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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: June 30, 2010

or



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

For the transition period from  to

Commission file number 333-135172





CRC HEALTH CORPORATION

(Exact name of registrant as specified in its charter)







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

(877)
272-8668

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes  x    No   ̈

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

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



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

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

The total number of shares of the registrants common stock, par value of $0.001 per share, outstanding as of August 16,
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 June 30, 2010 and December 31, 2009                           |  | 2 
|              |  |                       |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009 |  | 3 
|              |  |                       |  | Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2010 and 2009    |  | 4 
|              |  |                       |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009           |  | 6 
|              |  |                       |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 7 
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 28
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosure About Market Risk                                                 |  | 37
|              |  | Item 4.               |  | Controls and Procedures                                                                                   |  | 37
|Part II.      |  | Other Information     |  |                                                                                                          
|              |  | Item 1A.              |  | Risk Factors                                                                                              |  | 38
|              |  | Item 6.               |  | Exhibits                                                                                                  |  | 38
|Signature     |  | 39                   
|Exhibit Index |  | 40                   

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)

JUNE 30, 2010 AND DECEMBER 31, 2009

(In thousands, except share amounts)



|                                                                                                                                   |  |              |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                   |  | June 30,2010 |           |   | December 31,2009 |  
|ASSETS                                                                                                                             |  |              |           |   |                  |   |           |  
|CURRENT ASSETS:                                                                                                                    |  |              |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                          |  | $            | 10,660    |   |                  | $ | 4,982     |  
|Restricted cash                                                                                                                    |  |              | 1,046     |   |                  |   | 420       |  
|Accounts receivable, net of allowance for doubtful accounts of $5,698 in 2010 and $5,327 in 2009                                   |  |              | 32,695    |   |                  |   | 31,558    |  
|Prepaid expenses                                                                                                                   |  |              | 6,661     |   |                  |   | 7,489     |  
|Other current assets                                                                                                               |  |              | 1,392     |   |                  |   | 1,306     |  
|Income taxes receivable                                                                                                            |  |              |          |   |                  |   | 676       |  
|Deferred income taxes                                                                                                              |  |              | 7,606     |   |                  |   | 6,346     |  
|Current assets of discontinued operations                                                                                          |  |              | 1,758     |   |                  |   | 1,720     |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|Total current assets                                                                                                               |  |              | 61,818    |   |                  |   | 54,497    |  
|PROPERTY AND EQUIPMENT-Net                                                                                                         |  |              | 122,646   |   |                  |   | 125,215   |  
|GOODWILL                                                                                                                           |  |              | 530,356   |   |                  |   | 573,594   |  
|INTANGIBLE ASSETS-Net                                                                                                              |  |              | 318,000   |   |                  |   | 335,409   |  
|OTHER ASSETS-Net                                                                                                                   |  |              | 19,811    |   |                  |   | 19,619    |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                                       |  | $            | 1,052,631 |   |                  | $ | 1,108,334 |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|LIABILITIES AND EQUITY                                                                                                             |  |              |           |   |                  |   |           |  
|CURRENT LIABILITIES:                                                                                                               |  |              |           |   |                  |   |           |  
|Accounts payable                                                                                                                   |  | $            | 6,214     |   |                  | $ | 3,011     |  
|Accrued liabilities                                                                                                                |  |              | 36,848    |   |                  |   | 29,851    |  
|Income taxes payable                                                                                                               |  |              | 4,785     |   |                  |   |          |  
|Current portion of long-term debt                                                                                                  |  |              | 1,715     |   |                  |   | 8,814     |  
|Other current liabilities                                                                                                          |  |              | 29,279    |   |                  |   | 25,992    |  
|Current liabilities of discontinued operations                                                                                     |  |              | 1,765     |   |                  |   | 2,114     |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|Total current liabilities                                                                                                          |  |              | 80,606    |   |                  |   | 69,782    |  
|LONG-TERM DEBT-Less current portion                                                                                                |  |              | 606,518   |   |                  |   | 622,262   |  
|OTHER LONG-TERM LIABILITIES                                                                                                        |  |              | 8,196     |   |                  |   | 8,735     |  
|LIABILITIES OF DISCONTINUED OPERATIONS                                                                                             |  |              | 1,298     |   |                  |   | 1,679     |  
|DEFERRED INCOME TAXES                                                                                                              |  |              | 107,283   |   |                  |   | 117,334   |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|Total liabilities                                                                                                                  |  |              | 803,901   |   |                  |   | 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 June 30, 2010 and
December 31, 2009 |  |              |          |   |                  |   |          |  
|Additional paid-in capital                                                                                                         |  |              | 457,464   |   |                  |   | 454,880   |  
|Accumulated deficit                                                                                                                |  |              | (204,956  | ) |                  |   | (161,363  | )
|Accumulated other comprehensive loss                                                                                               |  |              | (3,778    | ) |                  |   | (4,975    | )
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|Total CRC Health Corporation stockholders equity                                                                                  |  |              | 248,730   |   |                  |   | 288,542   |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|NONCONTROLLING INTEREST                                                                                                            |  |              |          |   |                  |   |          |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|Total equity                                                                                                                       |  |              | 248,730   |   |                  |   | 288,542   |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  
|TOTAL LIABILITIES AND EQUITY                                                                                                       |  | $            | 1,052,631 |   |                  | $ | 1,108,334 |  
|                                                                                                                                   |  |              |           |   |                  |   |           |  

See notes to unaudited condensed consolidated financial statements.



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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(In thousands)



|                                                                                                                                                                                                                 |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ------------------------------ | - | ------- | ---------------------------- |  | - | ---------------------------- | - |  | - | ------- | -
|                                                                                                                                                                                                                 |  | Three MonthsEnded June 30,2010 |         |   | Three MonthsEnded June 30,2009 |   |         | Six MonthsEnded June 30,2010 |  |   | Six MonthsEnded June 30,2009 |  
|NET REVENUE:                                                                                                                                                                                                     |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|Net client service revenue                                                                                                                                                                                       |  | $                              | 114,716 |   |                                | $ | 108,929 |                              |  | $ | 218,735                      |   |  | $ | 211,771 |  
|                                                                                                                                                                                                                 |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|OPERATING EXPENSES:                                                                                                                                                                                              |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|Salaries and benefits                                                                                                                                                                                            |  |                                | 54,101  |   |                                |   | 54,070  |                              |  |   | 107,738                      |   |  |   | 109,741 |  
|Supplies, facilities and other operating costs                                                                                                                                                                   |  |                                | 32,949  |   |                                |   | 30,562  |                              |  |   | 63,090                       |   |  |   | 61,112  |  
|Provision for doubtful accounts                                                                                                                                                                                  |  |                                | 1,924   |   |                                |   | 1,530   |                              |  |   | 3,767                        |   |  |   | 3,012   |  
|Depreciation and amortization                                                                                                                                                                                    |  |                                | 5,319   |   |                                |   | 5,576   |                              |  |   | 10,877                       |   |  |   | 11,251  |  
|Asset impairment                                                                                                                                                                                                 |  |                                | 18,009  |   |                                |   |        |                              |  |   | 18,009                       |   |  |   |        |  
|Goodwill impairment                                                                                                                                                                                              |  |                                | 43,671  |   |                                |   |        |                              |  |   | 43,671                       |   |  |   |        |  
|                                                                                                                                                                                                                 |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|Total operating expenses                                                                                                                                                                                         |  |                                | 155,973 |   |                                |   | 91,738  |                              |  |   | 247,152                      |   |  |   | 185,116 |  
|                                                                                                                                                                                                                 |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|OPERATING (LOSS) INCOME                                                                                                                                                                                          |  |                                | (41,257 | ) |                                |   | 17,191  |                              |  |   | (28,417                      | ) |  |   | 26,655  |  
|INTEREST EXPENSE                                                                                                                                                                                                 |  |                                | (10,711 | ) |                                |   | (11,866 | )                            |  |   | (21,517                      | ) |  |   | (23,818 | )
|OTHER EXPENSE                                                                                                                                                                                                    |  |                                | (88     | ) |                                |   |        |                              |  |   | (88                          | ) |  |   | (82     | )
|                                                                                                                                                                                                                 |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                                                                                                                     |  |                                | (52,056 | ) |                                |   | 5,325   |                              |  |   | (50,022                      | ) |  |   | 2,755   |  
|INCOME TAX (BENEFIT) EXPENSE                                                                                                                                                                                     |  |                                | (7,805  | ) |                                |   | 2,520   |                              |  |   | (6,936                       | ) |  |   | 247     |  
|                                                                                                                                                                                                                 |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS, NET OF TAX                                                                                                                                                             |  |                                | (44,251 | ) |                                |   | 2,805   |                              |  |   | (43,086                      | ) |  |   | 2,508   |  
|LOSS FROM DISCONTINUED OPERATIONS (net of tax benefit of ($151) and ($267) in the three months ended June 30, 2010 and
2009, and ($314) and ($838) in the six months ended June 30, 2010 and 2009, respectively) |  |                                | (203    | ) |                                |   | (474    | )                            |  |   | (507                         | ) |  |   | (1,491  | )
|                                                                                                                                                                                                                 |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|NET (LOSS) INCOME                                                                                                                                                                                                |  |                                | (44,454 | ) |                                |   | 2,331   |                              |  |   | (43,593                      | ) |  |   | 1,017   |  
|LESS: NET INCOME (LOSS) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST                                                                                                                                              |  |                                |        |   |                                |   | 9       |                              |  |   |                             |   |  |   | (119    | )
|                                                                                                                                                                                                                 |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|NET (LOSS) INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION                                                                                                                                                         |  | $                              | (44,454 | ) |                                | $ | 2,322   |                              |  | $ | (43,593                      | ) |  | $ | 1,136   |  
|                                                                                                                                                                                                                 |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|AMOUNTS ATTRIBUTABLE TO CRC HEALTH CORPORATION:                                                                                                                                                                  |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS, NET OF TAX                                                                                                                                                             |  | $                              | (44,251 | ) |                                | $ | 2,796   |                              |  | $ | (43,086                      | ) |  | $ | 2,623   |  
|DISCONTINUED OPERATIONS, NET OF TAX                                                                                                                                                                              |  |                                | (203    | ) |                                |   | (474    | )                            |  |   | (507                         | ) |  |   | (1,487  | )
|                                                                                                                                                                                                                 |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  
|NET (LOSS) INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION                                                                                                                                                         |  | $                              | (44,454 | ) |                                | $ | 2,322   |                              |  | $ | (43,593                      | ) |  | $ | 1,136   |  
|                                                                                                                                                                                                                 |  |                                |         |   |                                |   |         |                              |  |   |                              |   |  |   |         |  

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 SIX MONTHS ENDED JUNE 30, 2010

(In thousands, except share amounts)



|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|------------------------------------------------------- |  | ----- | ------- | - | -------------------------- | - | ------- | ------------------------------------------- |  | - | --------------------------------- | - |  | ------------ | ------ | ------------------------ |  | ---------------------- |  | - | - |  | - | ------- |  | - | -
|                                                        |  |       |         |   |                            |   |         | CRC Health Corporation Stockholders Equity |  |  
|                                                        |  | Total |         |   | ComprehensiveIncome (Loss) |   |         | AccumulatedDeficit                          |  |   | AccumulatedOtherComprehensiveLoss |   |  | Common Stock |        | AdditionalPaid-inCapital |  | NoncontrollingInterest
|                                                        |  |       |         |   | Shares                     |   | Amount  |                                             | 
|BALANCEDecember 31, 2009                               |  | $     | 288,542 |   |                            |   |         |                                             |  | $ | (161,363                          | ) |  | $            | (4,975 | )                        |  | 1,000                  |  | $ |  |  | $ | 454,880 |  | $ | 
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|Comprehensive loss:                                     |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|Net loss for the six months ended June 30, 2010         |  |       | (43,593 | ) |                            | $ | (43,593 | )                                           |  |   | (43,593                           | ) |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   | 
|Other comprehensive income, net of tax:                 |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|Unrealized gain on cash flow hedges, net of tax of $800 |  |       | 1,197   |   |                            |   | 1,197   |                                             |  |   |                                   |   |  |              | 1,197  |                          |  |                        |  |   |   |  |   |         |  |   |  
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|Other comprehensive income                              |  |       | 1,197   |   |                            |   | 1,197   |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|Comprehensive loss                                      |  |       | (42,396 | ) |                            | $ | (42,396 | )                                           |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|Capital contributed by Parent, net                      |  |       | 2,584   |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   | 2,584   |  |   |  
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  
|BALANCEJune 30, 2010                                   |  | $     | 248,730 |   |                            |   |         |                                             |  | $ | (204,956                          | ) |  | $            | (3,778 | )                        |  | 1,000                  |  | $ |  |  | $ | 457,464 |  | $ | 
|                                                        |  |       |         |   |                            |   |         |                                             |  |   |                                   |   |  |              |        |                          |  |                        |  |   |   |  |   |         |  |   |  

See notes to unaudited condensed consolidated financial
statements.



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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2009

(In thousands, except share amounts)



|                                                          |  |       |         |   |                            |   |                                             |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  
|--------------------------------------------------------- |  | ----- | ------- | - | -------------------------- | - | ------------------------------------------- |  | - | --------------------------------- | - |  | ------------ | ------ | ------------------------ |  | ----- | ---------------------- | - | - |  | - | ------- | - |  | - | ---- | -
|                                                          |  |       |         |   |                            |   | CRC Health Corporation Stockholders Equity |  |   |                                   |  
|                                                          |  | Total |         |   | ComprehensiveIncome (Loss) |   | AccumulatedDeficit                          |  |   | AccumulatedOtherComprehensiveLoss |   |  | Common Stock |        | AdditionalPaid-inCapital |  |       | NoncontrollingInterest |  
|                                                          |  |       |         |   | Shares                     |   | Amount                                      |  |  
|BALANCEDecember 31, 2008                                 |  | $     | 303,443 |   |                            |   |                                             |  | $ | (134,764                          | ) |  | $            | (6,289 | )                        |  | 1,000 |                        | $ |  |  | $ | 444,275 |   |  | $ | 221  |  
|                                                          |  |       |         |   |                            |   |                                             |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  
|Noncontrolling interest buyout                            |  |       | (89     | ) |                            |   |                                             |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   | (84     | ) |  |   | (5   | )
|Comprehensive income:                                     |  |       |         |   |                            |   |                                             |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  
|Net income for the six months ended June 30, 2009         |  |       | 1,017   |   |                            | $ | 1,017                                       |  |   | 1,136                             |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   | (119 | )
|Other comprehensive income, net of tax:                   |  |       |         |   |                            |   |                                             |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  
|Unrealized gain on cash flow hedges, net of tax of $1,014 |  |       | 1,540   |   |                            |   | 1,540                                       |  |   |                                   |   |  |              | 1,540  |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  
|                                                          |  |       |         |   |                            |   |                                             |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  
|Other comprehensive income                                |  |       | 1,540   |   |                            |   | 1,540                                       |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  
|                                                          |  |       |         |   |                            |   |                                             |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  
|Comprehensive income                                      |  |       | 2,557   |   |                            | $ | 2,557                                       |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  
|                                                          |  |       |         |   |                            |   |                                             |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  
|Capital contributed by Parent, net                        |  |       | 3,542   |   |                            |   |                                             |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   | 3,542   |   |  |   |      |  
|                                                          |  |       |         |   |                            |   |                                             |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  
|BALANCEJune 30, 2009                                     |  | $     | 309,453 |   |                            |   |                                             |  | $ | (133,628                          | ) |  | $            | (4,749 | )                        |  | 1,000 |                        | $ |  |  | $ | 447,733 |   |  | $ | 97   |  
|                                                          |  |       |         |   |                            |   |                                             |  |   |                                   |   |  |              |        |                          |  |       |                        |   |   |  |   |         |   |  |   |      |  

See notes to unaudited condensed consolidated financial statements.



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##### Table of Contents

CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(In thousands)



|                                                                                         |  |                               |         |   |                               |   |         |  
|---------------------------------------------------------------------------------------- |  | ----------------------------- | ------- | - | ----------------------------- | - | ------- | -
|                                                                                         |  | Six Months EndedJune 30, 2010 |         |   | Six Months EndedJune 30, 2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                               |         |   |                               |   |         |  
|Net (loss) income                                                                        |  | $                             | (43,593 | ) |                               | $ | 1,017   |  
|Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |                               |         |   |                               |   |         |  
|Depreciation and amortization                                                            |  |                               | 10,884  |   |                               |   | 11,429  |  
|Amortization of debt discount and capitalized financing costs                            |  |                               | 2,113   |   |                               |   | 2,175   |  
|Gain on interest rate swap agreement                                                     |  |                               | (214    | ) |                               |   |        |  
|Asset impairment                                                                         |  |                               | 18,009  |   |                               |   | 1,417   |  
|Goodwill impairment                                                                      |  |                               | 43,671  |   |                               |   |        |  
|Write-off of acquisition costs                                                           |  |                               |        |   |                               |   | 62      |  
|Loss (gain) on disposition of property and equipment                                     |  |                               | (15     | ) |                               |   | 440     |  
|Gain on sale of discontinued operations                                                  |  |                               |        |   |                               |   | (24     | )
|Provision for doubtful accounts                                                          |  |                               | 3,819   |   |                               |   | 3,084   |  
|Stock-based compensation                                                                 |  |                               | 2,855   |   |                               |   | 2,788   |  
|Deferred income taxes                                                                    |  |                               | (10,975 | ) |                               |   | (1,111  | )
|Changes in assets and liabilities:                                                       |  |                               |         |   |                               |   |         |  
|Restricted cash                                                                          |  |                               | (626    | ) |                               |   | (1,521  | )
|Accounts receivable                                                                      |  |                               | (4,828  | ) |                               |   | (4,738  | )
|Prepaid expenses                                                                         |  |                               | 879     |   |                               |   | 1,150   |  
|Other current assets                                                                     |  |                               | (16     | ) |                               |   | 403     |  
|Income taxes receivable and payable                                                      |  |                               | 3,220   |   |                               |   | (236    | )
|Accounts payable                                                                         |  |                               | 3,210   |   |                               |   | (799    | )
|Accrued liabilities                                                                      |  |                               | 6,875   |   |                               |   | 9,551   |  
|Other current liabilities                                                                |  |                               | 5,284   |   |                               |   | 3,788   |  
|Other assets                                                                             |  |                               | (2,172  | ) |                               |   | (300    | )
|Other long-term liabilities                                                              |  |                               | (620    | ) |                               |   | (99     | )
|                                                                                         |  |                               |         |   |                               |   |         |  
|Net cash provided by operating activities                                                |  |                               | 37,760  |   |                               |   | 28,476  |  
|                                                                                         |  |                               |         |   |                               |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                               |         |   |                               |   |         |  
|Additions of property and equipment                                                      |  |                               | (8,898  | ) |                               |   | (4,655  | )
|Proceeds from sale of property and equipment                                             |  |                               | 41      |   |                               |   | 126     |  
|Proceeds from sale of discontinued operations                                            |  |                               |        |   |                               |   | 475     |  
|Acquisition of business, net of cash acquired                                            |  |                               | (58     | ) |                               |   |        |  
|Acquisition adjustments                                                                  |  |                               |        |   |                               |   | (59     | )
|                                                                                         |  |                               |         |   |                               |   |         |  
|Net cash used in investing activities                                                    |  |                               | (8,915  | ) |                               |   | (4,113  | )
|                                                                                         |  |                               |         |   |                               |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                               |         |   |                               |   |         |  
|Capital contributed from (distributed to) Parent                                         |  |                               | 8       |   |                               |   | (156    | )
|Capitalized financing costs                                                              |  |                               |        |   |                               |   | (92     | )
|Noncontrolling interest buyout                                                           |  |                               |        |   |                               |   | (89     | )
|Repayment of capital lease obligations                                                   |  |                               |        |   |                               |   | (7      | )
|Borrowings under revolving line of credit                                                |  |                               | 10,500  |   |                               |   | 9,000   |  
|Repayments under revolving line of credit                                                |  |                               | (25,000 | ) |                               |   | (16,000 | )
|Repayments of term loan and seller notes                                                 |  |                               | (8,675  | ) |                               |   | (4,042  | )
|                                                                                         |  |                               |         |   |                               |   |         |  
|Net cash used in financing activities                                                    |  |                               | (23,167 | ) |                               |   | (11,386 | )
|                                                                                         |  |                               |         |   |                               |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                |  |                               | 5,678   |   |                               |   | 12,977  |  
|CASH AND CASH EQUIVALENTS-Beginning of period                                            |  |                               | 4,982   |   |                               |   | 2,540   |  
|                                                                                         |  |                               |         |   |                               |   |         |  
|CASH AND CASH EQUIVALENTS-End of period                                                  |  | $                             | 10,660  |   |                               | $ | 15,517  |  
|                                                                                         |  |                               |         |   |                               |   |         |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:                                 |  |                               |         |   |                               |   |         |  
|Payable related to acquisition                                                           |  | $                             | 337     |   |                               | $ |        |  
|                                                                                         |  |                               |         |   |                               |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                        |  |                               |         |   |                               |   |         |  
|Cash paid for interest                                                                   |  | $                             | 19,654  |   |                               | $ | 21,997  |  
|                                                                                         |  |                               |         |   |                               |   |         |  
|Cash paid for income taxes, net of refunds                                               |  | $                             | 505     |   |                               | $ | 757     |  
|                                                                                         |  |                               |         |   |                               |   |         |  

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.

3. ACQUISITION

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



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CRC HEALTH CORPORATION

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



4. BALANCE SHEET COMPONENTS

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



|                                     |  |              |        |   |                  |   |        |  
|------------------------------------ |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                     |  | June 30,2010 |        |   | December 31,2009 |  
|Accounts receivable-gross            |  | $            | 38,393 |   |                  | $ | 36,885 |  
|Less allowance for doubtful accounts |  |              | (5,698 | ) |                  |   | (5,327 | )
|                                     |  |              |        |   |                  |   |        |  
|Accounts receivable-net              |  | $            | 32,695 |   |                  | $ | 31,558 |  
|                                     |  |              |        |   |                  |   |        |  
|Other assets-net:                    |  |              |        |   |                  |   |        |  
|Capitalized financing costs-net      |  | $            | 12,682 |   |                  | $ | 14,663 |  
|Deposits                             |  |              | 884    |   |                  |   | 925    |  
|Note receivable                      |  |              | 6,245  |   |                  |   | 4,031  |  
|                                     |  |              |        |   |                  |   |        |  
|Total other assets-net               |  | $            | 19,811 |   |                  | $ | 19,619 |  
|                                     |  |              |        |   |                  |   |        |  
|Accrued liabilities:                 |  |              |        |   |                  |   |        |  
|Accrued payroll and related expenses |  | $            | 17,471 |   |                  | $ | 8,698  |  
|Accrued vacation                     |  |              | 5,014  |   |                  |   | 4,615  |  
|Accrued interest                     |  |              | 8,132  |   |                  |   | 8,019  |  
|Accrued expenses                     |  |              | 6,231  |   |                  |   | 8,519  |  
|                                     |  |              |        |   |                  |   |        |  
|Total accrued liabilities            |  | $            | 36,848 |   |                  | $ | 29,851 |  
|                                     |  |              |        |   |                  |   |        |  
|Other current liabilities:           |  |              |        |   |                  |   |        |  
|Deferred revenue                     |  | $            | 12,944 |   |                  | $ | 9,650  |  
|Client deposits                      |  |              | 9,259  |   |                  |   | 4,130  |  
|Interest rate swap liability         |  |              | 6,447  |   |                  |   | 8,659  |  
|Other liabilities                    |  |              | 629    |   |                  |   | 3,553  |  
|                                     |  |              |        |   |                  |   |        |  
|Total other current liabilities      |  | $            | 29,279 |   |                  | $ | 25,992 |  
|                                     |  |              |        |   |                  |   |        |  

5. PROPERTY AND EQUIPMENT

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



|                              |  |              |         |   |                  |   |         |  
|----------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                              |  | June 30,2010 |         |   | December 31,2009 |  
|Land                          |  | $            | 21,373  |   |                  | $ | 21,373  |  
|Building and improvements     |  |              | 76,691  |   |                  |   | 74,551  |  
|Leasehold improvements        |  |              | 21,010  |   |                  |   | 23,181  |  
|Furniture and fixtures        |  |              | 12,775  |   |                  |   | 12,404  |  
|Computer equipment            |  |              | 11,656  |   |                  |   | 10,855  |  
|Computer software             |  |              | 13,488  |   |                  |   | 11,332  |  
|Motor vehicles                |  |              | 5,931   |   |                  |   | 5,911   |  
|Field equipment               |  |              | 2,803   |   |                  |   | 2,782   |  
|Construction in progress      |  |              | 7,822   |   |                  |   | 6,363   |  
|                              |  |              |         |   |                  |   |         |  
|                              |  |              | 173,549 |   |                  |   | 168,752 |  
|Less accumulated depreciation |  |              | (50,903 | ) |                  |   | (43,537 | )
|                              |  |              |         |   |                  |   |         |  
|Property and equipment-net    |  | $            | 122,646 |   |                  | $ | 125,215 |  
|                              |  |              |         |   |                  |   |         |  

Depreciation expense was $3.6 million and $3.7 million for the three months ended June 30, 2010 and
2009, respectively, and $7.4 million and $7.6 million for the six months ended June 30, 2010 and 2009, respectively.

Asset impairment

The Company tests its long-lived assets for impairment whenever events and changes in circumstances indicate that the carrying value of
certain of its assets may not be recoverable. If the undiscounted future cash flows from the assets tested are less than the



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CRC HEALTH CORPORATION

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



carrying value, a loss equal to the difference between the carrying value and the fair value of the asset is recorded. Fair value is determined using discounted cash flow methods. The
Companys analysis of its undiscounted cash flows requires judgment with respect to many factors, including future cash flows, success at executing its business strategy, and future revenue and expense growth rates. It is possible that the
Companys estimates of undiscounted cash flows may change in the future resulting in the need to reassess the carrying value of its long-lived assets for impairment.

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

6. GOODWILL AND INTANGIBLE ASSETS

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



|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|---------------------------------- |  | -------- | ------- | - | -------------- | - | -------- | ----- |  | - | -------- | -
|                                   |  | Recovery |         |   | Healthy Living |   |          | Total | 
|Balance as of January 1, 2010      |  |          |         |   |                |   |          |       |  |   |          |  
|Goodwill                           |  | $        | 502,168 |   |                | $ | 244,785  |       |  | $ | 746,953  |  
|Accumulated impairment losses      |  |          | (624    | ) |                |   | (172,735 | )     |  |   | (173,359 | )
|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|                                   |  |          | 501,544 |   |                |   | 72,050   |       |  |   | 573,594  |  
|Activity during the year:          |  |          |         |   |                |   |          |       |  |   |          |  
|Goodwill addition from acquisition |  |          |        |   |                |   | 433      |       |  |   | 433      |  
|Goodwill impairment                |  |          |        |   |                |   | (43,671  | )     |  |   | (43,671  | )
|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|Balance as of June 30, 2010        |  |          |         |   |                |   |          |       |  |   |          |  
|Goodwill                           |  |          | 502,168 |   |                |   | 245,218  |       |  |   | 747,386  |  
|Accumulated impairment losses      |  |          | (624    | ) |                |   | (216,406 | )     |  |   | (217,030 | )
|                                   |  |          |         |   |                |   |          |       |  |   |          |  
|                                   |  | $        | 501,544 |   |                | $ | 28,812   |       |  | $ | 530,356  |  
|                                   |  |          |         |   |                |   |          |       |  |   |          |  

Goodwill impairment

The Company tests goodwill for impairment annually, at the beginning of its fourth quarter or more frequently if evidence of
possible impairment arises. The Company performs a two-step impairment test on goodwill. In the first step, the Company compares the fair value of the reporting unit being tested to its carrying value. The Companys reporting units are
consistent with the operating segments identified in Note 17 to the consolidated financial statements. The Company determines the fair value of its reporting units using a combination of the income approach and the market approach. Under the
income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, the Company estimates fair value based on what investors have paid for similar interests
in comparable companies through the development of ratios of market prices to various earnings indications of comparable companies taking into consideration adjustments for growth prospects, debt levels and overall size. If the fair value of the
reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit
exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting units goodwill. If the carrying value of a reporting
units goodwill exceeds its implied fair value, then the Company records an impairment loss equal to the difference.

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



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



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CRC HEALTH CORPORATION

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



Intangible Assets

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



|                                                    |  |               |  |                     |        |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|--------------------------------------------------- |  | ------------- |  | ------------------- | ------ | ----------------------- | - | ------- | ----------------- |  | ---------- | ------- | ------------------- | -------- | ----------------------- | - | ------- | ----------------- | - | ------- | - |  | - | -------
|                                                    |  | June 30, 2010 |  | December 31, 2009  
|                                                    |  | UsefulLife    |  | GrossCarryingAmount |        | AccumulatedAmortization |   |         | NetCarryingAmount |  | UsefulLife |         | GrossCarryingAmount |          | AccumulatedAmortization |   |         | NetCarryingAmount
|Intangible assets subject to amortization:          |  |               |  |                     |        |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|Referral network                                    |  | 20 years      |  | $                   | 21,424 |                         | $ | (3,883  | )                 |  | $          | 17,541  |                     | 20 years |                         | $ | 29,695  |                   | $ | (4,632  | ) |  | $ | 25,063 
|Accreditations                                      |  | 20 years      |  |                     | 9,248  |                         |   | (1,676  | )                 |  |            | 7,572   |                     | 20 years |                         |   | 14,144  |                   |   | (2,219  | ) |  |   | 11,925 
|Curriculum                                          |  | 20 years      |  |                     | 5,668  |                         |   | (1,027  | )                 |  |            | 4,641   |                     | 20 years |                         |   | 7,425   |                   |   | (1,159  | ) |  |   | 6,266  
|Government including Medicaid contracts             |  | 15 years      |  |                     | 34,967 |                         |   | (10,296 | )                 |  |            | 24,671  |                     | 15 years |                         |   | 34,967  |                   |   | (9,131  | ) |  |   | 25,836 
|Managed care contracts                              |  | 10 years      |  |                     | 14,400 |                         |   | (6,360  | )                 |  |            | 8,040   |                     | 10 years |                         |   | 14,400  |                   |   | (5,640  | ) |  |   | 8,760  
|Managed care contracts                              |  | 5 years       |  |                     | 100    |                         |   | (55     | )                 |  |            | 45      |                     | 5 years  |                         |   | 100     |                   |   | (45     | ) |  |   | 55     
|Core developed technology                           |  | 5 years       |  |                     | 2,704  |                         |   | (2,393  | )                 |  |            | 311     |                     | 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     |  |               |  | $                   | 88,663 |                         | $ | (25,842 | )                 |  | $          | 62,821  |                     |          |                         | $ | 103,587 |                   | $ | (25,100 | ) |  | $ | 78,487 
|                                                    |  |               |  |                     |        |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|Intangible assets not subject to amortization:      |  |               |  |                     |        |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|Trademarks and trade names                          |  |               |  |                     |        |                         |   |         |                   |  |            | 173,078 |                     |          |                         |   |         |                   |   |         |   |  |   | 174,821
|Certificates of need                                |  |               |  |                     |        |                         |   |         |                   |  |            | 44,600  |                     |          |                         |   |         |                   |   |         |   |  |   | 44,600 
|Regulatory licenses                                 |  |               |  |                     |        |                         |   |         |                   |  |            | 37,501  |                     |          |                         |   |         |                   |   |         |   |  |   | 37,501 
|                                                    |  |               |  |                     |        |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|Total intangible assets not subject to amortization |  |               |  |                     |        |                         |   |         |                   |  |            | 255,179 |                     |          |                         |   |         |                   |   |         |   |  |   | 256,922
|                                                    |  |               |  |                     |        |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        
|Total intangible assets                             |  |               |  |                     |        |                         |   |         |                   |  | $          | 318,000 |                     |          |                         |   |         |                   |   |         |   |  | $ | 335,409
|                                                    |  |               |  |                     |        |                         |   |         |                   |  |            |         |                     |          |                         |   |         |                   |   |         |   |  |   |        

Intangible assets subject to amortization

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

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

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

Total amortization expense of intangible assets subject to
amortization was $1.7 million and $1.8 million for the three months ended June 30, 2010 and 2009, respectively, and $3.4 million and $3.7 million for the six months ended June 30, 2010 and 2009, respectively.



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##### Table of Contents

CRC HEALTH CORPORATION

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



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



|                            |  |   |       
|--------------------------- |  | - | ------
|Fiscal Year                 |  |  
|2010 (remaining six months) |  | $ | 3,075 
|2011                        |  |   | 5,649 
|2012                        |  |   | 5,603 
|2013                        |  |   | 5,588 
|2014                        |  |   | 5,588 
|Thereafter                  |  |   | 37,318
|                            |  |   |       
|Total                       |  | $ | 62,821
|                            |  |   |       

Intangible assets not subject to amortization

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

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

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 and six months ended June 30, 2010, the Companys tax benefit on continuing operations is $7.8 million and
$6.9 million respectively, representing an effective tax rate of 15.0% and 13.9% respectively. The overall effective tax rate on continuing operations differs from the U.S. federal statutory rate of 35% primarily because of state income taxes
and $11.8 million tax benefit related to three discrete items. The first discrete item is a $0.5 million tax benefit on the release of a tax reserve related to transaction costs associated with 2006 Aspen acquisition as a result of the conclusion of
an Internal Revenue Service tax audit for tax years of 2004 to 2006. The second discrete item is a $0.8 million tax benefit as a result of a tax return to tax provision true up related to 2009. The third discrete item is a $10.5 million tax benefit
related to the goodwill, other intangible asset and fixed assets impairments. Without the discrete items, the effective tax rate for continuing operation is 41.2% and 41.4% respectively.

For the three and six months ended June 30, 2009, the Companys tax expense on continuing operations was $2.5 million and $0.2
million, representing an effective tax rate of 47.3% and 9.0% respectively. The effective tax rate on continuing operations 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.

The Company files its income tax returns in various jurisdictions,
including United States federal and state filings, and United Kingdom and Canada filings. The Company 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 tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. While the Company believes its positions comply with applicable laws, it
periodically evaluates its exposure associated with its tax filing positions.

During the six months ended June 30, 2010,
the Company recognized a total of $61.7 million in impairments related to goodwill, intangible assets, and fixed assets. Of the $61.7 million in impairments related to goodwill, intangible assets and fixed assets, $27.8 million of
impairments generated approximately $10.5 million of income tax benefits in the form of reductions to deferred tax liabilities. All the impairment and the corresponding income tax effect are related to continuing operations.



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CRC HEALTH CORPORATION

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



8. LONG-TERM DEBT

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



|                                                                                |  |              |         |   |                  |   |         |  
|------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                |  | June 30,2010 |         |   | December 31,2009 |  
|Term loan                                                                       |  | $            | 398,305 |   |                  | $ | 405,649 |  
|Revolving line of credit                                                        |  |              | 32,000  |   |                  |   | 46,500  |  
|Senior subordinated notes, net of discount of $1,474 in 2010 and $1,606 in 2009 |  |              | 175,822 |   |                  |   | 175,690 |  
|Seller notes                                                                    |  |              | 2,002   |   |                  |   | 3,116   |  
|Note payable, leasehold improvement                                             |  |              | 104     |   |                  |   | 121     |  
|                                                                                |  |              |         |   |                  |   |         |  
|Total debt                                                                      |  |              | 608,233 |   |                  |   | 631,076 |  
|Less current portion                                                            |  |              | (1,715  | ) |                  |   | (8,814  | )
|                                                                                |  |              |         |   |                  |   |         |  
|Long-term debt-less current portion                                             |  | $            | 606,518 |   |                  | $ | 622,262 |  
|                                                                                |  |              |         |   |                  |   |         |  

Interest expense on total debt was $10.7 million and $11.9 million for the three months ended June 30,
2010 and 2009, respectively, and $21.5 million and $23.8 million for the six months ended June 30, 2010 and 2009, respectively.

9.
DERIVATIVES

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

The effective portion of changes in the fair value
of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the
three and six months ending June 30, 2010, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized
directly in earnings.

As of June 30, 2010, the Company had two outstanding interest rate derivatives with a combined
$220.0 million notional amounts that were designated as cash flow hedges of interest rate risk. The first derivative (the 2006 Swap) with a maturity date of March 31, 2011, converts $20.0 million of the Companys
floating-rate debt to fixed-rate debt at a rate of 4.99%. The second derivative (the 2008 Swap) with a maturity date of June 30, 2011, converts $200.0 million of the Companys floating-rate debt to fixed rate debt at a rate of
3.875%.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest
expense as interest payments are made on the Companys variable-rate debt. During the next twelve months, the Company estimates that an additional $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
June 30, 2010 and December 31, 2009 (in thousands):



|                                                    |                       |                           |              |   |                  |  |   |      
|--------------------------------------------------- | --------------------- | ------------------------- | ------------ | - | ---------------- |  | - | -----
|                                                    |                       | Liability Derivatives    
|                                                    | Balance SheetLocation |                           | Fair Value  
|                                                    |                       |                           | June 30,2010 |   | December 31,2009
|Derivatives designated as hedging instruments       |                       |                           |              |   |                  |  |   |      
|Interest Rate Swaps                                 |                       | Other current liabilities |              | $ | 6,447            |  | $ | 8,659
|                                                    |                       |                           |              |   |                  |  |   |      
|Total derivatives designated as hedging instruments |                       |                           |              | $ | 6,447            |  | $ | 8,659
|                                                    |                       |                           |              |   |                  |  |   |      



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##### Table of Contents

CRC HEALTH CORPORATION

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



The table below presents the before-tax effect of the Companys derivative
financial instruments for the three months ending June 30, 2010 and 2009 (in thousands):



|                                |  |                                                                        |      |   |                                                                                         |   |                                                                                    |   |  |                                                                                                                          |  |                                                                                                                         |        |   |  |   |        |       |  |                  |  |   |   |  |   |      |  
|------------------------------- |  | ---------------------------------------------------------------------- | ---- | - | --------------------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------------- | - |  | ------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------- | ------ | - |  | - | ------ | ----- |  | ---------------- |  | - | - |  | - | ---- | -
|Cash
Flow Hedging
Relationships |  | Amount ofGain or (Loss)Recognized inOCI
onDerivative(EffectivePortion) |      |   | Location of Gainor (Loss)Reclassified fromAccumulated OCIinto
Income(Effective Portion) |   | Amount ofGain or (Loss)ReclassifiedfromAccumulatedOCI
intoIncome(EffectivePortion) |   |  | Location of Gainor(Loss) Recognizedin Income onDerivative(IneffectivePortionand
AmountExcluded fromEffectivenessTesting) |  | Amount of Gainor (Loss)Recognized inIncome onDerivative(IneffectivePortion
andAmount Excludedfrom EffectivenessTesting) |       
|                                |  | Q210                                                                  |      |   | Q209                                                                                   |   |                                                                                    |   |  | Q210                                                                                                                    |  |                                                                                                                         | Q209  |   |  |   |        | Q210 |  | Q209            | 
|Interest Rate Swaps             |  | $                                                                      | (279 | ) |                                                                                         | $ | (856                                                                               | ) |  | Interest expense                                                                                                         |  | $                                                                                                                       | (2,011 | ) |  | $ | (1,630 | )     |  | Interest expense |  | $ |  |  | $ | (192 | )

The table below presents
the before-tax effect of the Companys derivative financial instruments for the six months ending June 30, 2010 and 2009 (in thousands):



|                                |  |                                                                        |        |   |                                                                                         |   |                                                                                    |   |  |                                                                                                                          |  |                                                                                                                         |        |   |  |   |        |       |  |                  |       |   |    |   |  |   |      |  
|------------------------------- |  | ---------------------------------------------------------------------- | ------ | - | --------------------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------------- | - |  | ------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------- | ------ | - |  | - | ------ | ----- |  | ---------------- | ----- | - | -- | - |  | - | ---- | -
|Cash
Flow Hedging
Relationships |  | Amount ofGain or (Loss)Recognized inOCI
onDerivative(EffectivePortion) |        |   | Location of Gainor (Loss)Reclassified fromAccumulated OCIinto
Income(Effective Portion) |   | Amount ofGain or (Loss)ReclassifiedfromAccumulatedOCI
intoIncome(EffectivePortion) |   |  | Location of Gainor(Loss) Recognizedin Income onDerivative(IneffectivePortionand
AmountExcluded fromEffectivenessTesting) |  | Amount of Gainor (Loss)Recognized inIncome onDerivative(IneffectivePortion
andAmount Excludedfrom EffectivenessTesting) |       
|                                |  | Q210                                                                  |        |   | Q209                                                                                   |   |                                                                                    |   |  | Q210                                                                                                                    |  |                                                                                                                         | Q209  |   |  |   |        | Q210 |  |                  | Q209 |  
|Interest Rate Swaps             |  | $                                                                      | (2,076 | ) |                                                                                         | $ | (586                                                                               | ) |  | Interest expense                                                                                                         |  | $                                                                                                                       | (4,074 | ) |  | $ | (3,140 | )     |  | Interest expense |       | $ | (1 | ) |  | $ | (420 | )

Credit-risk-related
contingent features

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

As of June 30, 2010, the liability due to counterparties to the derivative agreements is $6.9 million, which includes
accrued interest but excludes any adjustment for nonperformance risk (credit valuation adjustments). As of June 30, 2010, the Company has not posted any collateral related to these agreements. If the Company had breached
any of these provisions at June 30, 2010, it may be required to settle its obligations under the agreements at their termination value of $6.9 million. At June 30, 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.



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CRC HEALTH CORPORATION

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



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 June 30, 2010 and December 31, 2009. These instruments are allocated to Level 2 on the fair value hierarchy because the
critical inputs into these models, including the relevant yield curves and the known contractual terms of the instrument, are readily available. Refer to Note 9 for disclosure of fair value measurements and impact of unrealized gain or
loss on earnings.

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

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

The following table presents the non-financial assets of healthy living division that were measured and recorded at fair value on a
nonrecurring basis as of June 30, 2010 (in thousands):



|                          |  |                                |        |                                        |   |         |  |         |   |         |   |   |  |   |       
|------------------------- |  | ------------------------------ | ------ | -------------------------------------- | - | ------- |  | ------- | - | ------- | - | - |  | - | ------
|                          |  | Six Months Ended June 30, 2010 |        | Level Used to Determine New Cost Basis
|                          |  | ImpairmentCharge               |        | New CostBasis                          |   | Level 1 |  | Level 2 |   | Level 3
|Property and equipment    |  | $                              | 4,047  |                                        | $ | 1,699   |  | $       |  |         | $ |  |  | $ | 1,699 
|Trademarks and tradenames |  |                                | 1,744  |                                        |   | 7,046   |  |         |  |         |   |  |  |   | 7,046 
|Accreditation             |  |                                | 4,009  |                                        |   | 377     |  |         |  |         |   |  |  |   | 377   
|Referral network          |  |                                | 6,771  |                                        |   | 637     |  |         |  |         |   |  |  |   | 637   
|Curricula                 |  |                                | 1,438  |                                        |   | 299     |  |         |  |         |   |  |  |   | 299   
|Goodwill                  |  |                                | 43,671 |                                        |   | 28,812  |  |         |  |         |   |  |  |   | 28,812
|                          |  |                                |        |                                        |   |         |  |         |   |         |   |   |  |   |       
|Total                     |  | $                              | 61,680 |                                        | $ | 38,870  |  | $       |  |         | $ |  |  | $ | 38,870
|                          |  |                                |        |                                        |   |         |  |         |   |         |   |   |  |   |       

Fair Value of Financial Instruments

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

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



|                          |                |               |            |                   |                |         |            |   |         |  |   |        
|------------------------- | -------------- | ------------- | ---------- | ----------------- | -------------- | ------- | ---------- | - | ------- |  | - | -------
|                          |                | June 30, 2010 |            | December 31, 2009
|                          | CarryingAmount |               | Fair Value |                   | CarryingAmount |         | Fair Value
|Assets                    |                |               |            |                   |                |         |            |   |         |  |   |        
|Loan program notes        |                | $             | 6,114      |                   | $              | 6,145   |            | $ | 3,821   |  | $ | 3,872  
|Liabilities               |                |               |            |                   |                |         |            |   |         |  |   |        
|Senior subordinated notes |                | $             | 175,822    |                   | $              | 171,497 |            | $ | 175,690 |  | $ | 156,570
|Term loan                 |                | $             | 398,305    |                   | $              | 364,594 |            | $ | 405,649 |  | $ | 358,568

Loan program notes
are measured at carrying value plus interest. The Companys senior subordinated notes are measured at fair value based on bond-yield data from market trading activity as well as U.S. Treasury rates with similar maturities as the senior
subordinated notes. The Companys term loans are measured at fair value based on present value methods using credit spreads derived from market data to discount the projected interest and principal payments on the Companys term loans. For
the six months ended June 30, 2010, the estimated fair value of loan program notes, senior subordinated notes and term loans was determined based on Level 3 inputs.



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CRC HEALTH CORPORATION

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



11. COMPREHENSIVE INCOME (LOSS)

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

Comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009 was as follows (in thousands):



|                                                                                                                                                                                                     |  |                                |         |   |                                |   |                              |  |   |                              |   |  |   |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ------------------------------ | - | ---------------------------- |  | - | ---------------------------- | - |  | - | ----- | -
|                                                                                                                                                                                                     |  | Three MonthsEnded June 30,2010 |         |   | Three MonthsEnded June 30,2009 |   | Six MonthsEnded June 30,2010 |  |   | Six MonthsEnded June 30,2009 |  
|Net (loss) income                                                                                                                                                                                    |  | $                              | (44,454 | ) |                                | $ | 2,331                        |  | $ | (43,593                      | ) |  | $ | 1,017 |  
|Other comprehensive income:                                                                                                                                                                          |  |                                |         |   |                                |   |                              |  |   |                              |   |  |   |       |  
|Net change in unrealized gain on cash flow hedges (net of tax of $694 and $298 in the three months ended June 30, 2010 and
2009, and $800 and $1,014 in the six months ended June 30, 2010 and 2009) |  |                                | 1,038   |   |                                |   | 475                          |  |   | 1,197                        |   |  |   | 1,540 |  
|                                                                                                                                                                                                     |  |                                |         |   |                                |   |                              |  |   |                              |   |  |   |       |  
|Comprehensive (loss)income                                                                                                                                                                           |  | $                              | (43,416 | ) |                                | $ | 2,806                        |  | $ | (42,396                      | ) |  | $ | 2,557 |  
|                                                                                                                                                                                                     |  |                                |         |   |                                |   |                              |  |   |                              |   |  |   |       |  
|Comprehensive income (loss) attributable to noncontrolling interest                                                                                                                                  |  | $                              |        |   |                                | $ | 9                            |  | $ |                             |   |  | $ | (119  | )
|                                                                                                                                                                                                     |  |                                |         |   |                                |   |                              |  |   |                              |   |  |   |       |  
|Comprehensive income (loss) attributable to CRC Health Corporation                                                                                                                                   |  | $                              | (43,416 | ) |                                | $ | 2,797                        |  | $ | (42,396                      | ) |  | $ | 2,676 |  
|                                                                                                                                                                                                     |  |                                |         |   |                                |   |                              |  |   |                              |   |  |   |       |  

12. COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

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 June 30, 2010, the Company had Board of Director approval for a loan pool of up to $20.0 million. At June 30, 2010, the Company had
purchased or was committed to purchase approximately $7.8 million in Loan Program notes with a weighted average interest rate of 7.0% and a maximum remaining amortization period of 20 years. Loan Program notes are recorded under other current
assets and other assets on the Companys condensed consolidated balance sheets. The Company has the intent and ability to hold these loan notes to maturity.



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CRC HEALTH CORPORATION

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



13. STOCK-BASED COMPENSATION

Stock-based equity awards are made by the Group to certain employees of the Company. The Company incurs stock-based compensation
expense related to the equity awards made by the Group to employees and consultants of the Company. For the three months and six months ended June 30, the Company recognized stock-based compensation expense of $1.4
million and $2.8 million in 2010, respectively, and $1.4 million and $2.8 million in 2009, 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 for the three months and six months ended June 30 was $0.5 million and $1.1 million in 2010 and $0.6 million and
$1.1million in 2009, respectively.

During the six months ended June 30, 2010, the Group granted 61,264 units,
which represent 551,379 share options to purchase Class A common stock of the Group and 61,264 share options to purchase Class L common stock of the Group. At June 30, 2010 and 2009, the Company had 3,782,767 and
4,183,517 unvested option shares with per-share, weighted average grant date fair values of $4.80 and $5.28, respectively. Additionally, 318,678 option shares with a per-share weighted average grant date fair value of $5.28 vested during the six
months ended June 30, 2010.

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



|                                           |  |               |   |  |                                        |      |                                     |      |                                                     |     
|------------------------------------------ |  | ------------- | - |  | -------------------------------------- | ---- | ----------------------------------- | ---- | --------------------------------------------------- | ----
|                                           |  | Option Shares |   |  | Weighted-AverageExercisePricePer Share |      | Weighted-AverageGrantDate FairValue |      | Weighted-AverageRemainingContractual Term(In Years)
|Balance at December 31, 2009               |  | 6,888,776     |   |  | $                                      | 7.87 |                                     |      |                                                     | 6.47
|Granted                                    |  | 612,643       |   |  |                                        | 9.00 |                                     | 2.34 |                                                     | 9.64
|Exercised                                  |  | (1,075        | ) |  |                                        |      |                                     |      |                                                     |    
|Forfeited/cancelled/expired                |  | (194,336      | ) |  |                                        | 9.14 |                                     | 5.10 |                                                     |     
|                                           |  |               |   |  |                                        |      |                                     |      |                                                     |     
|Outstanding-June 30, 2010                  |  | 7,306,008     |   |  | $                                      | 7.93 |                                     |      |                                                     | 6.27
|                                           |  |               |   |  |                                        |      |                                     |      |                                                     |     
|Exercisable-June 30, 2010                  |  | 3,523,242     |   |  | $                                      | 6.45 |                                     |      |                                                     | 5.79
|                                           |  |               |   |  |                                        |      |                                     |      |                                                     |     
|Exercisable and expected to be exercisable |  | 6,940,708     |   |  | $                                      | 7.93 |                                     |      |                                                     | 6.27

14. CONDENSED CONSOLIDATING
FINANCIAL INFORMATION

As of June 30, 2010, the Company had $177.3 million aggregate principal amount of the 10.75%
senior subordinated notes due 2016 (the Notes) outstanding. The Notes are fully and unconditionally guaranteed, jointly and severally on an unsecured senior subordinated basis, by the Companys wholly owned subsidiaries.

The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors as of
June 30, 2010 and December 31, 2009, the condensed consolidating statements of operations for the three months and six months ended June 30, 2010 and 2009, and the condensed consolidating statements of cash flows for the six
months ended June 30, 2010 and 2009.



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 June 30, 2010

(In thousands) (Unaudited)



|                                               |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|---------------------------------------------- |  | --------------------- | ------- | -------------------- | - | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ---------
|                                               |  | CRC HealthCorporation |         | SubsidiaryGuarantors |   | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated
|ASSETS                                         |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|CURRENT ASSETS:                                |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Cash and cash equivalents                      |  | $                     |        |                      | $ | 9,659                    |  | $ | 1,001        |   |  | $            |         |   |  | $ | 10,660   
|Restricted cash                                |  |                       | 1,046   |                      |   |                         |  |   |             |   |  |              |         |   |  |   | 1,046    
|Accounts receivable-net of allowance           |  |                       | 1       |                      |   | 32,474                   |  |   | 220          |   |  |              |         |   |  |   | 32,695   
|Prepaid expenses                               |  |                       | 3,198   |                      |   | 3,022                    |  |   | 441          |   |  |              |         |   |  |   | 6,661    
|Other current assets                           |  |                       | 278     |                      |   | 1,114                    |  |   |             |   |  |              |         |   |  |   | 1,392    
|Deferred income taxes                          |  |                       | 7,606   |                      |   |                         |  |   |             |   |  |              |         |   |  |   | 7,606    
|Current assets of discontinued operations      |  |                       |        |                      |   | 1,758                    |  |   |             |   |  |              |         |   |  |   | 1,758    
|                                               |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total current assets                           |  |                       | 12,129  |                      |   | 48,027                   |  |   | 1,662        |   |  |              |         |   |  |   | 61,818   
|PROPERTY AND EQUIPMENT-Net                     |  |                       | 8,113   |                      |   | 113,249                  |  |   | 1,284        |   |  |              |         |   |  |   | 122,646  
|GOODWILL                                       |  |                       |        |                      |   | 526,859                  |  |   | 3,497        |   |  |              |         |   |  |   | 530,356  
|INTANGIBLE ASSETS-Net                          |  |                       |        |                      |   | 318,000                  |  |   |             |   |  |              |         |   |  |   | 318,000  
|OTHER ASSETS-Net                               |  |                       | 18,878  |                      |   | 918                      |  |   | 15           |   |  |              |         |   |  |   | 19,811   
|INVESTMENT IN SUBSIDIARIES                     |  |                       | 956,979 |                      |   |                         |  |   |             |   |  |              | (956,979 | ) |  |   |         
|                                               |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|TOTAL ASSETS                                   |  | $                     | 996,099 |                      | $ | 1,007,053                |  | $ | 6,458        |   |  | $            | (956,979 | ) |  | $ | 1,052,631
|                                               |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|LIABILITIES AND EQUITY                         |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|CURRENT LIABILITIES:                           |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Accounts payable                               |  | $                     | 4,208   |                      | $ | 1,974                    |  | $ | 32           |   |  | $            |         |   |  | $ | 6,214    
|Accrued liabilities                            |  |                       | 17,629  |                      |   | 17,882                   |  |   | 1,337        |   |  |              |         |   |  |   | 36,848   
|Income tax payable                             |  |                       | 4,785   |                      |   |                         |  |   |             |   |  |              |         |   |  |   | 4,785    
|Current portion of long-term debt              |  |                       |        |                      |   | 1,715                    |  |   |             |   |  |              |         |   |  |   | 1,715    
|Other current liabilities                      |  |                       | 6,925   |                      |   | 16,467                   |  |   | 5,887        |   |  |              |         |   |  |   | 29,279   
|Current liabilities of discontinued operations |  |                       |        |                      |   | 1,765                    |  |   |             |   |  |              |         |   |  |   | 1,765    
|                                               |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total current liabilities                      |  |                       | 33,547  |                      |   | 39,803                   |  |   | 7,256        |   |  |              |         |   |  |   | 80,606   
|LONG-TERM DEBT-Less current portion            |  |                       | 606,127 |                      |   | 391                      |  |   |             |   |  |              |         |   |  |   | 606,518  
|OTHER LONG-TERM LIABILITIES                    |  |                       | 412     |                      |   | 7,540                    |  |   | 244          |   |  |              |         |   |  |   | 8,196    
|LIABILITIES OF DISCONTINUED OPERATIONS         |  |                       |        |                      |   | 1,298                    |  |   |             |   |  |              |         |   |  |   | 1,298    
|DEFERRED INCOME TAXES                          |  |                       | 107,283 |                      |   |                         |  |   |             |   |  |              |         |   |  |   | 107,283  
|                                               |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total liabilities                              |  |                       | 747,369 |                      |   | 49,032                   |  |   | 7,500        |   |  |              |         |   |  |   | 803,901  
|EQUITY:                                        |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY    |  |                       | 248,730 |                      |   | 958,021                  |  |   | (1,042       | ) |  |              | (956,979 | ) |  |   | 248,730  
|                                               |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total equity                                   |  |                       | 248,730 |                      |   | 958,021                  |  |   | (1,042       | ) |  |              | (956,979 | ) |  |   | 248,730  
|                                               |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|TOTAL LIABILITIES AND EQUITY                   |  | $                     | 996,099 |                      | $ | 1,007,053                |  | $ | 6,458        |   |  | $            | (956,979 | ) |  | $ | 1,052,631
|                                               |  |                       |         |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          



17



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CRC HEALTH CORPORATION

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



Condensed Consolidating Balance Sheet as of December 31, 2009

(In thousands)



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



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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 June 30, 2010

(In thousands) (Unaudited)



|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                      |  | $                     | 48      |   |                      | $ | 111,188 |                          |  | $ | 3,480        |   |  | $            |        |   |  | $ | 114,716 |  
|Management fee revenue                                          |  |                       | 18,611  |   |                      |   |        |                          |  |   |             |   |  |              | (18,611 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                               |  |                       | 18,659  |   |                      |   | 111,188 |                          |  |   | 3,480        |   |  |              | (18,611 | ) |  |   | 114,716 |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                           |  |                       | 5,006   |   |                      |   | 47,362  |                          |  |   | 1,733        |   |  |              |        |   |  |   | 54,101  |  
|Supplies, facilities and other operating costs                  |  |                       | 1,962   |   |                      |   | 28,672  |                          |  |   | 2,315        |   |  |              |        |   |  |   | 32,949  |  
|Provision for doubtful accounts                                 |  |                       |        |   |                      |   | 1,908   |                          |  |   | 16           |   |  |              |        |   |  |   | 1,924   |  
|Depreciation and amortization                                   |  |                       | 942     |   |                      |   | 4,257   |                          |  |   | 120          |   |  |              |        |   |  |   | 5,319   |  
|Asset impairment                                                |  |                       |        |   |                      |   | 17,772  |                          |  |   | 237          |   |  |              |        |   |  |   | 18,009  |  
|Goodwill impairment                                             |  |                       |        |   |                      |   | 34,936  |                          |  |   | 8,735        |   |  |              |        |   |  |   | 43,671  |  
|Management fee expense                                          |  |                       |        |   |                      |   | 17,909  |                          |  |   | 702          |   |  |              | (18,611 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                        |  |                       | 7,910   |   |                      |   | 152,816 |                          |  |   | 13,858       |   |  |              | (18,611 | ) |  |   | 155,973 |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                         |  |                       | 10,749  |   |                      |   | (41,628 | )                        |  |   | (10,378      | ) |  |              |        |   |  |   | (41,257 | )
|INTEREST (EXPENSE) INCOME                                       |  |                       | (10,619 | ) |                      |   | 192     |                          |  |   | (284         | ) |  |              |        |   |  |   | (10,711 | )
|OTHER EXPENSE                                                   |  |                       |        |   |                      |   | (88     | )                        |  |   |             |   |  |              |        |   |  |   | (88     | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES    |  |                       | 130     |   |                      |   | (41,524 | )                        |  |   | (10,662      | ) |  |              |        |   |  |   | (52,056 | )
|INCOME TAX EXPENSE (BENEFIT)                                    |  |                       | 19      |   |                      |   | (6,226  | )                        |  |   | (1,598       | ) |  |              |        |   |  |   | (7,805  | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX            |  |                       | 111     |   |                      |   | (35,298 | )                        |  |   | (9,064       | ) |  |              |        |   |  |   | (44,251 | )
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($151) |  |                       |        |   |                      |   | (203    | )                        |  |   |             |   |  |              |        |   |  |   | (203    | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS)                                               |  |                       | 111     |   |                      |   | (35,501 | )                        |  |   | (9,064       | ) |  |              |        |   |  |   | (44,454 | )
|EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX                      |  |                       | (44,565 | ) |                      |   |        |                          |  |   |             |   |  |              | 44,565  |   |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION                 |  | $                     | (44,454 | ) |                      | $ | (35,501 | )                        |  | $ | (9,064       | ) |  | $            | 44,565  |   |  | $ | (44,454 | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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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 June 30, 2009

(In thousands) (Unaudited)



|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                      |  | $                     | 62      |   |                      | $ | 106,027 |                          |  | $ | 2,840        |   |  | $            |        |   |  | $ | 108,929 |  
|Management fee revenue                                          |  |                       | 20,404  |   |                      |   |        |                          |  |   |             |   |  |              | (20,404 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                               |  |                       | 20,466  |   |                      |   | 106,027 |                          |  |   | 2,840        |   |  |              | (20,404 | ) |  |   | 108,929 |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                           |  |                       | 5,854   |   |                      |   | 46,703  |                          |  |   | 1,513        |   |  |              |        |   |  |   | 54,070  |  
|Supplies, facilities and other operating costs                  |  |                       | 2,012   |   |                      |   | 26,668  |                          |  |   | 1,882        |   |  |              |        |   |  |   | 30,562  |  
|Provision for doubtful accounts                                 |  |                       | 1       |   |                      |   | 1,471   |                          |  |   | 58           |   |  |              |        |   |  |   | 1,530   |  
|Depreciation and amortization                                   |  |                       | 852     |   |                      |   | 4,601   |                          |  |   | 123          |   |  |              |        |   |  |   | 5,576   |  
|Management fee expense                                          |  |                       |        |   |                      |   | 19,983  |                          |  |   | 421          |   |  |              | (20,404 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                        |  |                       | 8,719   |   |                      |   | 99,426  |                          |  |   | 3,997        |   |  |              | (20,404 | ) |  |   | 91,738  |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                         |  |                       | 11,747  |   |                      |   | 6,601   |                          |  |   | (1,157       | ) |  |              |        |   |  |   | 17,191  |  
|INTEREST EXPENSE                                                |  |                       | (11,744 | ) |                      |   | (122    | )                        |  |   |             |   |  |              |        |   |  |   | (11,866 | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES    |  |                       | 3       |   |                      |   | 6,479   |                          |  |   | (1,157       | ) |  |              |        |   |  |   | 5,325   |  
|INCOME TAX EXPENSE (BENEFIT)                                    |  |                       | 1       |   |                      |   | 3,067   |                          |  |   | (548         | ) |  |              |        |   |  |   | 2,520   |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX            |  |                       | 2       |   |                      |   | 3,412   |                          |  |   | (609         | ) |  |              |        |   |  |   | 2,805   |  
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($267) |  |                       |        |   |                      |   | (474    | )                        |  |   |             |   |  |              |        |   |  |   | (474    | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS)                                               |  |                       | 2       |   |                      |   | 2,938   |                          |  |   | (609         | ) |  |              |        |   |  |   | 2,331   |  
|LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST    |  |                       |        |   |                      |   | 9       |                          |  |   |             |   |  |              |        |   |  |   | 9       |  
|EQUITY IN INCOME OF SUBSIDIARIES, NET OF TAX                    |  |                       | 2,320   |   |                      |   |        |                          |  |   |             |   |  |              | (2,320  | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS) ATTRIBUTABLE TO CRC HEALTH CORPORATION        |  | $                     | 2,322   |   |                      | $ | 2,929   |                          |  | $ | (609         | ) |  | $            | (2,320  | ) |  | $ | 2,322   |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



20



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##### Table of Contents

CRC HEALTH CORPORATION

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



Condensed Consolidating Statements of Operations

For the Six Months Ended June 30, 2010

(In thousands) (Unaudited)



|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                      |  | $                     | 98      |   |                      | $ | 213,407 |                          |  | $ | 5,230        |   |  | $            |        |   |  | $ | 218,735 |  
|Management fee revenue                                          |  |                       | 37,717  |   |                      |   |        |                          |  |   |             |   |  |              | (37,717 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                               |  |                       | 37,815  |   |                      |   | 213,407 |                          |  |   | 5,230        |   |  |              | (37,717 | ) |  |   | 218,735 |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                             |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                           |  |                       | 10,309  |   |                      |   | 94,449  |                          |  |   | 2,980        |   |  |              |        |   |  |   | 107,738 |  
|Supplies, facilities and other operating costs                  |  |                       | 4,109   |   |                      |   | 55,276  |                          |  |   | 3,705        |   |  |              |        |   |  |   | 63,090  |  
|Provision for doubtful accounts                                 |  |                       |        |   |                      |   | 3,657   |                          |  |   | 110          |   |  |              |        |   |  |   | 3,767   |  
|Depreciation and amortization                                   |  |                       | 1,870   |   |                      |   | 8,766   |                          |  |   | 241          |   |  |              |        |   |  |   | 10,877  |  
|Asset impairment                                                |  |                       |        |   |                      |   | 17,772  |                          |  |   | 237          |   |  |              |        |   |  |   | 18,009  |  
|Goodwill impairment                                             |  |                       |        |   |                      |   | 34,936  |                          |  |   | 8,735        |   |  |              |        |   |  |   | 43,671  |  
|Management fee expense                                          |  |                       |        |   |                      |   | 36,507  |                          |  |   | 1,210        |   |  |              | (37,717 | ) |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                        |  |                       | 16,288  |   |                      |   | 251,363 |                          |  |   | 17,218       |   |  |              | (37,717 | ) |  |   | 247,152 |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                         |  |                       | 21,527  |   |                      |   | (37,956 | )                        |  |   | (11,988      | ) |  |              |        |   |  |   | (28,417 | )
|INTEREST (EXPENSE) INCOME                                       |  |                       | (21,323 | ) |                      |   | 265     |                          |  |   | (459         | ) |  |              |        |   |  |   | (21,517 | )
|OTHER EXPENSE                                                   |  |                       |        |   |                      |   | (88     | )                        |  |   |             |   |  |              |        |   |  |   | (88     | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES    |  |                       | 204     |   |                      |   | (37,779 | )                        |  |   | (12,447      | ) |  |              |        |   |  |   | (50,022 | )
|INCOME TAX EXPENSE (BENEFIT)                                    |  |                       | 28      |   |                      |   | (5,238  | )                        |  |   | (1,726       | ) |  |              |        |   |  |   | (6,936  | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX            |  |                       | 176     |   |                      |   | (32,541 | )                        |  |   | (10,721      | ) |  |              |        |   |  |   | (43,086 | )
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($314) |  |                       |        |   |                      |   | (507    | )                        |  |   |             |   |  |              |        |   |  |   | (507    | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS)                                               |  |                       | 176     |   |                      |   | (33,048 | )                        |  |   | (10,721      | ) |  |              |        |   |  |   | (43,593 | )
|EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX                      |  |                       | (43,769 | ) |                      |   |        |                          |  |   |             |   |  |              | 43,769  |   |  |   |        |  
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION                 |  | $                     | (43,593 | ) |                      | $ | (33,048 | )                        |  | $ | (10,721      | ) |  | $            | 43,769  |   |  | $ | (43,593 | )
|                                                                |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



21



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##### Table of Contents

CRC HEALTH CORPORATION

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



Condensed Consolidating Statements of Operations

For the Six Months Ended June 30, 2009

(In thousands) (Unaudited)



|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                    |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                                        |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                                          |  | $                     | 126     |   |                      | $ | 206,540 |                          |  | $ | 5,105        |   |  | $            |        |   |  | $ | 211,771 |  
|Management fee revenue                                              |  |                       | 40,467  |   |                      |   |        |                          |  |   |             |   |  |              | (40,467 | ) |  |   |        |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total net revenue                                                   |  |                       | 40,593  |   |                      |   | 206,540 |                          |  |   | 5,105        |   |  |              | (40,467 | ) |  |   | 211,771 |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                                                 |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                                               |  |                       | 11,030  |   |                      |   | 95,859  |                          |  |   | 2,852        |   |  |              |        |   |  |   | 109,741 |  
|Supplies, facilities and other operating costs                      |  |                       | 3,956   |   |                      |   | 53,490  |                          |  |   | 3,666        |   |  |              |        |   |  |   | 61,112  |  
|Provision for doubtful accounts                                     |  |                       | 1       |   |                      |   | 2,928   |                          |  |   | 83           |   |  |              |        |   |  |   | 3,012   |  
|Depreciation and amortization                                       |  |                       | 1,745   |   |                      |   | 9,258   |                          |  |   | 248          |   |  |              |        |   |  |   | 11,251  |  
|Management fee expense                                              |  |                       |        |   |                      |   | 39,565  |                          |  |   | 902          |   |  |              | (40,467 | ) |  |   |        |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                                            |  |                       | 16,732  |   |                      |   | 201,100 |                          |  |   | 7,751        |   |  |              | (40,467 | ) |  |   | 185,116 |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING INCOME (LOSS)                                             |  |                       | 23,861  |   |                      |   | 5,440   |                          |  |   | (2,646       | ) |  |              |        |   |  |   | 26,655  |  
|INTEREST EXPENSE                                                    |  |                       | (23,565 | ) |                      |   | (253    | )                        |  |   |             |   |  |              |        |   |  |   | (23,818 | )
|OTHER EXPENSE                                                       |  |                       | (82     | ) |                      |   |        |                          |  |   |             |   |  |              |        |   |  |   | (82     | )
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES        |  |                       | 214     |   |                      |   | 5,187   |                          |  |   | (2,646       | ) |  |              |        |   |  |   | 2,755   |  
|INCOME TAX EXPENSE (BENEFIT)                                        |  |                       | 19      |   |                      |   | 466     |                          |  |   | (238         | ) |  |              |        |   |  |   | 247     |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX                |  |                       | 195     |   |                      |   | 4,721   |                          |  |   | (2,408       | ) |  |              |        |   |  |   | 2,508   |  
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($838)     |  |                       |        |   |                      |   | (1,491  | )                        |  |   |             |   |  |              |        |   |  |   | (1,491  | )
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS)                                                   |  |                       | 195     |   |                      |   | 3,230   |                          |  |   | (2,408       | ) |  |              |        |   |  |   | 1,017   |  
|LESS: NET INCOME (LOSS) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST |  |                       |        |   |                      |   | 15      |                          |  |   | (134         | ) |  |              |        |   |  |   | (119    | )
|EQUITY IN INCOME OF SUBSIDIARIES, NET OF TAX                        |  |                       | 941     |   |                      |   |        |                          |  |   |             |   |  |              | (941    | ) |  |   |        |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET INCOME (LOSS) ATTRIBUTABLE TO CRC HEALTH CORPORATION            |  | $                     | 1,136   |   |                      | $ | 3,215   |                          |  | $ | (2,274       | ) |  | $            | (941    | ) |  | $ | 1,136   |  
|                                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



22



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##### Table of Contents

CRC HEALTH CORPORATION

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



Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2010

(In thousands) (Unaudited)



|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|--------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                                    |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash (used in) provided by operating activities |  | $                     | (2,795  | ) |                      | $ | 35,533  |                          |  | $ | 5,022        |   |              | $ |  |  | $ | 37,760  |  
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Additions of property and equipment                 |  |                       | (2,227  | ) |                      |   | (6,607  | )                        |  |   | (64          | ) |              |   |  |  |   | (8,898  | )
|Proceeds from sale of property and equipment        |  |                       |        |   |                      |   | 41      |                          |  |   |             |   |              |   |  |  |   | 41      |  
|Acquisition of business, net of cash acquired       |  |                       | (58     | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (58     | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities               |  |                       | (2,285  | ) |                      |   | (6,566  | )                        |  |   | (64          | ) |              |   |  |  |   | (8,915  | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Intercompany transfers                              |  |                       | 28,247  |   |                      |   | (24,053 | )                        |  |   | (4,194       | ) |              |   |  |  |   |        |  
|Capital contributed from Parent                     |  |                       | 8       |   |                      |   |        |                          |  |   |             |   |              |   |  |  |   | 8       |  
|Borrowings under revolving line of credit           |  |                       | 10,500  |   |                      |   |        |                          |  |   |             |   |              |   |  |  |   | 10,500  |  
|Repayments under revolving line of credit           |  |                       | (25,000 | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (25,000 | )
|Repayments of term loan and seller notes            |  |                       | (8,675  | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (8,675  | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities |  |                       | 5,080   |   |                      |   | (24,053 | )                        |  |   | (4,194       | ) |              |   |  |  |   | (23,167 | )
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|INCREASE IN CASH AND CASH EQUIVALENTS               |  |                       |        |   |                      |   | 4,914   |                          |  |   | 764          |   |              |   |  |  |   | 5,678   |  
|CASH AND CASH EQUIVALENTSBeginning of period        |  |                       |        |   |                      |   | 4,745   |                          |  |   | 237          |   |              |   |  |  |   | 4,982   |  
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|CASH AND CASH EQUIVALENTSEnd of period              |  | $                     |        |   |                      | $ | 9,659   |                          |  | $ | 1,001        |   |              | $ |  |  | $ | 10,660  |  
|                                                    |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  



23



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##### Table of Contents

CRC HEALTH CORPORATION

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



Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2009

(In thousands) (Unaudited)



|                                              |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|--------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------- | -
|                                              |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES:         |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash provided by operating activities     |  | $                     | 1,374   |   |                      | $ | 25,738  |                          |  | $ | 1,364        |   |              | $ |  |  | $ | 28,476  |  
|                                              |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:         |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Additions of property and equipment-net       |  |                       | (1,240  | ) |                      |   | (3,350  | )                        |  |   | (65          | ) |              |   |  |  |   | (4,655  | )
|Proceeds from sale of property and equipment  |  |                       | 110     |   |                      |   | 16      |                          |  |   |             |   |              |   |  |  |   | 126     |  
|Proceeds from sale of discontinued operations |  |                       |        |   |                      |   | 475     |                          |  |   |             |   |              |   |  |  |   | 475     |  
|Payments made under earnout arrangements      |  |                       | (59     | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (59     | )
|                                              |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in investing activities         |  |                       | (1,189  | ) |                      |   | (2,859  | )                        |  |   | (65          | ) |              |   |  |  |   | (4,113  | )
|                                              |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:         |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Intercompany transfers                        |  |                       | 11,194  |   |                      |   | (10,430 | )                        |  |   | (764         | ) |              |   |  |  |   |        |  
|Capital distributed to Parent                 |  |                       | (156    | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (156    | )
|Capitalized financing costs                   |  |                       | (92     | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (92     | )
|Noncontrolling interest buyout                |  |                       | (89     | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (89     | )
|Repayments of capital lease obligations       |  |                       |        |   |                      |   | (7      | )                        |  |   |             |   |              |   |  |  |   | (7      | )
|Borrowings under revolver line of credit      |  |                       | 9,000   |   |                      |   |        |                          |  |   |             |   |              |   |  |  |   | 9,000   |  
|Repayments under revolver line of credit      |  |                       | (16,000 | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (16,000 | )
|Repayments of term loan and seller notes      |  |                       | (4,042  | ) |                      |   |        |                          |  |   |             |   |              |   |  |  |   | (4,042  | )
|                                              |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|Net cash used in financing activities         |  |                       | (185    | ) |                      |   | (10,437 | )                        |  |   | (764         | ) |              |   |  |  |   | (11,386 | )
|                                              |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|INCREASE IN CASH AND CASH EQUIVALENTS         |  |                       |        |   |                      |   | 12,442  |                          |  |   | 535          |   |              |   |  |  |   | 12,977  |  
|CASH AND CASH EQUIVALENTS-Beginning of period |  |                       |        |   |                      |   | 2,251   |                          |  |   | 289          |   |              |   |  |  |   | 2,540   |  
|                                              |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  
|CASH AND CASH EQUIVALENTS-End of period       |  | $                     |        |   |                      | $ | 14,693  |                          |  | $ | 824          |   |              | $ |  |  | $ | 15,517  |  
|                                              |  |                       |         |   |                      |   |         |                          |  |   |              |   |              |   |   |  |   |         |  

15. RESTRUCTURING

During the three months and six months ended June 30, 2010, the Company continued its activity under the FY08 plan related to
employee severance payments and long-term lease commitments resulting from prior period employee terminations and facility closures.



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CRC HEALTH CORPORATION

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



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



|                                                 |  |                    |      |   |                                            |   |       |       |  |   |        |  
|------------------------------------------------ |  | ------------------ | ---- | - | ------------------------------------------ | - | ----- | ----- |  | - | ------ | -
|                                                 |  | WorkforceReduction |      |   | Consolidation and Exit ofExcess Facilities |   |       | Total | 
|Restructuring reserve at December 31, 2009       |  | $                  |     |   |                                            | $ |      |       |  | $ |       |  
|Recovery division                                |  |                    | 19   |   |                                            |   | 2,107 |       |  |   | 2,126  |  
|Healthy living division                          |  |                    | 592  |   |                                            |   | 875   |       |  |   | 1,467  |  
|Corporate                                        |  |                    |     |   |                                            |   |      |       |  |   |       |  
|                                                 |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Total restructuring reserve at December 31, 2009 |  | $                  | 611  |   |                                            | $ | 2,982 |       |  | $ | 3,593  |  
|                                                 |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Expenses                                         |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Recovery division                                |  |                    | 2    |   |                                            |   | 20    |       |  |   | 22     |  
|Healthy living division                          |  |                    | (19  | ) |                                            |   | 87    |       |  |   | 68     |  
|Corporate                                        |  |                    |     |   |                                            |   |      |       |  |   |       |  
|                                                 |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Total expenses                                   |  |                    | (17  | ) |                                            |   | 107   |       |  |   | 90     |  
|Cash payments                                    |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Recovery division                                |  |                    | (2   | ) |                                            |   | (318  | )     |  |   | (320   | )
|Healthy living division                          |  |                    | (367 | ) |                                            |   | (369  | )     |  |   | (736   | )
|Corporate                                        |  |                    |     |   |                                            |   |      |       |  |   |       |  
|                                                 |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Total cash payments                              |  |                    | (369 | ) |                                            |   | (687  | )     |  |   | (1,056 | )
|Restructuring reserve at June 30, 2010           |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Recovery division                                |  |                    | 19   |   |                                            |   | 1,809 |       |  |   | 1,828  |  
|Healthy living division                          |  |                    | 206  |   |                                            |   | 593   |       |  |   | 799    |  
|Corporate                                        |  |                    |     |   |                                            |   |      |       |  |   |       |  
|                                                 |  |                    |      |   |                                            |   |       |       |  |   |        |  
|Total restructuring reserve at June 30, 2010     |  | $                  | 225  |   |                                            | $ | 2,402 |       |  | $ | 2,627  |  
|                                                 |  |                    |      |   |                                            |   |       |       |  |   |        |  

16. DISCONTINUED OPERATIONS

At June 30, 2010, the Company had closed or sold an aggregate of 15 facilities under discontinued operations compared to 12
facilities at June 30, 2009.

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



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CRC HEALTH CORPORATION

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



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



|                                  |  |                                 |      |   |                                 |   |       |                               |  |   |                               |   |  |   |        |  
|--------------------------------- |  | ------------------------------- | ---- | - | ------------------------------- | - | ----- | ----------------------------- |  | - | ----------------------------- | - |  | - | ------ | -
|                                  |  | Three Months EndedJune 30, 2010 |      |   | Three Months EndedJune 30, 2009 |   |       | Six Months EndedJune 30, 2010 |  |   | Six Months EndedJune 30, 2009 |  
|Net revenue                       |  | $                               | 32   |   |                                 | $ | 2,930 |                               |  | $ | 94                            |   |  | $ | 7,035  |  
|Operating expenses                |  |                                 | 384  |   |                                 |   | 3,640 |                               |  |   | 912                           |   |  |   | 7,915  |  
|Asset impairment                  |  |                                 |     |   |                                 |   |      |                               |  |   |                              |   |  |   | 1,417  |  
|Interest expense                  |  |                                 | 2    |   |                                 |   | 2     |                               |  |   | 3                             |   |  |   | 5      |  
|Loss on disposals                 |  |                                 |     |   |                                 |   | 29    |                               |  |   |                              |   |  |   | 27     |  
|Loss before income taxes          |  |                                 | (354 | ) |                                 |   | (741  | )                             |  |   | (821                          | ) |  |   | (2,329 | )
|Tax benefit                       |  |                                 | (151 | ) |                                 |   | (267  | )                             |  |   | (314                          | ) |  |   | (838   | )
|                                  |  |                                 |      |   |                                 |   |       |                               |  |   |                               |   |  |   |        |  
|Loss from discontinued operations |  | $                               | (203 | ) |                                 | $ | (474  | )                             |  | $ | (507                          | ) |  | $ | (1,491 | )
|                                  |  |                                 |      |   |                                 |   |       |                               |  |   |                               |   |  |   |        |  

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 June 30, 2010, the recovery segment operates 31 inpatient, 15 outpatient facilities, and 54 comprehensive treatment centers (CTCs) in 21 states.

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

As of June 30, 2010, the healthy living segment
operates 23 adolescent and young adult programs in 8 states which provide a wide variety of therapeutic educational programs for underachieving young people. The healthy living segment also operates 18 weight management facilities. These facilities
are located in 9 states in the United States (16 facilities), in the United Kingdom (1 facility), and in Canada (1 facility), with a focus on providing treatment services for eating disorders and weight management.

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

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

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



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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 EndedJune 30, 2010 |         |   | Three Months EndedJune 30, 2009 |   |         | Six Months EndedJune 30, 2010 |  |   | Six Months EndedJune 30, 2009 |  
|Net revenue:                                                                    |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Recovery division                                                               |  | $                               | 84,071  |   |                                 | $ | 78,386  |                               |  | $ | 163,120                       |   |  | $ | 153,450   |  
|Healthy living division                                                         |  |                                 | 30,597  |   |                                 |   | 30,481  |                               |  |   | 55,517                        |   |  |   | 58,195    |  
|Corporate                                                                       |  |                                 | 48      |   |                                 |   | 62      |                               |  |   | 98                            |   |  |   | 126       |  
|                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Total consolidated net revenue                                                  |  | $                               | 114,716 |   |                                 | $ | 108,929 |                               |  | $ | 218,735                       |   |  | $ | 211,771   |  
|                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Operating expenses:                                                             |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Recovery division                                                               |  | $                               | 54,454  |   |                                 | $ | 52,791  |                               |  | $ | 108,194                       |   |  | $ | 107,188   |  
|Healthy
living division(1)                                                      |  |                                 | 93,609  |   |                                 |   | 30,215  |                               |  |   | 122,670                       |   |  |   | 61,169    |  
|Corporate                                                                       |  |                                 | 7,910   |   |                                 |   | 8,732   |                               |  |   | 16,288                        |   |  |   | 16,759    |  
|                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Total consolidated operating expenses                                           |  | $                               | 155,973 |   |                                 | $ | 91,738  |                               |  | $ | 247,152                       |   |  | $ | 185,116   |  
|                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Operating income (loss):                                                        |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Recovery division                                                               |  | $                               | 29,617  |   |                                 | $ | 25,595  |                               |  | $ | 54,926                        |   |  | $ | 46,262    |  
|Healthy living division                                                         |  |                                 | (63,012 | ) |                                 |   | 266     |                               |  |   | (67,153                       | ) |  |   | (2,974    | )
|Corporate                                                                       |  |                                 | (7,862  | ) |                                 |   | (8,670  | )                             |  |   | (16,190                       | ) |  |   | (16,633   | )
|                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Total consolidated operating (loss) income                                      |  |                                 | (41,257 | ) |                                 |   | 17,191  |                               |  |   | (28,417                       | ) |  |   | 26,655    |  
|Interest expense                                                                |  |                                 | (10,711 | ) |                                 |   | (11,866 | )                             |  |   | (21,517                       | ) |  |   | (23,818   | )
|Other expense                                                                   |  |                                 | (88     | ) |                                 |   |        |                               |  |   | (88                           | ) |  |   | (82       | )
|                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Total consolidated (loss) income from continuing operations before income taxes |  | $                               | (52,056 | ) |                                 | $ | 5,325   |                               |  | $ | (50,022                       | ) |  | $ | 2,755     |  
|                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Capital expenditures:                                                           |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Recovery division                                                               |  | $                               | 3,983   |   |                                 | $ | 1,085   |                               |  | $ | 5,440                         |   |  | $ | 2,341     |  
|Healthy living division                                                         |  |                                 | 814     |   |                                 |   | 728     |                               |  |   | 1,231                         |   |  |   | 1,074     |  
|Corporate                                                                       |  |                                 | 1,226   |   |                                 |   | 528     |                               |  |   | 2,227                         |   |  |   | 1,240     |  
|                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Total consolidated capital expenditures                                         |  | $                               | 6,023   |   |                                 | $ | 2,341   |                               |  | $ | 8,898                         |   |  | $ | 4,655     |  
|                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|                                                                                |  |                                 |         |  
|                                                                                |  |                                 |         |   |                                 |   |         | June 30,2010                  |  |   | December 31,2009              |  
|Total assets(2):                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Recovery division                                                               |  |                                 |         |   |                                 |   |         |                               |  | $ | 897,730                       |   |  | $ | 897,239   |  
|Healthy living division                                                         |  |                                 |         |   |                                 |   |         |                               |  |   | 110,711                       |   |  |   | 171,580   |  
|Corporate                                                                       |  |                                 |         |   |                                 |   |         |                               |  |   | 44,190                        |   |  |   | 39,515    |  
|                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  
|Total consolidated assets                                                       |  |                                 |         |   |                                 |   |         |                               |  | $ | 1,052,631                     |   |  | $ | 1,108,334 |  
|                                                                                |  |                                 |         |   |                                 |   |         |                               |  |   |                               |   |  |   |           |  



|(1) | Healthy living division operating expenses for the three months and six months ended June 30, 2010 include $18.0 million of asset impairment and $43.7 million of
goodwill impairment.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

18. SUBSEQUENT EVENT

On
July 30, 2010, as a result of Dr. Barry Karlins decision to step down as the Chief Executive Officer, the Company entered into a Letter Agreement with Dr. Karlin. Pursuant to the Letter Agreement, Dr. Karlin will remain as
the Companys Chief Executive Officer until the earlier of his replacement being named, or December 31, 2010, or an earlier date as determined by the Board of Directors. In addition, he will remain as non-executive Chairman of the Board of
Directors. The agreement specified the terms of this arrangement. Pursuant to the terms of the Letter Agreement, Dr. Karlin will be entitled to a lump sum payment payable 60 days following August 2, 2010. The agreement also provides for a
revised vesting schedule on a portion of Dr. Karlins options. The Company will recognize approximately $0.6 million, net, as salaries and benefits during the third quarter of 2010 to reflect the terms of the Letter Agreement.



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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 June 30, 2010, our recovery division,
which operates 31 inpatient, 15 outpatient facilities, and 54 comprehensive treatment centers (CTCs) in 21 states, provides treatment services to patients suffering from chronic addiction related diseases and related behavioral
disorders. As of June 30, 2010, our healthy living division, which operates 23 adolescent and young adult programs in 8 states, provides a wide variety of therapeutic educational programs for underachieving young people. The healthy living
segment also operates 18 weight management facilities. These facilities are located in 9 states in the United States (16 facilities), in the United Kingdom (1 facility), and in Canada (1 facility), with a focus on providing treatment services
for eating disorders and weight management. Other activities classified as corporate represent revenue and expenses associated with eGetgoing, an online internet treatment option, and general and administrative expenses (i.e., expenses
associated with our corporate offices in Cupertino, California, which provides management, financial, human resource and information system support).

EXECUTIVE SUMMARY

We
generate revenue by providing substance abuse treatment services and youth treatment services. We also generate revenue by providing treatment services for other specialized behavioral disorders such as eating disorders. Revenue is recognized when
rehabilitation and treatment services are provided to a client. Client service revenue is reported at the estimated net realizable amounts from clients, third-party payors and others for services rendered. Revenue under third-party payor agreements
is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided for in the period the related services are rendered and adjusted in future periods as final settlements are determined. Revenue for
educational services provided to youth consists primarily of tuition, enrollment fees, alumni services and ancillary charges. Tuition revenue and ancillary charges are recognized based on contracted monthly/daily rates as services are rendered. The
enrollment fees for service contracts that are charged upfront are deferred and recognized over the average student length of stay, approximately nine months. Alumni fee revenue represents non-refundable upfront fees for post graduation services and
these fees are deferred and recognized systematically over the contracted life. During the three months ended June 30, 2010 and 2009, we generated 79.4% and 80.6% of our net revenue from non-governmental sources, including 61.6% and 64.8% from
self payors, respectively, and 17.8% and 15.8% from commercial payors, respectively. During the six months ended June 30, 2010 and 2009, we generated 79.2% and 80.9% of our net revenue from non-governmental sources, including 61.6% and 64.9%
from self payors, respectively, and 17.6% and 16.0% 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 second quarter of 2010, the Company lowered its view of forecasted future cash flows, compared to a forecast prepared in the
fourth quarter of 2009, for the healthy living division. This was based upon the Companys recent reassessment of economic conditions and lack of available credit for families of potential students of the healthy living division each of which
affect both admissions and pricing. As a result, for the quarter and six months ended June 30, 2010, the Company recognized a $43.7 million non-cash impairment charge for goodwill and an $18.0 million non-cash impairment charge related to asset
impairment.



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During the three and six months ended June 30, 2010, our consolidated net revenue increased
by $5.8 million and $7.0 million, or 5.3% and 3.3%, respectively, when compared to the comparable periods in 2009. Our consolidated operating expenses increased $64.2 million and $62.0 million, or 70.0% and 33.5%, respectively, during the three and
six months ended June 30, 2010, of which $61.7 million is related to asset impairment and goodwill impairment. During the three and six months ended June 30, 2010, our consolidated same-facility net revenue increased by $5.8 million and
$7.1 million, or 5.3% and 3.3%, respectively, when compared to the comparable periods in 2009. On a consolidated basis, same-facility operating expenses increased $21.5 million and $21.0 million, or 28.9% and 14.1%, respectively, during
the three and six months ended June 30, 2010, of which $17.9 million is related to asset impairment. Same-facility means a comparison over the comparable period of the financial performance of a facility we have operated for at
least one year. Our operating expenses include salaries and benefits, supplies, facilities and other operating costs, provision for doubtful accounts, depreciation and amortization, asset impairment, and goodwill impairment. Operating expenses for
our recovery and healthy living divisions exclude corporate level general and administrative costs (i.e., expenses associated with our corporate offices in Cupertino, California, which provide management, financial, human resources and information
systems support), stock-based compensation expense and expenses associated with eGetgoing.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

The accompanying discussion and analysis of our financial condition and results of operations are based on our unaudited condensed
consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles of the United States (U.S. GAAP). The preparation of these financial statements requires us to make estimates,
assumptions and judgments that affect the reported amounts of assets, liabilities, net revenue and expenses. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has reviewed our critical accounting policies and
their application in the preparation of our financial statements and related disclosures and discussed the development, selection and disclosure of significant estimates. To the extent that actual results differ from those estimates, our future
results of operations may be affected. We believe that there have not been any significant changes during the three and six months ended June 30, 2010 to the items that we have previously reported in our critical accounting policies in
managements discussion and analysis of financial condition and results of operations for the year ended December 31, 2009 in our Annual Report on Form 10-K.

Recently Adopted Accounting Guidance

During the quarter ended March 31, 2010, 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.



29



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##### Table of Contents

RESULTS OF OPERATIONS

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

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



|                                                                                                                                            |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | ---- | - | ------- | --------------------- |  | - | --------------------- | - |  | --------- | --
|                                                                                                                                            |  | Three Months Ended June 30,Total Facility |        
|Statement of Income Data:                                                                                                                   |  | 2010                                      |         |   | 2009 |   |         | 2010 vs. 2009$ Change |  |   | 2010 vs. 2009% Change |  
|Net revenue:                                                                                                                                |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   
|Recovery division                                                                                                                           |  | $                                         | 84,071  |   |      | $ | 78,386  |                       |  | $ | 5,685                 |   |  | 7.3       | % 
|Healthy living division                                                                                                                     |  |                                           | 30,597  |   |      |   | 30,481  |                       |  |   | 116                   |   |  | 0.4       | % 
|Corporate                                                                                                                                   |  |                                           | 48      |   |      |   | 62      |                       |  |   | (14                   | ) |  | (22.6     | )%
|                                                                                                                                            |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   
|Total net revenue                                                                                                                           |  |                                           | 114,716 |   |      |   | 108,929 |                       |  |   | 5,787                 |   |  | 5.3       | % 
|Operating expenses:                                                                                                                         |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   
|Recovery division                                                                                                                           |  |                                           | 54,454  |   |      |   | 52,791  |                       |  |   | 1,663                 |   |  | 3.2       | % 
|Healthy
living division(1)                                                                                                                  |  |                                           | 93,609  |   |      |   | 30,215  |                       |  |   | 63,394                |   |  | 209.8     | % 
|Corporate                                                                                                                                   |  |                                           | 7,910   |   |      |   | 8,732   |                       |  |   | (822                  | ) |  | (9.4      | )%
|                                                                                                                                            |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   
|Total operating expenses                                                                                                                    |  |                                           | 155,973 |   |      |   | 91,738  |                       |  |   | 64,235                |   |  | 70.0      | % 
|Operating income (loss):                                                                                                                    |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   
|Recovery division                                                                                                                           |  |                                           | 29,617  |   |      |   | 25,595  |                       |  |   | 4,022                 |   |  | 15.7      | % 
|Healthy living division                                                                                                                     |  |                                           | (63,012 | ) |      |   | 266     |                       |  |   | (63,278               | ) |  | (23,788.7 | )%
|Corporate                                                                                                                                   |  |                                           | (7,862  | ) |      |   | (8,670  | )                     |  |   | 808                   |   |  | (9.3      | )%
|                                                                                                                                            |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   
|Operating (loss) income                                                                                                                     |  |                                           | (41,257 | ) |      |   | 17,191  |                       |  |   | (58,448               | ) |  | (340.0    | )%
|Interest expense                                                                                                                            |  |                                           | (10,711 | ) |      |   | (11,866 | )                     |  |   | 1,155                 |   |  | (9.7      | )%
|Other expense                                                                                                                               |  |                                           | (88     | ) |      |   |        |                       |  |   | (88                   | ) |  | n/a       |   
|                                                                                                                                            |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   
|(Loss) income from continuing operations before income taxes                                                                                |  |                                           | (52,056 | ) |      |   | 5,325   |                       |  |   | (57,381               | ) |  | (1,077.6  | )%
|Income tax (benefit) expense                                                                                                                |  |                                           | (7,805  | ) |      |   | 2,520   |                       |  |   | (10,325               | ) |  | (409.7    | )%
|                                                                                                                                            |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   
|(Loss) income from continuing operations, net of tax                                                                                        |  |                                           | (44,251 | ) |      |   | 2,805   |                       |  |   | (47,056               | ) |  | (1,677.6  | )%
|Loss from discontinued operations, (net of tax benefit of ($151) and ($267) in the three months ended June 30, 2010 and
2009, respectively) |  |                                           | (203    | ) |      |   | (474    | )                     |  |   | 271                   |   |  | (57.2     | )%
|                                                                                                                                            |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   
|Net (loss) income                                                                                                                           |  |                                           | (44,454 | ) |      |   | 2,331   |                       |  |   | (46,785               | ) |  | (2,007.1  | )%
|Less: Net income attributable to the noncontrolling interest                                                                                |  |                                           |        |   |      |   | 9       |                       |  |   | (9                    | ) |  | (100.0    | )%
|                                                                                                                                            |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   
|Net (loss) income attributable to CRC Health Corporation                                                                                    |  | $                                         | (44,454 | ) |      | $ | 2,322   |                       |  | $ | (46,776               | ) |  | (2,014.5  | )%
|                                                                                                                                            |  |                                           |         |   |      |   |         |                       |  |   |                       |   |  |           |   



|(1) | Healthy living division operating expenses for the three months ended June 30, 2010 include $18.0 million asset impairment and $43.7 million goodwill impairment.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



30



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##### Table of Contents

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



|                            |  |                                           |           |      |   |           |  |      |   
|--------------------------- |  | ----------------------------------------- | --------- | ---- | - | --------- |  | ---- | --
|                            |  | Three Months Ended June 30,Total Facility |          
|                            |  | 2010                                      |           | 2009 |   | % change  | 
|Recovery Division           |  |                                           |           |      |   |           |  |      |   
|Residential facilities      |  |                                           |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                         | 54,050    |      | $ | 50,138    |  | 7.8  | % 
|Patient Days                |  |                                           | 145,140   |      |   | 139,839   |  | 3.8  | % 
|Net revenue per patient day |  | $                                         | 372.40    |      | $ | 358.54    |  | 3.9  | % 
|CTCs                        |  |                                           |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                         | 30,021    |      | $ | 28,248    |  | 6.3  | % 
|Patient Days                |  |                                           | 2,409,764 |      |   | 2,367,278 |  | 1.8  | % 
|Net revenue per patient day |  | $                                         | 12.46     |      | $ | 11.93     |  | 4.4  | % 
|                            |  |                                           |          
|Healthy Living Division     |  |                                           |           |      |   |           |  |      |   
|Residential facilities      |  |                                           |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                         | 16,317    |      | $ | 17,420    |  | (6.3 | )%
|Patient Days                |  |                                           | 65,802    |      |   | 68,945    |  | (4.6 | )%
|Net revenue per patient day |  | $                                         | 247.97    |      | $ | 252.66    |  | (1.9 | )%
|Outdoor programs            |  |                                           |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                         | 6,886     |      | $ | 6,818     |  | 1.0  | % 
|Patient Days                |  |                                           | 15,753    |      |   | 14,463    |  | 8.9  | % 
|Net revenue per patient day |  | $                                         | 437.09    |      | $ | 471.44    |  | (7.3 | )%
|Weight management programs  |  |                                           |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                         | 7,378     |      | $ | 6,233     |  | 18.4 | % 
|Patient Days                |  |                                           | 23,531    |      |   | 19,834    |  | 18.6 | % 
|Net revenue per patient day |  | $                                         | 313.53    |      | $ | 314.27    |  | (0.2 | )%

Consolidated
net revenue increased $5.8 million, or 5.3%, to $114.7 million for the three months ended June 30, 2010 from $108.9 million for the three months ended June 30, 2009. Of the total net revenue increase, the recovery division contributed an
increase of $5.7 million, or 7.3%, and the healthy living division contributed an increase of $0.1 million, or 0.4%. The $5.7 million, or 7.3%, increase within the recovery division was driven by increases of $3.9 million and $1.8 million within
residential facilities and CTCs, respectively. The $0.1 million, or 0.4%, increase within the healthy living division was driven by increases of $1.1 million and $0.1 million within weight management and outdoor programs, respectively, offset by a
decrease of $1.1 million in residential facilities.

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

Consolidated operating expenses increased $64.2 million, or
70.0%, to $155.9 million for the three months ended June 30, 2010 from $91.7 million in the same period of 2009. The $64.2 million increase in operating expenses was primarily driven by non-cash goodwill and asset impairment charges of $61.7
million within the healthy living division. Without considering non-cash goodwill and asset impairment charges, consolidated operating expenses increased $2.6 million, or 2.8%, over the same period of 2009. Of the $2.6 million increase, the recovery
division and the healthy living division each contributed an increase of $1.7 million, offset by a decrease of $0.8 million at corporate.

Our consolidated operating margin was (36.0)% in the three months ended June 30, 2010 compared to 15.8% in the comparable period of
2009. The decrease in operating margin resulted from non-cash goodwill and asset impairment charges. Without considering non-cash goodwill and asset impairment charges, consolidated operating margin was 17.8% in the three months ended June 30,
2010 compared to 15.8% in the comparable period of 2009. Recovery division margins for the three months ended June 30, 2010 were 35.2% compared to 32.7% in the prior year period. Healthy living division operating margin decreased to (205.9)%
for the three months ended June 30, 2010 compared to operating margin of 0.9% in the comparable period of 2009. Without considering non-cash goodwill and asset impairment charges, healthy living division operating margin was (4.4)% for the
three months ended June 30, 2010 compared to 0.9% in the comparable period of 2009.

For the three months ended
June 30, 2010, consolidated net income from continuing operations decreased by $47.1 million over the prior year period resulting in a loss from continuing operations, net of tax, of $44.3 million compared to an income from continuing
operations, net of tax, of $2.8 million in the same period of 2009. The decrease in income from continuing operations in 2010 compared to 2009 is primarily driven by non-cash goodwill and asset impairment charges of $61.7 million offset by an
increase in tax benefit of $10.3 million and increase in revenue of $5.8 million.



31



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##### Table of Contents

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



|                           |  |                                          |         |   |      |   |                       |  |   |                       |   |  |        |   
|-------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | --------------------- |  | - | --------------------- | - |  | ------ | --
|                           |  | Three Months Ended June 30,Same Facility |        
|Statement of Income Data:  |  | 2010                                     |         |   | 2009 |   | 2010 vs. 2009$ Change |  |   | 2010 vs. 2009% Change |  
|Net revenue:               |  |                                          |         |   |      |   |                       |  |   |                       |   |  |        |   
|Recovery division          |  | $                                        | 84,071  |   |      | $ | 78,386                |  | $ | 5,685                 |   |  | 7.3    | % 
|Healthy living division    |  |                                          | 30,585  |   |      |   | 30,461                |  |   | 124                   |   |  | 0.4    | % 
|                           |  |                                          |         |   |      |   |                       |  |   |                       |   |  |        |   
|Total net revenue          |  |                                          | 114,656 |   |      |   | 108,847               |  |   | 5,809                 |   |  | 5.3    | % 
|Operating expenses:        |  |                                          |         |   |      |   |                       |  |   |                       |   |  |        |   
|Recovery division          |  |                                          | 49,305  |   |      |   | 47,397                |  |   | 1,908                 |   |  | 4.0    | % 
|Healthy living division(1) |  |                                          | 46,332  |   |      |   | 26,773                |  |   | 19,559                |   |  | 73.1   | % 
|                           |  |                                          |         |   |      |   |                       |  |   |                       |   |  |        |   
|Total operating expenses   |  |                                          | 95,637  |   |      |   | 74,170                |  |   | 21,467                |   |  | 28.9   | % 
|Operating income (loss):   |  |                                          |         |   |      |   |                       |  |   |                       |   |  |        |   
|Recovery division          |  |                                          | 34,766  |   |      |   | 30,989                |  |   | 3,777                 |   |  | 12.2   | % 
|Healthy living division    |  |                                          | (15,747 | ) |      |   | 3,688                 |  |   | (19,435               | ) |  | (527.0 | )%
|                           |  |                                          |         |   |      |   |                       |  |   |                       |   |  |        |   
|Operating income           |  | $                                        | 19,019  |   |      | $ | 34,677                |  | $ | (15,658               | ) |  | (45.2  | )%
|                           |  |                                          |         |   |      |   |                       |  |   |                       |   |  |        |   



|(1) | Healthy living division operating expenses for the three months ended June 30, 2010, include $17.9 million asset impairment.
|--- | ----------------------------------------------------------------------------------------------------------------------------

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



|                            |  |                                           |           |      |   |           |  |      |   
|--------------------------- |  | ----------------------------------------- | --------- | ---- | - | --------- |  | ---- | --
|                            |  | Three Months Ended June 
30,Same Facility |          
|                            |  | 2010                                      |           | 2009 |   | % change  | 
|Recovery Division           |  |                                           |           |      |   |           |  |      |   
|Residential facilities      |  |                                           |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                         | 54,050    |      | $ | 50,138    |  | 7.8  | % 
|Patient Days                |  |                                           | 145,140   |      |   | 139,839   |  | 3.8  | % 
|Net revenue per patient day |  | $                                         | 372.40    |      | $ | 358.54    |  | 3.9  | % 
|CTCs                        |  |                                           |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                         | 30,021    |      | $ | 28,248    |  | 6.3  | % 
|Patient Days                |  |                                           | 2,409,764 |      |   | 2,367,278 |  | 1.8  | % 
|Net revenue per patient day |  | $                                         | 12.46     |      | $ | 11.93     |  | 4.4  | % 
|                            |  |                                           |          
|Healthy Living Division     |  |                                           |           |      |   |           |  |      |   
|Residential facilities      |  |                                           |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                         | 16,317    |      | $ | 17,420    |  | (6.3 | )%
|Patient Days                |  |                                           | 65,802    |      |   | 68,945    |  | (4.6 | )%
|Net revenue per patient day |  | $                                         | 247.97    |      | $ | 252.66    |  | (1.9 | )%
|Outdoor programs            |  |                                           |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                         | 6,886     |      | $ | 6,818     |  | 1.0  | % 
|Patient Days                |  |                                           | 15,753    |      |   | 14,463    |  | 8.9  | % 
|Net revenue per patient day |  | $                                         | 437.09    |      | $ | 471.44    |  | (7.3 | )%
|Weight management programs  |  |                                           |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                         | 7,378     |      | $ | 6,222     |  | 18.6 | % 
|Patient Days                |  |                                           | 23,531    |      |   | 19,834    |  | 18.6 | % 
|Net revenue per patient day |  | $                                         | 313.53    |      | $ | 313.73    |  | (0.1 | )%

On a
same-facility basis, recovery division net revenue increased $5.7 million, or 7.3%, to $84.1 million from $78.4 million in the same prior year quarter. The same-facility increases were due to increases of $3.9 million within residential facilities
and $1.8 million within CTCs. Healthy living division same-facility revenue increased $0.1 million or 0.4% to $30.6 million from $30.5 million in the prior year quarter. The $0.1 million same-facility revenue increase within the healthy living
division was driven by increases of $1.1 million and $0.1 million within weight management and outdoor programs, respectively, offset by a decrease of $1.1 million in residential facilities.

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



32



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##### Table of Contents

On a same-facility basis, recovery division operating expenses increased $1.9 million driven
by an increase of $1.4 million in residential facilities and an increase of $0.5 million in CTCs compared to the same prior year quarter. Healthy living division same-facility operating expenses increased $19.6 million due to asset impairment
charges of $17.9 million. The remaining $1.7 million is related to $1.1 million increase in salaries and benefits, and $0.9 million increase in supplies, facilities and other costs, offset by $0.4 million decrease in depreciation and amortization.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

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



|                                                                                                                                          |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   
|----------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------- | --------------------- |  | - | --------------------- | - |  | -------- | --
|                                                                                                                                          |  | Six Months Ended June 30,Total Facility |        
|Statement of Income Data:                                                                                                                 |  | 2010                                    |         |   | 2009 |   |         | 2010 vs. 2009$ Change |  |   | 2010 vs. 2009% Change |  
|Net revenue:                                                                                                                              |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   
|Recovery division                                                                                                                         |  | $                                       | 163,120 |   |      | $ | 153,450 |                       |  | $ | 9,670                 |   |  | 6.3      | % 
|Healthy living division                                                                                                                   |  |                                         | 55,517  |   |      |   | 58,195  |                       |  |   | (2,678                | ) |  | (4.6     | )%
|Corporate                                                                                                                                 |  |                                         | 98      |   |      |   | 126     |                       |  |   | (28                   | ) |  | (22.2    | )%
|                                                                                                                                          |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   
|Total net revenue                                                                                                                         |  |                                         | 218,735 |   |      |   | 211,771 |                       |  |   | 6,964                 |   |  | 3.3      | % 
|Operating expenses:                                                                                                                       |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   
|Recovery division                                                                                                                         |  |                                         | 108,194 |   |      |   | 107,188 |                       |  |   | 1,006                 |   |  | 0.9      | % 
|Healthy
living division                                                                                                                   |  |                                         | 122,670 |   |      |   | 61,169  |                       |  |   | 61,501                |   |  | 100.5    | % 
|Corporate                                                                                                                                 |  |                                         | 16,288  |   |      |   | 16,759  |                       |  |   | (471                  | ) |  | (2.8     | )%
|                                                                                                                                          |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   
|Total operating expenses                                                                                                                  |  |                                         | 247,152 |   |      |   | 185,116 |                       |  |   | 62,036                |   |  | 33.5     | % 
|Operating income (loss):                                                                                                                  |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   
|Recovery division                                                                                                                         |  |                                         | 54,926  |   |      |   | 46,262  |                       |  |   | 8,664                 |   |  | 18.7     | % 
|Healthy living division(1)                                                                                                                |  |                                         | (67,153 | ) |      |   | (2,974  | )                     |  |   | (64,179               | ) |  | 2,158.0  | % 
|Corporate                                                                                                                                 |  |                                         | (16,190 | ) |      |   | (16,633 | )                     |  |   | 443                   |   |  | (2.7     | )%
|                                                                                                                                          |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   
|Operating (loss) income                                                                                                                   |  |                                         | (28,417 | ) |      |   | 26,655  |                       |  |   | (55,072               | ) |  | (206.6   | )%
|Interest expense                                                                                                                          |  |                                         | (21,517 | ) |      |   | (23,818 | )                     |  |   | 2,301                 |   |  | (9.7     | )%
|Other expense                                                                                                                             |  |                                         | (88     | ) |      |   | (82     | )                     |  |   | (6                    | ) |  | 7.3      | % 
|                                                                                                                                          |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   
|(Loss) income from continuing operations before income taxes                                                                              |  |                                         | (50,022 | ) |      |   | 2,755   |                       |  |   | (52,777               | ) |  | (1,915.7 | )%
|Income tax (benefit) expense                                                                                                              |  |                                         | (6,936  | ) |      |   | 247     |                       |  |   | (7,183                | ) |  | (2,908.1 | )%
|                                                                                                                                          |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   
|(Loss) income from continuing operations, net of tax                                                                                      |  |                                         | (43,086 | ) |      |   | 2,508   |                       |  |   | (45,594               | ) |  | (1,817.9 | )%
|Loss from discontinued operations, (net of tax benefit of ($314) and ($838) in the six months ended June 30, 2010 and 2009,
respectively) |  |                                         | (507    | ) |      |   | (1,491  | )                     |  |   | 984                   |   |  | (66.0    | )%
|                                                                                                                                          |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   
|Net (loss) income                                                                                                                         |  |                                         | (43,593 | ) |      |   | 1,017   |                       |  |   | (44,610               | ) |  | (4,386.4 | )%
|Less: Net loss attributable to the noncontrolling interest                                                                                |  |                                         |        |   |      |   | (119    | )                     |  |   | 119                   |   |  | (100.0   | )%
|                                                                                                                                          |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   
|Net (loss) income attributable to CRC Health Corporation                                                                                  |  | $                                       | (43,593 | ) |      | $ | 1,136   |                       |  | $ | (44,729               | ) |  | (3,937.4 | )%
|                                                                                                                                          |  |                                         |         |   |      |   |         |                       |  |   |                       |   |  |          |   



|(1) | Healthy living division operating expenses for the six months ended June 30, 2010 include $18.0 million asset impairment and $43.7 million goodwill impairment.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



33



---

##### Table of Contents

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



|                            |  |                                         |           |      |   |           |  |      |   
|--------------------------- |  | --------------------------------------- | --------- | ---- | - | --------- |  | ---- | --
|                            |  | Six Months Ended June 30,Total
Facility |          
|                            |  | 2010                                    |           | 2009 |   | % change  | 
|Recovery Division           |  |                                         |           |      |   |           |  |      |   
|Residential facilities      |  |                                         |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                       | 104,669   |      | $ | 97,994    |  | 6.8  | % 
|Patient Days                |  |                                         | 285,394   |      |   | 274,230   |  | 4.1  | % 
|Net revenue per patient day |  | $                                       | 366.75    |      | $ | 357.34    |  | 2.6  | % 
|CTCs                        |  |                                         |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                       | 58,451    |      | $ | 55,456    |  | 5.4  | % 
|Patient Days                |  |                                         | 4,755,255 |      |   | 4,658,976 |  | 2.1  | % 
|Net revenue per patient day |  | $                                       | 12.29     |      | $ | 11.90     |  | 3.3  | % 
|Healthy Living Division     |  |                                         |           |      |   |           |  |      |   
|Residential facilities      |  |                                         |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                       | 31,433    |      | $ | 34,754    |  | (9.6 | )%
|Patient Days                |  |                                         | 127,975   |      |   | 137,063   |  | (6.6 | )%
|Net revenue per patient day |  | $                                       | 245.62    |      | $ | 253.56    |  | (3.1 | )%
|Outdoor programs            |  |                                         |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                       | 11,665    |      | $ | 12,482    |  | (6.5 | )%
|Patient Days                |  |                                         | 26,805    |      |   | 26,580    |  | 0.8  | % 
|Net revenue per patient day |  | $                                       | 435.18    |      | $ | 469.60    |  | (7.3 | )%
|Weight management programs  |  |                                         |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                       | 12,393    |      | $ | 10,938    |  | 13.3 | % 
|Patient Days                |  |                                         | 38,815    |      |   | 34,230    |  | 13.4 | % 
|Net revenue per patient day |  | $                                       | 319.28    |      | $ | 319.54    |  | (0.1 | )%

Consolidated
net revenue increased $7.0 million, or 3.3%, to $218.7 million for the six months ended June 30, 2010 from $211.7 million for the six months ended June 30, 2009. Of the total net revenue increase, the recovery division contributed an
increase of $9.7 million, or 6.3%, which was partially offset by a decrease within the healthy living division of $2.7 million. The $9.7 million, or 6.3%, increase within the recovery division was driven by increases of $6.7 million and $3.0 million
within residential facilities and CTCs, respectively. The $2.7 million, or 4.6%, decrease within the healthy living division was driven by decreases of $3.3 million and $0.8 million within residential facilities and outdoor programs, respectively,
offset by an increase of $1.5 million in weight management programs.

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

Consolidated operating expenses increased
$62.0 million, or 33.5%, to $247.1 million for the six months ended June 30, 2010 from $185.1 million in the same period of 2009. The $62.0 million increase in operating expenses was primarily driven by non-cash goodwill and asset impairment
charges of $61.7 million within the healthy living division. Without considering non-cash goodwill and asset impairment charges, consolidated operating expenses increased $0.4 million over the same period of 2009.

Our consolidated operating margin was (13.0)% in the six months ended June 30, 2010 compared to 12.6% in the comparable period of
2009. The decrease in operating margin resulted from non-cash goodwill and asset impairment charges in the healthy living division. Without considering non-cash goodwill and asset impairment charges, consolidated operating margin was 15.2% in the
six months ended June 30, 2010 compared to 12.6% in the comparable period of 2009. Recovery division margins for the six months ended June 30, 2010 were 33.7% compared to 30.1% in the prior year period. Healthy living division operating
margin decreased to (121.0)% for the six months ended June 30, 2010 compared to operating margin of (5.1)% in the comparable period of 2009. Without considering non-cash goodwill and asset impairment charges, healthy living division operating
margin was (9.9)% for the six months ended June 30, 2010 compared to (5.1)% in the comparable period of 2009.

For the
six months ended June 30, 2010, consolidated net income from continuing operations decreased by $45.6 million over the prior year period resulting in a loss from continuing operations, net of tax, of $43.1 million compared to an income from
continuing operations, net of tax, of $2.5 million in the same period of 2009. The decrease in income from continuing operations in 2010 compared to 2009 is primarily driven by non-cash goodwill and asset impairment charges of $61.7 million offset
by an increase in tax benefit of $7.2 million and an increase of $7.0 million in revenue and a decrease in interest expense of $2.3 million.



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



|                           |  |                                        |         |   |      |   |                       |  |   |                       |   |  |        |   
|-------------------------- |  | -------------------------------------- | ------- | - | ---- | - | --------------------- |  | - | --------------------- | - |  | ------ | --
|                           |  | Six Months Ended June 30,Same Facility |        
|Statement of Income Data:  |  | 2010                                   |         |   | 2009 |   | 2010 vs. 2009$ Change |  |   | 2010 vs. 2009% Change |  
|Net revenue:               |  |                                        |         |   |      |   |                       |  |   |                       |   |  |        |   
|Recovery division          |  | $                                      | 163,120 |   |      | $ | 153,450               |  | $ | 9,670                 |   |  | 6.3    | % 
|Healthy living division    |  |                                        | 55,498  |   |      |   | 58,105                |  |   | (2,607                | ) |  | (4.5   | )%
|                           |  |                                        |         |   |      |   |                       |  |   |                       |   |  |        |   
|Total net revenue          |  |                                        | 218,618 |   |      |   | 211,555               |  |   | 7,063                 |   |  | 3.3    | % 
|Operating expenses:        |  |                                        |         |   |      |   |                       |  |   |                       |   |  |        |   
|Recovery division          |  |                                        | 97,800  |   |      |   | 95,770                |  |   | 2,030                 |   |  | 2.1    | % 
|Healthy
living division(1) |  |                                        | 72,064  |   |      |   | 53,144                |  |   | 18,920                |   |  | 35.6   | % 
|                           |  |                                        |         |   |      |   |                       |  |   |                       |   |  |        |   
|Total operating expenses   |  |                                        | 169,864 |   |      |   | 148,914               |  |   | 20,950                |   |  | 14.1   | % 
|Operating income (loss):   |  |                                        |         |   |      |   |                       |  |   |                       |   |  |        |   
|Recovery division          |  |                                        | 65,320  |   |      |   | 57,680                |  |   | 7,640                 |   |  | 13.2   | % 
|Healthy living division    |  |                                        | (16,566 | ) |      |   | 4,961                 |  |   | (21,527               | ) |  | (433.9 | )%
|                           |  |                                        |         |   |      |   |                       |  |   |                       |   |  |        |   
|Operating income           |  | $                                      | 48,754  |   |      | $ | 62,641                |  | $ | (13,887               | ) |  | (22.2  | )%
|                           |  |                                        |         |   |      |   |                       |  |   |                       |   |  |        |   



|(1) | Healthy living division operating expenses for the six months ended June 30, 2010 include $17.9 million asset impairment.
|--- | -------------------------------------------------------------------------------------------------------------------------

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



|                            |  |                                        |           |      |   |           |  |      |   
|--------------------------- |  | -------------------------------------- | --------- | ---- | - | --------- |  | ---- | --
|                            |  | Six Months Ended June 30,Same
Facility |          
|                            |  | 2010                                   |           | 2009 |   | % change  | 
|Recovery Division           |  |                                        |           |      |   |           |  |      |   
|Residential facilities      |  |                                        |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                      | 104,669   |      | $ | 97,994    |  | 6.8  | % 
|Patient Days                |  |                                        | 285,394   |      |   | 274,230   |  | 4.1  | % 
|Net revenue per patient day |  | $                                      | 366.75    |      | $ | 357.34    |  | 2.6  | % 
|CTCs                        |  |                                        |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                      | 58,451    |      | $ | 55,456    |  | 5.4  | % 
|Patient Days                |  |                                        | 4,755,255 |      |   | 4,658,976 |  | 2.1  | % 
|Net revenue per patient day |  | $                                      | 12.29     |      | $ | 11.90     |  | 3.3  | % 
|                            |  |                                        |          
|Healthy Living Division     |  |                                        |           |      |   |           |  |      |   
|Residential facilities      |  |                                        |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                      | 31,433    |      | $ | 34,754    |  | (9.6 | )%
|Patient Days                |  |                                        | 127,975   |      |   | 137,063   |  | (6.6 | )%
|Net revenue per patient day |  | $                                      | 245.62    |      | $ | 253.56    |  | (3.1 | )%
|Outdoor programs            |  |                                        |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                      | 11,665    |      | $ | 12,482    |  | (6.5 | )%
|Patient Days                |  |                                        | 26,805    |      |   | 26,580    |  | 0.8  | % 
|Net revenue per patient day |  | $                                      | 435.18    |      | $ | 469.60    |  | (7.3 | )%
|Weight management programs  |  |                                        |           |      |   |           |  |      |   
|Revenue (in thousands)      |  | $                                      | 12,393    |      | $ | 10,869    |  | 14.0 | % 
|Patient Days                |  |                                        | 38,815    |      |   | 34,230    |  | 13.4 | % 
|Net revenue per patient day |  | $                                      | 319.28    |      | $ | 317.53    |  | 0.6  | % 

On a
same-facility basis, recovery division net revenue increased $9.7 million, or 6.3%, to $163.1 million from $153.4 million in the same prior year period. The same-facility increases were due to increases of $3.0 million within CTCs and $6.7 million
within residential facilities. Healthy living division same-facility revenue decreased $2.6 million, or 4.5%, to $55.5 million from $58.1 million in the same prior year period. The $2.6 million same-facility revenue decrease within the healthy
living division was driven by decreases of $3.3 million and $0.8 million within residential facilities and outdoor programs, respectively, offset by an increase of $1.5 million in weight management programs.

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



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On a same-facility basis, recovery division operating expenses increased $2.0 million driven
by an increase of $1.7 million in residential facilities and an increase of $0.3 million in CTCs compared to the same prior year period. Healthy living division same-facility operating expenses increased $18.9 million due to asset impairment charges
of $17.9 million. The remaining $1.0 million increase is mainly due to the increase in supplies, facilities and other costs.

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 $18.8 million at June 30, 2010 compared to negative
working capital of $15.3 million at December 31, 2009. The decrease of $3.5 million in working capital was attributable to an increase in accounts payable of $3.2 million related to payment timing; an increase in accrued liabilities
of $7.0 million related primarily to timing of payroll accrual; and a net increase in taxes payable of $5.5 million. These were offset by a reduction in the current portion of long-term debt of $7.1 million due to a prepayment in
2010 and an increase in cash of $5.7 million.

Sources and Uses of Cash



|                                          |                |                          |         |      |  |   |         |  
|----------------------------------------- | -------------- | ------------------------ | ------- | ---- |  | - | ------- | -
|                                          |                | Six Months EndedJune 30, |        
|                                          | 2010           |                          |         | 2009 | 
|                                          | (In thousands) |                         
|Net cash provided by operating activities |                | $                        | 37,760  |      |  | $ | 28,476  |  
|Net cash used in investing activities     |                |                          | (8,915  | )    |  |   | (4,113  | )
|Net cash used in financing activities     |                |                          | (23,167 | )    |  |   | (11,386 | )
|                                          |                |                          |         |      |  |   |         |  
|Net increase in cash                      |                | $                        | 5,678   |      |  | $ | 12,977  |  
|                                          |                |                          |         |      |  |   |         |  

Cash provided by operating activities was $37.8 million for the six months ended June 30, 2010 compared to
cash provided by operating activities of $28.5 million during the same period in 2009. The increase of $9.3 million in cash flows from operating was primarily the result of cash provided by improved operating results offset by an increase
of $2.0 million in loan program note purchases.

Cash used in investing activities was $8.9 million for the six months
ended June 30, 2010 compared to $4.1 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 six months
ended June 30, 2010 compared to June 30, 2009.

Cash used in financing activities was $23.2 million for the six
months ended June 30, 2010 compared to cash used in financing activities of $11.4 million for the same period in 2009. The increase in cash used in financing activities is primarily due to an increase of $4.6 million in repayment of the term
loan and seller notes and the increase of $7.5 million in the net repayments of the revolving line of credit, offset by $0.4 million decrease in other financing activities.

Financing and Liquidity

We fund our ongoing operations through cash generated by operations, funds available under the revolving portion of our senior secured
credit facility and existing cash and cash equivalents. As of June 30, 2010, our senior secured credit facility was comprised of a $398.3 million senior secured term loan facility and a $100.0 million revolving credit facility. At June 30,
2010, the revolving credit facility had $58.1 million available for borrowing, $32.0 million outstanding and classified on our balance sheet as long term debt, and $9.9 million of letters of credit issued and outstanding. At June 30, 2010,
we had $177.3 million in aggregate principal amount of 10.75% senior subordinated notes due 2016. We anticipate that cash generated by operations, the remaining funds available under the revolving portion of our senior secured credit facility and
existing cash and cash equivalents will be sufficient to meet working capital requirements, service our debt and finance capital expenditures over the next 12 months.



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

Under the terms of
our borrowing arrangements, we are required to comply with various covenants, including the maintenance of certain financial ratios. As of June 30, 2010, we were in compliance with all such covenants. A breach of these could result in a default
under our credit facilities and in our being unable to borrow additional amounts under our revolving credit facility. If an event of default occurs, the lenders could elect to declare all amounts borrowed under our credit facilities to be
immediately due and payable and the lenders under our term loans and revolving credit facility could proceed against the collateral securing the indebtedness.



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

For quantitative and qualitative disclosures about market risk affecting us, see Quantitative and Qualitative Disclosure about
Market Risk in Item 7A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2009. As of June 30, 2010, our exposure to market risk has not changed materially since December 31, 2009.



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

Evaluation of Disclosure Controls and Procedures

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

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



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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 June 30, 2010, there have been no material changes to the factors disclosed in Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009.



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

The Exhibit
Index beginning on page 39 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: August 16, 2010



CRC HEALTH CORPORATION(Registrant)By

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




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CRC HEALTH CORPORATION

EXHIBIT INDEX



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



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

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



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