2009 |  
|Term loan                                                                       |  | $             | 398,305 |   |                  | $ | 405,649 |  
|Revolving line of credit                                                        |  |               | 49,000  |   |                  |   | 46,500  |  
|Senior subordinated notes, net of discount of $1,540 in 2010 and $1,606 in 2009 |  |               | 175,756 |   |                  |   | 175,690 |  
|Seller notes                                                                    |  |               | 2,002   |   |                  |   | 3,116   |  
|Note payable, leasehold improvement                                             |  |               | 113     |   |                  |   | 121     |  
|                                                                                |  |               |         |   |                  |   |         |  
|Total debt                                                                      |  |               | 625,176 |   |                  |   | 631,076 |  
|Less current portion                                                            |  |               | (1,471  | ) |                  |   | (8,814  | )
|                                                                                |  |               |         |   |                  |   |         |  
|Long-term debt-less current portion                                             |  | $             | 623,705 |   |                  | $ | 622,262 |  
|                                                                                |  |               |         |   |                  |   |         |  

Interest expense on total debt was $10.8 million for the three months ended March 31, 2010 and $12.0
million for the three months ended March 31, 2009.

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 interest rate swaps
designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three
months ended March 31, 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.



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##### Table of Contents

CRC HEALTH CORPORATION

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



As of March 31, 2010, the Company had two outstanding interest rate derivatives
with a combined $225.0 million notional amounts that were designated as cash flow hedges of interest rate risk. One of the derivatives (the 2006 Swap) with a maturity date of March 31, 2011, converts $25.0
million of its floating-rate debt to fixed-rate debt at 4.99%. For the second derivative (the 2008 Swap) with a maturity date of June 30, 2011, the Company receives an interest rate equal to 3-month LIBOR and in exchange pays a
fixed rate of 3.875% on the $200.0 million notional amount.

Amounts reported in accumulated other comprehensive income (loss)
related to derivatives will be reclassified to interest expense as interest payments are made on the Companys variable-rate debt. During the next twelve months, the Company estimates that an additional $7.7 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 March 31, 2010 and December 31, 2009 (in thousands):



|                                                    |                       |                           |               |   |                  |  |   |      
|--------------------------------------------------- | --------------------- | ------------------------- | ------------- | - | ---------------- |  | - | -----
|                                                    |                       | Liability Derivatives    
|                                                    | Balance SheetLocation |                           | Fair Value   
|                                                    |                       |                           | March 31,2010 |   | December 31,2009
|Derivatives designated as hedging instruments       |                       |                           |               |   |                  |  |   |      
|Interest Rate Swaps                                 |                       | Other current liabilities |               | $ | 8,275            |  | $ | 8,659
|                                                    |                       |                           |               |   |                  |  |   |      
|Total derivatives designated as hedging instruments |                       |                           |               | $ | 8,275            |  | $ | 8,659
|                                                    |                       |                           |               |   |                  |  |   |      

The table below presents the before-tax effect of
the Companys derivative financial instruments for the three months ending March 31, 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) |       
|                                |  | Q110                                                                  |        |                                                                                         | Q109 |                                                                                    |     |  | Q110                                                                                                                    |  |                                                                                                                         | Q109  |   |  |   |        | Q110 |  |                  | Q109 |  
|Interest Rate Swaps             |  | $                                                                      | (1,797 | )                                                                                       |       | $                                                                                  | 270 |  | Interest expense                                                                                                         |  | $                                                                                                                       | (2,063 | ) |  | $ | (1,510 | )     |  | Interest expense |       | $ | (1 | ) |  | $ | (228 | )

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.



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CRC HEALTH CORPORATION

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



As of March 31, 2010, the liability due to counterparties to the derivative
agreements is $8.9 million, which includes accrued interest but excludes any adjustment for nonperformance risk (credit valuation adjustments). As of March 31, 2010, the Company has not posted any collateral related to these
agreements. If the Company had breached any of these provisions at March 31, 2010, it may be required to settle its obligations under the agreements at their termination value of $8.9 million. At March 31, 2010, the Company was
in compliance with all agreements related to its debt and derivatives.

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 March 31, 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.



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CRC HEALTH CORPORATION

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



Fair Value of Financial Instruments

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

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



|                          |                |                |            |                   |                |         |            |   |         |  |   |        
|------------------------- | -------------- | -------------- | ---------- | ----------------- | -------------- | ------- | ---------- | - | ------- |  | - | -------
|                          |                | March 31, 2010 |            | December 31, 2009
|                          | (in thousands)
|                          | CarryingAmount |                | Fair Value |                   | CarryingAmount |         | Fair Value
|Assets                    |                |                |            |                   |                |         |            |   |         |  |   |        
|Loan program notes        |                | $              | 4,962      |                   | $              | 5,030   |            | $ | 3,821   |  | $ | 3,872  
|Liabilities               |                |                |            |                   |                |         |            |   |         |  |   |        
|Senior subordinated notes |                | $              | 175,756    |                   | $              | 163,186 |            | $ | 175,690 |  | $ | 156,570
|Term loan                 |                | $              | 398,305    |                   | $              | 356,162 |            | $ | 405,649 |  | $ | 358,568

Loan program notes
are measured at fair value using discounting methods based on loan loss risk indices derived from industry-wide consumer credit scores. 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 and the forward yield curve derived from market data.

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 months ended March 31, 2010 and 2009 was as follows (in thousands):



|                                                                                                 |  |                                 |       |                                 |   |        |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | ----- | ------------------------------- | - | ------ | -
|                                                                                                 |  | Three MonthsEnded March 31,2010 |       | Three MonthsEnded March 31,2009 |  
|Net income (loss)                                                                                |  | $                               | 861   |                                 | $ | (1,313 | )
|Other comprehensive income (loss):                                                               |  |                                 |       |                                 |   |        |  
|Net change in unrealized gain on cash flow hedges (net of tax of $106 in 2010, and $716 in 2009) |  |                                 | 160   |                                 |   | 1,065  |  
|                                                                                                 |  |                                 |       |                                 |   |        |  
|Comprehensive income (loss)                                                                      |  | $                               | 1,021 |                                 | $ | (248   | )
|                                                                                                 |  |                                 |       |                                 |   |        |  
|Comprehensive income (loss) attributable to noncontrolling interest                              |  | $                               |      |                                 | $ | (128   | )
|                                                                                                 |  |                                 |       |                                 |   |        |  
|Comprehensive income (loss) attributable to CRC Health Corporation                               |  | $                               | 1,021 |                                 | $ | (120   | )
|                                                                                                 |  |                                 |       |                                 |   |        |  

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.



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CRC HEALTH CORPORATION

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



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

Loan Program 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 our programs. During the three months ended March 31, 2010, we were 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.

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 March 31, 2010, the Company had Board of Director approval for a loan pool of up to $20.0 million. At March 31, 2010, the Company had
purchased approximately $5.9 million in Loan Program notes with a weighted average interest rate of 7.1% and a maximum remaining amortization period of 19.9 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 ended March 31, 2010 and 2009, the Company recognized stock-based compensation expense of $1.4
million and $1.4 million, respectively. Stock-based compensation expense is recorded within salaries and benefits on the condensed consolidated statements of operations. The total income tax benefit recognized in the condensed consolidated
statement of operations for stock-based compensation expense was $0.6 million and $0.5 million for the three months ended March 31, 2010 and 2009, respectively.

During the three months ended March 31, 2010, the Group granted 51,574 units, which represent 464,166 share
options to purchase Class A common stock of the Group and 51,574 share options to purchase Class L common stock of the Group. At March 31, 2010 and 2009, the Company had 3,738,382 and 4,337,165 unvested option shares with
per-share, weighted average grant date fair values of $3.63 and $5.30, respectively. Additionally, 282,308 option shares with a per-share weighted average grant date fair value of $3.43 vested during the three months ended March 31, 2010.

Activity under the Groups Plans for the three months ended March 31, 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                                    |  | 515,742       |   |  |                                        | 9.00 |                                     | 24.01 |                                                     | 9.85
|Exercised                                  |  | (1,075        | ) |  |                                        |      |                                     |       |                                                     |    
|Forfeited/cancelled/expired                |  | (117,053      | ) |  |                                        | 9.47 |                                     | 7.26  |                                                     |     
|                                           |  |               |   |  |                                        |      |                                     |       |                                                     |     
|Outstanding-March 31, 2010                 |  | 7,286,390     |   |  | $                                      | 7.92 |                                     |       |                                                     | 6.47
|                                           |  |               |   |  |                                        |      |                                     |       |                                                     |     
|Exercisable-March 31, 2010                 |  | 3,547,997     |   |  | $                                      | 6.44 |                                     |       |                                                     | 6.03
|                                           |  |               |   |  |                                        |      |                                     |       |                                                     |     
|Exercisable and expected to be exercisable |  | 6,922,071     |   |  | $                                      | 7.92 |                                     |       |                                                     | 6.47
|                                           |  |               |   |  |                                        |      |                                     |       |                                                     |     

14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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



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##### Table of Contents

CRC HEALTH CORPORATION

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



Condensed Consolidating Balance Sheet as of March 31, 2010

(In thousands) (Unaudited)



|                                                               |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|-------------------------------------------------------------- |  | --------------------- | --------- | -------------------- | - | ------------------------ |  | ------------ | ------ |  | ------------ | ---------- | - |  | - | ---------
|                                                               |  | CRC HealthCorporation |           | SubsidiaryGuarantors |   | SubsidiaryNon-Guarantors |  | Eliminations |        |  | Consolidated
|ASSETS                                                         |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|CURRENT ASSETS:                                                |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|Cash and cash equivalents                                      |  | $                     |          |                      | $ | 1,925                    |  | $            | 244    |  | $            |           |   |  | $ | 2,169    
|Restricted cash                                                |  |                       | 1,144     |                      |   |                         |  |              |       |  |              |           |   |  |   | 1,144    
|Accounts receivable-net of allowance                           |  |                       | 1         |                      |   | 32,173                   |  |              | 266    |  |              |           |   |  |   | 32,440   
|Prepaid expenses                                               |  |                       | 4,067     |                      |   | 3,302                    |  |              | 160    |  |              |           |   |  |   | 7,529    
|Other current assets                                           |  |                       | 281       |                      |   | 979                      |  |              | 4      |  |              |           |   |  |   | 1,264    
|Deferred income taxes                                          |  |                       | 6,346     |                      |   |                         |  |              |       |  |              |           |   |  |   | 6,346    
|Current assets of discontinued operations, facility exits      |  |                       |          |                      |   | 1,568                    |  |              |       |  |              |           |   |  |   | 1,568    
|                                                               |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|Total current assets                                           |  |                       | 11,839    |                      |   | 39,947                   |  |              | 674    |  |              |           |   |  |   | 52,460   
|PROPERTY AND EQUIPMENT-Net                                     |  |                       | 7,961     |                      |   | 114,814                  |  |              | 1,506  |  |              |           |   |  |   | 124,281  
|GOODWILL                                                       |  |                       |          |                      |   | 561,795                  |  |              | 12,232 |  |              |           |   |  |   | 574,027  
|INTANGIBLE ASSETS-Net                                          |  |                       |          |                      |   | 333,685                  |  |              |       |  |              |           |   |  |   | 333,685  
|OTHER ASSETS-Net                                               |  |                       | 18,765    |                      |   | 936                      |  |              | 15     |  |              |           |   |  |   | 19,716   
|INVESTMENT IN SUBSIDIARIES                                     |  |                       | 1,019,569 |                      |   |                         |  |              |       |  |              | (1,019,569 | ) |  |   |         
|                                                               |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|TOTAL ASSETS                                                   |  | $                     | 1,058,134 |                      | $ | 1,051,177                |  | $            | 14,427 |  | $            | (1,019,569 | ) |  | $ | 1,104,169
|                                                               |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|LIABILITIES AND EQUITY                                         |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|CURRENT LIABILITIES:                                           |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|Accounts payable                                               |  | $                     | 3,238     |                      | $ | 1,371                    |  | $            | 61     |  | $            |           |   |  | $ | 4,670    
|Accrued liabilities                                            |  |                       | 13,604    |                      |   | 14,283                   |  |              | 610    |  |              |           |   |  |   | 28,497   
|Income tax payable                                             |  |                       | 749       |                      |   |                         |  |              |       |  |              |           |   |  |   | 749      
|Current portion of long-term debt                              |  |                       |          |                      |   | 1,471                    |  |              |       |  |              |           |   |  |   | 1,471    
|Other current liabilities                                      |  |                       | 8,670     |                      |   | 15,541                   |  |              | 1,117  |  |              |           |   |  |   | 25,328   
|Current liabilities of discontinued operations, facility exits |  |                       |          |                      |   | 1,412                    |  |              |       |  |              |           |   |  |   | 1,412    
|                                                               |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|Total current liabilities                                      |  |                       | 26,261    |                      |   | 34,078                   |  |              | 1,788  |  |              |           |   |  |   | 62,127   
|LONG-TERM DEBT-Less current portion                            |  |                       | 623,061   |                      |   | 644                      |  |              |       |  |              |           |   |  |   | 623,705  
|OTHER LONG-TERM LIABILITIES                                    |  |                       | 950       |                      |   | 7,628                    |  |              | 277    |  |              |           |   |  |   | 8,855    
|LIABILITIES OF DISCONTINUED OPERATIONS, FACILITY EXITS         |  |                       |          |                      |   | 1,620                    |  |              |       |  |              |           |   |  |   | 1,620    
|DEFERRED INCOME TAXES                                          |  |                       | 116,871   |                      |   |                         |  |              |       |  |              |           |   |  |   | 116,871  
|                                                               |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|Total liabilities                                              |  |                       | 767,143   |                      |   | 43,970                   |  |              | 2,065  |  |              |           |   |  |   | 813,178  
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY                    |  |                       | 290,991   |                      |   | 1,007,207                |  |              | 12,362 |  |              | (1,019,569 | ) |  |   | 290,991  
|NONCONTROLLING INTEREST                                        |  |                       |          |                      |   |                         |  |              |       |  |              |           |   |  |   |          
|                                                               |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|Total equity                                                   |  |                       | 290,991   |                      |   | 1,007,207                |  |              | 12,362 |  |              | (1,019,569 | ) |  |   | 290,991  
|                                                               |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|TOTAL LIABILITIES AND EQUITY                                   |  | $                     | 1,058,134 |                      | $ | 1,051,177                |  | $            | 14,427 |  | $            | (1,019,569 | ) |  | $ | 1,104,169
|                                                               |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          



16



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##### Table of Contents

CRC HEALTH CORPORATION

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



Condensed Consolidating Balance Sheet as of December 31, 2009

(In thousands) (Unaudited)



|                                                           |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          
|---------------------------------------------------------- |  | --------------------- | --------- | -------------------- | - | ------------------------ |  | ------------ | ------ |  | ------------ | ---------- | - |  | - | ---------
|                                                           |  | 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
|                                                           |  |                       |           |                      |   |                          |  |              |        |  |              |            |   |  |   |          



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CRC HEALTH CORPORATION

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



Condensed Consolidating Statements of Operations

For the Three Months Ended March 31, 2010

(In thousands) (Unaudited)



|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                      |  | $                     | 50      |   |                      | $ | 102,219 |                          |  | $ | 1,749        |   |  | $            |        |   |  | $ | 104,018 |  
|Management fee revenue                                          |  |                       | 19,106  |   |                      |   |        |                          |  |   |             |   |  |              | (19,106 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                               |  |                       | 19,156  |   |                      |   | 102,219 |                          |  |   | 1,749        |   |  |              | (19,106 | ) |  |   | 104,018 |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                           |  |                       | 5,302   |   |                      |   | 47,087  |                          |  |   | 1,247        |   |  |              |        |   |  |   | 53,636  |  
|Supplies, facilities and other operating costs                  |  |                       | 2,147   |   |                      |   | 26,604  |                          |  |   | 1,390        |   |  |              |        |   |  |   | 30,141  |  
|Provision for doubtful accounts                                 |  |                       |        |   |                      |   | 1,751   |                          |  |   | 93           |   |  |              |        |   |  |   | 1,844   |  
|Depreciation and amortization                                   |  |                       | 928     |   |                      |   | 4,509   |                          |  |   | 121          |   |  |              |        |   |  |   | 5,558   |  
|Management fee expense                                          |  |                       |        |   |                      |   | 18,598  |                          |  |   | 508          |   |  |              | (19,106 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                        |  |                       | 8,377   |   |                      |   | 98,549  |                          |  |   | 3,359        |   |  |              | (19,106 | ) |  |   | 91,179  |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                         |  |                       | 10,779  |   |                      |   | 3,670   |                          |  |   | (1,610       | ) |  |              |        |   |  |   | 12,839  |  
|INTEREST EXPENSE                                                |  |                       | (10,704 | ) |                      |   | 169     |                          |  |   | (270         | ) |  |              |        |   |  |   | (10,805 | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES    |  |                       | 75      |   |                      |   | 3,839   |                          |  |   | (1,880       | ) |  |              |        |   |  |   | 2,034   |  
|INCOME TAX (BENEFIT) EXPENSE                                    |  |                       | 32      |   |                      |   | 1,641   |                          |  |   | (804         | ) |  |              |        |   |  |   | 869     |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS, NET OF TAX            |  |                       | 43      |   |                      |   | 2,198   |                          |  |   | (1,076       | ) |  |              |        |   |  |   | 1,165   |  
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($162) |  |                       |        |   |                      |   | (304    | )                        |  |   |             |   |  |              |        |   |  |   | (304    | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                               |  |                       | 43      |   |                      |   | 1,894   |                          |  |   | (1,076       | ) |  |              |        |   |  |   | 861     |  
|LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST    |  |                       |        |   |                      |   |        |                          |  |   |             |   |  |              |        |   |  |   |        |  
|EQUITY IN INCOME OF SUBSIDIARIES, NET OF TAX                    |  |                       | 818     |   |                      |   |        |                          |  |   |             |   |  |              | (818    | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS) ATTRIBUTABLE TO CRC HEALTH CORPORATION        |  | $                     | 861     |   |                      | $ | 1,894   |                          |  | $ | (1,076       | ) |  | $            | (818    | ) |  | $ | 861     |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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CRC HEALTH CORPORATION

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



Condensed Consolidating Statements of Operations

For the Three Months Ended March 31, 2009

(In thousands) (Unaudited)



|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                    |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                        |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                          |  | $                     | 64      |   |                      | $ | 100,512 |                          |  | $ | 2,266        |   |  | $            |        |   |  | $ | 102,842 |  
|Management fee revenue                                              |  |                       | 20,063  |   |                      |   |        |                          |  |   |             |   |  |              | (20,063 | ) |  |   |        |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                                   |  |                       | 20,127  |   |                      |   | 100,512 |                          |  |   | 2,266        |   |  |              | (20,063 | ) |  |   | 102,842 |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                                 |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                               |  |                       | 5,176   |   |                      |   | 49,154  |                          |  |   | 1,339        |   |  |              |        |   |  |   | 55,669  |  
|Supplies, facilities and other operating costs                      |  |                       | 1,903   |   |                      |   | 26,864  |                          |  |   | 1,783        |   |  |              |        |   |  |   | 30,550  |  
|Provision for doubtful accounts                                     |  |                       |        |   |                      |   | 1,458   |                          |  |   | 25           |   |  |              |        |   |  |   | 1,483   |  
|Depreciation and amortization                                       |  |                       | 891     |   |                      |   | 4,660   |                          |  |   | 124          |   |  |              |        |   |  |   | 5,675   |  
|Management fee expense                                              |  |                       |        |   |                      |   | 19,581  |                          |  |   | 482          |   |  |              | (20,063 | ) |  |   |        |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                            |  |                       | 7,970   |   |                      |   | 101,717 |                          |  |   | 3,753        |   |  |              | (20,063 | ) |  |   | 93,377  |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                             |  |                       | 12,157  |   |                      |   | (1,205  | )                        |  |   | (1,487       | ) |  |              |        |   |  |   | 9,465   |  
|INTEREST EXPENSE                                                    |  |                       | (11,821 | ) |                      |   | 207     |                          |  |   | (338         | ) |  |              |        |   |  |   | (11,952 | )
|OTHER EXPENSE                                                       |  |                       | (82     | ) |                      |   |        |                          |  |   |             |   |  |              |        |   |  |   | (82     | )
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES        |  |                       | 254     |   |                      |   | (998    | )                        |  |   | (1,825       | ) |  |              |        |   |  |   | (2,569  | )
|INCOME TAX (BENEFIT) EXPENSE                                        |  |                       | 224     |   |                      |   | (882    | )                        |  |   | (1,614       | ) |  |              |        |   |  |   | (2,272  | )
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS, NET OF TAX                |  |                       | 30      |   |                      |   | (116    | )                        |  |   | (211         | ) |  |              |        |   |  |   | (297    | )
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($571)     |  |                       |        |   |                      |   | (1,016  | )                        |  |   |             |   |  |              |        |   |  |   | (1,016  | )
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                                   |  |                       | 30      |   |                      |   | (1,132  | )                        |  |   | (211         | ) |  |              |        |   |  |   | (1,313  | )
|LESS: NET INCOME (LOSS) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST |  |                       |        |   |                      |   |        |                          |  |   | (128         | ) |  |              |        |   |  |   | (128    | )
|EQUITY IN INCOME OF SUBSIDIARIES, NET OF TAX                        |  |                       | (1,215  | ) |                      |   |        |                          |  |   |             |   |  |              | 1,215   |   |  |   |        |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS) ATTRIBUTABLE TO CRC HEALTH CORPORATION            |  | $                     | (1,185  | ) |                      | $ | (1,132  | )                        |  | $ | (83          | ) |  | $            | 1,215   |   |  | $ | (1,185  | )
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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CRC HEALTH CORPORATION

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



Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2010

(In thousands) (Unaudited)



|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|--------------------------------------------------- |  | --------------------- | ------ | - | -------------------- | - | ------ | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------ | -
|                                                    |  | CRC HealthCorporation |        |   | SubsidiaryGuarantors |   |        | SubsidiaryNon-Guarantors |  |   | Eliminations |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net cash (used in) provided by operating activities |  | $                     | (2,402 | ) |                      | $ | 8,441  |                          |  | $ | 187          |   |              | $ |  |  | $ | 6,226  |  
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Additions of property and equipment                 |  |                       | (1,001 | ) |                      |   | (1,843 | )                        |  |   | (31          | ) |              |   |  |  |   | (2,875 | )
|Proceeds from sale of property and equipment        |  |                       |       |   |                      |   | 14     |                          |  |   |             |   |              |   |  |  |   | 14     |  
|Acquisition of business, net of cash acquired       |  |                       | (30    | ) |                      |   |       |                          |  |   |             |   |              |   |  |  |   | (30    | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net cash used in investing activities               |  |                       | (1,031 | ) |                      |   | (1,829 | )                        |  |   | (31          | ) |              |   |  |  |   | (2,891 | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Intercompany transfers                              |  |                       | 9,581  |   |                      |   | (9,432 | )                        |  |   | (149         | ) |              |   |  |  |   |       |  
|Capital contributed from Parent                     |  |                       | 8      |   |                      |   |       |                          |  |   |             |   |              |   |  |  |   | 8      |  
|Borrowings under revolving line of credit           |  |                       | 5,000  |   |                      |   |       |                          |  |   |             |   |              |   |  |  |   | 5,000  |  
|Repayments under revolving line of credit           |  |                       | (2,500 | ) |                      |   |       |                          |  |   |             |   |              |   |  |  |   | (2,500 | )
|Repayments of term loan and seller notes            |  |                       | (8,656 | ) |                      |   |       |                          |  |   |             |   |              |   |  |  |   | (8,656 | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net cash provided by (used in) financing activities |  |                       | 3,433  |   |                      |   | (9,432 | )                        |  |   | (149         | ) |              |   |  |  |   | (6,148 | )
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS    |  |                       |       |   |                      |   | (2,820 | )                        |  |   | 7            |   |              |   |  |  |   | (2,813 | )
|CASH AND CASH EQUIVALENTS Beginning of period       |  |                       |       |   |                      |   | 4,745  |                          |  |   | 237          |   |              |   |  |  |   | 4,982  |  
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|CASH AND CASH EQUIVALENTS End of period             |  | $                     |       |   |                      | $ | 1,925  |                          |  | $ | 244          |   |              | $ |  |  | $ | 2,169  |  
|                                                    |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  



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CRC HEALTH CORPORATION

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



Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2009

(In thousands) (Unaudited)



|                                                    |  |                       |        |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|--------------------------------------------------- |  | --------------------- | ------ | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                    |  | CRC HealthCorporation |        |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |                       |        |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash (used in) provided by operating activities |  | $                     | (5,757 | ) |                      | $ | 8,296   |                          |  | $ | 152          |   |              | $ |  |  | $ | 2,691   |  
|                                                    |  |                       |        |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                       |        |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Additions of property and equipment                 |  |                       | (712   | ) |                      |   | (1,584  | )                        |  |   | (18          | ) |              |   |  |  |   | (2,314  | )
|Proceeds from sale of property and equipment        |  |                       | 110    |   |                      |   | 12      |                          |  |   | 4            |   |              |   |  |  |   | 126     |  
|Acquisition adjustments                             |  |                       | (59    | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (59     | )
|                                                    |  |                       |        |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities               |  |                       | (661   | ) |                      |   | (1,572  | )                        |  |   | (14          | ) |              |   |   |  |   | (2,247  | )
|                                                    |  |                       |        |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                       |        |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Intercompany transfers                              |  |                       | 8,868  |   |                      |   | (8,833  | )                        |  |   | (35          | ) |              |   |  |  |   |        |  
|Capital distributed to Parent                       |  |                       | (12    | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (12     | )
|Capitalized financing costs                         |  |                       | (40    | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (40     | )
|Noncontrolling interest buyout                      |  |                       | (89    | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (89     | )
|Repayments of capital lease obligations             |  |                       |       |   |                      |   | (4      | )                        |  |   |             |   |              |   |  |  |   | (4      | )
|Borrowings under revolving line of credit           |  |                       | 7,000  |   |                      |   |        |                          |  |   |             |   |              |   |  |  |   | 7,000   |  
|Repayments under revolving line of credit           |  |                       | (7,000 | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (7,000  | )
|Repayments of term loan and seller notes            |  |                       | (2,309 | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (2,309  | )
|                                                    |  |                       |        |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities |  |                       | 6,418  |   |                      |   | (8,837  | )                        |  |   | (35          | ) |              |   |  |  |   | (2,454  | )
|                                                    |  |                       |        |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS    |  |                       |       |   |                      |   | (2,113) |                          |  |   | 103          |   |              |   |  |  |   | (2,010) |  
|CASH AND CASH EQUIVALENTS-Beginning of period       |  |                       |       |   |                      |   | 2,251   |                          |  |   | 289          |   |              |   |  |  |   | 2,540   |  
|                                                    |  |                       |        |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|CASH AND CASH EQUIVALENTS-End of period             |  | $                     |       |   |                      | $ | 138     |                          |  | $ | 392          |   |              | $ |  |  | $ | 530     |  
|                                                    |  |                       |        |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  



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CRC HEALTH CORPORATION

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



15. RESTRUCTURING

During the three months ended March 31, 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.

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



|                                                 |  |                    |      |   |                                             |   |       |       |  |   |       |  
|------------------------------------------------ |  | ------------------ | ---- | - | ------------------------------------------- | - | ----- | ----- |  | - | ----- | -
|                                                 |  | WorkforceReduction |      |   | Consolidation and Exit 
ofExcess Facilities |   |       | Total | 
|                                                 |  | (in thousands)     |     
|Restructuring reserve at December 31, 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    |   |                                             |   | 11    |       |  |   | 14    |  
|Healthy living division                          |  |                    | (19  | ) |                                             |   | 72    |       |  |   | 53    |  
|Corporate                                        |  |                    |     |   |                                             |   |      |       |  |   |      |  
|                                                 |  |                    |      |   |                                             |   |       |       |  |   |       |  
|Total expenses                                   |  |                    | (16  | ) |                                             |   | 83    |       |  |   | 67    |  
|Cash payments                                    |  |                    |      |   |                                             |   |       |       |  |   |       |  
|Recovery division                                |  |                    | (3   | ) |                                             |   | (163  | )     |  |   | (166  | )
|Healthy living division                          |  |                    | (290 | ) |                                             |   | (209  | )     |  |   | (499  | )
|Corporate                                        |  |                    |     |   |                                             |   |      |       |  |   |      |  
|                                                 |  |                    |      |   |                                             |   |       |       |  |   |       |  
|Total cash payments                              |  |                    | (293 | ) |                                             |   | (372  | )     |  |   | (665  | )
|Restructuring reserve at March 31, 2010          |  |                    |      |   |                                             |   |       |       |  |   |       |  
|Recovery division                                |  |                    | 19   |   |                                             |   | 1,955 |       |  |   | 1,974 |  
|Healthy living division                          |  |                    | 283  |   |                                             |   | 738   |       |  |   | 1,021 |  
|Corporate                                        |  |                    |     |   |                                             |   |      |       |  |   |      |  
|                                                 |  |                    |      |   |                                             |   |       |       |  |   |       |  
|Total restructuring reserve at March 31, 2010    |  | $                  | 302  |   |                                             | $ | 2,693 |       |  | $ | 2,995 |  
|                                                 |  |                    |      |   |                                             |   |       |       |  |   |       |  

16. DISCONTINUED OPERATIONS

At March 31, 2010, the Company had closed or sold 17 facilities under discontinued operations compared to 11 facilities at
March 31, 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 EndedMarch
31, 2010 |      |   | Three Months EndedMarch 
31, 2009 |  
|Net revenue                       |  | $                                | 62   |   |                                   |   | 4,105  |  
|Operating expenses                |  |                                  | 526  |   |                                   |   | 4,276  |  
|Asset impairment                  |  |                                  |     |   |                                   |   | 1,417  |  
|Interest expense                  |  |                                  | 2    |   |                                   |   | 1      |  
|(Gain) loss on disposals          |  |                                  |     |   |                                   |   | (2     | )
|Loss before income taxes          |  |                                  | (466 | ) |                                   |   | (1,587 | )
|Tax benefit                       |  |                                  | (162 | ) |                                   |   | (571   | )
|                                  |  |                                  |      |   |                                   |   |        |  
|Loss from discontinued operations |  | $                                | (304 | ) |                                   | $ | (1,016 | )
|                                  |  |                                  |      |   |                                   |   |        |  



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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 March 31, 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 March 31, 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 18 weight management facilities in 9 states,
inclusive of one facility each in the United Kingdom and in Canada 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.



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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 EndedMarch 31, 2010 |           |   | Three Months EndedMarch 31, 2009 |  
|Net revenue:                                                                    |  |                                  |           |   |                                  |   |           |  
|Recovery division                                                               |  | $                                | 79,048    |   |                                  | $ | 75,063    |  
|Healthy living division                                                         |  |                                  | 24,920    |   |                                  |   | 27,715    |  
|Corporate                                                                       |  |                                  | 50        |   |                                  |   | 64        |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated net revenue                                                  |  | $                                | 104,018   |   |                                  | $ | 102,842   |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Operating expenses:                                                             |  |                                  |           |   |                                  |   |           |  
|Recovery division                                                               |  | $                                | 53,740    |   |                                  | $ | 54,397    |  
|Healthy living division                                                         |  |                                  | 29,061    |   |                                  |   | 30,953    |  
|Corporate                                                                       |  |                                  | 8,378     |   |                                  |   | 8,027     |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated operating expenses                                           |  | $                                | 91,179    |   |                                  | $ | 93,377    |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Operating income (loss):                                                        |  |                                  |           |   |                                  |   |           |  
|Recovery division                                                               |  | $                                | 25,308    |   |                                  | $ | 20,666    |  
|Healthy living division                                                         |  |                                  | (4,141    | ) |                                  |   | (3,238    | )
|Corporate                                                                       |  |                                  | (8,328    | ) |                                  |   | (7,963    | )
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated operating income                                             |  |                                  | 12,839    |   |                                  |   | 9,465     |  
|Interest expense                                                                |  |                                  | (10,805   | ) |                                  |   | (11,952   | )
|Other expense                                                                   |  |                                  |          |   |                                  |   | (82       | )
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated income (loss) from continuing operations before income taxes |  | $                                | 2,034     |   |                                  | $ | (2,569    | )
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Capital expenditures:                                                           |  |                                  |           |   |                                  |   |           |  
|Recovery division                                                               |  | $                                | 1,457     |   |                                  | $ | 1,256     |  
|Healthy living division                                                         |  |                                  | 417       |   |                                  |   | 346       |  
|Corporate                                                                       |  |                                  | 1,001     |   |                                  |   | 712       |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated capital expenditures                                         |  | $                                | 2,875     |   |                                  | $ | 2,314     |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|                                                                                |  |                                 
|                                                                                |  | March 31,2010                    |           |   | December 31,2009                 |  
|Total assets(1):                                                                |  |                                  |           |   |                                  |   |           |  
|Recovery division                                                               |  | $                                | 897,228   |   |                                  | $ | 897,239   |  
|Healthy living division                                                         |  |                                  | 169,494   |   |                                  |   | 171,580   |  
|Corporate                                                                       |  |                                  | 37,447    |   |                                  |   | 39,515    |  
|                                                                                |  |                                  |           |   |                                  |   |           |  
|Total consolidated assets                                                       |  | $                                | 1,104,169 |   |                                  | $ | 1,108,334 |  
|                                                                                |  |                                  |           |   |                                  |   |           |  



|(1) | 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 March 31, 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 March 31, 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
division also operates 18 weight management facilities in 9 states, inclusive of one facility each in the United Kingdom and in Canada 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).

Basis of Presentation

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.



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EXECUTIVE SUMMARY

We generate revenue by providing substance abuse treatment services and youth treatment services. We also generate revenue by providing
treatment services for other specialized behavioral disorders such as eating disorders. Revenue is recognized when rehabilitation and treatment services are provided to a client. Client service revenue is reported at the estimated net realizable
amounts from clients, third-party payors and others for services rendered. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided for in the
period the related services are rendered and adjusted in future periods as final settlements are determined. Revenue for educational services provided to youth consists primarily of tuition, enrollment fees, alumni services and ancillary charges.
Tuition revenue and ancillary charges are recognized based on contracted monthly/daily rates as services are rendered. The enrollment fees for service contracts that are charged upfront are deferred and recognized over the average student length of
stay, approximately nine months. Alumni fee revenue represents non-refundable upfront fees for post graduation services and these fees are deferred and recognized systematically over the contracted life. During the three months ended March 31,
2010 and 2009, we generated 78.9% and 81.3% of our net revenue from non-governmental sources, including 61.5% and 65.1% from self payors, respectively, and 17.4% and 15.3% from commercial payors, respectively. Substantially all of our government
program net revenue was received from multiple counties and states under Medicaid and similar programs.

During the three
months ended March 31, 2010, our consolidated same-facility net revenue increased by $1.3 million or 1.2% respectively, when compared to the comparable periods in 2009. On a consolidated basis, same-facility operating expenses
decreased $0.5 million or 0.7%, respectively, during the three months ended March 31, 2010. 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 months ended March 31, 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, 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



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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 consolidated financial statements.

RESULTS OF OPERATIONS

The following table presents our results of operations by segment for the three months ended March 31, 2010 and 2009 (dollars in
thousands, except for percentages).



|                                                                                                                                             |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |        |   
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | - | ---- | - | ------- | --------------------- |  | - | --------------------- | - |  | ------ | --
|                                                                                                                                             |  | Three Months
Ended March 31,Total Facility |        
|Statement of Income Data:                                                                                                                    |  | 2010                                       |         |   | 2009 |   |         | 2010 vs. 2009$ Change |  |   | 2010 vs. 2009% Change |  
|Net revenue:                                                                                                                                 |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |        |   
|Recovery division                                                                                                                            |  | $                                          | 79,048  |   |      | $ | 75,063  |                       |  | $ | 3,985                 |   |  | 5.3    | % 
|Healthy living division                                                                                                                      |  |                                            | 24,920  |   |      |   | 27,715  |                       |  |   | (2,795                | ) |  | (10.1  | )%
|Corporate                                                                                                                                    |  |                                            | 50      |   |      |   | 64      |                       |  |   | (14                   | ) |  | (21.9  | )%
|                                                                                                                                             |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |        |   
|Total net revenue                                                                                                                            |  |                                            | 104,018 |   |      |   | 102,842 |                       |  |   | 1,176                 |   |  | 1.1    | % 
|Operating expenses:                                                                                                                          |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |        |   
|Recovery division                                                                                                                            |  |                                            | 53,740  |   |      |   | 54,397  |                       |  |   | (657                  | ) |  | (1.2   | )%
|Healthy
living division                                                                                                                      |  |                                            | 29,061  |   |      |   | 30,953  |                       |  |   | (1,892                | ) |  | (6.1   | )%
|Corporate                                                                                                                                    |  |                                            | 8,378   |   |      |   | 8,027   |                       |  |   | 351                   |   |  | 4.4    | % 
|                                                                                                                                             |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |        |   
|Total operating expenses                                                                                                                     |  |                                            | 91,179  |   |      |   | 93,377  |                       |  |   | (2,198                | ) |  | (2.4   | )%
|Operating income (loss):                                                                                                                     |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |        |   
|Recovery division                                                                                                                            |  |                                            | 25,308  |   |      |   | 20,666  |                       |  |   | 4,642                 |   |  | 22.5   | % 
|Healthy living division                                                                                                                      |  |                                            | (4,141  | ) |      |   | (3,238  | )                     |  |   | (903                  | ) |  | 27.9   | % 
|Corporate                                                                                                                                    |  |                                            | (8,328  | ) |      |   | (7,963  | )                     |  |   | (365                  | ) |  | 4.6    | % 
|                                                                                                                                             |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |        |   
|Operating income                                                                                                                             |  |                                            | 12,839  |   |      |   | 9,465   |                       |  |   | 3,374                 |   |  | 35.6   | % 
|Interest expense                                                                                                                             |  |                                            | (10,805 | ) |      |   | (11,952 | )                     |  |   | (1,147                | ) |  | (9.6   | )%
|Other expense                                                                                                                                |  |                                            |        |   |      |   | (82     | )                     |  |   | 82                    |   |  | (100.0 | )%
|                                                                                                                                             |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |        |   
|Income (loss) from continuing operations before income taxes                                                                                 |  |                                            | 2,034   |   |      |   | (2,569  | )                     |  |   | 4,603                 |   |  | (179.2 | )%
|Income tax expense (benefit)                                                                                                                 |  |                                            | 869     |   |      |   | (2,272  | )                     |  |   | 3,141                 |   |  | (138.2 | )%
|                                                                                                                                             |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |        |   
|Income (loss) from continuing operations, net of tax                                                                                         |  |                                            | 1,165   |   |      |   | (297    | )                     |  |   | 1,462                 |   |  | (492.3 | )%
|Loss from discontinued operations, (net of tax benefit of ($162) and ($571) in the three months ended March 31, 2010 and
2009, respectively) |  |                                            | (304    | ) |      |   | (1,016  | )                     |  |   | 712                   |   |  | (70.1  | )%
|                                                                                                                                             |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |        |   
|Net income (loss)                                                                                                                            |  |                                            | 861     |   |      |   | (1,313  | )                     |  |   | 2,174                 |   |  | (165.5 | )%
|Less: Net loss attributable to the noncontrolling interest                                                                                   |  |                                            |        |   |      |   | (128    | )                     |  |   | 128                   |   |  | (100.0 | )%
|                                                                                                                                             |  |                                            |         |   |      |   |         |                       |  |   |                       |   |  |        |   
|Net income (loss) attributable to CRC Health Corporation                                                                                     |  | $                                          | 861     |   |      | $ | (1,185  | )                     |  | $ | 2,046                 |   |  | (172.7 | )%



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Three Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009

Consolidated net revenue increased $1.2 million, or 1.1%, to $104.0 million for the three months ended
March 31, 2010 from $102.8 million for the three months ended March 31, 2009. Of the total net revenue increase, the recovery division contributed an increase of $4.0 million or 5.3% which was partially offset by a decrease within the
healthy living division of $2.8 million. The $2.8 million, or 10.1%, decrease within the healthy living division was driven by decreases of $2.2 million and $0.9 million within residential facilities and outdoor programs, respectively, offset by an
increase of $0.3 million in weight management.

Consolidated operating expenses decreased $2.2 million, or 2.4%, to $91.2
million for the three months ended March 31, 2010 from $93.4 million in the same period of 2009. The $2.2 million decrease in operating expenses was primarily driven by operating expense decreases across the divisions the largest element of
which was a combined decrease of $1.4 million in restructuring charges. The net operating expense decrease across the divisions represents cost savings from a smaller organizational footprint resulting from restructuring activities under the FY08
plan.

Our consolidated operating margin was 12.3% in the three months ended March 31, 2010 compared to 9.2% in the
comparable period of 2009. The increase in operating margin resulted from increased revenue performance from the recovery division together with a lower cost structure resulting from restructuring activities under the FY08 plan. The increased
revenue performance within the recovery division was partially offset by declines in healthy living division revenues due to current weakness in the consumer credit markets and the resulting inability of some families to access financing for
treatment services. Recovery division margins for the three months ended March 31, 2010 were 32.0% compared to 27.5% in the prior year period. Healthy living division operating margin decreased to (16.6)% for the three months ended
March 31, 2010 compared to operating margin of (11.7)% in the comparable period of 2009.

For the three months ended
March 31, 2010, consolidated net income from continuing operations increased by $1.5 million over the prior year period resulting in income from continuing operations, net of tax, of $1.2 million compared to a loss from continuing operations,
net of tax, of $0.3 million in the same period of 2009. The increase in income from continuing operations in 2010 compared to 2009 is primarily driven by increase in operating income of $3.4 million and a combined decrease in net interest expense
and other expense of $1.2 million offset by an increase in tax expense of $3.1 million.

The following table presents our
same-facility results of operations for our recovery division and our healthy living division for the three months ended March 31, 2010 and 2009 (dollars in thousands, except for percentages).



|                          |  |                                           |         |   |      |   |                       |  |   |                       |   |  |        |   
|------------------------- |  | ----------------------------------------- | ------- | - | ---- | - | --------------------- |  | - | --------------------- | - |  | ------ | --
|                          |  | Three Months
Ended March 31,Same Facility |        
|Statement of Income Data: |  | 2010                                      |         |   | 2009 |   | 2010 vs. 2009$ Change |  |   | 2010 vs. 2009% Change |  
|Net revenue:              |  |                                           |         |   |      |   |                       |  |   |                       |   |  |        |   
|Recovery division         |  | $                                         | 79,048  |   |      | $ | 75,063                |  | $ | 3,985                 |   |  | 5.3    | % 
|Healthy living division   |  |                                           | 24,914  |   |      |   | 27,645                |  |   | (2,731                | ) |  | (9.9   | )%
|                          |  |                                           |         |   |      |   |                       |  |   |                       |   |  |        |   
|Total net revenue         |  |                                           | 103,962 |   |      |   | 102,708               |  |   | 1,254                 |   |  | 1.2    | % 
|Operating expenses:       |  |                                           |         |   |      |   |                       |  |   |                       |   |  |        |   
|Recovery division         |  |                                           | 48,496  |   |      |   | 48,373                |  |   | 123                   |   |  | 0.3    | % 
|Healthy
living division   |  |                                           | 25,732  |   |      |   | 26,371                |  |   | (639                  | ) |  | (2.4   | )%
|                          |  |                                           |         |   |      |   |                       |  |   |                       |   |  |        |   
|Total operating expenses  |  |                                           | 74,228  |   |      |   | 74,744                |  |   | (516                  | ) |  | (0.7   | )%
|Operating income (loss):  |  |                                           |         |   |      |   |                       |  |   |                       |   |  |        |   
|Recovery division         |  |                                           | 30,552  |   |      |   | 26,690                |  |   | 3,862                 |   |  | 14.5   | % 
|Healthy living division   |  |                                           | (818    | ) |      |   | 1,274                 |  |   | (2,092                | ) |  | (164.2 | )%
|                          |  |                                           |         |   |      |   |                       |  |   |                       |   |  |        |   
|Operating income          |  |                                           | 29,734  |   |      |   | 27,964                |  |   | 1,770                 |   |  | 6.3    | % 

On a
same-facility basis, recovery division net revenue increased $4.0 million or 5.3% to $79.0 million from $75.0 million in the same prior year period. The same-facility increases were due to increases of $1.2 million within CTCs and $2.8 million
within residential facilities. Healthy living division same-facility revenue decreased $2.7 million or 9.9% to $24.9 million from $27.6 million in the prior year quarter. The $2.7 million same-facility revenue decrease within healthy living division
was driven by decreases of $2.2 million and $0.9 million within residential facilities and outdoor programs, respectively, offset by an increase of $0.4 million in weight management.

On a same-facility basis, recovery division operating expenses increased $0.1 million driven by an increase of $0.3 million in
residential facilities offset by a decrease of $0.2 million in CTCs. Healthy living division same-facility operating expenses decreased $0.6 million due to a combined decrease of $0.8 million in residential facilities and outdoor programs offset by
an increase of $0.2 million in weight management.



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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 $9.7 million at March 31, 2010, compared to
negative working capital of $15.3 million at December 31, 2009. The improvement in working capital from March 31, 2010 compared to December 31, 2009 is primarily attributed to a decrease of $7.3 million in the current portion of long
term debt due to a prepayment of the term loan required under the credit agreement.

Sources and Uses of Cash



|                                          |                |                             |        |      |  |   |        |  
|----------------------------------------- | -------------- | --------------------------- | ------ | ---- |  | - | ------ | -
|                                          |                | Three Months EndedMarch 31, |       
|                                          | 2010           |                             |        | 2009 | 
|                                          | (In thousands) |                            
|Net cash provided by operating activities |                | $                           | 6,226  |      |  | $ | 2,691  |  
|Net cash used in investing activities     |                |                             | (2,891 | )    |  |   | (2,247 | )
|Net cash used in financing activities     |                |                             | (6,148 | )    |  |   | (2,454 | )
|                                          |                |                             |        |      |  |   |        |  
|Net decrease in cash                      |                | $                           | (2,813 | )    |  | $ | (2,010 | )
|                                          |                |                             |        |      |  |   |        |  

Cash provided by operating activities was $6.2 million for the three months ended March 31, 2010
compared to cash provided by operating activities of $2.7 million during the same period in 2009. The increase in cash flows from operating activities was primarily the result of cash provided by an increase in net income as well as an increase
in working capital of $5.6 million slightly offset by an increase of $1.1 million in loan program note purchases commitments.

Cash used in investing activities was $2.9 million for the three months ended March 31, 2010 compared to $2.2 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 three months ended March 31, 2010.

Cash used in financing activities was $6.1 million for the three months ended March 31, 2010 compared to cash used in financing
activities of $2.5 million for the same period in 2009. The increase in cash used in financing activities is primarily due to a $7.3 million prepayment of the term loan required under the credit agreement.

Financing and Liquidity

We fund our ongoing operations through cash generated by operations, funds available under the revolving portion of our senior secured
credit facility and existing cash and cash equivalents. As of March 31, 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
March 31, 2010, the revolving credit facility had $42.0 million available for borrowing, $49.0 million outstanding and classified on our balance sheet as long term debt, and $9.0 million of letters of credit issued and outstanding. At
March 31, 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.

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

Under the terms of our borrowing arrangements, we are required to
comply with various covenants, including the maintenance of certain financial ratios. As of March 31, 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.



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|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 March 31, 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.



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Inherent Limitations on Effectiveness of Controls

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

PART II. OTHER INFORMATION



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

As
of March 31, 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 33 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: May 14, 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.
|- | -------------------



33