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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q /A

Amendment No.1 to Form 10-Q





(Mark One)

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

For the quarterly period ended: March 31, 2011

or



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

For the transition period from  to

Commission file number 333-135172





CRC HEALTH CORPORATION

(Exact name of registrant as specified in its charter)







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

(877) 272-8668

(Registrants telephone number, including area code)





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

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

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



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

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

The total number of shares of the registrants common stock, par value of $0.001 per share, outstanding as of October 17, 2011
was 1,000.









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CRC HEALTH CORPORATION

INDEX



|              |  |                       |    |                                                                                                                           |   |          |    | 
|------------- |  | --------------------- | -- | ------------------------------------------------------------------------------------------------------------------------- | - | -------- | -- | 
|              |  |                       |    |                                                                                                                           |   | Page No. |   
|              |  |                      
|              |  | Explanatory Note      |    |                                                                                                                           | 3 |         
|              |  |                      
|Part I.       |  | Financial Information |    |                                                                                                                           |   |         
|              |  | Item 1.               |    | Financial Statements (Unaudited)                                                                                          |   |          |    | 
|              |  |                       |    | Condensed Consolidated Balance Sheets as of March 31, 2011 (Restated) and December 31,
2010                               |   |          | 5  | 
|              |  |                       |    | Condensed Consolidated Statements of Operations for the three months ended March 31, 2011(Restated) and 2010
 (Restated)  |   |          | 6  | 
|              |  |                       |    | Condensed Consolidated Statements of Cash Flows for the 
three months ended March 31, 2011 (Restated) and 2010 (Restated) |   |          | 7  | 
|              |  |                       |    | Notes to Condensed Consolidated Financial Statements                                                                      |   |          | 8  | 
|              |  | Item 2.               |    | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                     |   |          | 34 | 
|              |  | Item 3.               |    | Quantitative and Qualitative Disclosure About Market Risk                                                                 |   |          | 42 | 
|              |  | Item 4.               |    | Controls and Procedures                                                                                                   |   |          | 42 | 
|Part II.      |  | Other Information     |    |                                                                                                                           |   |         
|              |  | Item 1A.              |    | Risk Factors                                                                                                              |   |          | 44 | 
|              |  | Item 6.               |    | Exhibits                                                                                                                  |   |          | 44 | 
|Signature     |  |                       | 45 |                                                                                                                          
|Exhibit Index |  |                       | 46 |                                                                                                                          

Forward-Looking Statements

This Quarterly Report on Form 10-Q/A, including Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I of this
Quarterly Report, includes or may include forward-looking statements. All statements included herein, other than statements of historical fact, may constitute forward-looking statements. In some cases you can identify forward-looking
statements by terminology such as may, should or could. Generally, the words anticipates, believes, expects, intends, estimates, projects,
plans and similar expressions identify forward-looking statements. Although CRC Health Corporation (CRC) believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following factors: effect of
healthcare reform and other changes in government reimbursement for CRCs services; reductions in the availability of governmental and private financial aid for CRCs youth treatment programs; CRCs substantial indebtedness; changes
in applicable regulations or a government investigation or assertion that CRC has violated applicable regulations; attempts by local residents to force the closure or relocation of CRCs facilities; the potentially difficult, unsuccessful or
costly integration of acquired operations and future acquisitions; the potentially difficult, unsuccessful or costly opening and operating of new treatment programs; implementation of the strategic plan for improving performance of the Aspen
business may not be successful; the possibility that commercial payors for CRCs services may undertake future cost containment initiatives; the limited number of national suppliers of methadone used in CRCs outpatient treatment clinics;
the failure to maintain established relationships or cultivate new relationships with patient referral sources; shortages in qualified healthcare workers; natural disasters such as hurricanes, earthquakes and floods; competition that limits
CRCs ability to grow; the potentially costly implementation of new information systems to comply with federal and state initiatives relating to patient privacy, security of medical information and electronic transactions; the potentially
costly implementation of accounting and other management systems and resources in response to financial reporting and other requirements; the loss of key members of CRCs management; claims asserted against CRC or lack of adequate available
insurance; Securities and Exchange Commission review of financial restatements; material weakness in our internal controls over financial reporting, 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/A for the year ended December 31, 2010 filed on October 17, 2011, and that are otherwise described from
time to time in CRCs Securities and Exchange Commission filings after this Quarterly Report. CRC assumes no obligation and does not intend to update these forward-looking statements.



2



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Explanatory Note

We are filing this Amended Quarterly Report on Form 10-Q/A (the Amended Filing or Form 10-Q/A) to our Quarterly
Report on Form 10-Q for the three months ended March 31, 2011 (the Original Filing) to amend and restate our condensed consolidated financial statements, financial data and related disclosures as a result of errors identified in
connection with an independent review initiated by our Board of Directors and management, as discussed in Note 2 to the accompanying restated condensed consolidated financial statements. The Original Filing was filed with the Securities and
Exchange Commission (the SEC) on May 13, 2011. We have also filed an Amended Annual Report on Form 10-K/A for the year ended December 31, 2010 with the SEC on October 17, 2011 immediately preceding the filing of this
report.

Restatement of Previously Issued Condensed Consolidated Financial Statements

On August 16, 2011, we announced that we were conducting a review of inconsistencies in the accounts at one of our recovery
residential treatment facilities (the Facility). In 2009 and 2010, such Facility accounted for approximately 2.9% and 3.2%, respectively, of the Companys total revenue. On October 4, 2011, the Board of Directors of the Company
(the Board), in consultation with the Audit Committee of the Board (the Audit Committee) and management, adopted the conclusions of the investigation and concluded that our previously issued consolidated financial statements
for the years ended December 31, 2008, 2009 and 2010, along with the accompanying independent auditors reports and our previously issued condensed consolidated financial statements for the fiscal quarter ended March 31, 2011 should
not be relied upon because of errors identified in such financial statements.

Management initially identified certain errors
upon initiating an internal investigation after noting inconsistencies in accounting for certain transactions at the Facility. Following a briefing by management on the issues, the Audit Committee hired independent counsel to conduct a review
of accounting transactions at the Facility. The investigation is complete and the Audit Committee identified issues related to misconduct by a former employee of the Facility as well as errors in accounting for revenue, accounts receivable, bad debt
expenses and general expenses. The investigation did not identify any instances in which patients or third party payors were incorrectly billed for services. As a result of these errors, we have restated our previously issued consolidated financial
statements for the years ended December 31, 2008, December 31, 2009 and December 31, 2010, including the quarterly data for the years 2009 and 2010, and for the fiscal quarter ended March 31, 2011.

We have also self-reported information concerning our review to the Securities and Exchange Commission (the SEC) and will
cooperate with the SECs review of this matter.

The restated condensed consolidated financial statements for the three
months ended March 31, 2011 and 2010, include adjustments to correct the following errors (in thousands):



| |  |  | $418 of revenue was improperly recognized in the three months ended March 31, 2011. $59 of revenue should have been recognized in the three months
ended March 31, 2010. The revenue recognition issues resulted primarily from a failure by a former employee of the Facility to use correct billing rates and to accurately record services provided. We did not identify any instances in which patients
or third party payors were incorrectly billed for services.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $185 and $85 of provision for doubtful accounts were understated for the three months ended March 31, 2011 and 2010, respectively. The understatement
resulted primarily from errors in the processes used by a former employee of the Facility in aging the receivables and the application of allowance percentages.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $95 and $22 of operating expenses should have been recognized in the three months ended March 31, 2011, and 2010, respectively. These adjustments
resulted primarily from errors in accruing for expenses and properly classifying and documenting prepaid assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $289 and $20 of income tax benefit for the tax effect of the items at the Facility in the three months ended March 31, 2011 and 2010, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

The restated condensed consolidated financial statements reflect adjustments to correct other previously
identified adjustments that had been previously considered immaterial and recorded so that they are now recorded in the proper period.



3



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Internal Control Considerations

As a result of the errors discussed above, management has now determined that the Company had a material weakness in our internal control
over financial reporting at March 31, 2011. The material weakness is described in Part I Item 4 of this Quarterly Report.

For the convenience of the reader, this Amended Filing sets forth the Original Filing in its entirety, as modified and superseded where necessary to reflect the restatement. The following items have
been amended principally as a result of, and to reflect, the restatement:



| |  |  | Part I  Item 1. Financial Statements;
| | - |  | --------------------------------------



| |  |  | Part I  Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Part I  Item 4. Controls and Procedures; and
| | - |  | ---------------------------------------------



| |  |  | Part II  Item 1A. Risk Factors;
| | - |  | --------------------------------



| |  |  | Part II  Item 6. Exhibits.
| | - |  | ---------------------------

In accordance with applicable SEC rules, this Amended Filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.



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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

MARCH 31, 2011 AND DECEMBER 31, 2010

(In thousands, except share amounts)



|                                                                                                                         |  |                           |           |  |                  |   |           | 
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | --------- |  | ---------------- | - | --------- | 
|                                                                                                                         |  | March 31,2011             |           |  | December 31,2010 |  
|                                                                                                                         |  | (As Restated,
see Note 2) |           |  |                  |  
|ASSETS                                                                                                                   |  |                           |           |  |                  |   |           | 
|Current assets:                                                                                                          |  |                           |           |  |                  |   |           | 
|Cash and cash equivalents                                                                                                |  | $                         | 6,894     |  |                  | $ | 7,111     | 
|Restricted cash                                                                                                          |  |                           | 897       |  |                  |   | 546       | 
|Accounts receivable (net of allowance for doubtful accounts of $5,563 in 2011 and $5,408 in 2010)                        |  |                           | 35,564    |  |                  |   | 31,873    | 
|Prepaid expenses                                                                                                         |  |                           | 7,602     |  |                  |   | 8,530     | 
|Other current assets                                                                                                     |  |                           | 2,048     |  |                  |   | 1,921     | 
|Income taxes receivable                                                                                                  |  |                           | 974       |  |                  |   | 470       | 
|Deferred income taxes                                                                                                    |  |                           | 6,761     |  |                  |   | 6,761     | 
|Current assets of discontinued operations                                                                                |  |                           | 1,409     |  |                  |   | 1,635     | 
|                                                                                                                         |  |                           |           |  |                  |   |           | 
|Total current assets                                                                                                     |  |                           | 62,149    |  |                  |   | 58,847    | 
|PROPERTY AND EQUIPMENT - Net                                                                                             |  |                           | 125,832   |  |                  |   | 125,626   | 
|GOODWILL - Net                                                                                                           |  |                           | 521,807   |  |                  |   | 521,807   | 
|OTHER INTANGIBLE ASSETS - Net                                                                                            |  |                           | 308,549   |  |                  |   | 314,032   | 
|OTHER ASSETS - Net                                                                                                       |  |                           | 22,081    |  |                  |   | 19,411    | 
|                                                                                                                         |  |                           |           |  |                  |   |           | 
|TOTAL ASSETS                                                                                                             |  | $                         | 1,040,418 |  |                  | $ | 1,039,723 | 
|                                                                                                                         |  |                           |           |  |                  |   |           | 
|                                                                                                                         |  |                          
|LIABILITIES AND EQUITY                                                                                                   |  |                           |           |  |                  |   |           | 
|CURRENT LIABILITIES:                                                                                                     |  |                           |           |  |                  |   |           | 
|Accounts payable                                                                                                         |  | $                         | 4,483     |  |                  | $ | 4,937     | 
|Accrued liabilities                                                                                                      |  |                           | 30,922    |  |                  |   | 30,856    | 
|Current portion of long-term debt                                                                                        |  |                           | 23,502    |  |                  |   | 11,111    | 
|Other current liabilities                                                                                                |  |                           | 18,245    |  |                  |   | 18,305    | 
|Current liabilities of discontinued operations                                                                           |  |                           | 2,764     |  |                  |   | 3,619     | 
|                                                                                                                         |  |                           |           |  |                  |   |           | 
|Total current liabilities                                                                                                |  |                           | 79,916    |  |                  |   | 68,828    | 
|                                                                                                                         |  |                           |           |  |                  |   |           | 
|LONG TERM DEBT - Less current portion                                                                                    |  |                           | 587,967   |  |                  |   | 598,915   | 
|OTHER LONG-TERM LIABILITIES                                                                                              |  |                           | 8,605     |  |                  |   | 8,786     | 
|LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS                                                                         |  |                           | 3,077     |  |                  |   | 3,142     | 
|DEFERRED INCOME TAXES                                                                                                    |  |                           | 105,523   |  |                  |   | 105,079   | 
|                                                                                                                         |  |                           |           |  |                  |   |           | 
|Total liabilities                                                                                                        |  |                           | 785,088   |  |                  |   | 784,750   | 
|                                                                                                                         |  |                           |           |  |                  |   |           | 
|COMMITMENTS AND CONTINGENCIES (Note 12)                                                                                  |  |                           |           |  |                  |   |           | 
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY                                                                              |  |                           |           |  |                  |   |           | 
|Common stock, $0.001 par value - 1,000 shares authorized, issued and outstanding at March 31, 2011 and December 31,
2010 |  |                           | -         |  |                  |   | -         | 
|Additional paid-in capital                                                                                               |  |                           | 463,163   |  |                  |   | 462,970   | 
|Accumulated deficit                                                                                                      |  |                           | (206,778) |  |                  |   | (205,891) | 
|Accumulated other comprehensive loss                                                                                     |  |                           | (1,055)   |  |                  |   | (2,106)   | 
|                                                                                                                         |  |                           |           |  |                  |   |           | 
|Total CRC Health Corporation stockholders equity                                                                        |  |                           | 255,330   |  |                  |   | 254,973   | 
|                                                                                                                         |  |                           |           |  |                  |   |           | 
|Total equity                                                                                                             |  |                           | 255,330   |  |                  |   | 254,973   | 
|                                                                                                                         |  |                           |           |  |                  |   |           | 
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                               |  | $                         | 1,040,418 |  |                  | $ | 1,039,723 | 
|                                                                                                                         |  |                           |           |  |                  |   |           | 

See notes to unaudited condensed consolidated financial statements.



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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(In thousands)



|                                                                                                                                                              |  |                                 |          |  |                                 |   |          | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------- |  | ------------------------------- | - | -------- | 
|                                                                                                                                                              |  | Three MonthsEnded March 31,2011 |          |  | Three MonthsEnded March 31,2010 |  
|                                                                                                                                                              |  | (As Restated,
see Note 2)       |          |  | (As Restated, see Note 2)       |  
|NET REVENUE:                                                                                                                                                  |  |                                 |          |  |                                 |   |          | 
|Net client service revenues                                                                                                                                   |  | $                               | 111,443  |  |                                 | $ | 103,636  | 
|                                                                                                                                                              |  |                                 |          |  |                                 |   |          | 
|OPERATING EXPENSES:                                                                                                                                           |  |                                 |          |  |                                 |   |          | 
|Salaries and benefits                                                                                                                                         |  |                                 | 57,347   |  |                                 |   | 53,149   | 
|Supplies, facilities and other operating costs                                                                                                                |  |                                 | 32,846   |  |                                 |   | 29,441   | 
|Provision for doubtful accounts                                                                                                                               |  |                                 | 1,856    |  |                                 |   | 1,905    | 
|Depreciation and amortization                                                                                                                                 |  |                                 | 4,902    |  |                                 |   | 5,553    | 
|Asset impairments                                                                                                                                             |  |                                 | 4,401    |  |                                 |   | -        | 
|                                                                                                                                                              |  |                                 |          |  |                                 |   |          | 
|Total operating expenses                                                                                                                                      |  |                                 | 101,352  |  |                                 |   | 90,048   | 
|                                                                                                                                                              |  |                                 |          |  |                                 |   |          | 
|OPERATING INCOME                                                                                                                                              |  |                                 | 10,091   |  |                                 |   | 13,588   | 
|INTEREST EXPENSE, NET                                                                                                                                         |  |                                 | (11,756) |  |                                 |   | (10,805) | 
|OTHER INCOME                                                                                                                                                  |  |                                 | 31       |  |                                 |   | -        | 
|                                                                                                                                                              |  |                                 |          |  |                                 |   |          | 
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                                                                  |  |                                 | (1,634)  |  |                                 |   | 2,783    | 
|INCOME TAX (BENEFIT) EXPENSE                                                                                                                                  |  |                                 | (713)    |  |                                 |   | 1,181    | 
|                                                                                                                                                              |  |                                 |          |  |                                 |   |          | 
|(LOSS) INCOME FROM CONTINUING OPERATIONS, NET OF TAX                                                                                                          |  |                                 | (921)    |  |                                 |   | 1,602    | 
|INCOME (LOSS) FROM DISCONTINUED OPERATIONS (net of tax benefit of ($26) and ($227) in the three months ended March 31, 2011
and March 31, 2010, respectively) |  |                                 | 34       |  |                                 |   | (360)    | 
|                                                                                                                                                              |  |                                 |          |  |                                 |   |          | 
|NET (LOSS) INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION                                                                                                      |  | $                               | (887)    |  |                                 | $ | 1,242    | 
|                                                                                                                                                              |  |                                 |          |  |                                 |   |          | 

See notes to unaudited condensed consolidated financial statements.



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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(In thousands)



|                                                                                         |  |                                 |         |  |                                 |   |         | 
|---------------------------------------------------------------------------------------- |  | ------------------------------- | ------- |  | ------------------------------- | - | ------- | 
|                                                                                         |  | Three MonthsEnded 
March31,2011 |         |  | Three MonthsEnded 
March31,2010 |  
|                                                                                         |  | (As Restated,
see Note 2)       |         |  | (As Restated,
see Note 2)       |  
|                                                                                         |  |                                
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                                 |         |  |                                 |   |         | 
|Net (loss) income                                                                        |  | $                               | (887)   |  |                                 | $ | 1,242   | 
|Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |                                 |         |  |                                 |   |         | 
|Depreciation and amortization                                                            |  |                                 | 4,903   |  |                                 |   | 5,562   | 
|Amortization of debt discount and capitalized financing costs                            |  |                                 | 1,016   |  |                                 |   | 1,053   | 
|Asset impairment                                                                         |  |                                 | 4,401   |  |                                 |   | -       | 
|Gain on interest rate swap agreement                                                     |  |                                 | (38)    |  |                                 |   | (118)   | 
|Gain on sale of property and equipment                                                   |  |                                 | (29)    |  |                                 |   | (5)     | 
|Provision for doubtful accounts                                                          |  |                                 | 1,870   |  |                                 |   | 1,956   | 
|Stock-based compensation                                                                 |  |                                 | 736     |  |                                 |   | 1,173   | 
|Changes in assets and liabilities:                                                       |  |                                 |         |  |                                 |   |         | 
|Restricted cash                                                                          |  |                                 | (351)   |  |                                 |   | (724)   | 
|Accounts receivable                                                                      |  |                                 | (5,515) |  |                                 |   | (2,772) | 
|Prepaid expenses                                                                         |  |                                 | 981     |  |                                 |   | 31      | 
|Income taxes receivable and payable                                                      |  |                                 | (736)   |  |                                 |   | 940     | 
|Other current assets                                                                     |  |                                 | (127)   |  |                                 |   | 105     | 
|Accounts payable                                                                         |  |                                 | (446)   |  |                                 |   | 1,654   | 
|Accrued liabilities                                                                      |  |                                 | (211)   |  |                                 |   | (2,147) | 
|Other current liabilities                                                                |  |                                 | 1,678   |  |                                 |   | (453)   | 
|Other long-term assets                                                                   |  |                                 | (366)   |  |                                 |   | (1,083) | 
|Other long-term liabilities                                                              |  |                                 | (563)   |  |                                 |   | (188)   | 
|                                                                                         |  |                                 |         |  |                                 |   |         | 
|Net cash provided by operating activities                                                |  |                                 | 6,316   |  |                                 |   | 6,226   | 
|                                                                                         |  |                                 |         |  |                                 |   |         | 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                                 |         |  |                                 |   |         | 
|Additions of property and equipment                                                      |  |                                 | (3,996) |  |                                 |   | (2,875) | 
|Proceeds from sale of property and equipment                                             |  |                                 | 42      |  |                                 |   | 14      | 
|Acquisition of businesses, net of cash acquired                                          |  |                                 | (28)    |  |                                 |   | (30)    | 
|                                                                                         |  |                                 |         |  |                                 |   |         | 
|Net cash used in investing activities                                                    |  |                                 | (3,982) |  |                                 |   | (2,891) | 
|                                                                                         |  |                                 |         |  |                                 |   |         | 
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                                 |         |  |                                 |   |         | 
|Capital (distributed to)/received from Parent                                            |  |                                 | (543)   |  |                                 |   | 8       | 
|Debt financing costs                                                                     |  |                                 | (3,195) |  |                                 |   | -       | 
|Borrowings under revolving line of credit                                                |  |                                 | 2,500   |  |                                 |   | 5,000   | 
|Repayments under revolving line of credit                                                |  |                                 | -       |  |                                 |   | (2,500) | 
|Repayment of long-term debt                                                              |  |                                 | (1,313) |  |                                 |   | (8,656) | 
|                                                                                         |  |                                 |         |  |                                 |   |         | 
|Net cash used in financing activities                                                    |  |                                 | (2,551) |  |                                 |   | (6,148) | 
|                                                                                         |  |                                 |         |  |                                 |   |         | 
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                |  |                                 | (217)   |  |                                 |   | (2,813) | 
|CASH AND CASH EQUIVALENTSBeginning of year                                              |  |                                 | 7,111   |  |                                 |   | 4,982   | 
|                                                                                         |  |                                 |         |  |                                 |   |         | 
|CASH AND CASH EQUIVALENTSEnd of period                                                  |  | $                               | 6,894   |  |                                 | $ | 2,169   | 
|                                                                                         |  |                                 |         |  |                                 |   |         | 
|                                                                                         |  |                                
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:                   |  |                                 |         |  |                                 |   |         | 
|Payable related to acquisition                                                           |  | $                               | 246     |  |                                 | $ | 365     | 
|                                                                                         |  |                                 |         |  |                                 |   |         | 
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                        |  |                                 |         |  |                                 |   |         | 
|Cash paid for interest                                                                   |  | $                               | 15,790  |  |                                 | $ | 13,545  | 
|                                                                                         |  |                                 |         |  |                                 |   |         | 
|Cash paid for income taxes, net of refunds                                               |  | $                               | 49      |  |                                 | $ | 13      | 
|                                                                                         |  |                                 |         |  |                                 |   |         | 

See notes to unaudited condensed consolidated financial statements.



7



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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, 2010 has been derived from our audited financial statements.

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

2. RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On August 16, 2011, the Company announced that it was conducting a review of inconsistencies in the accounts at
one of its recovery residential treatment facilities (the Facility). In 2009 and 2010, such Facility accounted for approximately 2.9% and 3.2%, respectively, of the Companys total revenue. On October 4, 2011, the Board of
Directors of the Company (the Board), in consultation with the Audit Committee of the Board (the Audit Committee) and management, adopted the conclusions of the investigation and concluded that the Companys previously
issued consolidated financial statements for the years ended December 31, 2008, 2009 and 2010, along with the accompanying independent auditors reports and its previously issued condensed consolidated financial statements for the fiscal
quarter ended March 31, 2011 should not be relied upon because of errors identified in such financial statements.

Management initially identified certain errors upon initiating an internal investigation after noting inconsistencies in accounting for
certain transactions at the Facility. Following a briefing by management on the issues, the Audit Committee hired independent counsel to conduct a review of accounting transactions at the Facility. The investigation is complete and the Audit
Committee identified issues related to misconduct by a former employee of the Facility as well as errors in accounting for revenue, accounts receivable, bad debt expenses and general expenses. As a result of these errors, the Company has restated
its previously issued condensed consolidated financial statements for the fiscal quarter ended March 31, 2011, and 2010, from amounts previously reported.

The Company also restated the accompanying condensed consolidated financial statements to correct other immaterial adjustments that had been previously recorded so such immaterial adjustments are recorded
in the proper period.

The following table summarizes the impact of the restatement on the previously reported net income
(loss) attributable to CRC Health Corporation:



8



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##### Table of Contents

|                                                                                 |  |                                 |       |  |                                 |   |       | 
|-------------------------------------------------------------------------------- |  | ------------------------------- | ----- |  | ------------------------------- | - | ----- | 
|                                                                                 |  | Three MonthsEnded March 31,2011 |       |  | Three MonthsEnded March 31,2010 |  
|                                                                                 |  | (in thousands)                  |      
|Net (loss) income attributable to CRC Health Corporation, as previously reported |  | $                               | (753) |  |                                 | $ | 861   | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Adjustments related to the Facility:                                             |  |                                 |       |  |                                 |   |       | 
|Net client service revenues                                                      |  |                                 | (418) |  |                                 |   | 59    | 
|Provision for doubtful accounts                                                  |  |                                 | (185) |  |                                 |   | (85)  | 
|Supplies, facilities and other operating costs                                   |  |                                 | (95)  |  |                                 |   | (22)  | 
|Income tax effects                                                               |  |                                 | 289   |  |                                 |   | 20    | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Facility adjustments after tax                                                   |  |                                 | (409) |  |                                 |   | (28)  | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Other Adjustments:                                                               |  |                                 |       |  |                                 |   |       | 
|Salaries and benefits                                                            |  |                                 | -     |  |                                 |   | 254   | 
|Supplies, facilities and other operating costs                                   |  |                                 | 455   |  |                                 |   | 422   | 
|Income tax effects                                                               |  |                                 | (180) |  |                                 |   | (267) | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Other adjustments after tax                                                      |  |                                 | 275   |  |                                 |   | 409   | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Total adjustments                                                                |  |                                 | (134) |  |                                 |   | 381   | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Net (loss) income attributable to CRC Health Corporation, as restated            |  | $                               | (887) |  |                                 | $ | 1,242 | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 

The restated condensed consolidated financial statements for the three months ended March 31, 2011 and
2010, include adjustments to correct the following errors related to the Facility (in thousands):



| |  |  | $418 of revenue was improperly recognized in the three months ended March 31, 2011. In addition, $59 of revenue should have been recognized in the
three months ended March 31, 2010. The revenue recognition issues resulted primarily from a failure by a former employee of the Facility to use correct billing rates and to accurately record services provided.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $185 and $85 of provision for doubtful accounts were understated for the three months ended March 31, 2011 and 2010, respectively. The understatement
resulted primarily from errors in the processes used by a former employee of the Facility in aging the receivables and the application of allowance percentages.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $95 and $22 of operating expenses should have been recognized in the three months ended March 31, 2011, and 2010, respectively. These adjustments
resulted primarily from errors in accruing for expenses and properly classifying and documenting prepaid assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $289 and $20 of income tax benefit for the tax effect of the items at the Facility in the three months ended March 31, 2011 and 2010, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

The restated condensed consolidated financial statements reflect adjustments to correct other previously
identified adjustments that had been previously considered immaterial and recorded in the three months ended March 31, 2011 so that they are now recorded in the proper period.

The effects of the correction of these other errors in the three months ended March 31, 2011 are as follows (in thousands):



| |  |  | $455 accrual for supplies, facilities and other operating costs previously recorded in the three months ended March 31, 2011 should have been recorded
as of December 31, 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $180 of income tax expense for the tax effect of the items presented above.
| | - |  | ---------------------------------------------------------------------------

The effects of the correction of these other errors in the three months ended March 31, 2010 are as follows (in thousands):



| |  |  | $254 reduction of salaries and benefits related to a correction of stock-based compensation expense that was previously recorded in the three months
ended December 31, 2010.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | $422 of supplies, facilities and other operating costs previously recorded in the three months ended March 31, 2010, that should have recorded in 2009.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $267 of income tax expense for the tax effect of items above.
| | - |  | -------------------------------------------------------------

In addition, the amounts shown in the line item equity in loss of subsidiaries, net of tax under the CRC Health Corporation
column in the condensed consolidating statements of operations for the Company and its subsidiary guarantors for the three months ended March 31, 2011 and 2010, respectively, included in Note 14, previously presented after income (loss) from
continuing operations have been correctly presented as a component of income (loss) from continuing operations.

The following
table summarizes the effects of the restatement on the Companys condensed consolidated balance sheet as of March 31, 2011 (in thousands):



|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 
|-------------------------------------------------------------------------------------------------- |  | --------------------- | --------- |  | ----------- | - | ------- | ----------- |  | - | --------- | 
|                                                                                                   |  | March 31, 2011        |          
|                                                                                                   |  | As PreviouslyReported |           |  | Adjustments |   |         | As Restated | 
|                                                                                                   |  |                       |          
|ASSETS                                                                                             |  |                       |           |  |             |   |         |             |  |   |           | 
|CURRENT ASSETS:                                                                                    |  |                       |           |  |             |   |         |             |  |   |           | 
|Cash and cash equivalents                                                                          |  | $                     | 6,894     |  |             | $ | -       |             |  | $ | 6,894     | 
|Restricted cash                                                                                    |  |                       | 897       |  |             |   | -       |             |  |   | 897       | 
|Accounts receivable, net                                                                           |  |                       | 37,001    |  |             |   | (1,437) |             |  |   | 35,564    | 
|Prepaid expenses                                                                                   |  |                       | 7,728     |  |             |   | (126)   |             |  |   | 7,602     | 
|Other current assets                                                                               |  |                       | 2,085     |  |             |   | (37)    |             |  |   | 2,048     | 
|Income taxes receivable                                                                            |  |                       | 654       |  |             |   | 320     |             |  |   | 974       | 
|Deferred income taxes                                                                              |  |                       | 6,547     |  |             |   | 214     |             |  |   | 6,761     | 
|Current assets of discontinued operations                                                          |  |                       | 1,409     |  |             |   | -       |             |  |   | 1,409     | 
|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 
|Total current assets                                                                               |  |                       | 63,215    |  |             |   | (1,066) |             |  |   | 62,149    | 
|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 
|PROPERTY AND EQUIPMENT - Net                                                                       |  |                       | 125,832   |  |             |   | -       |             |  |   | 125,832   | 
|GOODWILL - Net                                                                                     |  |                       | 521,807   |  |             |   | -       |             |  |   | 521,807   | 
|OTHER INTANGIBLE ASSETS - Net                                                                      |  |                       | 308,549   |  |             |   | -       |             |  |   | 308,549   | 
|OTHER ASSETS - Net                                                                                 |  |                       | 22,081    |  |             |   | -       |             |  |   | 22,081    | 
|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 
|TOTAL ASSETS                                                                                       |  | $                     | 1,041,484 |  |             | $ | (1,066) |             |  | $ | 1,040,418 | 
|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 
|                                                                                                   |  |                       |          
|LIABILITIES AND EQUITY                                                                             |  |                       |           |  |             |   |         |             |  |   |           | 
|CURRENT LIABILITIES:                                                                               |  |                       |           |  |             |   |         |             |  |   |           | 
|Accounts payable                                                                                   |  | $                     | 4,503     |  |             | $ | (20)    |             |  | $ | 4,483     | 
|Accrued liabilities                                                                                |  |                       | 30,789    |  |             |   | 133     |             |  |   | 30,922    | 
|Current portion of long-term debt                                                                  |  |                       | 23,502    |  |             |   | -       |             |  |   | 23,502    | 
|Other current liabilities                                                                          |  |                       | 18,245    |  |             |   | -       |             |  |   | 18,245    | 
|Current liabilities of discontinued operations                                                     |  |                       | 2,764     |  |             |   | -       |             |  |   | 2,764     | 
|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 
|Total current liabilities                                                                          |  |                       | 79,803    |  |             |   | 113     |             |  |   | 79,916    | 
|LONG TERM DEBT - Less current portion                                                              |  |                       | 587,967   |  |             |   | -       |             |  |   | 587,967   | 
|OTHER LONG-TERM LIABILITIES                                                                        |  |                       | 8,605     |  |             |   | -       |             |  |   | 8,605     | 
|LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS                                                   |  |                       | 3,077     |  |             |   | -       |             |  |   | 3,077     | 
|DEFERRED INCOME TAXES                                                                              |  |                       | 105,700   |  |             |   | (177)   |             |  |   | 105,523   | 
|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 
|Total liabilities                                                                                  |  |                       | 785,152   |  |             |   | (64)    |             |  |   | 785,088   | 
|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 
|COMMITMENTS AND CONTIGENCIES                                                                       |  |                       |           |  |             |   |         |             |  |   |           | 
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY                                                        |  |                       |           |  |             |   |         |             |  |   |           | 
|Common stock, $0.001 par value - 1,000 shares authorized, issued and outstanding at March 31, 2011 |  |                       | -         |  |             |   | -       |             |  |   | -         | 
|Additional paid-in capital                                                                         |  |                       | 463,163   |  |             |   | -       |             |  |   | 463,163   | 
|Accumulated deficit                                                                                |  |                       | (205,776) |  |             |   | (1,002) |             |  |   | (206,778) | 
|Accumulated other comprehensive loss                                                               |  |                       | (1,055)   |  |             |   | -       |             |  |   | (1,055)   | 
|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 
|Total CRC Health Corporation Stockholders Equity                                                  |  |                       | 256,332   |  |             |   | (1,002) |             |  |   | 255,330   | 
|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 
|Total Equity                                                                                       |  |                       | 256,332   |  |             |   | (1,002) |             |  |   | 255,330   | 
|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                         |  | $                     | 1,041,484 |  |             | $ | (1,066) |             |  | $ | 1,040,418 | 
|                                                                                                   |  |                       |           |  |             |   |         |             |  |   |           | 



10



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##### Table of Contents

The following tables summarize the effects of the restatement on the Companys
condensed consolidated statements of operations for the three months ended March 31, 2011, and 2010 (in thousands):



|                                                    |  |                                   |          |  |             |   |       |             |  |   |          | 
|--------------------------------------------------- |  | --------------------------------- | -------- |  | ----------- | - | ----- | ----------- |  | - | -------- | 
|                                                    |  | Three months ended March 31, 2011 |         
|                                                    |  | As Previously      Reported       |          |  | Adjustments |   |       | As Restated | 
|                                                    |  |                                   |          | 
|                                                    |  |                                   |         
|NET REVENUE:                                        |  |                                   |          |  |             |   |       |             |  |   |          | 
|Net client service revenues                         |  | $                                 | 111,861  |  |             | $ | (418) |             |  | $ | 111,443  | 
|                                                    |  |                                   |          |  |             |   |       |             |  |   |          | 
|OPERATING EXPENSES:                                 |  |                                   |          |  |             |   |       |             |  |   |          | 
|Salaries and benefits                               |  |                                   | 57,347   |  |             |   | -     |             |  |   | 57,347   | 
|Supplies, facilities and other operating costs      |  |                                   | 33,206   |  |             |   | (360) |             |  |   | 32,846   | 
|Provision for doubtful accounts                     |  |                                   | 1,671    |  |             |   | 185   |             |  |   | 1,856    | 
|Depreciation and amortization                       |  |                                   | 4,902    |  |             |   | -     |             |  |   | 4,902    | 
|Asset impairments                                   |  |                                   | 4,401    |  |             |   | -     |             |  |   | 4,401    | 
|                                                    |  |                                   |          |  |             |   |       |             |  |   |          | 
|Total operating expenses                            |  |                                   | 101,527  |  |             |   | (175) |             |  |   | 101,352  | 
|                                                    |  |                                   |          |  |             |   |       |             |  |   |          | 
|OPERATING INCOME                                    |  |                                   | 10,334   |  |             |   | (243) |             |  |   | 10,091   | 
|INTEREST EXPENSE, NET                               |  |                                   | (11,756) |  |             |   | -     |             |  |   | (11,756) | 
|OTHER INCOME                                        |  |                                   | 31       |  |             |   | -     |             |  |   | 31       | 
|                                                    |  |                                   |          |  |             |   |       |             |  |   |          | 
|LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |  |                                   | (1,391)  |  |             |   | (243) |             |  |   | (1,634)  | 
|INCOME TAX (BENEFIT)                                |  |                                   | (604)    |  |             |   | (109) |             |  |   | (713)    | 
|                                                    |  |                                   |          |  |             |   |       |             |  |   |          | 
|LOSS FROM CONTINUING OPERATIONS, NET OF TAX         |  |                                   | (787)    |  |             |   | (134) |             |  |   | (921)    | 
|DISCONTINUED OPERATIONS, NET OF TAX                 |  |                                   | 34       |  |             |   | -     |             |  |   | 34       | 
|                                                    |  |                                   |          |  |             |   |       |             |  |   |          | 
|NET LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION     |  | $                                 | (753)    |  |             | $ | (134) |             |  | $ | (887)    | 
|                                                    |  |                                   |          |  |             |   |       |             |  |   |          | 



|                                                      |  |                                   |          |  |             |   |       |             |  |   |          | 
|----------------------------------------------------- |  | --------------------------------- | -------- |  | ----------- | - | ----- | ----------- |  | - | -------- | 
|                                                      |  | Three Months Ended March 31, 2010 |         
|                                                      |  | As Previously      Reported       |          |  | Adjustments |   |       | As Restated | 
|                                                      |  |                                   |          | 
|                                                      |  |                                   |         
|NET REVENUE:                                          |  |                                   |          |  |             |   |       |             |  |   |          | 
|Net client service revenues                           |  | $                                 | 103,577  |  |             | $ | 59    |             |  | $ | 103,636  | 
|                                                      |  |                                   |          |  |             |   |       |             |  |   |          | 
|OPERATING EXPENSES:                                   |  |                                   |          |  |             |   |       |             |  |   |          | 
|Salaries and benefits                                 |  |                                   | 53,403   |  |             |   | (254) |             |  |   | 53,149   | 
|Supplies, facilities and other operating costs        |  |                                   | 29,841   |  |             |   | (400) |             |  |   | 29,441   | 
|Provision for doubtful accounts                       |  |                                   | 1,820    |  |             |   | 85    |             |  |   | 1,905    | 
|Depreciation and amortization                         |  |                                   | 5,553    |  |             |   | -     |             |  |   | 5,553    | 
|                                                      |  |                                   |          |  |             |   |       |             |  |   |          | 
|Total operating expenses                              |  |                                   | 90,617   |  |             |   | (569) |             |  |   | 90,048   | 
|                                                      |  |                                   |          |  |             |   |       |             |  |   |          | 
|OPERATING INCOME                                      |  |                                   | 12,960   |  |             |   | 628   |             |  |   | 13,588   | 
|INTEREST EXPENSE, NET                                 |  |                                   | (10,805) |  |             |   | -     |             |  |   | (10,805) | 
|                                                      |  |                                   |          |  |             |   |       |             |  |   |          | 
|INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |  |                                   | 2,155    |  |             |   | 628   |             |  |   | 2,783    | 
|INCOME TAX EXPENSE                                    |  |                                   | 934      |  |             |   | 247   |             |  |   | 1,181    | 
|                                                      |  |                                   |          |  |             |   |       |             |  |   |          | 
|INCOME FROM CONTINUING OPERATIONS, NET OF TAX         |  |                                   | 1,221    |  |             |   | 381   |             |  |   | 1,602    | 
|LOSS FROM DISCONTINUED OPERATIONS                     |  |                                   | (360)    |  |             |   | -     |             |  |   | (360)    | 
|                                                      |  |                                   |          |  |             |   |       |             |  |   |          | 
|NET INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION     |  | $                                 | 861      |  |             | $ | 381   |             |  | $ | 1,242    | 
|                                                      |  |                                   |          |  |             |   |       |             |  |   |          | 
|AMOUNTS ATTRIBUTABLE TO CRC HEALTH CORPORATION:       |  |                                   |          |  |             |   |       |             |  |   |          | 
|INCOME FROM CONTINUING OPERATIONS, NET OF TAX         |  | $                                 | 1,221    |  |             | $ | 381   |             |  | $ | 1,602    | 
|DISCONTINUED OPERATIONS, NET OF TAX                   |  |                                   | (360)    |  |             |   | -     |             |  |   | (360)    | 
|                                                      |  |                                   |          |  |             |   |       |             |  |   |          | 
|NET INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION     |  | $                                 | 861      |  |             | $ | 381   |             |  | $ | 1,242    | 
|                                                      |  |                                   |          |  |             |   |       |             |  |   |          | 



11



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##### Table of Contents

The following tables summarize the effects of the restatement on the Companys
condensed consolidated statements of cash flows for the three months ended March 31, 2011, and 2010 (in thousands):



|                                                                                |                       |                             |         |             |  |   |             |  |  |   |         | 
|------------------------------------------------------------------------------- | --------------------- | --------------------------- | ------- | ----------- |  | - | ----------- |  |  | - | ------- | 
|                                                                                |                       | Three Months March 31, 2011 |        
|                                                                                | As PreviouslyReported |                             |         | Adjustments |  |   | As Restated | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |                       |                             |         |             |  |   |             |  |  |   |         | 
|Net loss                                                                        |                       | $                           | (753)   |             |  | $ | (134)       |  |  | $ | (887)   | 
|Adjustments to reconcile net loss to net cash provided by operating activities: |                       |                             |         |             |  |   |             |  |  |   |         | 
|Depreciation and amortization                                                   |                       |                             | 4,903   |             |  |   | -           |  |  |   | 4,903   | 
|Amortization of debt discount and capitalized financing costs                   |                       |                             | 1,016   |             |  |   | -           |  |  |   | 1,016   | 
|Asset impairment                                                                |                       |                             | 4,401   |             |  |   | -           |  |  |   | 4,401   | 
|Gain on interest rate swap agreement                                            |                       |                             | (38)    |             |  |   | -           |  |  |   | (38)    | 
|Gain on sale of property and equipment                                          |                       |                             | (29)    |             |  |   | -           |  |  |   | (29)    | 
|Provision for doubtful accounts                                                 |                       |                             | 1,685   |             |  |   | 185         |  |  |   | 1,870   | 
|Stock-based compensation                                                        |                       |                             | 736     |             |  |   | -           |  |  |   | 736     | 
|Changes in assets and liabilities:                                              |                       |                             |         |             |  |   |             |  |  |   |         | 
|Restricted cash                                                                 |                       |                             | (351)   |             |  |   | -           |  |  |   | (351)   | 
|Accounts receivable                                                             |                       |                             | (5,935) |             |  |   | 420         |  |  |   | (5,515) | 
|Prepaid expenses                                                                |                       |                             | 948     |             |  |   | 33          |  |  |   | 981     | 
|Income taxes receivable and payable                                             |                       |                             | (626)   |             |  |   | (110)       |  |  |   | (736)   | 
|Other current assets                                                            |                       |                             | (164)   |             |  |   | 37          |  |  |   | (127)   | 
|Accounts payable                                                                |                       |                             | (446)   |             |  |   | -           |  |  |   | (446)   | 
|Accrued liabilities                                                             |                       |                             | 220     |             |  |   | (431)       |  |  |   | (211)   | 
|Other current liabilities                                                       |                       |                             | 1,678   |             |  |   | -           |  |  |   | 1,678   | 
|Other long-term assets                                                          |                       |                             | (366)   |             |  |   | -           |  |  |   | (366)   | 
|Other long-term liabilities                                                     |                       |                             | (563)   |             |  |   | -           |  |  |   | (563)   | 
|                                                                                |                       |                             |         |             |  |   |             |  |  |   |         | 
|Net cash provided by operating activities                                       |                       |                             | 6,316   |             |  |   | -           |  |  |   | 6,316   | 
|                                                                                |                       |                             |         |             |  |   |             |  |  |   |         | 
|                                                                                |                       |                             |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |                       |                             |         |             |  |   |             |  |  |   |         | 
|                                                                                |                       |                             |         |             |  |   |             |  |  |   |         | 
|Net cash used in investing activities                                           |                       |                             | (3,982) |             |  |   | -           |  |  |   | (3,982) | 
|                                                                                |                       |                             |         |             |  |   |             |  |  |   |         | 
|                                                                                |                       |                             |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |                       |                             |         |             |  |   |             |  |  |   |         | 
|                                                                                |                       |                             |         |             |  |   |             |  |  |   |         | 
|Net cash used in financing activities                                           |                       |                             | (2,551) |             |  |   | -           |  |  |   | (2,551) | 
|                                                                                |                       |                             |         |             |  |   |             |  |  |   |         | 



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|                                                                                |  |                             |         |  |             |   |       |             |  |   |         | 
|------------------------------------------------------------------------------- |  | --------------------------- | ------- |  | ----------- | - | ----- | ----------- |  | - | ------- | 
|                                                                                |  | Three Months March 31, 2010 |        
|                                                                                |  | As Previously    Reported   |         |  | Adjustments |   |       | As Restated | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |  |                             |         |  |             |   |       |             |  |   |         | 
|Net loss                                                                        |  | $                           | 861     |  |             | $ | 381   |             |  | $ | 1,242   | 
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                             |         |  |             |   |       |             |  |   |         | 
|Depreciation and amortization                                                   |  |                             | 5,562   |  |             |   | -     |             |  |   | 5,562   | 
|Amortization of debt discount and capitalized financing costs                   |  |                             | 1,053   |  |             |   | -     |             |  |   | 1,053   | 
|Gain on interest rate swap agreement                                            |  |                             | (118)   |  |             |   | -     |             |  |   | (118)   | 
|Gain on sale of property and equipment                                          |  |                             | (5)     |  |             |   | -     |             |  |   | (5)     | 
|Provision for doubtful accounts                                                 |  |                             | 1,871   |  |             |   | 85    |             |  |   | 1,956   | 
|Stock-based compensation                                                        |  |                             | 1,427   |  |             |   | (254) |             |  |   | 1,173   | 
|Changes in assets and liabilities:                                              |  |                             |         |  |             |   |       |             |  |   |         | 
|Restricted cash                                                                 |  |                             | (724)   |  |             |   | -     |             |  |   | (724)   | 
|Accounts receivable                                                             |  |                             | (2,714) |  |             |   | (58)  |             |  |   | (2,772) | 
|Prepaid expenses                                                                |  |                             | 4       |  |             |   | 27    |             |  |   | 31      | 
|Income taxes receivable and payable                                             |  |                             | 693     |  |             |   | 247   |             |  |   | 940     | 
|Other current assets                                                            |  |                             | 105     |  |             |   | -     |             |  |   | 105     | 
|Accounts payable                                                                |  |                             | 1,665   |  |             |   | (11)  |             |  |   | 1,654   | 
|Accrued liabilities                                                             |  |                             | (1,730) |  |             |   | (417) |             |  |   | (2,147) | 
|Other current liabilities                                                       |  |                             | (453)   |  |             |   | -     |             |  |   | (453)   | 
|Other long-term assets                                                          |  |                             | (1,083) |  |             |   | -     |             |  |   | (1,083) | 
|Other long-term liabilities                                                     |  |                             | (188)   |  |             |   | -     |             |  |   | (188)   | 
|                                                                                |  |                             |         |  |             |   |       |             |  |   |         | 
|Net cash provided by operating activities                                       |  |                             | 6,226   |  |             |   | -     |             |  |   | 6,226   | 
|                                                                                |  |                             |         |  |             |   |       |             |  |   |         | 
|                                                                                |  |                             |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |  |                             |         |  |             |   |       |             |  |   |         | 
|                                                                                |  |                             |         |  |             |   |       |             |  |   |         | 
|Net cash used in investing activities                                           |  |                             | (2,891) |  |             |   | -     |             |  |   | (2,891) | 
|                                                                                |  |                             |         |  |             |   |       |             |  |   |         | 
|                                                                                |  |                             |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |  |                             |         |  |             |   |       |             |  |   |         | 
|                                                                                |  |                             |         |  |             |   |       |             |  |   |         | 
|Net cash used in financing activities                                           |  |                             | (6,148) |  |             |   | -     |             |  |   | (6,148) | 
|                                                                                |  |                             |         |  |             |   |       |             |  |   |         | 

3. 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.



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

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

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

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

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

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

4. BALANCE SHEET COMPONENTS

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



|                                     |  |               |         |  |                  |   |         | 
|------------------------------------ |  | ------------- | ------- |  | ---------------- | - | ------- | 
|                                     |  | March 31,2011 |         |  | December 31,2010 |  
|                                     |  | As Restated   |         |  |                  |  
|Accounts receivable-gross            |  | $             | 41,127  |  |                  | $ | 37,281  | 
|Less allowance for doubtful accounts |  |               | (5,563) |  |                  |   | (5,408) | 
|                                     |  |               |         |  |                  |   |         | 



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|                                     |  |               |        |  |                  |   |        | 
|------------------------------------ |  | ------------- | ------ |  | ---------------- | - | ------ | 
|                                     |  | March 31,2011 |        |  | December 31,2010 |  
|Accounts receivable-net              |  | $             | 35,564 |  |                  | $ | 31,873 | 
|                                     |  |               |        |  |                  |   |        | 
|Other assets-net:                    |  |               |        |  |                  |   |        | 
|Capitalized financing costs-net      |  | $             | 13,022 |  |                  | $ | 10,776 | 
|Deposits                             |  |               | 644    |  |                  |   | 662    | 
|Note receivable                      |  |               | 8,415  |  |                  |   | 7,973  | 
|                                     |  |               |        |  |                  |   |        | 
|Total other assets-net               |  | $             | 22,081 |  |                  | $ | 19,411 | 
|                                     |  |               |        |  |                  |   |        | 
|Accrued liabilities:                 |  |               |        |  |                  |   |        | 
|Accrued payroll and related expenses |  | $             | 14,057 |  |                  | $ | 10,796 | 
|Accrued vacation                     |  |               | 4,711  |  |                  |   | 4,596  | 
|Accrued interest                     |  |               | 3,350  |  |                  |   | 8,153  | 
|Accrued expenses                     |  |               | 8,804  |  |                  |   | 7,311  | 
|                                     |  |               |        |  |                  |   |        | 
|Total accrued liabilities            |  | $             | 30,922 |  |                  | $ | 30,856 | 
|                                     |  |               |        |  |                  |   |        | 
|Other current liabilities:           |  |               |        |  |                  |   |        | 
|Deferred revenue                     |  | $             | 11,770 |  |                  | $ | 10,600 | 
|Client deposits                      |  |               | 4,170  |  |                  |   | 3,604  | 
|Interest rate swap liability         |  |               | 1,744  |  |                  |   | 3,535  | 
|Other liabilities                    |  |               | 561    |  |                  |   | 566    | 
|                                     |  |               |        |  |                  |   |        | 
|Total other current liabilities      |  | $             | 18,245 |  |                  | $ | 18,305 | 
|                                     |  |               |        |  |                  |   |        | 

Loan program-The Companys Loan Program allows students and/or patients (the
Borrowers) who meet certain predetermined credit and underwriting standards such as high FICO scores, full documentation, verification and certain cosigning requirements, to obtain third-party financing to pay a portion of the cost of
participating in certain of the Companys programs. The balance of the loan program (net of reserves) was $8.4 million and $7.9 million at March 31, 2011 and December 31, 2010, respectively. Interest income related to the Loan Program
notes was $0.2 million and $0.1 million for the three months ended March 31, 2011 and 2010, respectively.

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



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

5. PROPERTY AND EQUIPMENT

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



|                          |  |               |        |  |                  |   |        | 
|------------------------- |  | ------------- | ------ |  | ---------------- | - | ------ | 
|                          |  | March 31,2011 |        |  | December 31,2010 |  
|Land                      |  | $             | 21,373 |  |                  | $ | 21,373 | 
|Building and improvements |  |               | 84,307 |  |                  |   | 79,860 | 
|Leasehold improvements    |  |               | 17,468 |  |                  |   | 19,203 | 
|Furniture and fixtures    |  |               | 12,608 |  |                  |   | 12,639 | 
|Computer equipment        |  |               | 12,717 |  |                  |   | 12,369 | 
|Computer software         |  |               | 17,693 |  |                  |   | 17,472 | 
|Motor vehicles            |  |               | 5,492  |  |                  |   | 5,660  | 



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|                              |  |               |          |  |                  |   |          | 
|----------------------------- |  | ------------- | -------- |  | ---------------- | - | -------- | 
|                              |  | March 31,2011 |          |  | December 31,2010 |  
|Field equipment               |  |               | 2,388    |  |                  |   | 2,634    | 
|Construction in progress      |  |               | 6,409    |  |                  |   | 8,370    | 
|                              |  |               |          |  |                  |   |          | 
|                              |  |               | 180,455  |  |                  |   | 179,580  | 
|Less accumulated depreciation |  |               | (54,623) |  |                  |   | (53,954) | 
|                              |  |               |          |  |                  |   |          | 
|Property and equipment-net    |  | $             | 125,832  |  |                  | $ | 125,626  | 
|                              |  |               |          |  |                  |   |          | 

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

As a result of the Companys strategic plan to transition the services provided by the Aspen
business within its healthy living division (see Note 15), the Company tested its long-lived assets at the eight affected facilities for impairment at March 31, 2011. The Company recognized a non-cash impairment charge of $0.3 million related
to impairment of property and equipment which was included in the condensed consolidated statement of operations as asset impairment.

6. GOODWILL AND INTANGIBLE ASSETS

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



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

Intangible Assets

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



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



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|                                                    |  |                |  |                     |                   |                         |  |                   |         |  |            |  |                     |  |                         |  |                   |   |         | 
|--------------------------------------------------- |  | -------------- |  | ------------------- | ----------------- | ----------------------- |  | ----------------- | ------- |  | ---------- |  | ------------------- |  | ----------------------- |  | ----------------- | - | ------- | 
|                                                    |  | March 31, 2011 |  |                     | December 31, 2010 |                        
|                                                    |  | UsefulLife     |  | GrossCarryingAmount |                   | AccumulatedAmortization |  | NetCarryingAmount |         |  | UsefulLife |  | GrossCarryingAmount |  | AccumulatedAmortization |  | NetCarryingAmount |  
|Intangible assets not subject to amortization:      |  |                |  |                     |                   |                         |  |                   |         |  |            |  |                     |  |                         |  |                   |   |         | 
|Trademarks and trade names                          |  |                |  |                     |                   |                         |  |                   | 171,132 |  |            |  |                     |  |                         |  |                   |   | 173,078 | 
|Certificates of need                                |  |                |  |                     |                   |                         |  |                   | 44,600  |  |            |  |                     |  |                         |  |                   |   | 44,600  | 
|Regulatory licenses                                 |  |                |  |                     |                   |                         |  |                   | 37,501  |  |            |  |                     |  |                         |  |                   |   | 37,501  | 
|                                                    |  |                |  |                     |                   |                         |  |                   |         |  |            |  |                     |  |                         |  |                   |   |         | 
|Total intangible assets not subject to amortization |  |                |  |                     |                   |                         |  |                   | 253,233 |  |            |  |                     |  |                         |  |                   |   | 255,179 | 
|                                                    |  |                |  |                     |                   |                         |  |                   |         |  |            |  |                     |  |                         |  |                   |   |         | 
|Total intangible assets                             |  |                |  |                     |                   |                         |  | $                 | 308,549 |  |            |  |                     |  |                         |  |                   | $ | 314,032 | 
|                                                    |  |                |  |                     |                   |                         |  |                   |         |  |            |  |                     |  |                         |  |                   |   |         | 

As a result of the Companys strategic plan to transition the services provided by the Aspen
business within its healthy living division (See Note 15), the Company tested its finite-lived and infinite-lived intangible assets at the eight affected facilities for impairment at March 31, 2011. The Company recognized non-cash impairment
charges of $2.1 million and $1.9 million related to the finite-lived and indefinite-lived intangible assets, respectively, which were included in the condensed consolidated statement of operations as asset impairment.

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



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



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

7. INCOME TAXES

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

For the three months ended March 31, 2011, the
Companys tax benefit on continuing operations is $0.7 million, representing an effective tax rate of 43.7%. The effective tax rate differs from the U.S. federal statutory rate of 35.0% primarily because of state income taxes. For the
three months ended March 31, 2010, the Companys tax expense on continuing operations was $1.2 million, representing an effective tax rate of 42.4% on continuing operations.

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

8. LONG-TERM DEBT

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



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

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

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



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##### Table of Contents

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

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

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

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

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

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

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

9. DERIVATIVES

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

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



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##### Table of Contents

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

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

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



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

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



|                                |  |                                                                         |       |  |                                                                                         |   |         |                                                                                      |  |  |                                                                                                                         |  |  |                                                                                                                          |         |  |  |   |         |      |  |  |                      |  |  |   |   |  |  |   |     | 
|------------------------------- |  | ----------------------------------------------------------------------- | ----- |  | --------------------------------------------------------------------------------------- | - | ------- | ------------------------------------------------------------------------------------ |  |  | ----------------------------------------------------------------------------------------------------------------------- |  |  | ------------------------------------------------------------------------------------------------------------------------ | ------- |  |  | - | ------- | ---- |  |  | -------------------- |  |  | - | - |  |  | - | --- | 
|Cash Flow Hedging Relationships |  | Amount ofGain or 
(Loss)Recognized inOCI
onDerivative(EffectivePortion) |       |  | Location of Gainor
(Loss)Reclassified fromAccumulated OCIinto
Income(Effective Portion) |   |         | Amount
ofGain or 
(Loss)ReclassifiedfromAccumulated
OCI intoIncome(EffectivePortion) |  |  | Location of Gainor(Loss) RecognizedinIncome onDerivative(IneffectivePortionand AmountExcluded fromEffectivenessTesting) |  |  | Amount of Gainor
(Loss)Recognized inIncome
onDerivative(IneffectivePortion
andAmount Excludedfrom 
EffectivenessTesting) |        
|                                |  | 2011                                                                    |       |  | 2010                                                                                    |   |         |                                                                                      |  |  | 2011                                                                                                                    |  |  | 2010                                                                                                                     |         |  |  |   |         | 2011 |  |  | 2010                 | 
|Interest Rate Swaps             |  | $                                                                       | (112) |  |                                                                                         | $ | (1,797) |                                                                                      |  |  | Interest expense-net                                                                                                    |  |  | $                                                                                                                        | (1,865) |  |  | $ | (2,063) |      |  |  | Interest expense-net |  |  | $ | 1 |  |  | $ | (1) | 

Credit-risk-related Contingent Features

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

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



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##### Table of Contents

10. FAIR VALUE MEASUREMENTS

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



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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

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

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

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



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

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

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.



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##### Table of Contents

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



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

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

11. COMPREHENSIVE INCOME

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



|                                                                                                 |  |                                     | Ended March 31, |  |                                     |   | Ended March 31, | 
|------------------------------------------------------------------------------------------------ |  | ----------------------------------- | --------------- |  | ----------------------------------- | - | --------------- | 
|                                                                                                 |  | Three Months    Ended March 31,2011 |                 |  | Three Months    Ended March 31,2010 |  
|Net (loss) income (restated)                                                                     |  | $                                   | (887)           |  |                                     | $ | 1,242           | 
|Other comprehensive income:                                                                      |  |                                     |                 |  |                                     |   |                 | 
|Net change in unrealized gain on cash flow hedges (net of tax of $702 in 2011, and $106 in 2010) |  |                                     | 1,051           |  |                                     |   | 160             | 
|                                                                                                 |  |                                     |                 |  |                                     |   |                 | 
|Comprehensive income attributable to CRC Health Corporation (restated)                           |  | $                                   | 164             |  |                                     | $ | 1,402           | 
|                                                                                                 |  |                                     |                 |  |                                     |   |                 | 

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



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13. STOCK-BASED COMPENSATION

Stock-based equity awards are made by the Group to certain employees of the Company. The Company incurs
stock-based compensation expense related to the equity awards made by the Group to employees and consultants of the Company. For the three months ended March 31, 2011 and 2010, the Company recognized stock-based compensation
expense of $0.7 million and $1.2 million, respectively. Stock-based compensation expense is recorded within salaries and benefits on the condensed consolidated statements of operations. The total income tax benefit recognized in the condensed
consolidated statement of operations for stock-based compensation expense was $0.3 million and $0.6 million for the three months ended March 31, 2011 and 2010, respectively.

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

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



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

14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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



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##### Table of Contents

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

Condensed Consolidating Balance Sheet as of March 31, 2011

(In thousands) (Unaudited)



|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|---------------------------------------------------------- |  | ----------------------- | ------- |  | ---------------------- | - | ------- | -------------------------- |  | - | ------------ |  |  | ------------ | --------- | - |  | - | --------- | 
|                                                           |  | CRC Health
 Corporation |         |  | Subsidiary
 Guarantors |   |         | Subsidiary
 Non-Guarantors |  |   | Eliminations |  |  | Consolidated |          
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|                                                           |  | As Restated             |         |  | As Restated            |   |         | As Restated                |  |   | As Restated  |  |  | AsRestated   |          
|ASSETS                                                     |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|CURRENT ASSETS:                                            |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Cash and cash equivalents                                  |  | $                       | -       |  |                        | $ | 6,524   |                            |  | $ | 370          |  |  | $            | -         |   |  | $ | 6,894     | 
|Restricted cash                                            |  |                         | 897     |  |                        |   | -       |                            |  |   | -            |  |  |              | -         |   |  |   | 897       | 
|Accounts receivablenet of allowance for doubtful accounts |  |                         | -       |  |                        |   | 35,437  |                            |  |   | 127          |  |  |              | -         |   |  |   | 35,564    | 
|Prepaid expenses                                           |  |                         | 4,064   |  |                        |   | 3,376   |                            |  |   | 162          |  |  |              | -         |   |  |   | 7,602     | 
|Other current assets                                       |  |                         | 485     |  |                        |   | 1,452   |                            |  |   | 111          |  |  |              | -         |   |  |   | 2,048     | 
|Income taxes receivable                                    |  |                         | 974     |  |                        |   | -       |                            |  |   | -            |  |  |              | -         |   |  |   | 974       | 
|Deferred income taxes                                      |  |                         | 6,761   |  |                        |   | -       |                            |  |   | -            |  |  |              | -         |   |  |   | 6,761     | 
|Current assets of discontinued operations                  |  |                         | -       |  |                        |   | 1,409   |                            |  |   | -            |  |  |              | -         |   |  |   | 1,409     | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Total current assets                                       |  |                         | 13,181  |  |                        |   | 48,198  |                            |  |   | 770          |  |  |              | -         |   |  |   | 62,149    | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|PROPERTY AND EQUIPMENTNet                                 |  |                         | 9,428   |  |                        |   | 115,330 |                            |  |   | 1,074        |  |  |              | -         |   |  |   | 125,832   | 
|GOODWILL                                                   |  |                         | -       |  |                        |   | 518,310 |                            |  |   | 3,497        |  |  |              | -         |   |  |   | 521,807   | 
|INTANGIBLE ASSETSNet                                      |  |                         | -       |  |                        |   | 308,549 |                            |  |   | -            |  |  |              | -         |   |  |   | 308,549   | 
|OTHER ASSETS-Net                                           |  |                         | 21,431  |  |                        |   | 636     |                            |  |   | 14           |  |  |              | -         |   |  |   | 22,081    | 
|INVESTMENT IN SUBSIDIARIES                                 |  |                         | 948,136 |  |                        |   | -       |                            |  |   | -            |  |  |              | ( 948,136 | ) |  |   | -         | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|TOTAL ASSETS                                               |  | $                       | 992,176 |  |                        | $ | 991,023 |                            |  | $ | 5,355        |  |  | $            | ( 948,136 | ) |  | $ | 1,040,418 | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|                                                           |  |                         |         |  |                       
|LIABILITIES AND EQUITY                                     |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|CURRENT LIABILITIES:                                       |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Accounts payable                                           |  | $                       | 3,384   |  |                        | $ | 1,070   |                            |  | $ | 29           |  |  | $            | -         |   |  | $ | 4,483     | 
|Accrued liabilities                                        |  |                         | 13,715  |  |                        |   | 16,619  |                            |  |   | 588          |  |  |              | -         |   |  |   | 30,922    | 
|Current portion of long-term debt                          |  |                         | 23,146  |  |                        |   | 356     |                            |  |   | -            |  |  |              | -         |   |  |   | 23,502    | 
|Other current liabilities                                  |  |                         | 2,404   |  |                        |   | 14,764  |                            |  |   | 1,077        |  |  |              | -         |   |  |   | 18,245    | 
|Current liabilities of discontinued operations             |  |                         | -       |  |                        |   | 2,764   |                            |  |   | -            |  |  |              | -         |   |  |   | 2,764     | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Total current liabilities                                  |  |                         | 42,649  |  |                        |   | 35,573  |                            |  |   | 1,694        |  |  |              | -         |   |  |   | 79,916    | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|LONG-TERM DEBTLess current portion                        |  |                         | 587,679 |  |                        |   | 288     |                            |  |   | -            |  |  |              | -         |   |  |   | 587,967   | 
|OTHER LONG-TERM LIABILITIES                                |  |                         | 995     |  |                        |   | 7,469   |                            |  |   | 141          |  |  |              | -         |   |  |   | 8,605     | 
|LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS           |  |                         | -       |  |                        |   | 3,077   |                            |  |   | -            |  |  |              | -         |   |  |   | 3,077     | 
|DEFERRED INCOME TAXES                                      |  |                         | 105,523 |  |                        |   | -       |                            |  |   | -            |  |  |              | -         |   |  |   | 105,523   | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Total liabilities                                          |  |                         | 736,846 |  |                        |   | 46,407  |                            |  |   | 1,835        |  |  |              | -         |   |  |   | 785,088   | 
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY                |  |                         | 255,330 |  |                        |   | 944,616 |                            |  |   | 3,520        |  |  |              | ( 948,136 | ) |  |   | 255,330   | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Total equity                                               |  |                         | 255,330 |  |                        |   | 944,616 |                            |  |   | 3,520        |  |  |              | ( 948,136 | ) |  |   | 255,330   | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|TOTAL LIABILITIES AND EQUITY                               |  | $                       | 992,176 |  |                        | $ | 991,023 |                            |  | $ | 5,355        |  |  | $            | ( 948,136 | ) |  | $ | 1,040,418 | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 



24



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##### Table of Contents

Condensed Consolidating Balance Sheet as of December 31, 2010

(In thousands) (Unaudited)



|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|---------------------------------------------------------- |  | ----------------------- | ------- |  | ---------------------- | - | ------- | -------------------------- |  | - | ------------ |  |  | ------------ | --------- | - |  | - | --------- | 
|                                                           |  | CRC Health

Corporation |         |  | Subsidiary
 Guarantors |   |         | Subsidiary
 Non-Guarantors |  |   | Eliminations |  |  | Consolidated |          
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|                                                           |  | As Restated             |         |  | As Restated            |   |         | As Restated                |  |   | As Restated  |  |  | As Restated  |          
|                                                           |  |                         |         |  |                       
|ASSETS                                                     |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|CURRENT ASSETS:                                            |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Cash and cash equivalents                                  |  | $                       | -       |  |                        | $ | 6,826   |                            |  | $ | 285          |  |  | $            | -         |   |  | $ | 7,111     | 
|Restricted cash                                            |  |                         | 546     |  |                        |   | -       |                            |  |   | -            |  |  |              | -         |   |  |   | 546       | 
|Accounts receivablenet of allowance for doubtful accounts |  |                         | -       |  |                        |   | 31,641  |                            |  |   | 232          |  |  |              | -         |   |  |   | 31,873    | 
|Prepaid expenses                                           |  |                         | 4,488   |  |                        |   | 3,862   |                            |  |   | 180          |  |  |              | -         |   |  |   | 8,530     | 
|Other current assets                                       |  |                         | 585     |  |                        |   | 1,333   |                            |  |   | 3            |  |  |              | -         |   |  |   | 1,921     | 
|Income taxes receivable                                    |  |                         | 470     |  |                        |   | -       |                            |  |   | -            |  |  |              | -         |   |  |   | 470       | 
|Deferred income taxes                                      |  |                         | 6,761   |  |                        |   | -       |                            |  |   | -            |  |  |              | -         |   |  |   | 6,761     | 
|Current assets of discontinued operations                  |  |                         | -       |  |                        |   | 1,635   |                            |  |   | -            |  |  |              | -         |   |  |   | 1,635     | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Total current assets                                       |  |                         | 12,850  |  |                        |   | 45,297  |                            |  |   | 700          |  |  |              | -         |   |  |   | 58,847    | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|PROPERTY AND EQUIPMENTNet                                 |  |                         | 9,515   |  |                        |   | 115,023 |                            |  |   | 1,088        |  |  |              | -         |   |  |   | 125,626   | 
|GOODWILL                                                   |  |                         | -       |  |                        |   | 518,310 |                            |  |   | 3,497        |  |  |              | -         |   |  |   | 521,807   | 
|INTANGIBLE ASSETSNet                                      |  |                         | -       |  |                        |   | 314,032 |                            |  |   | -            |  |  |              | -         |   |  |   | 314,032   | 
|OTHER ASSETS-Net                                           |  |                         | 18,728  |  |                        |   | 669     |                            |  |   | 14           |  |  |              | -         |   |  |   | 19,411    | 
|INVESTMENT IN SUBSIDIARIES                                 |  |                         | 953,587 |  |                        |   | -       |                            |  |   | -            |  |  |              | ( 953,587 | ) |  |   | -         | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|TOTAL ASSETS                                               |  | $                       | 994,680 |  |                        | $ | 993,331 |                            |  | $ | 5,299        |  |  | $            | ( 953,587 | ) |  | $ | 1,039,723 | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|                                                           |  |                         |         |  |                       
|LIABILITIES AND EQUITY                                     |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|CURRENT LIABILITIES:                                       |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Accounts payable                                           |  | $                       | 3,850   |  |                        | $ | 1,046   |                            |  | $ | 41           |  |  | $            | -         |   |  | $ | 4,937     | 
|Accrued liabilities                                        |  |                         | 17,396  |  |                        |   | 12,796  |                            |  |   | 664          |  |  |              | -         |   |  |   | 30,856    | 
|Current portion of long-term debt                          |  |                         | 9,641   |  |                        |   | 1,470   |                            |  |   | -            |  |  |              | -         |   |  |   | 11,111    | 
|Other current liabilities                                  |  |                         | 4,127   |  |                        |   | 13,128  |                            |  |   | 1,050        |  |  |              | -         |   |  |   | 18,305    | 
|Current liabilities of discontinued operations             |  |                         | -       |  |                        |   | 3,619   |                            |  |   | -            |  |  |              | -         |   |  |   | 3,619     | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Total current liabilities                                  |  |                         | 35,014  |  |                        |   | 32,059  |                            |  |   | 1,755        |  |  |              | -         |   |  |   | 68,828    | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|LONG-TERM DEBTLess current portion                        |  |                         | 598,618 |  |                        |   | 297     |                            |  |   | -            |  |  |              | -         |   |  |   | 598,915   | 
|OTHER LONG-TERM LIABILITIES                                |  |                         | 996     |  |                        |   | 7,613   |                            |  |   | 177          |  |  |              | -         |   |  |   | 8,786     | 
|LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS           |  |                         | -       |  |                        |   | 3,142   |                            |  |   | -            |  |  |              | -         |   |  |   | 3,142     | 
|DEFERRED INCOME TAXES                                      |  |                         | 105,079 |  |                        |   | -       |                            |  |   | -            |  |  |              | -         |   |  |   | 105,079   | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Total liabilities                                          |  |                         | 739,707 |  |                        |   | 43,111  |                            |  |   | 1,932        |  |  |              | -         |   |  |   | 784,750   | 
|CRC HEALTH CORPORATION STOCKHOLDERS EQUITY                |  |                         | 254,973 |  |                        |   | 950,220 |                            |  |   | 3,367        |  |  |              | ( 953,587 | ) |  |   | 254,973   | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|Total equity                                               |  |                         | 254,973 |  |                        |   | 950,220 |                            |  |   | 3,367        |  |  |              | ( 953,587 | ) |  |   | 254,973   | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 
|TOTAL LIABILITIES AND EQUITY                               |  | $                       | 994,680 |  |                        | $ | 993,331 |                            |  | $ | 5,299        |  |  | $            | ( 953,587 | ) |  | $ | 1,039,723 | 
|                                                           |  |                         |         |  |                        |   |         |                            |  |   |              |  |  |              |           |   |  |   |           | 



25



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##### Table of Contents

Condensed Consolidating Statements of Operations

For the Three Months Ended March 31, 2011

(In thousands) (Unaudited)



|                                                               |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|-------------------------------------------------------------- |  | ----------------------- | -------- | - | ---------------------- | - | ------- | -------------------------- |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ---------- | 
|                                                               |  | CRC Health

Corporation |          |   | Subsidiary
 Guarantors |   |         | Subsidiary
 Non-Guarantors |  |   | Eliminations |   |  | Consolidated |         
|                                                               |  | As Restated             |          |   | As Restated            |   |         | As Restated                |  |   | As Restated  |   |  | As Restated  |         
|                                                               |  |                         |          |   |                       
|REVENUE:                                                       |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|Net client service revenue                                     |  | $                       | 43       |   |                        | $ | 108,994 |                            |  | $ | 2,406        |   |  | $            | -        |   |  | $ | 111,443    | 
|Management fee revenue                                         |  |                         | 21,049   |   |                        |   | -       |                            |  |   | -            |   |  |              | ( 21,049 | ) |  |   | -          | 
|                                                               |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|Total net revenue                                              |  |                         | 21,092   |   |                        |   | 108,994 |                            |  |   | 2,406        |   |  |              | ( 21,049 | ) |  |   | 111,443    | 
|                                                               |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|                                                               |  |                         |          |   |                       
|OPERATING EXPENSES:                                            |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|Salaries and benefits                                          |  |                         | 5,330    |   |                        |   | 50,911  |                            |  |   | 1,106        |   |  |              | -        |   |  |   | 57,347     | 
|Supplies, facilities and other operating costs                 |  |                         | 2,886    |   |                        |   | 28,757  |                            |  |   | 1,203        |   |  |              | -        |   |  |   | 32,846     | 
|Provision for doubtful accounts                                |  |                         | -        |   |                        |   | 1,842   |                            |  |   | 14           |   |  |              | -        |   |  |   | 1,856      | 
|Depreciation and amortization                                  |  |                         | 1,053    |   |                        |   | 3,755   |                            |  |   | 94           |   |  |              | -        |   |  |   | 4,902      | 
|Asset impairments                                              |  |                         | -        |   |                        |   | 4,401   |                            |  |   | -            |   |  |              | -        |   |  |   | 4,401      | 
|Management fee expense                                         |  |                         | -        |   |                        |   | 20,298  |                            |  |   | 751          |   |  |              | ( 21,049 | ) |  |   | -          | 
|                                                               |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|Total operating expenses                                       |  |                         | 9,269    |   |                        |   | 109,964 |                            |  |   | 3,168        |   |  |              | ( 21,049 | ) |  |   | 101,352    | 
|                                                               |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|OPERATING INCOME (LOSS)                                        |  |                         | 11,823   |   |                        |   | ( 970   | )                          |  |   | ( 762        | ) |  |              | -        |   |  |   | 10,091     | 
|INTEREST EXPENSE, NET                                          |  |                         | ( 11,686 | ) |                        |   | ( 70    | )                          |  |   | -            |   |  |              | -        |   |  |   | ( 11,756 ) | 
|OTHER INCOME AND EXPENSE                                       |  |                         | 31       |   |                        |   | -       |                            |  |   | -            |   |  |              | -        |   |  |   | 31         | 
|                                                               |  |                         |          |   |                       
|                                                               |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES   |  |                         | 168      |   |                        |   | ( 1,040 | )                          |  |   | ( 762        | ) |  |              | -        |   |  |   | ( 1,634 )  | 
|INCOME TAX EXPENSE (BENEFIT)                                   |  |                         | 73       |   |                        |   | ( 453   | )                          |  |   | ( 333        | ) |  |              | -        |   |  |   | ( 713 )    | 
|EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX                     |  |                         | ( 982    | ) |                        |   |         |                            |  |   |              |   |  |              | 982      |   |  |   | -          | 
|                                                               |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|INCOME (LOSS) FROM CONTINUING OPERATIONS                       |  |                         | ( 887    | ) |                        |   | ( 587   | )                          |  |   | ( 429        | ) |  |              | 982      |   |  |   | ( 921 )    | 
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($26) |  |                         | -        |   |                        |   | 34      |                            |  |   | -            |   |  |              | -        |   |  |   | 34         | 
|                                                               |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|NET LOSS                                                       |  | $                       | ( 887    | ) |                        | $ | ( 553   | )                          |  | $ | ( 429        | ) |  | $            | 982      |   |  | $ | ( 887 )    | 
|                                                               |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 



26



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##### Table of Contents

Condensed Consolidating Statements of Operations

For the Three Months Ended March 31, 2010

(In thousands) (Unaudited)



|                                                                |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|--------------------------------------------------------------- |  | ----------------------- | -------- | - | ---------------------- | - | ------- | -------------------------- |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ---------- | 
|                                                                |  | CRC Health

Corporation |          |   | Subsidiary
 Guarantors |   |         | Subsidiary
 Non-Guarantors |  |   | Eliminations |   |  | Consolidated |         
|                                                                |  | As Restated             |          |   | As Restated            |   |         | As Restated                |  |   | As Restated  |   |  | As Restated  |         
|                                                                |  |                         |          |   |                       
|REVENUE:                                                        |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|Net client service revenue                                      |  | $                       | 50       |   |                        | $ | 101,837 |                            |  | $ | 1,749        |   |  | $            | -        |   |  | $ | 103,636    | 
|Management fee revenue                                          |  |                         | 18,451   |   |                        |   | -       |                            |  |   | -            |   |  |              | ( 18,451 | ) |  |   | -          | 
|                                                                |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|Total net revenue                                               |  |                         | 18,501   |   |                        |   | 101,837 |                            |  |   | 1,749        |   |  |              | ( 18,451 | ) |  |   | 103,636    | 
|                                                                |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|                                                                |  |                         |          |   |                       
|OPERATING EXPENSES:                                             |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|Salaries and benefits                                           |  |                         | 5,048    |   |                        |   | 46,854  |                            |  |   | 1,247        |   |  |              | -        |   |  |   | 53,149     | 
|Supplies, facilities and other operating costs                  |  |                         | 1,747    |   |                        |   | 26,304  |                            |  |   | 1,390        |   |  |              | -        |   |  |   | 29,441     | 
|Provision for doubtful accounts                                 |  |                         | -        |   |                        |   | 1,812   |                            |  |   | 93           |   |  |              | -        |   |  |   | 1,905      | 
|Depreciation and amortization                                   |  |                         | 928      |   |                        |   | 4,504   |                            |  |   | 121          |   |  |              | -        |   |  |   | 5,553      | 
|Management fee expense                                          |  |                         | -        |   |                        |   | 17,964  |                            |  |   | 487          |   |  |              | ( 18,451 | ) |  |   | -          | 
|                                                                |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|Total operating expenses                                        |  |                         | 7,723    |   |                        |   | 97,438  |                            |  |   | 3,338        |   |  |              | ( 18,451 | ) |  |   | 90,048     | 
|                                                                |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|OPERATING INCOME (LOSS)                                         |  |                         | 10,778   |   |                        |   | 4,399   |                            |  |   | ( 1,589      | ) |  |              | -        |   |  |   | 13,588     | 
|INTEREST EXPENSE, NET                                           |  |                         | ( 10,704 | ) |                        |   | 169     |                            |  |   | ( 270        | ) |  |              | -        |   |  |   | ( 10,805 ) | 
|                                                                |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES    |  |                         | 74       |   |                        |   | 4,568   |                            |  |   | ( 1,859      | ) |  |              | -        |   |  |   | 2,783      | 
|INCOME TAX EXPENSE (BENEFIT)                                    |  |                         | 32       |   |                        |   | 1,938   |                            |  |   | ( 789        | ) |  |              | -        |   |  |   | 1,181      | 
|EQUITY IN INCOME (LOSS) OF SUBSIDIARIES, NET OF TAX             |  |                         | 1,200    |   |                        |   |         |                            |  |   |              |   |  |              | ( 1,200  | ) |  |   | -          | 
|                                                                |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|INCOME (LOSS) FROM CONTINUING OPERATIONS                        |  |                         | 1,242    |   |                        |   | 2,630   |                            |  |   | ( 1,070      | ) |  |              | ( 1,200  | ) |  |   | 1,602      | 
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($227) |  |                         | -        |   |                        |   | ( 360   | )                          |  |   | -            |   |  |              | -        |   |  |   | ( 360 )    | 
|                                                                |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 
|NET INCOME (LOSS)                                               |  | $                       | 1,242    |   |                        | $ | 2,270   |                            |  | $ | ( 1,070      | ) |  | $            | ( 1,200  | ) |  | $ | 1,242      | 
|                                                                |  |                         |          |   |                        |   |         |                            |  |   |              |   |  |              |          |   |  |   |            | 



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Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2011

(In thousands) (Unaudited)



|                                                    |  |                         | Non-Guarantors |  |                        |   | Non-Guarantors |                            |  |   | Non-Guarantors |  |  |              | Non-Guarantors |  |  |   | Non-Guarantors | 
|--------------------------------------------------- |  | ----------------------- | -------------- |  | ---------------------- | - | -------------- | -------------------------- |  | - | -------------- |  |  | ------------ | -------------- |  |  | - | -------------- | 
|                                                    |  | CRC Health 
Corporation |                |  | Subsidiary 
Guarantors |   |                | Subsidiary
 Non-Guarantors |  |   | Eliminations   |  |  | Consolidated |               
|                                                    |  | As Restated             |                |  | As Restated            |   |                | As Restated                |  |   | As Restated    |  |  | As Restated  |               
|                                                    |  |                         |                |  |                       
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|Net cash (used in) provided by operating activities |  | $                       | (2,240)        |  |                        | $ | 8,758          |                            |  | $ | (202)          |  |  | $            | -              |  |  | $ | 6,316          | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                       
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|Additions of property and equipment                 |  |                         | (1,453)        |  |                        |   | (2,463)        |                            |  |   | (80)           |  |  |              | -              |  |  |   | (3,996)        | 
|Proceeds from sale of property and equipment        |  |                         | -              |  |                        |   | 42             |                            |  |   | -              |  |  |              | -              |  |  |   | 42             | 
|Acquisition of business, net of cash acquired       |  |                         | (28)           |  |                        |   | -              |                            |  |   | -              |  |  |              | -              |  |  |   | (28)           | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|Net cash used in investing activities               |  |                         | (1,481)        |  |                        |   | (2,421)        |                            |  |   | (80)           |  |  |              | -              |  |  |   | (3,982)        | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                       
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|Intercompany transfers                              |  |                         | 4,978          |  |                        |   | (5,345)        |                            |  |   | 367            |  |  |              | -              |  |  |   | -              | 
|Capital contributed from Parent                     |  |                         | (543)          |  |                        |   | -              |                            |  |   | -              |  |  |              | -              |  |  |   | (543)          | 
|Capitalized financing costs                         |  |                         | (3,195)        |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   | (3,195)        | 
|Borrowings under revolving line of credit           |  |                         | 2,500          |  |                        |   | -              |                            |  |   | -              |  |  |              | -              |  |  |   | 2,500          | 
|Repayments of term loan and seller notes            |  |                         | (19)           |  |                        |   | (1,294)        |                            |  |   | -              |  |  |              | -              |  |  |   | (1,313)        | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|Net cash provided by (used in) financing activities |  |                         | 3,721          |  |                        |   | (6,639)        |                            |  |   | 367            |  |  |              | -              |  |  |   | (2,551)        | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                       
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS    |  |                         | -              |  |                        |   | (302)          |                            |  |   | 85             |  |  |              | -              |  |  |   | (217)          | 
|                                                    |  |                         |                |  |                       
|CASH AND CASH EQUIVALENTS Beginning of period       |  |                         | -              |  |                        |   | 6,826          |                            |  |   | 285            |  |  |              | -              |  |  |   | 7,111          | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   | -              | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|CASH AND CASH EQUIVALENTS End of period             |  | $                       | -              |  |                        | $ | 6,524          |                            |  | $ | 370            |  |  | $            | -              |  |  | $ | 6,894          | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 



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Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2010

(In thousands) (Unaudited)



|                                                    |  |                         | Non-Guarantors |  |                        |   | Non-Guarantors |                            |  |   | Non-Guarantors |  |  |              | Non-Guarantors |  |  |   | Non-Guarantors | 
|--------------------------------------------------- |  | ----------------------- | -------------- |  | ---------------------- | - | -------------- | -------------------------- |  | - | -------------- |  |  | ------------ | -------------- |  |  | - | -------------- | 
|                                                    |  | CRC Health 
Corporation |                |  | Subsidiary 
Guarantors |   |                | Subsidiary
 Non-Guarantors |  |   | Eliminations   |  |  | Consolidated |               
|                                                    |  | As Restated             |                |  | As Restated            |   |                | As Restated                |  |   | As Restated    |  |  | As Restated  |               
|                                                    |  |                         |                |  |                       
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|Net cash (used in) provided by operating activities |  | $                       | (2,843)        |  |                        | $ | 8,876          |                            |  | $ | 193            |  |  | $            | -              |  |  | $ | 6,226          | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                       
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|Additions of property and equipment                 |  |                         | (1,001)        |  |                        |   | (1,843)        |                            |  |   | (31)           |  |  |              | -              |  |  |   | (2,875)        | 
|Proceeds from sale of property and equipment        |  |                         | -              |  |                        |   | 14             |                            |  |   | -              |  |  |              | -              |  |  |   | 14             | 
|Acquisition of business, net of cash acquired       |  |                         | (30)           |  |                        |   | -              |                            |  |   | -              |  |  |              | -              |  |  |   | (30)           | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|Net cash used in investing activities               |  |                         | (1,031)        |  |                        |   | (1,829)        |                            |  |   | (31)           |  |  |              | -              |  |  |   | (2,891)        | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                       
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|Intercompany transfers                              |  |                         | 10,022         |  |                        |   | (9,867)        |                            |  |   | (155)          |  |  |              | -              |  |  |   | -              | 
|Capital contributed from Parent                     |  |                         | 8              |  |                        |   | -              |                            |  |   | -              |  |  |              | -              |  |  |   | 8              | 
|Borrowings under revolving line of credit           |  |                         | 5,000          |  |                        |   | -              |                            |  |   | -              |  |  |              | -              |  |  |   | 5,000          | 
|Repayments under revolving line of credit           |  |                         | (2,500)        |  |                        |   | -              |                            |  |   | -              |  |  |              | -              |  |  |   | (2,500)        | 
|Repayments of term loan and seller notes            |  |                         | (8,656)        |  |                        |   | -              |                            |  |   | -              |  |  |              | -              |  |  |   | (8,656)        | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|Net cash provided by (used in) financing activities |  |                         | 3,874          |  |                        |   | (9,867)        |                            |  |   | (155)          |  |  |              | -              |  |  |   | (6,148)        | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|                                                    |  |                         |                |  |                       
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS    |  |                         | -              |  |                        |   | (2,820)        |                            |  |   | 7              |  |  |              | -              |  |  |   | (2,813)        | 
|                                                    |  |                         |                |  |                       
|CASH AND CASH EQUIVALENTS Beginning of period       |  |                         | -              |  |                        |   | 4,745          |                            |  |   | 237            |  |  |              | -              |  |  |   | 4,982          | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   | -              | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 
|CASH AND CASH EQUIVALENTS End of period             |  | $                       | -              |  |                        | $ | 1,925          |                            |  | $ | 244            |  |  | $            | -              |  |  | $ | 2,169          | 
|                                                    |  |                         |                |  |                        |   |                |                            |  |   |                |  |  |              |                |  |  |   |                | 



15. RESTRUCTURING

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



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



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

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



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



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

16. DISCONTINUED OPERATIONS

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

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

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



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



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17. SEGMENT INFORMATION

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

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

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

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

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

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

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

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

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



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



|                                                                                |  |                                  |           |  |                                  |   |           | 
|------------------------------------------------------------------------------- |  | -------------------------------- | --------- |  | -------------------------------- | - | --------- | 
|                                                                                |  | Three Months EndedMarch 31, 2011 |           |  | Three Months EndedMarch 31, 2010 |  
|                                                                                |  | As Restated                      |           |  | As Restated                      |  
|Net revenue:                                                                    |  |                                  |           |  |                                  |   |           | 
|Recovery division                                                               |  | $                                | 85,721    |  |                                  | $ | 78,665    | 
|Healthy living division                                                         |  |                                  | 25,679    |  |                                  |   | 24,920    | 
|Corporate                                                                       |  |                                  | 43        |  |                                  |   | 51        | 
|                                                                                |  |                                  |           |  |                                  |   |           | 
|Total consolidated net revenue                                                  |  | $                                | 111,443   |  |                                  | $ | 103,636   | 
|                                                                                |  |                                  |           |  |                                  |   |           | 
|Operating expenses:                                                             |  |                                  |           |  |                                  |   |           | 
|Recovery division                                                               |  | $                                | 57,555    |  |                                  | $ | 53,263    | 
|Healthy living division                                                         |  |                                  | 34,529    |  |                                  |   | 29,061    | 
|Corporate                                                                       |  |                                  | 9,268     |  |                                  |   | 7,724     | 
|                                                                                |  |                                  |           |  |                                  |   |           | 
|Total consolidated operating expenses                                           |  | $                                | 101,352   |  |                                  | $ | 90,048    | 
|                                                                                |  |                                  |           |  |                                  |   |           | 
|Operating income (loss):                                                        |  |                                  |           |  |                                  |   |           | 
|Recovery division                                                               |  | $                                | 28,166    |  |                                  | $ | 25,402    | 
|Healthy living division                                                         |  |                                  | (8,850)   |  |                                  |   | (4,141)   | 
|Corporate                                                                       |  |                                  | (9,225)   |  |                                  |   | (7,673)   | 
|                                                                                |  |                                  |           |  |                                  |   |           | 
|Total consolidated operating income                                             |  |                                  | 10,091    |  |                                  |   | 13,588    | 
|Interest expense-net                                                            |  |                                  | (11,756)  |  |                                  |   | (10,805)  | 
|Other income                                                                    |  |                                  | 31        |  |                                  |   |          | 
|                                                                                |  |                                  |           |  |                                  |   |           | 
|Total consolidated (loss) income from continuing operations before income taxes |  | $                                | (1,634)   |  |                                  | $ | 2,783     | 
|                                                                                |  |                                  |           |  |                                  |   |           | 
|Capital expenditures:                                                           |  |                                  |           |  |                                  |   |           | 
|Recovery division                                                               |  | $                                | 2,042     |  |                                  | $ | 1,457     | 
|Healthy living division                                                         |  |                                  | 501       |  |                                  |   | 417       | 
|Corporate                                                                       |  |                                  | 1,453     |  |                                  |   | 1,001     | 
|                                                                                |  |                                  |           |  |                                  |   |           | 
|Total consolidated capital expenditures                                         |  | $                                | 3,996     |  |                                  | $ | 2,875     | 
|                                                                                |  |                                  |           |  |                                  |   |           | 
|                                                                                |  |                                 
|                                                                                |  | March 31,2011                    |           |  | December 31,2010                 |  
|Total assets(1):                                                                |  |                                  |           |  |                                  |   |           | 
|Recovery division                                                               |  | $                                | 902,638   |  |                                  | $ | 901,411   | 
|Healthy living division                                                         |  |                                  | 91,516    |  |                                  |   | 94,516    | 
|Corporate                                                                       |  |                                  | 46,264    |  |                                  |   | 43,796    | 
|                                                                                |  |                                  |           |  |                                  |   |           | 
|Total consolidated assets                                                       |  | $                                | 1,040,418 |  |                                  | $ | 1,039,723 | 
|                                                                                |  |                                  |           |  |                                  |   |           | 



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



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

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the related
notes that appear elsewhere in this Quarterly Report. Unless the context otherwise requires, in this managements discussion and analysis of financial condition and results of operations, the terms our company, we,
us, the Company and our refer to CRC Health Corporation and its consolidated subsidiaries.

RESTATEMENT OF PREVIOUSLY ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

We are filing this Amended Quarterly Report on Form 10-Q/A (the Amended Filing or Form 10-Q/A) to our Quarterly
Report on Form 10-Q for the three months ended March 31, 2011 (the Original Filing) to restate our condensed consolidated financial statements, financial data and related disclosures as a result of errors identified in connection
with an independent review initiated by our Board of Directors and management, as discussed in Note 2 to the accompanying restated condensed consolidated financial statements. We have also filed an Amended Annual Report on Form 10-K/A for the
year ended December 31, 2010 with the SEC on October 17, 2011 immediately preceding the filing of this report to correct errors resulting from the above-mentioned review.

On August 16, 2011, we announced that we were conducting a review of inconsistencies in the accounts at one of our recovery
residential treatment facilities (the Facility). In 2009 and 2010, such Facility accounted for approximately 2.9% and 3.2%, respectively, of the Companys total revenue. On October 4, 2011, the Board of Directors of the Company
(the Board), in consultation with the Audit Committee of the Board (the Audit Committee) and management, adopted the conclusions of the investigation and concluded that our previously issued consolidated financial statements
for the years ended December 31, 2008, 2009 and 2010, along with the accompanying independent auditors reports and our previously issued condensed consolidated financial statements for the fiscal quarter ended March 31, 2011 should
not be relied upon because of errors identified in such financial statements.

Management initially identified certain errors
upon initiating an internal investigation after noting inconsistencies in accounting for certain transactions at the Facility. Following a briefing by management on the issues, the Audit Committee hired independent counsel to conduct a review
of accounting transactions at the Facility. The investigation is complete and the Audit Committee identified issues related to misconduct by a former employee of the Facility as well as errors in accounting for revenue, accounts receivable, bad debt
expenses and general expenses. The investigation did not identify any instances in which patients or third party payors were incorrectly billed for services. As a result of these errors, we have restated our previously issued consolidated financial
statements for the years ended December 31, 2008, December 31, 2009 and December 31, 2010, including the quarterly data for the years 2009 and 2010, and for the fiscal quarter ended March 31, 2011.

The restated condensed consolidated financial statements also include adjustments to correct immaterial adjustments that had been
previously recorded in 2009 and 2010 and the three months ended March 31, 2011, so such immaterial adjustments are recorded in the proper period.

The following table summarizes the impact of the restatement to the previously reported net (loss) income attributable to CRC Health Corporation.



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|                                                                                 |  |                                 |       |  |                                 |   |       | 
|-------------------------------------------------------------------------------- |  | ------------------------------- | ----- |  | ------------------------------- | - | ----- | 
|                                                                                 |  | Three MonthsEnded March 31,2011 |       |  | Three MonthsEnded March 31,2010 |  
|                                                                                 |  | (in thousands)                  |      
|Net (loss) income attributable to CRC Health Corporation, as previously reported |  | $                               | (753) |  |                                 | $ | 861   | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Adjustments related to the Facility:                                             |  |                                 |       |  |                                 |   |       | 
|Net client service revenues                                                      |  |                                 | (418) |  |                                 |   | 59    | 
|Provision for doubtful accounts                                                  |  |                                 | (185) |  |                                 |   | (85)  | 
|Supplies, facilities and other operating costs                                   |  |                                 | (95)  |  |                                 |   | (22)  | 
|Income tax effects                                                               |  |                                 | 289   |  |                                 |   | 20    | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Facility adjustments after tax                                                   |  |                                 | (409) |  |                                 |   | (28)  | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Other Adjustments:                                                               |  |                                 |       |  |                                 |   |       | 
|Salaries and benefits                                                            |  |                                 | -     |  |                                 |   | 254   | 
|Supplies, facilities and other operating costs                                   |  |                                 | 455   |  |                                 |   | 422   | 
|Income tax effects                                                               |  |                                 | (180) |  |                                 |   | (267) | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Other adjustments after tax                                                      |  |                                 | 275   |  |                                 |   | 409   | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Total adjustments                                                                |  |                                 | (134) |  |                                 |   | 381   | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 
|Net (loss) income attributable to CRC Health Corporation, as restated            |  | $                               | (887) |  |                                 | $ | 1,242 | 
|                                                                                 |  |                                 |       |  |                                 |   |       | 



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OVERVIEW

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

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

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

EXECUTIVE SUMMARY

We generate revenue by providing substance abuse treatment services and youth treatment services. We also generate revenue by providing treatment services for other specialized behavioral disorders such
as eating disorders. Revenue is recognized when rehabilitation and treatment services are provided to a client. Client service revenue is reported at the estimated net realizable amounts from clients, third-party payors and others for services
rendered. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided for in the period the related services are rendered and adjusted in future
periods as final settlements are determined. Revenue for educational services provided to youth consists primarily of tuition, enrollment fees, alumni services and ancillary charges. Tuition revenue and ancillary charges are recognized based on
contracted monthly/daily rates as services are rendered. The enrollment fees for service contracts that are charged upfront are deferred and recognized over the average student length of stay, approximately nine months. Alumni fee revenue represents
non-refundable upfront fees for post graduation services and these fees are deferred and recognized systematically over the contracted life. During the three months ended March 31, 2011 and 2010, we generated 78.9% and 78.9% of our net revenue
from non-governmental sources, including 56.7% and 61.5% from self payors, respectively, and 22.2% and 17.4% from commercial payors, respectively. Substantially all of our government program net revenue was received from multiple counties and states
under Medicaid and similar programs.

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



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During the three months ended March 31, 2011, our consolidated same-facility net
revenue increased by $7.8 million or 7.5% respectively, when compared to the comparable periods in 2010. On a consolidated basis, same-facility operating expenses increased $7.6 million or 10.5%, respectively, during the three months
ended March 31, 2011. Same-facility means a comparison over the comparable period of the financial performance of a facility we have operated for at least one year. Total-facility means a comparison over the comparable
period of the financial performance of a facility that we have operated for any duration of time. Both the total-facility and same-facility represent facilities that are a part of the continuing operations. Our operating expenses include salaries
and benefits, supplies, facilities and other operating costs, provision for doubtful accounts, depreciation and amortization, asset impairment, and goodwill impairment. Operating expenses for our recovery and healthy living divisions exclude
corporate level general and administrative costs (i.e., expenses associated with our corporate offices in Cupertino, California, which provide management, financial, human resources and information systems support), stock-based compensation expense
and expenses associated with eGetgoing. Goodwill impairment is not included in the same-facility analysis.

CRITICAL ACCOUNTING POLICIES
AND ESTIMATES

General

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

Recent Accounting Guidance

For a summary of recently adopted and recently issued accounting guidance, please see Note 3 to the condensed consolidated financial
statements, as included herein.



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##### Table of Contents

RESULTS OF OPERATIONS

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

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



|                                                                                                                                                            |  |                                            |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | -------- |  | ---- | - | -------- | --------------------- |  | - | --------------------- |  |  |  | -------- | 
|                                                                                                                                                            |  | Three Months Ended March 31,Total
Facility |         
|Statement of Operations Data:                                                                                                                               |  | 2011                                       |          |  | 2010 |   |          | 2011 vs. 2010$ Change |  |   | 2011 vs. 2010% Change | 
|Net revenue:                                                                                                                                                |  |                                            | Restated |  |      |   | Restated |                       |  |   |                       |  |  |  |          | 
|Recovery division                                                                                                                                           |  | $                                          | 85,721   |  |      | $ | 78,665   |                       |  | $ | 7,056                 |  |  |  | 9.0%     | 
|Healthy living division                                                                                                                                     |  |                                            | 25,679   |  |      |   | 24,920   |                       |  |   | 759                   |  |  |  | 3.0%     | 
|Corporate                                                                                                                                                   |  |                                            | 43       |  |      |   | 51       |                       |  |   | (8)                   |  |  |  | (14.0)%  | 
|                                                                                                                                                            |  |                                            |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|Total net revenue                                                                                                                                           |  |                                            | 111,443  |  |      |   | 103,636  |                       |  |   | 7,807                 |  |  |  | 7.5%     | 
|Operating expenses:                                                                                                                                         |  |                                            |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|Recovery division                                                                                                                                           |  |                                            | 57,555   |  |      |   | 53,263   |                       |  |   | 4,292                 |  |  |  | 8.1%     | 
|Healthy living division(1)                                                                                                                                  |  |                                            | 34,529   |  |      |   | 29,061   |                       |  |   | 5,468                 |  |  |  | 18.8%    | 
|Corporate                                                                                                                                                   |  |                                            | 9,268    |  |      |   | 7,724    |                       |  |   | 1,544                 |  |  |  | 20.0%    | 
|                                                                                                                                                            |  |                                            |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|Total operating expenses                                                                                                                                    |  |                                            | 101,352  |  |      |   | 90,048   |                       |  |   | 11,304                |  |  |  | 12.6%    | 
|Operating income (loss):                                                                                                                                    |  |                                            |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|Recovery division                                                                                                                                           |  |                                            | 28,166   |  |      |   | 25,402   |                       |  |   | 2,764                 |  |  |  | 10.9%    | 
|Healthy living division                                                                                                                                     |  |                                            | (8,850)  |  |      |   | (4,141)  |                       |  |   | (4,709)               |  |  |  | (113.7)% | 
|Corporate                                                                                                                                                   |  |                                            | (9,225)  |  |      |   | (7,673)  |                       |  |   | (1,552)               |  |  |  | (20.2)%  | 
|                                                                                                                                                            |  |                                            |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|Total operating income                                                                                                                                      |  |                                            | 10,091   |  |      |   | 13,588   |                       |  |   | (3,497)               |  |  |  | (25.7)%  | 
|Interest expense-net                                                                                                                                        |  |                                            | (11,756) |  |      |   | (10,805) |                       |  |   | (951)                 |  |  |  | (8.8)%   | 
|Other income                                                                                                                                                |  |                                            | 31       |  |      |   |         |                       |  |   | 31                    |  |  |  | n/a      | 
|                                                                                                                                                            |  |                                            |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|(Loss) income from continuing operations before income taxes                                                                                                |  |                                            | (1,634)  |  |      |   | 2,783    |                       |  |   | (4,417)               |  |  |  | (158.7)% | 
|Income tax (benefit) expense                                                                                                                                |  |                                            | (713)    |  |      |   | 1,181    |                       |  |   | (1,894)               |  |  |  | 160.4%   | 
|                                                                                                                                                            |  |                                            |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|(Loss) income from continuing operations, net of tax                                                                                                        |  |                                            | (921)    |  |      |   | 1,602    |                       |  |   | (2,523)               |  |  |  | (157.5)% | 
|Income(loss) from discontinued operations, (net of tax expense (benefit) of $26 and ($227) in the three months ended
March 31, 2011 and 2010, respectively) |  |                                            | 34       |  |      |   | (360)    |                       |  |   | 394                   |  |  |  | 109.4%   | 
|                                                                                                                                                            |  |                                            |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|Net (loss) income attributable to CRC Health Corporation                                                                                                    |  | $                                          | (887)    |  |      | $ | 1,242    |                       |  | $ | (2,129)               |  |  |  | (171.4)% | 
|                                                                                                                                                            |  |                                            |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 



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



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



|                                       |  |                                            |           |  |      |   |           |          |  |  |         | 
|-------------------------------------- |  | ------------------------------------------ | --------- |  | ---- | - | --------- | -------- |  |  | ------- | 
|                                       |  | Three Months Ended March
31,Total Facility |          
|                                       |  | 2011                                       |           |  | 2010 |   |           | % change | 
|                                       |  |                                            |          
|Recovery Division                      |  |                                            |           |  |      |   |           |          |  |  |         | 
|Residential facilities                 |  |                                            |           |  |      |   |           |          |  |  |         | 
|Revenue (in thousands) (restated)      |  | $                                          | 55,941    |  |      | $ | 50,236    |          |  |  | 11.4%   | 
|Patient days                           |  |                                            | 150,210   |  |      |   | 139,532   |          |  |  | 7.7%    | 
|Net revenue per patient day (restated) |  | $                                          | 372.42    |  |      | $ | 360.03    |          |  |  | 3.4%    | 
|CTCs                                   |  |                                            |           |  |      |   |           |          |  |  |         | 
|Revenue (in thousands)                 |  | $                                          | 29,780    |  |      | $ | 28,429    |          |  |  | 4.8%    | 
|Patient days                           |  |                                            | 2,377,284 |  |      |   | 2,345,490 |          |  |  | 1.4%    | 
|Net revenue per patient day            |  | $                                          | 12.53     |  |      | $ | 12.12     |          |  |  | 3.4%    | 
|                                       |  |                                            |          
|Healthy Living Division                |  |                                            |           |  |      |   |           |          |  |  |         | 
|Residential facilities                 |  |                                            |           |  |      |   |           |          |  |  |         | 
|Revenue (in thousands)                 |  | $                                          | 14,160    |  |      | $ | 15,119    |          |  |  | (6.3)%  | 
|Patient days                           |  |                                            | 53,643    |  |      |   | 62,173    |          |  |  | (13.7)% | 
|Net revenue per patient day            |  | $                                          | 263.97    |  |      | $ | 243.18    |          |  |  | 8.5%    | 
|Outdoor programs                       |  |                                            |           |  |      |   |           |          |  |  |         | 
|Revenue (in thousands)                 |  | $                                          | 5,391     |  |      | $ | 4,780     |          |  |  | 12.8%   | 
|Patient days                           |  |                                            | 11,766    |  |      |   | 11,052    |          |  |  | 6.5%    | 
|Net revenue per patient day            |  | $                                          | 458.18    |  |      | $ | 432.50    |          |  |  | 5.9%    | 
|Weight management programs             |  |                                            |           |  |      |   |           |          |  |  |         | 
|Revenue (in thousands)                 |  | $                                          | 6,124     |  |      | $ | 5,015     |          |  |  | 22.1%   | 
|Patient days                           |  |                                            | 15,735    |  |      |   | 15,284    |          |  |  | 3.0%    | 
|Net revenue per patient day            |  | $                                          | 389.20    |  |      | $ | 328.12    |          |  |  | 18.6%   | 

Consolidated net revenue increased $7.8 million, or 7.5%, to $111.4 million for the three months ended
March 31, 2011 from $103.6 million for the three months ended March 31, 2010. Of the total net revenue increase, the recovery division contributed an increase of $7.0 million and the healthy living division contributed an increase of $0.8
million. The $7.1 million, or 9.0%, increase within the recovery division was driven by increases of $5.7 million and $1.4 million within residential and CTC facilities, respectively. The $0.8 million, or 3.0%, increase within the healthy living
division was driven by increases of $1.1 million and $0.6 million within weight management and outdoor programs, respectively, offset by a decrease of $0.9 million in residential facilities.

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

Consolidated operating expenses increased $11.3 million, or 12.6%, to $101.4 million for the three months ended
March 31, 2011 from $90.0 million in the same period of 2010. The $11.3 million increase in operating expenses was primarily driven by the non-cash asset impairments of $4.4 million during the three months ended March 31, 2011 within the
healthy living division. Without considering non-cash asset impairment charges, consolidated operating expenses increased $6.9 million, or 7.7%, over the same period of 2010. Of the $6.9 million increase, the recovery division, the healthy living
division and corporate contributed an increase of $4.3 million, $1.1 million and $1.5 million, respectively.

Our consolidated
operating margin was 9.1% in the three months ended March 31, 2011 compared to 13.1% in the same period of 2010. The decrease in operating margin resulted from the increase in non-cash asset impairments and other operating costs offset by an
increase in revenues. Without considering non-cash asset impairment charges, consolidated operating margin was 13.0% in the three months ended March 31, 2011 compared to 13.1% in the same period of 2010. Recovery division margins for the three
months ended March 31, 2011 were 32.9% compared to 32.2% in the same period of 2010. Healthy living division operating margin decreased to (34.5)% for the three months ended March 31, 2011 compared to operating margin of (16.6)% in the
same period of 2010. Without considering non-cash asset impairment charges, healthy living division operating margin was (17.3)% for the three months ended March 31, 2011 compared to (16.6)% in the same period of 2010.



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For the three months ended March 31, 2011, consolidated net income from continuing
operations, net of tax, decreased by $2.5 million over the same period of 2010 resulting in a loss from continuing operations, net of tax, of $0.9 million compared to an income from continuing operations, net of tax, of $1.6 million in the same
period of 2010. The decrease in income from continuing operations in 2011 compared to 2010 is primarily driven by increases in non-cash asset impairment charge of $4.4 million and other operating expenses of $6.9 million offset by an increase in
revenues of $7.8 million.

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



|                              |  |                                           |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|----------------------------- |  | ----------------------------------------- | -------- |  | ---- | - | -------- | --------------------- |  | - | --------------------- |  |  |  | -------- | 
|                              |  | Three Months
Ended March 31,Same Facility |         
|Statement of Operations Data: |  | 2011                                      |          |  | 2010 |   |          | 2011 vs. 2010$ Change |  |   | 2011 vs. 2010% Change | 
|Net revenue:                  |  |                                           | Restated |  |      |   | Restated |                       |  |   |                       |  |  |  |          | 
|Recovery division             |  | $                                         | 85,458   |  |      | $ | 78,665   |                       |  | $ | 6,793                 |  |  |  | 8.6%     | 
|Healthy living division       |  |                                           | 25,226   |  |      |   | 24,251   |                       |  |   | 975                   |  |  |  | 4.0%     | 
|                              |  |                                           |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|Total net revenue             |  |                                           | 110,684  |  |      |   | 102,916  |                       |  |   | 7,768                 |  |  |  | 7.5%     | 
|Operating expenses:           |  |                                           |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|Recovery division             |  |                                           | 51,912   |  |      |   | 48,019   |                       |  |   | 3,893                 |  |  |  | 8.1%     | 
|Healthy living division       |  |                                           | 28,727   |  |      |   | 24,980   |                       |  |   | 3,747                 |  |  |  | 15.0%    | 
|                              |  |                                           |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|Total operating expenses      |  |                                           | 80,639   |  |      |   | 72,999   |                       |  |   | 7,640                 |  |  |  | 10.5%    | 
|Operating income (loss):      |  |                                           |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|Recovery division             |  |                                           | 33,546   |  |      |   | 30,646   |                       |  |   | 2,900                 |  |  |  | 9.5%     | 
|Healthy living division       |  |                                           | (3,501)  |  |      |   | (729)    |                       |  |   | (2,772)               |  |  |  | (380.2)% | 
|                              |  |                                           |          |  |      |   |          |                       |  |   |                       |  |  |  |          | 
|Operating income              |  |                                           | 30,045   |  |      |   | 29,917   |                       |  |   | 128                   |  |  |  | 0.4%     | 

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



|                                       |  |                                           | 00000000000000 |  |      |   | 00000000000000 |          |  |  | 00000000000000 | 
|-------------------------------------- |  | ----------------------------------------- | -------------- |  | ---- | - | -------------- | -------- |  |  | -------------- | 
|                                       |  | Three Months Ended March
31,Same Facility |               
|                                       |  | 2011                                      |                |  | 2010 |   |                | % change | 
|Recovery Division                      |  |                                           |                |  |      |   |                |          |  |  |                | 
|Residential facilities                 |  |                                           |                |  |      |   |                |          |  |  |                | 
|Revenue (in thousands) (restated)      |  | $                                         | 55,678         |  |      | $ | 50,236         |          |  |  | 10.8%          | 
|Patient days                           |  |                                           | 150,210        |  |      |   | 139,532        |          |  |  | 7.7%           | 
|Net revenue per patient day (restated) |  | $                                         | 370.67         |  |      | $ | 360.03         |          |  |  | 3.0%           | 
|CTCs                                   |  |                                           |                |  |      |   |                |          |  |  |                | 
|Revenue (in thousands)                 |  | $                                         | 29,780         |  |      | $ | 28,429         |          |  |  | 4.8%           | 
|Patient days                           |  |                                           | 2,377,284      |  |      |   | 2,345,490      |          |  |  | 1.4%           | 
|Net revenue per patient day            |  | $                                         | 12.53          |  |      | $ | 12.12          |          |  |  | 3.4%           | 
|                                       |  |                                           |               
|Healthy Living Division                |  |                                           |                |  |      |   |                |          |  |  |                | 
|Residential facilities                 |  |                                           |                |  |      |   |                |          |  |  |                | 
|Revenue (in thousands)                 |  | $                                         | 13,711         |  |      | $ | 14,456         |          |  |  | (5.2)%         | 
|Patient days                           |  |                                           | 51,527         |  |      |   | 59,134         |          |  |  | (12.9)%        | 
|Net revenue per patient day            |  | $                                         | 266.09         |  |      | $ | 244.46         |          |  |  | 8.8%           | 
|Outdoor programs                       |  |                                           |                |  |      |   |                |          |  |  |                | 
|Revenue (in thousands)                 |  | $                                         | 5,391          |  |      | $ | 4,780          |          |  |  | 12.8%          | 
|Patient days                           |  |                                           | 11,766         |  |      |   | 11,052         |          |  |  | 6.5%           | 
|Net revenue per patient day            |  | $                                         | 458.18         |  |      | $ | 432.50         |          |  |  | 5.9%           | 
|Weight management programs             |  |                                           |                |  |      |   |                |          |  |  |                | 
|Revenue (in thousands)                 |  | $                                         | 6,124          |  |      | $ | 5,015          |          |  |  | 22.1%          | 
|Patient days                           |  |                                           | 15,735         |  |      |   | 15,284         |          |  |  | 3.0%           | 
|Net revenue per patient day            |  | $                                         | 389.20         |  |      | $ | 328.12         |          |  |  | 18.6%          | 



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On a same-facility basis, recovery division net revenue increased $6.8 million, or 8.6%, to
$85.5 million for the three months ended March 31, 2011 from $78.7 million in the same period of 2010. The same-facility revenue increases were due to increases of $5.4 million and $1.4 million within the residential and CTC facilities,
respectively. Healthy living division same-facility revenue increased $1.0 million or 4.0% to $25.2 million for the three months ended March 31, 2011 from $24.2 million in the same period of 2010. The same-facility revenue increase within the
healthy living division was driven by increases of $1.1 million and $0.6 million within weight management and outdoor programs, respectively, offset by a decrease of $0.7 million in residential facilities.

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

On a same-facility basis, recovery division operating expenses increased $3.9 million driven by an increase of $2.8 million
in residential facilities and an increase of $1.1 million in CTCs compared to the same period of 2010. Healthy living division same-facility operating expenses increased $3.7 million due to increases in asset impairment charges of $2.5 million, an
increase in salaries and benefits of $1.8 million and an increase in supplies, facilities and other costs of $0.3 million, offset by decreases of $0.6 million and $0.3 million in depreciation and amortization and provision for doubtful accounts,
respectively.

Sources and Uses of Cash



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

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

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

Cash used in financing activities was $2.6 million for the three months ended March 31, 2011 compared to cash used in financing activities of $6.1 million for the same period in 2010. The
decrease in cash used in financing activities is primarily due to lower repayments of debt of $9.8 million offset by lower borrowings of $2.5 million and higher outflows related to financing costs of $3.2 million, during the three months ended
March 31, 2011.

Financing and Liquidity

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



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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 March 31, 2011, we were in compliance with all such covenants. A breach of these could result in a
default under our credit facilities and in our being unable to borrow additional amounts under our revolving credit facility. If an event of default occurs, the lenders could elect to declare all amounts borrowed under our credit facilities to be
immediately due and payable and the lenders under our term loans and revolving credit facility could proceed against the collateral securing the indebtedness.



|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/A for the year ended December 31, 2010. As of March 31, 2011, our exposure to market risk has not changed materially since December 31, 2010.



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

Background

On August 16, 2011, the Company announced that it was conducting a review of inconsistencies in the accounts at one
of its recovery residential treatment facilities (the Facility). On October 4, 2011, the Board of Directors of the Company (the Board), in consultation with the Audit Committee of the Board (the Audit
Committee) and management, adopted the conclusions of the investigation and concluded that the Companys previously issued consolidated financial statements for the years ended December 31, 2008, 2009 and 2010, along with the
accompanying independent auditors reports and its previously issued condensed consolidated financial statements for the fiscal quarter ended March 31, 2011 should not be relied upon because of errors identified in such financial
statements.

Management initially identified certain errors upon initiating an internal investigation after noting
inconsistencies in accounting for certain transactions at the Facility. Following a briefing by management on the issues, the Audit Committee hired independent counsel to conduct a review of accounting transactions at the Facility. The
investigation is complete and the Audit Committee identified issues related to misconduct by a former employee as well as errors in accounting for revenue, accounts receivable, bad debt expenses and general expenses. As a result of these errors, the
Company has restated its previously issued consolidated financial statements for the years ended December 31, 2008, December 31, 2009 and December 31, 2010, including the quarterly data for the years 2009 and 2010, and for the
fiscal quarter ended March 31, 2011.

Evaluation of Disclosure Controls and Procedures

After discovering the errors identified in this Form 10-Q/A, we, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, have reevaluated 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 Exchange Act,
as of the end of the period covered by this report. This reevaluation identified a material weakness in our internal control over financial reporting. Based on the evaluation of this material weakness, our principal executive officer and principal
financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective to ensure that 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 SEC 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.

Plan for Remediation of the Material Weaknesses in
Internal Control Over Financial Reporting

Management has been actively engaged in the planning for, and implementation of,
remediation efforts to address the material weakness at facilities with manual accounting procedures. These remediation efforts, outlined below, are intended both to address the identified material weakness and to enhance our overall financial
control environment.

Management has already added new accounting staff at the Facility and plans to undertake the following
actions to further address these issues in fiscal 2011:



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| |  |  | the addition of more experienced accounting staff;
| | - |  | --------------------------------------------------

| |  |  | training programs for accounting and finance personnel;
| | - |  | -------------------------------------------------------

| |  |  | a review of the processes and procedures, including appropriate segregation of duties, surrounding revenue recognition and accounting for accounts
receivable, the allowance for doubtful accounts, accrued expenses and prepaid assets, as well as reconciliations of general ledger accounts at facilities with manual systems; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | an evaluation of our relevant accounting policies and procedures to ensure that they are documented and standardized across the Company, circulated to
the appropriate constituencies and reviewed and updated on a periodic basis.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Audit Committee has
directed management to develop a detailed plan and timetable for the implementation of the foregoing remedial measures and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue to review
and make necessary changes to the overall design of our internal control environment to improve the overall effectiveness of internal control over financial reporting.

Management believes the measures described above and others that will be implemented will remediate the control deficiencies that we have identified and strengthen our internal control over financial
reporting. As management continues to evaluate and improve internal control over financial reporting, we may decide to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete,
certain of the remediation measures described above.

Inherent Limitations on Effectiveness of Controls

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



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PART II. OTHER INFORMATION



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

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



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

The Exhibit
Index beginning on page 46 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: October 17, 2011



CRC HEALTH CORPORATION (Registrant)By

/s/    LEANNE M.
STEWARTLeAnne M. Stewart,Chief Financial Officer(Principal Financial 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 
|     | 
|32.1 |  | Section 1350 Certification of Principal Executive Officer             
|     | 
|32.2 |  | Section 1350 Certification of Principal Financial Officer             



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

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



46