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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(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, 2007

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



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CRC HEALTH CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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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 (the Exchange Act) 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer  x

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

There is no market for the registrants equity.
The total number of shares of the registrants common stock, par value of $0.001 per share, outstanding as of May 10, 2007 was 1,000.



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##### Table of Contents

CRC HEALTH CORPORATION

INDEX



|              |  |                       |  |                                                                                                                                                                                                       |  |   
|------------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|              |  | Page No.             
|Part I.       |  | Financial Information |  |                                                                                                                                                                                                      
|              |  | Item 1.               |  | Financial Statements                                                                                                                                                                                  |  |   
|              |  |                       |  | Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006                                                                                                                      |  | 3 
|              |  |                       |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 (Successor), two months ended March 31, 2006 (Successor) and one month ended January 31, 2006 (Predecessor) |  | 4 
|              |  |                       |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 (Successor), two months ended March 31, 2006 (Successor) and one month ended January 31, 2006 (Predecessor) |  | 5 
|              |  |                       |  | Notes to Condensed Consolidated Financial Statements                                                                                                                                                  |  | 6 
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                 |  | 26
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosure About Market Risk                                                                                                                                             |  | 32
|              |  | Item 4.               |  | Controls and Procedures                                                                                                                                                                               |  | 32
|              |  |                      
|Part II.      |  | Other Information     |  |                                                                                                                                                                                                      
|              |  | Item 1A.              |  | Risk Factors                                                                                                                                                                                          |  | 33
|              |  | Item 6.               |  | Exhibits                                                                                                                                                                                              |  | 33
|              | 
|Signature     |  | 34                   
|Exhibit Index |  | 35                   

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I of this Quarterly Report,
includes or may include forward-looking statements. All statements included herein, other than statements of historical fact, may constitute forward-looking statements. In some cases you can identify forward-looking statements by
terminology such as may, should or could. Generally, the words anticipates, believes, expects, intends, estimates, projects,
plans and similar expressions identify forward-looking statements. Although CRC Health Corporation (CRC) believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following factors: changes in
government reimbursement for CRCs services; our substantial indebtedness, changes in applicable regulations or a government investigation or assertion that CRC has violated applicable regulations, attempts by local residents to force our
closure or relocation, the potentially difficult, unsuccessful or costly integration of recently acquired operations and future acquisitions; the potentially difficult, unsuccessful or costly opening and operating of new treatment programs; the
possibility that commercial payors for CRCs services may undertake future cost containment initiatives; the limited number of national suppliers of methadone used in CRCs outpatient treatment clinics; the failure to maintain established
relationships or cultivate new relationships with patient referral sources; shortages in qualified healthcare workers; natural disasters such as hurricanes, earthquakes and floods; competition that limits CRCs ability to grow; the potentially
costly implementation of new information systems to comply with federal and state initiatives relating to patient privacy, security of medical information and electronic transactions; the potentially costly implementation of accounting and other
management systems and resources in response to financial reporting and other requirements; the loss of key members of CRCs management; claims asserted against CRC or lack of adequate available insurance; and certain restrictive covenants in
CRCs debt documents and other risks that are described herein, including but not limited to the items discussed in Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2006 filed on
April 2, 2007, and that are otherwise described from time to time in CRCs Securities and Exchange Commission filings after this Quarterly Report. CRC assumes no obligation and does not intend to update these forward-looking statements.



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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

MARCH 31, 2007 AND DECEMBER 31, 2006

(In thousands, except share
amounts)

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|                                                                                                                                    |  |               |           |                  |   |          
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | ---------------- | - | ---------
|                                                                                                                                    |  | March 31,2007 |           | December 31,2006
|ASSETS                                                                                                                              |  |               |           |                  |   |          
|CURRENT ASSETS:                                                                                                                     |  |               |           |                  |   |          
|Cash and cash equivalents                                                                                                           |  | $             | 3,166     |                  | $ | 4,206    
|Accounts receivable, net of allowance for doubtful accounts of $8,851 in 2007 and $8,235 in 2006                                    |  |               | 32,441    |                  |   | 33,805   
|Prepaid expenses                                                                                                                    |  |               | 7,615     |                  |   | 7,675    
|Other current assets                                                                                                                |  |               | 2,395     |                  |   | 2,261    
|Income taxes receivable                                                                                                             |  |               | 8,666     |                  |   | 6,496    
|Deferred income taxes                                                                                                               |  |               | 7,226     |                  |   | 7,052    
|                                                                                                                                    |  |               |           |                  |   |          
|Total current assets                                                                                                                |  |               | 61,509    |                  |   | 61,495   
|PROPERTY AND EQUIPMENTNet                                                                                                          |  |               | 98,409    |                  |   | 94,976   
|GOODWILL                                                                                                                            |  |               | 703,480   |                  |   | 702,425  
|INTANGIBLE ASSETSNet                                                                                                               |  |               | 398,039   |                  |   | 400,714  
|OTHER ASSETS                                                                                                                        |  |               | 27,848    |                  |   | 29,178   
|                                                                                                                                    |  |               |           |                  |   |          
|TOTAL ASSETS                                                                                                                        |  | $             | 1,289,285 |                  | $ | 1,288,788
|                                                                                                                                    |  |               |           |                  |   |          
|                                                                                                                                    |  |              
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                |  |               |           |                  |   |          
|CURRENT LIABILITIES:                                                                                                                |  |               |           |                  |   |          
|Accounts payable                                                                                                                    |  | $             | 5,540     |                  | $ | 6,714    
|Accrued liabilities                                                                                                                 |  |               | 27,608    |                  |   | 34,827   
|Current portion of long-term debt                                                                                                   |  |               | 19,205    |                  |   | 10,743   
|Other current liabilities                                                                                                           |  |               | 28,943    |                  |   | 27,941   
|                                                                                                                                    |  |               |           |                  |   |          
|Total current liabilities                                                                                                           |  |               | 81,296    |                  |   | 80,225   
|                                                                                                                                    |  |              
|LONG-TERM DEBTLess current portion                                                                                                 |  |               | 617,842   |                  |   | 615,785  
|OTHER LONG-TERM LIABILITIES                                                                                                         |  |               | 2,310     |                  |   | 5,526    
|DEFERRED INCOME TAXES                                                                                                               |  |               | 147,315   |                  |   | 149,827  
|                                                                                                                                    |  |               |           |                  |   |          
|Total liabilities                                                                                                                   |  |               | 848,763   |                  |   | 851,363  
|                                                                                                                                    |  |               |           |                  |   |          
|COMMITMENTS AND CONTINGENCIES (Note 9)                                                                                              |  |               |           |                  |   |          
|MINORITY INTEREST                                                                                                                   |  |               | 157       |                  |   | 251      
|                                                                                                                                    |  |               |           |                  |   |          
|                                                                                                                                    |  |              
|STOCKHOLDERS EQUITY:                                                                                                               |  |               |           |                  |   |          
|Common stock, $0.001 par value1,000 shares authorized; 1,000 shares issued and outstanding at March 31, 2007 and December 31,
2006 |  |               |           |                  |   |          
|Additional paid-in capital                                                                                                          |  |               | 434,734   |                  |   | 433,652  
|Retained earnings                                                                                                                   |  |               | 5,631     |                  |   | 3,522    
|                                                                                                                                    |  |               |           |                  |   |          
|Total stockholders equity                                                                                                          |  |               | 440,365   |                  |   | 437,174  
|                                                                                                                                    |  |               |           |                  |   |          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                          |  | $             | 1,289,285 |                  | $ | 1,288,788
|                                                                                                                                    |  |               |           |                  |   |          

See notes to condensed consolidated financial statements.



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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED M ARCH 31, 2007 (SUCCESSOR), TWO MONTHS ENDED MARCH 31, 2006 (SUCCESSOR) AND ONE MONTH ENDED JANUARY 31, 2006 (PREDECESSOR)

(In thousands)

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|                                                  |  |                               |         |   |                             |   |        |                               |  |   |         |  
|------------------------------------------------- |  | ----------------------------- | ------- | - | --------------------------- | - | ------ | ----------------------------- |  | - | ------- | -
|                                                  |  | Successor                     |         |   | Predecessor                 |  
|                                                  |  | ThreeMonthsEndedMarch 31,2007 |         |   | TwoMonthsEndedMarch 31,2006 |   |        | One MonthEndedJanuary 31,2006 | 
|NET REVENUE:                                      |  |                               |         |   |                             |   |        |                               |  |   |         |  
|Net client service revenue                        |  | $                             | 106,482 |   |                             | $ | 37,810 |                               |  | $ | 19,360  |  
|Other revenue                                     |  |                               | 1,448   |   |                             |   | 792    |                               |  |   | 490     |  
|                                                  |  |                               |         |   |                             |   |        |                               |  |   |         |  
|Net revenue                                       |  |                               | 107,930 |   |                             |   | 38,602 |                               |  |   | 19,850  |  
|                                                  |  |                               |         |   |                             |   |        |                               |  |   |         |  
|OPERATING EXPENSES:                               |  |                               |         |   |                             |   |        |                               |  |   |         |  
|Salaries and benefits                             |  |                               | 55,308  |   |                             |   | 18,494 |                               |  |   | 9,265   |  
|Supplies, facilities and other operating costs    |  |                               | 30,736  |   |                             |   | 10,319 |                               |  |   | 4,561   |  
|Provision for doubtful accounts                   |  |                               | 1,503   |   |                             |   | 837    |                               |  |   | 285     |  
|Depreciation and amortization                     |  |                               | 5,292   |   |                             |   | 1,459  |                               |  |   | 361     |  
|Acquisition related costs                         |  |                               |        |   |                             |   |       |                               |  |   | 43,710  |  
|                                                  |  |                               |         |   |                             |   |        |                               |  |   |         |  
|Total operating expenses                          |  |                               | 92,839  |   |                             |   | 31,109 |                               |  |   | 58,182  |  
|                                                  |  |                               |         |   |                             |   |        |                               |  |   |         |  
|INCOME (LOSS) FROM OPERATIONS                     |  |                               | 15,091  |   |                             |   | 7,493  |                               |  |   | (38,332 | )
|INTEREST EXPENSE, NET                             |  |                               | (14,989 | ) |                             |   | (6,316 | )                             |  |   | (2,505  | )
|OTHER FINANCING COSTS                             |  |                               |        |   |                             |   |       |                               |  |   | (10,655 | )
|OTHER (LOSS) INCOME                               |  |                               | (349    | ) |                             |   | 566    |                               |  |   | 55      |  
|                                                  |  |                               |         |   |                             |   |        |                               |  |   |         |  
|(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |  |                               | (247    | ) |                             |   | 1,743  |                               |  |   | (51,437 | )
|INCOME TAX (BENEFIT) EXPENSE                      |  |                               | (101    | ) |                             |   | 718    |                               |  |   | (12,444 | )
|MINORITY INTEREST IN LOSS OF A SUBSIDIARY         |  |                               | (100    | ) |                             |   |       |                               |  |   |        |  
|                                                  |  |                               |         |   |                             |   |        |                               |  |   |         |  
|NET (LOSS) INCOME                                 |  | $                             | (46     | ) |                             | $ | 1,025  |                               |  | $ | (38,993 | )
|                                                  |  |                               |         |   |                             |   |        |                               |  |   |         |  

See notes to 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, 2007 (SUCCESSOR), TWO MONTHS ENDED MARCH 31, 2006 (SUCCESSOR) AND ONE MONTH ENDED JANUARY 31, 2006 (PREDECESSOR)

(In thousands)

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|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---------------------------- | - | -------- | ----------------------------- |  | - | ------- | -
|                                                                                                   |  | Successor                      |        |   | Predecessor                  |  
|                                                                                                   |  | Three MonthsEndedMarch 31,2007 |        |   | Two MonthsEndedMarch 31,2006 |   |          | One MonthEndedJanuary 31,2006 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                                |        |   |                              |   |          |                               |  |   |         |  
|Net (loss) income                                                                                  |  | $                              | (46    | ) |                              | $ | 1,025    |                               |  | $ | (38,993 | )
|Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |  |                                |        |   |                              |   |          |                               |  |   |         |  
|Depreciation and amortization                                                                      |  |                                | 5,292  |   |                              |   | 1,459    |                               |  |   | 361     |  
|Write-off of debt discount and capitalized financing costs                                         |  |                                |       |   |                              |   |         |                               |  |   | 10,655  |  
|Amortization of debt discount and capitalized financing costs                                      |  |                                | 1,095  |   |                              |   | 535      |                               |  |   | 162     |  
|Loss (gain) on interest rate swap agreement                                                        |  |                                | 306    |   |                              |   | (567     | )                             |  |   | (55     | )
|(Gain) loss on disposition of property                                                             |  |                                | (10    | ) |                              |   | (3       | )                             |  |   | (1      | )
|Provision for doubtful accounts                                                                    |  |                                | 1,503  |   |                              |   | 837      |                               |  |   | 285     |  
|Stock-based compensation                                                                           |  |                                | 1,088  |   |                              |   | 628      |                               |  |   | 17,666  |  
|Deferred income taxes                                                                              |  |                                | (442   | ) |                              |   | (258     | )                             |  |   |        |  
|Minority interest                                                                                  |  |                                | (100   | ) |                              |   |         |                               |  |   |        |  
|Changes in current assets and liabilities:                                                         |  |                                |        |   |                              |   |          |                               |  |   |         |  
|Accounts receivable                                                                                |  |                                | (139   | ) |                              |   | (1,771   | )                             |  |   | (1,271  | )
|Income taxes receivable                                                                            |  |                                | 102    |   |                              |   | 788      |                               |  |   | (9,041  | )
|Accounts payable                                                                                   |  |                                | (1,174 | ) |                              |   | 24       |                               |  |   | (2,997  | )
|Accrued liabilities                                                                                |  |                                | (7,223 | ) |                              |   | (24,488  | )                             |  |   | 25,641  |  
|Income taxes payable                                                                               |  |                                |       |   |                              |   |         |                               |  |   | (3,384  | )
|Other working capital accounts                                                                     |  |                                | (206   | ) |                              |   | 2,457    |                               |  |   | 842     |  
|Other assets and liabilities                                                                       |  |                                | 198    |   |                              |   | 81       |                               |  |   | 1,331   |  
|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  
|Net cash provided by (used in) operating activities                                                |  |                                | 244    |   |                              |   | (19,253  | )                             |  |   | 1,201   |  
|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |                                |        |   |                              |   |          |                               |  |   |         |  
|Additions of property and equipment                                                                |  |                                | (5,975 | ) |                              |   | (1,291   | )                             |  |   | (316    | )
|Proceeds from sale of property and equipment                                                       |  |                                | 26     |   |                              |   | 3        |                               |  |   | 1       |  
|Acquisition of business, net of cash acquired                                                      |  |                                | (1,082 | ) |                              |   |         |                               |  |   |        |  
|Prior period acquisition adjustments                                                               |  |                                | (226   | ) |                              |   |         |                               |  |   |        |  
|Payment of purchase price to former shareholders                                                   |  |                                |       |   |                              |   | (429,190 | )                             |  |   |        |  
|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  
|Net cash used in investing activities                                                              |  |                                | (7,257 | ) |                              |   | (430,478 | )                             |  |   | (315    | )
|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |                                |        |   |                              |   |          |                               |  |   |         |  
|Equity contribution from Bain Capital                                                              |  |                                |       |   |                              |   | 294,475  |                               |  |   |        |  
|Payment of transaction related costs                                                               |  |                                |       |   |                              |   | (5,354   | )                             |  |   |        |  
|Stock options exercised                                                                            |  |                                |       |   |                              |   |         |                               |  |   | 7       |  
|Debt financing costs                                                                               |  |                                | (15    | ) |                              |   | (22,105  | )                             |  |   | (547    | )
|Net borrowings (repayments) under revolver line of credit                                          |  |                                | 7,400  |   |                              |   | (4,500   | )                             |  |   | (5,000  | )
|Proceeds from issuances of long-term debt                                                          |  |                                |       |   |                              |   | 442,022  |                               |  |   |        |  
|Repayment of long-term debt                                                                        |  |                                | (1,412 | ) |                              |   | (253,975 | )                             |  |   |        |  
|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  
|Net cash provided by (used in) financing activities                                                |  |                                | 5,973  |   |                              |   | 450,563  |                               |  |   | (5,540  | )
|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                               |  |                                | (1,040 | ) |                              |   | 832      |                               |  |   | (4,654  | )
|CASH AND CASH EQUIVALENTSBeginning of period                                                      |  |                                | 4,206  |   |                              |   | 423      |                               |  |   | 5,077   |  
|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  
|CASH AND CASH EQUIVALENTSEnd of period                                                            |  | $                              | 3,166  |   |                              | $ | 1,255    |                               |  | $ | 423     |  
|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:                                           |  |                                |        |   |                              |   |          |                               |  |   |         |  
|Payable in conjunction with the addition of property and equipment                                 |  | $                              |       |   |                              | $ | 312      |                               |  | $ | 95      |  
|Payable in conjunction with acquisition contingent consideration                                   |  | $                              | 1,094  |   |                              | $ |         |                               |  | $ |        |  
|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                  |  |                                |        |   |                              |   |          |                               |  |   |         |  
|Cash paid for interest                                                                             |  | $                              | 19,521 |   |                              | $ | 3,938    |                               |  | $ | 1,336   |  
|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  
|Cash paid for income taxes, net of refunds                                                         |  | $                              | 240    |   |                              | $ | 189      |                               |  | $ |        |  
|                                                                                                   |  |                                |        |   |                              |   |          |                               |  |   |         |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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|1. | ORGANIZATION
|-- | ------------

CRC Health Corporation (the
Company or We) 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 Company
delivers its substance abuse and behavioral disorder treatment services through residential and outpatient treatment facilities, which we refer to as our residential and outpatient treatment divisions. We deliver our youth treatment services through
our residential schools, wilderness programs and weight loss programs, which we refer to as our youth treatment division. As of March 31, 2007, we operated 104 residential and outpatient treatment facilities in 23 states and treated
approximately 24,500 patients per day. As of March 31, 2007, our youth treatment division operated programs at 35 facilities in 12 states and 1 in the United Kingdom.



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------

Basis of Presentation and Principles of ConsolidationThe date of the Bain Merger was February 6, 2006 but for accounting purposes and to coincide with its normal financial closing, the Company has utilized
February 1, 2006 as the effective date. As a result, the Company has reported operating results and financial position for all periods presented prior to February 1, 2006 as those of the Predecessor Company (Predecessor) and
for all periods from and subsequent to February 1, 2006 as those of the Successor Company (Successor) due to the resulting change in the basis of accounting.

These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC) applicable for interim financial information. The Companys condensed consolidated financial
statements include the accounts of CRC Health Corporation and its consolidated subsidiaries, and, for the periods through January 31, 2006, CRC Health Group, Inc. and its consolidated subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

In the opinion of management, these unaudited condensed consolidated financial
statements contain all adjustments, including normal recurring adjustments, necessary to present fairly the financial position of the Company as of March 31, 2007, its results of operations for the three months ended March 31, 2007, two
months ended March 31, 2006 and one month ended January 31, 2006, and its cash flows for the three months ended March 31, 2007, two months ended March 31, 2006 and one month ended January 31, 2006. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2006.

Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting PronouncementsIn February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Standards No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment to FASB Statement No. 115 (SFAS 159).SFAS 159 expands the use of fair value accounting but does
not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity
method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that would otherwise not be recognized at inception and non-cash warranty obligations where a warrantor is
permitted to pay a third party to provide the warranty goods or services. If fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election
is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has
been elected are reported as a cumulative adjustment to beginning retained earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company in the first quarter 2008. The Company is
currently determining whether fair value is appropriate for any of its eligible items and cannot estimate the impact, if any, which SFAS 159 will have on its consolidated results of operations and financial condition.



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In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement
attribute; however SFAS 157 does not apply to SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)). SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. SFAS 157 is required to be adopted by the Company on January 1, 2008. The Company is currently evaluating the effect of the adoption of SFAS 157 will have on its financial statements.

The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement
No. 109 (FIN 48) on January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law recognized in an enterprises financial statements in accordance with SFAS No. 109. FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in income tax returns. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. See Note 7 for additional information, including the effects of adoption on the Companys condensed consolidated balance sheet.



|3. | ACQUISITIONS
|-- | ------------

2007 Acquisitions

In the three months ended March 31, 2007, the Company completed one acquisition and paid total cash consideration of
approximately $1.1 million, including acquisition related expenses. The acquisition is intended to provide expansion of its youth services into new geographic regions in the United States. The Company recorded $1.2 million of goodwill none of which
is expected to be deductible for tax purposes. The goodwill was assigned to the youth segment.

The acquisition was accounted for as a
purchase in accordance with SFAS No. 141, Business Combinations. Under purchase accounting the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The Company has
included the results of operations in the condensed consolidated statements of operations of the acquisition from the date of the acquisition. Pro forma results of operations have not been presented because the effect of the acquisition is not
material.

Prior Period Acquisitions

In connection with an acquisition closed in October 2005, the Company is obligated to make certain additional payments in the amount of up to $2.0 million upon the achievement of certain performance milestones for the
year ending October 7, 2007. As of May 11, 2007, the entity has achieved a pro-rata portion of the second year performance milestones and as a result the Company recorded additional goodwill and a liability of $0.6 million, respectively.
Any additional payments earned will be paid by the Company in the fourth quarter of 2007.

Certain acquisition agreements acquired in the
Aspen Acquisition (as defined below) contain contingent earnout provisions that provide for additional consideration to be paid to the sellers if the results of the entitys operations exceed negotiated benchmarks. As a result of one of the
entities exceeding the benchmark, the Youth segment recorded additional goodwill and a liability of $1.1 million, respectively. The additional consideration consists of a combination of cash and notes payable issued to the seller. The Company
expects the cash payment to be made in the third quarter of 2007.

Aspen Acquisition In November 2006, the Company
acquired substantially all the outstanding capital stock of Aspen Education Group, Inc., a California corporation (Aspen Education Group) for approximately $273.9 million in cash purchase price consideration, the assumption of
approximately $20.6 million of indebtedness as defined per the merger agreement (includes the buy-out of minority interest of $4.2 million), and the payment of costs associated with the acquisition and the related financing of approximately $1.5
million and $10.8 million respectively. Aspen Education Group provides educational services to youth who have demonstrated behavioral issues that have interfered with their performance in school and life. Aspen Education Group offers its programs
through its residential division (boarding schools), outdoor division (outdoor education programs) and health living division (weight management programs for children and teenagers). Among other benefits, the Aspen Acquisition offers multiple
revenue and cost synergies. The Aspen Acquisition further enhances the Companys private pay mix and business diversification, thereby reducing business risk from any one aspect of the Companys operations. In addition, the Company is
expected to benefit from increased cross-referral opportunities.



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The acquisition was accounted for as a purchase and accordingly, the purchase consideration was allocated
to the assets and liabilities based on their relative fair values. The consideration remaining was allocated to the Companys intangible assets with finite lives and is being amortized over that life, as well as to goodwill and identifiable
intangible assets with indefinite lives, which will be evaluated on at least an annual basis to determine impairment and adjusted accordingly.

Bain MergerOn February 6, 2006, investment funds managed by Bain Capital Partners, LLC (Bain Capital) acquired Health Group for a total cash consideration of approximately $742.3 million (including
acquisition and financing transactions related fees and expenses of $28.5 million). As a result of the acquisition, Bain Capital received control of the Company.

The acquisition was accounted for as a purchase and accordingly, the purchase consideration was allocated to the assets and liabilities based on their relative fair values. The consideration remaining was allocated to
the Companys intangible assets with finite lives and is being amortized over that life, as well as to goodwill and identifiable intangible assets with indefinite lives, which will be evaluated on at least an annual basis to determine
impairment and adjusted accordingly.



|4. | BALANCE SHEET COMPONENTS
|-- | ------------------------

Balance sheet components
at March 31, 2007 and December 31, 2006 consist of the following (in thousands):



|                                     |  |                |        |   |                   |   |        |  
|------------------------------------ |  | -------------- | ------ | - | ----------------- | - | ------ | -
|                                     |  | March 31, 2007 |        |   | December 31, 2006 |  
|Other assets:                        |  |                |        |   |                   |   |        |  
|Capitalized financing costsnet      |  | $              | 25,893 |   |                   | $ | 26,899 |  
|Deposits                             |  |                | 862    |   |                   |   | 1,078  |  
|Note receivable and accrued interest |  |                | 1,093  |   |                   |   | 1,201  |  
|                                     |  |                |        |   |                   |   |        |  
|Total other assets                   |  | $              | 27,848 |   |                   | $ | 29,178 |  
|                                     |  |                |        |   |                   |   |        |  
|Accrued liabilities:                 |  |                |        |   |                   |   |        |  
|Accrued payroll and related expenses |  | $              | 10,842 |   |                   | $ | 13,227 |  
|Accrued vacation                     |  |                | 6,057  |   |                   |   | 5,376  |  
|Accrued interest                     |  |                | 3,823  |   |                   |   | 9,288  |  
|Accrued expenses                     |  |                | 6,886  |   |                   |   | 6,936  |  
|                                     |  |                |        |   |                   |   |        |  
|Total accrued liabilities            |  | $              | 27,608 |   |                   | $ | 34,827 |  
|                                     |  |                |        |   |                   |   |        |  
|Other current liabilities:           |  |                |        |   |                   |   |        |  
|Deferred revenue                     |  | $              | 19,307 |   |                   | $ | 15,343 |  
|Other liabilities                    |  |                | 1,865  |   |                   |   | 5,434  |  
|Client deposits                      |  |                | 5,720  |   |                   |   | 4,347  |  
|Insurance premium financing          |  |                | 2,051  |   |                   |   | 2,817  |  
|                                     |  |                |        |   |                   |   |        |  
|Total other current liabilities      |  | $              | 28,943 |   |                   | $ | 27,941 |  
|                                     |  |                |        |   |                   |   |        |  
|Accounts receivable:                 |  |                |        |   |                   |   |        |  
|Accounts receivable                  |  | $              | 40,212 |   |                   | $ | 41,323 |  
|Unbilled client service fees         |  |                | 1,080  |   |                   |   | 717    |  
|                                     |  |                |        |   |                   |   |        |  
|                                     |  |                | 41,292 |   |                   |   | 42,040 |  
|Less allowance for doubtful accounts |  |                | (8,851 | ) |                   |   | (8,235 | )
|                                     |  |                |        |   |                   |   |        |  
|Accounts receivablenet              |  | $              | 32,441 |   |                   | $ | 33,805 |  
|                                     |  |                |        |   |                   |   |        |  



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The following schedule reflects activity associated with the Companys allowance for doubtful
accounts for the three months ended March 31, 2007 and the year ended December 31, 2006 (in thousands):



|                                    |  |               |       |   |                  |   |        |  
|----------------------------------- |  | ------------- | ----- | - | ---------------- | - | ------ | -
|                                    |  | March 31,2007 |       |   | December 31,2006 |  
|Allowance for Doubtful Accounts     |  |               |       |   |                  |   |        |  
|Balancebeginning of the period     |  | $             | 8,235 |   |                  | $ | 4,459  |  
|Provision for doubtful accounts     |  |               | 1,503 |   |                  |   | 5,391  |  
|Write-off of uncollectible accounts |  |               | (887  | ) |                  |   | (1,615 | )
|                                    |  |               |       |   |                  |   |        |  
|Balanceend of the period           |  | $             | 8,851 |   |                  | $ | 8,235  |  
|                                    |  |               |       |   |                  |   |        |  



|5. | PROPERTY AND EQUIPMENT
|-- | ----------------------

Property and equipment at
March 31, 2007 and December 31, 2006 consists of the following (in thousands):



|                              |  |                |         |   |                   |   |         |  
|----------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                              |  | March 31, 2007 |         |   | December 31, 2006 |  
|Land                          |  | $              | 19,031  |   |                   | $ | 19,031  |  
|Building and improvements     |  |                | 42,786  |   |                   |   | 41,886  |  
|Leasehold improvements        |  |                | 16,383  |   |                   |   | 12,011  |  
|Furniture and fixtures        |  |                | 7,883   |   |                   |   | 7,074   |  
|Computer equipment            |  |                | 6,340   |   |                   |   | 5,766   |  
|Computer software             |  |                | 4,866   |   |                   |   | 3,078   |  
|Motor vehicles                |  |                | 3,651   |   |                   |   | 3,687   |  
|Field equipment               |  |                | 1,666   |   |                   |   | 1,423   |  
|Construction in progress      |  |                | 3,601   |   |                   |   | 6,208   |  
|                              |  |                |         |   |                   |   |         |  
|                              |  |                | 106,207 |   |                   |   | 100,164 |  
|Less accumulated depreciation |  |                | (7,798  | ) |                   |   | (5,188  | )
|                              |  |                |         |   |                   |   |         |  
|Property and equipmentnet    |  | $              | 98,409  |   |                   | $ | 94,976  |  
|                              |  |                |         |   |                   |   |         |  

Depreciation expense was $2.6 million for the three months ended March 31, 2007, $0.7 million
and $0.3 million for the two months ended March 31, 2006 and one month ended January 31, 2006, respectively



|6. | GOODWILL AND INTANGIBLE ASSETS
|-- | ------------------------------

Changes to goodwill
by segment for the three months ended March 31, 2007 are as follows (in thousands):



|                                        |  |             |         |            |   |         |  |   |         |   |  |   |         |  
|--------------------------------------- |  | ----------- | ------- | ---------- | - | ------- |  | - | ------- | - |  | - | ------- | -
|                                        |  | Residential |         | Outpatient |   | Youth   |  |   | Total   |  
|GoodwillDecember 31, 2006              |  | $           | 267,631 |            | $ | 208,179 |  | $ | 226,615 |   |  | $ | 702,425 |  
|Goodwill additions (Other Acquisitions) |  |             |         |            |   |        |  |   | 2,260   |   |  |   | 2,260   |  
|Goodwill adjustments                    |  |             | 177     |            |   |        |  |   | (1,382  | ) |  |   | (1,205  | )
|                                        |  |             |         |            |   |         |  |   |         |   |  |   |         |  
|GoodwillMarch 31, 2007                 |  | $           | 267,808 |            | $ | 208,179 |  | $ | 227,493 |   |  | $ | 703,480 |  
|                                        |  |             |         |            |   |         |  |   |         |   |  |   |         |  

The goodwill additions for the Other Acquisitions relate to the acquisitions completed in the
current and prior fiscal year. The goodwill adjustments for the prior fiscal year Other Acquisitions and Aspen Acquisition relate primarily to revisions of the original estimates.



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Intangible assets at March 31, 2007 and December 31, 2006 consist of the following (in
thousands):



|                                                    |  |                    |  |                |         |   |                   |   |         |  
|--------------------------------------------------- |  | ------------------ |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                                    |  | Amortization Lives |  | March 31, 2007 |         |   | December 31, 2006 |  
|Intangible assets subject to amortization:          |  |                    |  |                |         |   |                   |   |         |  
|Referral network                                    |  | 20 years           |  | $              | 45,400  |   |                   | $ | 45,400  |  
|Accreditations                                      |  | 20 years           |  |                | 24,400  |   |                   |   | 24,400  |  
|Curriculum                                          |  | 20 years           |  |                | 9,000   |   |                   |   | 9,000   |  
|Government, including Medicaid, contracts           |  | 15 years           |  |                | 35,600  |   |                   |   | 35,600  |  
|Managed care contracts                              |  | 10 years           |  |                | 14,400  |   |                   |   | 14,400  |  
|Core developed technology                           |  | 5 years            |  |                | 2,704   |   |                   |   | 2,704   |  
|Covenants not to compete                            |  | 3 years            |  |                | 152     |   |                   |   | 152     |  
|Registration rights                                 |  | 2 years            |  |                | 200     |   |                   |   | 200     |  
|Student contracts                                   |  | 1 year             |  |                | 2,241   |   |                   |   | 2,241   |  
|Less: accumulated amortization                      |  |                    |  |                | (7,604  | ) |                   |   | (4,929  | )
|                                                    |  |                    |  |                |         |   |                   |   |         |  
|Total intangible assets subject to amortization     |  |                    |  |                | 126,493 |   |                   |   | 129,168 |  
|                                                    |  |                    |  |                |         |   |                   |   |         |  
|                                                    |  |                    | 
|Intangible assets not subject to amortization:      |  |                    |  |                |         |   |                   |   |         |  
|Trademarks and trade names                          |  |                    |  |                | 183,725 |   |                   |   | 183,725 |  
|Certificates of need                                |  |                    |  |                | 44,600  |   |                   |   | 44,600  |  
|Licenses                                            |  |                    |  |                | 43,221  |   |                   |   | 43,221  |  
|                                                    |  |                    |  |                |         |   |                   |   |         |  
|Total intangible assets not subject to amortization |  |                    |  |                | 271,546 |   |                   |   | 271,546 |  
|                                                    |  |                    |  |                |         |   |                   |   |         |  
|Total intangible assets                             |  |                    |  | $              | 398,039 |   |                   | $ | 400,714 |  
|                                                    |  |                    |  |                |         |   |                   |   |         |  

Amortization expense of intangible assets subject to amortization was $2.7 million for the three
months ended March 31, 2007, $0.7 million and $0.02 million for the two months ended March 31, 2006 and one month ended January 31, 2006, respectively.

Estimated future amortization expense related to the amortizable intangible assets at March 31, 2007 is as follows (in thousands):



|                          |  |   |        
|------------------------- |  | - | -------
|Fiscal Year               |  |  
|2007 (remaining 9 months) |  | $ | 7,746  
|2008                      |  |   | 8,318  
|2009                      |  |   | 8,293  
|2010                      |  |   | 8,293  
|2011                      |  |   | 7,798  
|Thereafter                |  |   | 86,045 
|                          |  |   |        
|Total                     |  | $ | 126,493
|                          |  |   |        



|7. | INCOME TAXES
|-- | ------------

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

The income tax benefit for the three months ended March 31, 2007 was $0.1 million, reflecting an effective tax rate of 40.8%. The income tax expense for the two months ended March 31, 2006 was $0.7 million, reflecting an
effective tax rate of 41.2% and the income benefit for the one month ended January 31, 2006 was $12.4 million, reflecting an effective tax rate of 24.2%. The tax benefit for the one month ended January 31, 2006 was primarily the
result of $31.9 million of one time acquisition-related expenses that are deductible for tax purposes. There were no material one-time items affecting the effective tax rate for the three and two months ended March 31, 2007 and March 31,
2006, respectively.

The Company currently expects that the effective tax rate during 2007 may be impacted by the revised estimates of the
tax deductible portion of the 2006 acquisition related expenses. The Company is currently evaluating the amount and has not completed its final evaluation; therefore, the Company cannot estimate the effect on the 2007 effective tax rate.



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Adoption of New Accounting Policy

The Company adopted the provisions of FIN 48 on January 1, 2007. The cumulative effect of adopting FIN 48 was a decrease in tax reserves of $1.5 million
and an increase of $2.2 million to the January 1, 2007 retained earnings balance. Upon adoption, the liability for income taxes associated with uncertain tax positions at January 1, 2007 was $2.1 million. This liability can be reduced by $0.2
million of offsetting tax benefits associated with the correlative effects of potential state income taxes and other timing adjustments. The net amount of $1.9 million, if recognized, would favorably affect the Companys effective tax rate. In
addition, consistent with the provisions of FIN 48, the Company reclassified $0.7 million of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the balance sheet date. These
non-current income tax liabilities are recorded in other liabilities in the condensed consolidated balance sheets.

The amount of accrued
interest and penalties recorded in income tax receivable in the condensed consolidated balance sheets at January 1, 2007 was $0.3 million. Of this amount, $0.03 million was also reclassified from current to non-current liabilities upon adoption of
FIN 48.

With limited exception, the Company is no longer subject to U.S. federal, state and local income tax audits by taxing authorities
for years through 2002. In connection with acquisitions during 2006, the Company is completing its evaluation of the deductibility of transaction costs for those acquisitions. The Companys evaluation is not complete and, therefore, the Company
cannot estimate the effect on the 2007 effective tax rate. Such impact will have a FIN 48 component. Due to normal expiry of statute of limitations, the Company expects $1.4 million of unrecognized tax benefits to reverse within the next 12 months.



|8. | LONG-TERM DEBT
|-- | --------------

Long-term debt at March 31,
2007 and December 31, 2006 consists of the following (in thousands):



|                                      |  |                |         |   |                   |   |         |  
|------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                      |  | March 31, 2007 |         |   | December 31, 2006 |  
|Term loans                            |  |                |         |   |                   |   |         |  
|2006 borrowing arrangements           |  | $              | 417,179 |   |                   | $ | 418,227 |  
|Revolving line of credit              |  |                | 11,000  |   |                   |   | 3,600   |  
|Senior subordinated notes             |  |                |         |   |                   |   |         |  
|2006 notes, net of discount of $2,631 |  |                | 197,369 |   |                   |   | 197,295 |  
|Seller notes                          |  |                | 11,275  |   |                   |   | 7,145   |  
|Capital lease obligations             |  |                | 224     |   |                   |   | 261     |  
|                                      |  |                |         |   |                   |   |         |  
|Total long-term debt                  |  |                | 637,047 |   |                   |   | 626,528 |  
|Less: current portion                 |  |                | (19,205 | ) |                   |   | (10,743 | )
|                                      |  |                |         |   |                   |   |         |  
|Long-term debtless current portion   |  | $              | 617,842 |   |                   | $ | 615,785 |  
|                                      |  |                |         |   |                   |   |         |  

Term Loans and Revolving Line of CreditOn November 17, 2006 the Company
amended and restated the Credit Agreement (the Amended and Restated Credit Agreement). The Amended and Restated Credit Agreement provides for financing of $419.3 million in senior secured term loans and $100.0 million of revolving
credit.

Term LoanAggregate commitment of $419.3 million matures on February 6, 2013. The term loan is payable in
quarterly principal installments of $1.05 million per quarter through December 31, 2012, and the remainder on February 6, 2013. Interest is payable quarterly at 90 day London Interbank Offered Rate (LIBOR) plus 2.50% (7.85% at
March 31, 2007). The principal balance outstanding at March 31, 2007 was $417.2 million.

Revolving Line of Credit
(Revolver)Maximum borrowings not to exceed $100.0 million. At the Companys option, interest is currently available at the LIBOR plus 2.50% or monthly at the Base Rate (defined as the higher of (a) the prime rate
or (b) the overnight federal funds rate plus 50 basis points) plus 1.50%. Principal is payable at the Companys discretion based on available operating cash balances. The



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revolving line of credit commitment expires on February 6, 2012. At March 31, 2007, the outstanding balance under the revolving line of credit was
$11.0 million. From time to time the Revolver may include one or more swing line loans at the Base Rate or one or more letters of credit (LCs). At March 31, 2007, there was no outstanding balance on the swing line loans. LCs
outstanding at March 31, 2007 was $3.9 million with interest payable quarterly at 2.50%. The LCs secure various liability and workers compensation policies in place for the Company and its subsidiaries

Senior Subordinated NotesConcurrent with the Bain Merger, the Company issued $200.0 million aggregate principal amount of 10 3/4%
Senior Subordinated Notes (the Notes) due February 1, 2016. Interest is payable semiannually beginning August 1, 2006. The Notes were issued at a price of 98.511%, resulting in $3.0 million of original issue discount. The
Company may redeem some or all of the Notes on or prior to February 1, 2011 at a redemption price equal to 100% of the principal amount of the Notes redeemed plus a make-whole premium or at the redemption prices set forth in the
indenture governing the Notes. The Company may also redeem up to 35% of the aggregate principal amount of the Notes using the proceeds of one or more equity offerings completed before February 1, 2009. If there is a change of control as
specified in the indenture, the Company must offer to repurchase the Notes. The Notes are subordinated to all of the Companys existing and future senior indebtedness, rank equally with all of the Companys existing and future senior
subordinated indebtedness and rank senior to all of the Companys existing and future subordinated indebtedness. The Notes are guaranteed on an unsecured senior subordinated basis by all of the Companys subsidiaries.

Seller NotesRepresents notes payable for amounts owed by Aspen Education Group arising out of achievement of certain earn out
obligations per the terms of the underlying purchase agreements and to fund prior acquisitions. Interest rates on these notes range from 6.75% to 10.25%. Principal and interest are payable quarterly through September 2011.

Capital LeasesPrincipal and interest are payable monthly at various dates through September 2011. Interest rates range from 5.00% to
12.20%.

Interest expense on total debt was $15.2 million for the three months ended March 31, 2007, $6.3 million and $2.5 million for
the two months ended March 31, 2006 and one month ended January 31, 2006, respectively.

Interest income was approximately $0.2
million for the three months ended March 31, 2007, $0.0 million in the two months ended March 31, 2006 and one month ended January 31, 2006.



|9. | COMMITMENTS AND CONTINGENCIES
|-- | -----------------------------

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.



|10. | STOCKHOLDERS EQUITY
|--- | --------------------

Common Stock

The Companys Amended and Restated Certificate of Incorporation authorizes the Company to issue 1,000 shares of $0.001 par
value common stock, all of which are issued and outstanding as of December 31, 2006 and are held by the Parent.

VotingEach share of common stock is entitled, on all matters submitted for a vote or the consent of the holders of shares of common stock, to one vote.

Capital Contributed by Parent

The Company received a capital contribution of $135.7 million from the Group to fund the Aspen Acquisition. The Group funded such capital contributions by a combination of $36.2 million resulting from the sale of its equity securities to
certain of the Groups equity holders and by the issuance of a PIK loan of $105.0 million issued at 1% original issue discount for net proceeds of $103.9 million. The Group incurred $4.5 million of financing costs in connection with the
issuance of the PIK loan which was treated as a reduction in the capital contribution. The interest payable per annum for the PIK loan is 180 day LIBOR plus 7.0% for the first year, 180 day LIBOR plus 7.5% for the second year and 180 day LIBOR plus
8.0% for the years thereafter until the maturity date. Per the PIK loan agreement, the interest is accrued through an increase in the principal amount. The aggregate principal amount inclusive of the accrued interest matures on November 17,
2013. This senior unsecured PIK loan is not guaranteed by the Company or any of its subsidiaries.



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|11. | STOCK-BASED COMPENSATION EXPENSE
|--- | --------------------------------

Adoption of
New Accounting Policy

On January 1, 2006, the Company adopted the provisions of Statement of Financial Standards No. 123
(revised 2004), Share-Based Payment( SFAS 123(R)) using the prospective transition method, which requires the application of the accounting standard to awards granted, modified or settled subsequent to the date of adoption.
Results from prior periods have not been restated.

The Companys condensed consolidated financial statements for the three months
ended March 31, 2007 and 2006 reflect the effect of SFAS 123(R). Stock option-based compensation expense related to employee stock options granted by CRC Health Group, Inc, (the Group) subsequent to the date of adoption
recognized under SFAS 123(R) was $1.1 million for the three months ended March 31, 2007, $0.6 million and $0.0 million for the two months ended March 31, 2006 and the one month ended January 31, 2006, respectively. The income tax
benefit recognized in the condensed consolidated statements of operations for stock-based compensation expense was $0.4 million and $0.3 million for the three months ended March 31, 2007 and the two months ended March 31, 2006,
respectively. There was no stock option-based compensation expense recognized in the condensed consolidated statements of operations for the three months ended March 31, 2007, two months ended March 31, 2006 and one month ended
January 31, 2006 related to the options granted prior to the date of adoption of SFAS 123(R). Stock option-based compensation expense of $17.7 million and tax benefit of $7.3 million was recognized in the 2006 Predecessor Company consolidated
statement of operations and is included in the acquisition related costs.

2006 Executive Incentive Plan and 2006 Management
Incentive Plan

On February 6, 2006, following the Bain Merger, Group adopted the 2006 Executive Incentive Plan and 2006
Management Incentive Plan, or the Executive Plan and the Management Plan, and collectively, the Plans. The Plans provide for the granting of stock options to the Companys key employees, directors,
consultants and advisors. Options granted under the Plans may be either incentive stock options or non-incentive stock options. Options granted under the Plans represent units. One unit consists of nine shares of class A and one share of class L
common stock of the Group.

The Company estimated the fair value of share based payments awards using a Black-Scholes valuation model for
Management Plan grants and tranches 1 and 3 of the Executive Plan grants. A Monte Carlo simulation approach was used to determine the fair value of the Executive Plan tranche 2 awards. The following assumptions were used to calculate the weighted
average fair value of employee stock options granted during the periods presented below.



|                                                                |  |                                  |       |   |                                  |   |       |  
|--------------------------------------------------------------- |  | -------------------------------- | ----- | - | -------------------------------- | - | ----- | -
|                                                                |  | Three Months Ended March 31,2007 |       |   | Three Months Ended March 31,2006 |  
|Weighted-average estimated fair value of units granted          |  | $                                | 55.65 |   |                                  | $ | 53.38 |  
|Expected volatility  tranches 1 and 3 and management awards    |  |                                  | 48.8  | % |                                  |   | 57.0  | %
|Expected volatility  tranche 2                                 |  |                                  | 55.1  | % |                                  |   | 57.0  | %
|Risk-free interest rate                                         |  |                                  | 4.70  | % |                                  |   | 4.52  | %
|Expected term  tranches 1 and 3 and management awards in years |  |                                  | 6.30  |   |                                  |   | 6.50  |  
|Expected term  tranche 2 in years                              |  |                                  | 5.58  |   |                                  |   | 5.67  |  
|Expected dividend to be paid over the option period             |  | $                                | 0.00  |   |                                  | $ | 0.00  |  
|Estimated forfeiture rate over the effective vesting period     |  |                                  | 5     | % |                                  |   | 5     | %

As of March 31, 2007, $19.6 million of total unrecognized compensation expense is expected to
be recognized over a weighted average period of 2.1 years.

Activity under the Executive and Management Plans for the three months ended
March 31, 2007 is set forth below:



|                                               |  |           |   |  |                                           |       |                                                         |     
|---------------------------------------------- |  | --------- | - |  | ----------------------------------------- | ----- | ------------------------------------------------------- | ----
|                                               |  | Options   |   |  | Weighted- Average Exercise PricePer Share |       | Weighted- Average Remaining Contractual Term (In Years)
|Options outstanding at December 31, 2006       |  | 6,310,558 |   |  |                                           | 9.02  |                                                         | 4.81
|Activity from January 1 through March 31, 2007 |  |           |   |  |                                           |       |                                                         |     
|Granted                                        |  | 801,496   |   |  |                                           | 10.23 |                                                         | 5.00
|Exercised                                      |  |          |   |  |                                           |      |                                                         |    
|Forfeited/cancelled/expired                    |  | (32,484   | ) |  |                                           | 10.05 |                                                         |    
|                                               |  |           |   |  |                                           |       |                                                         |     
|OutstandingMarch 31, 2007                     |  | 7,079,570 |   |  | $                                         | 7.64  |                                                         | 4.51
|                                               |  |           |   |  |                                           |       |                                                         |     
|ExercisableMarch 31, 2007                     |  | 1,969,687 |   |  | $                                         | 3.57  |                                                         | 4.51
|                                               |  |           |   |  |                                           |       |                                                         |     



13



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##### Table of Contents

|12. | RELATED PARTY TRANSACTIONS
|--- | --------------------------

In connection with the
Bain Merger, Bain Capital and the Companys management entered into a stockholders agreement. The stockholders agreement contains agreements among the parties with respect to the election of the Companys directors and the directors of the
Companys direct parent company, restrictions on the issuance or transfer of shares, including tag-along rights and drag-along rights, other special corporate governance provisions (including the right to approve various corporate actions),
registration rights (including customary indemnification provisions) and call options. Three of the Companys directors are employees of Bain Capital Partners, LLC, the Companys principal shareholder.

Upon the consummation of the Bain Merger, the Company entered into a management agreement with an affiliate of Bain Capital Partners, LLC pursuant to
which such entity or its affiliates will provide management services. Pursuant to such agreement, an affiliate of Bain Capital Partners, LLC receives an aggregate annual management fee of $2.0 million and reimbursement for out-of-pocket
expenses and any additional fees incurred in connection with the provision of services pursuant to the agreement. In addition, pursuant to such agreement, an affiliate of Bain Capital Partners, LLC also received aggregate transaction fees of
approximately $7.2 million in connection with services provided by such entity related to the Bain Merger. Of the $7.2 million, approximately $2.9 million were for acquisition related expenses and $4.3 million were for financing related
expenses which are capitalized and recorded in other assets. The management agreement has a five year, evergreen term, however, in certain circumstances, such as an initial public offering or change of control of the Group, the Company may terminate
the management agreement and buy out its remaining obligations under the agreement to Bain Capital Partners, LLC and affiliates. In addition, the management agreement provides that an affiliate of Bain Capital Partners, LLC may receive fees in
connection with certain subsequent financing and acquisition transactions. The management agreement includes customary indemnification provisions in favor of Bain Capital Partners, LLC and its affiliates. The Company under this agreement paid
management fees of $0.5 million and $0.3 million during the three months ended March 31, 2007 and two months ended March 31, 2006, respectively, which is included in supplies, facilities and other operating costs.

In addition, under a separate management agreement with two of the former stockholders of the Predecessor Company, the Predecessor Company paid management
fees of $0.1 million during the one month ended January 31, 2006, which is included in supplies, facilities and other operating costs. This agreement was terminated as part of the Bain Merger.

In connection with the closing of the Bain Merger on February 6, 2006, and pursuant to a rollover and subscription agreement, certain members of the
Companys management converted options to purchase stock of the Predecessor Company into options to purchase stock of the Group with an aggregate value of $9.1 million.



|13. | CONDENSED CONSOLIDATING FINANCIAL INFORMATION
|--- | ---------------------------------------------

As
of March 31, 2007, the Company had outstanding $200.0 million aggregate principal amount of Notes due 2016. The Notes are fully and unconditionally guaranteed, jointly and severally on an unsecured senior subordinated basis, by substantially
all of the Companys subsidiaries.

The following supplemental tables present condensed consolidating balance sheets for the Company
and its subsidiary guarantors as of March 31, 2007 and December 31, 2006, the condensed consolidating statements of operations for the three months ended March 31, 2007 (Successor Company), two months ended March 31, 2006
(Successor Company) and one month ended January 31, 2006 (Predecessor Company), and the condensed consolidating statement of cash flows for the three months ended March 31, 2007, two months ended March 31, 2006 (Successor Company) and
one month ended January 31, 2006 (Predecessor Company).



14



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Condensed Consolidating Balance Sheet as of March 31, 2007

(In thousands)

---



|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|------------------------------------------ |  | --------------------- | -------- | - | -------------------- | - | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ---------
|                                           |  | CRC HealthCorporation |          |   | SubsidiaryGuarantors |   | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated
|ASSETS                                     |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|                                           |  |                       |          |   |                     
|CURRENT ASSETS:                            |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Cash and cash equivalents                  |  | $                     |         |   |                      | $ | 3,007                    |  | $ | 159          |   |  | $            |         |   |  | $ | 3,166    
|Accounts receivablenet of allowance       |  |                       | 1        |   |                      |   | 31,890                   |  |   | 550          |   |  |              |          |   |  |   | 32,441   
|Prepaid expenses                           |  |                       | 3,711    |   |                      |   | 3,693                    |  |   | 211          |   |  |              |          |   |  |   | 7,615    
|Other current assets                       |  |                       | 20       |   |                      |   | 2,330                    |  |   | 45           |   |  |              |          |   |  |   | 2,395    
|Income taxes receivable                    |  |                       | 8,193    |   |                      |   | 473                      |  |   |              |   |  |              |          |   |  |   | 8,666    
|Deferred income taxes                      |  |                       | 6,047    |   |                      |   | 1,179                    |  |   |              |   |  |              |          |   |  |   | 7,226    
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total current assets                       |  |                       | 17,972   |   |                      |   | 42,572                   |  |   | 965          |   |  |              |         |   |  |   | 61,509   
|PROPERTY AND EQUIPMENTNet                 |  |                       | 4,336    |   |                      |   | 92,866                   |  |   | 1,207        |   |  |              |          |   |  |   | 98,409   
|GOODWILL                                   |  |                       |          |   |                      |   | 703,480                  |  |   |              |   |  |              |          |   |  |   | 703,480  
|INTANGIBLE ASSETSNet                      |  |                       |          |   |                      |   | 398,039                  |  |   |              |   |  |              |          |   |  |   | 398,039  
|OTHER ASSETS                               |  |                       | 25,946   |   |                      |   | 1,886                    |  |   | 16           |   |  |              |          |   |  |   | 27,848   
|INVESTMENT IN SUBSIDIARIESAt cost         |  |                       | 580,141  |   |                      |   |                          |  |   |              |   |  |              | (580,141 | ) |  |   |          
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|TOTAL ASSETS                               |  | $                     | 628,395  |   |                      | $ | 1,238,843                |  | $ | 2,188        |   |  | $            | (580,141 | ) |  | $ | 1,289,285
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|                                           |  |                       |          |   |                     
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|                                           |  |                       |          |   |                     
|CURRENT LIABILITIES:                       |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Accounts payable                           |  | $                     | 3,303    |   |                      | $ | 2,082                    |  | $ | 155          |   |  | $            |         |   |  | $ | 5,540    
|Accrued liabilities                        |  |                       | 8,796    |   |                      |   | 17,947                   |  |   | 865          |   |  |              |          |   |  |   | 27,608   
|Current portion of long-term debt          |  |                       | 15,193   |   |                      |   | 4,012                    |  |   |              |   |  |              |          |   |  |   | 19,205   
|Other current liabilities                  |  |                       | 1,837    |   |                      |   | 26,326                   |  |   | 780          |   |  |              |          |   |  |   | 28,943   
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total current liabilities                  |  |                       | 29,129   |   |                      |   | 50,367                   |  |   | 1,800        |   |  |              |         |   |  |   | 81,296   
|LONG-TERM DEBTLess current portion        |  |                       | 610,355  |   |                      |   | 7,487                    |  |   |              |   |  |              |          |   |  |   | 617,842  
|OTHER LONG-TERM LIABILITIES                |  |                       | 865      |   |                      |   | 1,445                    |  |   |              |   |  |              |          |   |  |   | 2,310    
|DEFERRED INCOME TAXES                      |  |                       | 109,087  |   |                      |   | 38,228                   |  |   |              |   |  |              |          |   |  |   | 147,315  
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total liabilities                          |  |                       | 749,436  |   |                      |   | 97,527                   |  |   | 1,800        |   |  |              |         |   |  |   | 848,763  
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|MINORITY INTEREST                          |  |                       |          |   |                      |   | 71                       |  |   | 86           |   |  |              |          |   |  |   | 157      
|STOCKHOLDERS EQUITY:                      |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Common stock                               |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Additional paid-in capital(1)              |  |                       | (115,097 | ) |                      |   | 1,129,095                |  |   | 877          |   |  |              | (580,141 | ) |  |   | 434,734  
|(Accumulated deficit) Retained earnings    |  |                       | (5,944   | ) |                      |   | 12,150                   |  |   | (575         | ) |  |              |          |   |  |   | 5,631    
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total stockholders equity                 |  |                       | (121,041 | ) |                      |   | 1,141,245                |  |   | 302          |   |  |              | (580,141 | ) |  |   | 440,365  
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |  | $                     | 628,395  |   |                      | $ | 1,238,843                |  | $ | 2,188        |   |  | $            | (580,141 | ) |  | $ | 1,289,285
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          

---

|(1) | Includes intercompany balances
|--- | ------------------------------



15



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Condensed Consolidating Balance Sheet as of December 31, 2006

(In thousands)

---



|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|------------------------------------------ |  | --------------------- | -------- | - | -------------------- | - | ------------------------ |  | - | ------------ | - |  | ------------ | -------- | - |  | - | ---------
|                                           |  | CRC HealthCorporation |          |   | SubsidiaryGuarantors |   | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated
|ASSETS                                     |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|                                           |  |                       |          |   |                     
|CURRENT ASSETS:                            |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Cash and cash equivalents                  |  | $                     |         |   |                      | $ | 4,167                    |  | $ | 39           |   |  | $            |         |   |  | $ | 4,206    
|Accounts receivablenet of allowance       |  |                       | 4        |   |                      |   | 33,309                   |  |   | 492          |   |  |              |          |   |  |   | 33,805   
|Prepaid expenses                           |  |                       | 3,977    |   |                      |   | 3,676                    |  |   | 22           |   |  |              |          |   |  |   | 7,675    
|Other current assets                       |  |                       | 152      |   |                      |   | 2,096                    |  |   | 13           |   |  |              |          |   |  |   | 2,261    
|Income taxes receivable                    |  |                       | 6,110    |   |                      |   | 386                      |  |   |              |   |  |              |          |   |  |   | 6,496    
|Deferred income taxes                      |  |                       | 5,873    |   |                      |   | 1,179                    |  |   |              |   |  |              |          |   |  |   | 7,052    
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total current assets                       |  |                       | 16,116   |   |                      |   | 44,813                   |  |   | 566          |   |  |              |         |   |  |   | 61,495   
|PROPERTY AND EQUIPMENTNet                 |  |                       | 4,258    |   |                      |   | 89,835                   |  |   | 883          |   |  |              |          |   |  |   | 94,976   
|GOODWILL                                   |  |                       |          |   |                      |   | 702,425                  |  |   |              |   |  |              |          |   |  |   | 702,425  
|INTANGIBLE ASSETSNet                      |  |                       | 43       |   |                      |   | 400,671                  |  |   |              |   |  |              |          |   |  |   | 400,714  
|OTHER ASSETS                               |  |                       | 26,953   |   |                      |   | 2,205                    |  |   | 20           |   |  |              |          |   |  |   | 29,178   
|INVESTMENT IN SUBSIDIARIESAt cost         |  |                       | 577,739  |   |                      |   |                          |  |   |              |   |  |              | (577,739 | ) |  |   |          
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|TOTAL ASSETS                               |  | $                     | 625,109  |   |                      | $ | 1,239,949                |  | $ | 1,469        |   |  | $            | (577,739 | ) |  | $ | 1,288,788
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|                                           |  |                       |          |   |                     
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|                                           |  |                       |          |   |                     
|CURRENT LIABILITIES:                       |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Accounts payable                           |  | $                     | 3,990    |   |                      | $ | 2,662                    |  | $ | 62           |   |  | $            |         |   |  | $ | 6,714    
|Accrued liabilities                        |  |                       | 13,473   |   |                      |   | 20,544                   |  |   | 810          |   |  |              |          |   |  |   | 34,827   
|Current portion of long-term debt          |  |                       | 7,793    |   |                      |   | 2,950                    |  |   |              |   |  |              |          |   |  |   | 10,743   
|Other current liabilities                  |  |                       | 332      |   |                      |   | 27,215                   |  |   | 394          |   |  |              |          |   |  |   | 27,941   
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total current liabilities                  |  |                       | 25,588   |   |                      |   | 53,371                   |  |   | 1,266        |   |  |              |         |   |  |   | 80,225   
|LONG-TERM DEBTLess current portion        |  |                       | 611,329  |   |                      |   | 4,456                    |  |   |              |   |  |              |          |   |  |   | 615,785  
|OTHER LONG-TERM LIABILITIES                |  |                       | 90       |   |                      |   | 5,436                    |  |   |              |   |  |              |          |   |  |   | 5,526    
|DEFERRED INCOME TAXES                      |  |                       | 109,992  |   |                      |   | 39,835                   |  |   |              |   |  |              |          |   |  |   | 149,827  
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total liabilities                          |  |                       | 746,999  |   |                      |   | 103,098                  |  |   | 1,266        |   |  |              |         |   |  |   | 851,363  
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|MINORITY INTEREST                          |  |                       |          |   |                      |   | 66                       |  |   | 185          |   |  |              |          |   |  |   | 251      
|STOCKHOLDERS EQUITY:                      |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Common stock                               |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Additional paid-in capital(1)              |  |                       | (118,916 | ) |                      |   | 1,130,185                |  |   | 122          |   |  |              | (577,739 | ) |  |   | 433,652  
|(Accumulated deficit) retained earnings    |  |                       | (2,974   | ) |                      |   | 6,600                    |  |   | (104         | ) |  |              |          |   |  |   | 3,522    
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|Total stockholders equity                 |  |                       | (121,890 | ) |                      |   | 1,136,785                |  |   | 18           |   |  |              | (577,739 | ) |  |   | 437,174  
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |  | $                     | 625,109  |   |                      | $ | 1,239,949                |  | $ | 1,469        |   |  | $            | (577,739 | ) |  | $ | 1,288,788
|                                           |  |                       |          |   |                      |   |                          |  |   |              |   |  |              |          |   |  |   |          

---

|(1) | Includes intercompany balances
|--- | ------------------------------



16



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##### Table of Contents

Condensed Consolidating Statements of Operations

For the Three Months Ended March 31, 2007 (Successor)

(In thousands)

---



|                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                  |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   |         | SubsidiaryNon-Guarantors |  |   | Eliminations |   |  | Consolidated |        
|NET REVENUE:                                      |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net client service revenue                        |  | $                     | 4       |   |                      | $ | 104,110 |                          |  | $ | 2,368        |   |  | $            |        |   |  | $ | 106,482 |  
|Other revenue                                     |  |                       | 2       |   |                      |   | 1,438   |                          |  |   | 8            |   |  |              |         |   |  |   | 1,448   |  
|Management fee revenue                            |  |                       | 12,483  |   |                      |   |         |                          |  |   |              |   |  |              | (12,483 | ) |  |   |         |  
|                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Net revenue                                       |  |                       | 12,489  |   |                      |   | 105,548 |                          |  |   | 2,376        |   |  |              | (12,483 | ) |  |   | 107,930 |  
|                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|OPERATING EXPENSES:                               |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Salaries and benefits                             |  |                       | 3,437   |   |                      |   | 50,698  |                          |  |   | 1,173        |   |  |              |         |   |  |   | 55,308  |  
|Supplies, facilities and other operating costs    |  |                       | 1,993   |   |                      |   | 27,181  |                          |  |   | 1,562        |   |  |              |         |   |  |   | 30,736  |  
|Provision for doubtful accounts                   |  |                       | (1      | ) |                      |   | 1,504   |                          |  |   |              |   |  |              |         |   |  |   | 1,503   |  
|Depreciation and amortization                     |  |                       | 579     |   |                      |   | 4,663   |                          |  |   | 50           |   |  |              |         |   |  |   | 5,292   |  
|Management fee expense                            |  |                       |         |   |                      |   | 11,929  |                          |  |   | 554          |   |  |              | (12,483 | ) |  |   |         |  
|                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|Total operating expenses                          |  |                       | 6,008   |   |                      |   | 95,975  |                          |  |   | 3,339        |   |  |              | (12,483 | ) |  |   | 92,839  |  
|                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|INCOME (LOSS) FROM OPERATIONS                     |  |                       | 6,481   |   |                      |   | 9,573   |                          |  |   | (963         | ) |  |              |         |   |  |   | 15,091  |  
|INTEREST EXPENSE, NET                             |  |                       | (14,802 | ) |                      |   | (186    | )                        |  |   | (1           | ) |  |              |         |   |  |   | (14,989 | )
|OTHER INCOME                                      |  |                       | (337    | ) |                      |   | (11     | )                        |  |   | (1           | ) |  |              |         |   |  |   | (349    | )
|                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |  |                       | (8,658  | ) |                      |   | 9,376   |                          |  |   | (965         | ) |  |              |         |   |  |   | (247    | )
|INCOME TAX (BENEFIT) EXPENSE                      |  |                       | (3,533  | ) |                      |   | 3,826   |                          |  |   | (394         | ) |  |              |         |   |  |   | (101    | )
|MINORITY INTEREST IN LOSS OF A SUBSIDIARY         |  |                       |         |   |                      |   |         |                          |  |   | (100         | ) |  |              |         |   |  |   | (100    | )
|                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  
|NET (LOSS) INCOME                                 |  | $                     | (5,125  | ) |                      | $ | 5,550   |                          |  | $ | (471         | ) |  | $            |        |   |  | $ | (46     | )
|                                                  |  |                       |         |   |                      |   |         |                          |  |   |              |   |  |              |         |   |  |   |         |  



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Condensed Consolidating Statements of Operations

For the Two Months Ended March 31, 2006 (Successor)

(In thousands)

---



|                                                  |  |                       |        |   |                      |   |              |  |   |              |   |  |   |        |  
|------------------------------------------------- |  | --------------------- | ------ | - | -------------------- | - | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                                  |  | CRC HealthCorporation |        |   | SubsidiaryGuarantors |   | Eliminations |  |   | Consolidated |  
|NET REVENUE:                                      |  |                       |        |   |                      |   |              |  |   |              |   |  |   |        |  
|Net client service revenue                        |  | $                     | 7      |   |                      | $ | 37,803       |  | $ |             |   |  | $ | 37,810 |  
|Other revenue                                     |  |                       | 2      |   |                      |   | 790          |  |   |              |   |  |   | 792    |  
|Management fee revenue                            |  |                       | 6,425  |   |                      |   |              |  |   | (6,425       | ) |  |   |        |  
|                                                  |  |                       |        |   |                      |   |              |  |   |              |   |  |   |        |  
|Net revenue                                       |  |                       | 6,434  |   |                      |   | 38,593       |  |   | (6,425       | ) |  |   | 38,602 |  
|                                                  |  |                       |        |   |                      |   |              |  |   |              |   |  |   |        |  
|OPERATING EXPENSES:                               |  |                       |        |   |                      |   |              |  |   |              |   |  |   |        |  
|Salaries and benefits                             |  |                       | 1,867  |   |                      |   | 16,627       |  |   |              |   |  |   | 18,494 |  
|Supplies, facilities and other operating costs    |  |                       | 1,111  |   |                      |   | 9,208        |  |   |              |   |  |   | 10,319 |  
|Provision for doubtful accounts                   |  |                       | 11     |   |                      |   | 826          |  |   |              |   |  |   | 837    |  
|Depreciation and amortization                     |  |                       | 76     |   |                      |   | 1,383        |  |   |              |   |  |   | 1,459  |  
|Management fee expense                            |  |                       |        |   |                      |   | 6,425        |  |   | (6,425       | ) |  |   |        |  
|                                                  |  |                       |        |   |                      |   |              |  |   |              |   |  |   |        |  
|Total operating expenses                          |  |                       | 3,065  |   |                      |   | 34,469       |  |   | (6,425       | ) |  |   | 31,109 |  
|                                                  |  |                       |        |   |                      |   |              |  |   |              |   |  |   |        |  
|INCOME FROM OPERATIONS                            |  |                       | 3,369  |   |                      |   | 4,124        |  |   |              |   |  |   | 7,493  |  
|INTEREST EXPENSE, NET                             |  |                       | (6,319 | ) |                      |   | 3            |  |   |              |   |  |   | (6,316 | )
|OTHER INCOME                                      |  |                       | 566    |   |                      |   |              |  |   |              |   |  |   | 566    |  
|                                                  |  |                       |        |   |                      |   |              |  |   |              |   |  |   |        |  
|(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |  |                       | (2,384 | ) |                      |   | 4,127        |  |   |              |   |  |   | 1,743  |  
|INCOME TAX (BENEFIT) EXPENSE                      |  |                       | (982   | ) |                      |   | 1,700        |  |   |              |   |  |   | 718    |  
|                                                  |  |                       |        |   |                      |   |              |  |   |              |   |  |   |        |  
|NET (LOSS) INCOME                                 |  | $                     | (1,402 | ) |                      | $ | 2,427        |  | $ |             |   |  | $ | 1,025  |  
|                                                  |  |                       |        |   |                      |   |              |  |   |              |   |  |   |        |  



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Condensed Consolidating Statements of Operations

For the One Month Ended January 31, 2006 (Predecessor)

(In thousands)

---



|                                                  |  |                       |         |   |                      |   |              |  |   |              |   |  |   |         |  
|------------------------------------------------- |  | --------------------- | ------- | - | -------------------- | - | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                                  |  | CRC HealthCorporation |         |   | SubsidiaryGuarantors |   | Eliminations |  |   | Consolidated |  
|NET REVENUE:                                      |  |                       |         |   |                      |   |              |  |   |              |   |  |   |         |  
|Net client service revenue                        |  | $                     | 5       |   |                      | $ | 19,355       |  | $ |             |   |  | $ | 19,360  |  
|Other revenue                                     |  |                       | 1       |   |                      |   | 489          |  |   |              |   |  |   | 490     |  
|Management fee revenue                            |  |                       | 1,110   |   |                      |   |              |  |   | (1,110       | ) |  |   |         |  
|                                                  |  |                       |         |   |                      |   |              |  |   |              |   |  |   |         |  
|Net revenue                                       |  |                       | 1,116   |   |                      |   | 19,844       |  |   | (1,110       | ) |  |   | 19,850  |  
|                                                  |  |                       |         |   |                      |   |              |  |   |              |   |  |   |         |  
|OPERATING EXPENSES:                               |  |                       |         |   |                      |   |              |  |   |              |   |  |   |         |  
|Salaries and benefits                             |  |                       | 666     |   |                      |   | 8,599        |  |   |              |   |  |   | 9,265   |  
|Supplies, facilities and other operating costs    |  |                       | 324     |   |                      |   | 4,237        |  |   |              |   |  |   | 4,561   |  
|Provision for doubtful accounts                   |  |                       |         |   |                      |   | 285          |  |   |              |   |  |   | 285     |  
|Depreciation and amortization                     |  |                       | 40      |   |                      |   | 321          |  |   |              |   |  |   | 361     |  
|Acquisition related costs                         |  |                       | 43,710  |   |                      |   |              |  |   |              |   |  |   | 43,710  |  
|Management fee expense                            |  |                       |         |   |                      |   | 1,110        |  |   | (1,110       | ) |  |   |         |  
|                                                  |  |                       |         |   |                      |   |              |  |   |              |   |  |   |         |  
|Total operating expenses                          |  |                       | 44,740  |   |                      |   | 14,552       |  |   | (1,110       | ) |  |   | 58,182  |  
|                                                  |  |                       |         |   |                      |   |              |  |   |              |   |  |   |         |  
|(LOSS) INCOME FROM OPERATIONS                     |  |                       | (43,624 | ) |                      |   | 5,292        |  |   |              |   |  |   | (38,332 | )
|INTEREST EXPENSE, NET                             |  |                       | (2,505  | ) |                      |   |              |  |   |              |   |  |   | (2,505  | )
|OTHER FINANCING COSTS                             |  |                       | (10,655 | ) |                      |   |              |  |   |              |   |  |   | (10,655 | )
|OTHER INCOME                                      |  |                       | 55      |   |                      |   |              |  |   |              |   |  |   | 55      |  
|                                                  |  |                       |         |   |                      |   |              |  |   |              |   |  |   |         |  
|(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |  |                       | (56,729 | ) |                      |   | 5,292        |  |   |              |   |  |   | (51,437 | )
|INCOME TAX (BENEFIT) EXPENSE                      |  |                       | (13,723 | ) |                      |   | 1,279        |  |   |              |   |  |   | (12,444 | )
|                                                  |  |                       |         |   |                      |   |              |  |   |              |   |  |   |         |  
|NET (LOSS) INCOME                                 |  | $                     | (43,006 | ) |                      | $ | 4,013        |  | $ |             |   |  | $ | (38,993 | )
|                                                  |  |                       |         |   |                      |   |              |  |   |              |   |  |   |         |  



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Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2007 (Successor)

(In thousands)

---



|                                                     |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|---------------------------------------------------- |  | --------------------- | ------ | - | -------------------- | - | ------ | ------------------------ |  | - | ------------ | - | ------------ | - | - |  | - | ------ | -
|                                                     |  | CRC HealthCorporation |        |   | SubsidiaryGuarantors |   |        | SubsidiaryNon-Guarantors |  |   | Eliminations |   | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net cash (used in) provided by operating activities  |  | $                     | (2,670 | ) |                      | $ | 3,177  |                          |  | $ | (263         | ) |              | $ |  |  | $ | 244    |  
|                                                     |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Additions of property and equipmentnet              |  |                       | (657   | ) |                      |   | (4,670 | )                        |  |   | (648         | ) |              |   |   |  |   | (5,975 | )
|Proceeds from sale of property and equipment         |  |                       |        |   |                      |   | 26     |                          |  |   |              |   |              |   |   |  |   | 26     |  
|Acquisition of businesses, net of cash acquired      |  |                       | (1,082 | ) |                      |   |        |                          |  |   |              |   |              |   |   |  |   | (1,082 | )
|Prior period acquisition adjustments                 |  |                       |        |   |                      |   | (226   | )                        |  |   |              |   |              |   |   |  |   | (226   | )
|                                                     |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net cash used in investing activities                |  |                       | (1,739 | ) |                      |   | (4,870 | )                        |  |   | (648         | ) |              |   |  |  |   | (7,257 | )
|                                                     |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Intercompany transfers                               |  |                       | (1,600 | ) |                      |   | 569    |                          |  |   | 1,031        |   |              |   |   |  |   |        |  
|Debt financing costs                                 |  |                       | (15    | ) |                      |   |        |                          |  |   |              |   |              |   |   |  |   | (15    | )
|Net borrowings under revolving line of credit        |  |                       | 7,400  |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   | 7,400  |  
|Repayments of long-term debt                         |  |                       | (1,376 | ) |                      |   | (36    | )                        |  |   |              |   |              |   |   |  |   | (1,412 | )
|                                                     |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|Net cash provided by financing activities            |  |                       | 4,409  |   |                      |   | 533    |                          |  |   | 1,031        |   |              |   |  |  |   | 5,973  |  
|                                                     |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |  |                       |        |   |                      |   | (1,160 | )                        |  |   | 120          |   |              |   |   |  |   | (1,040 | )
|CASH AND CASH EQUIVALENTSBeginning of period        |  |                       |        |   |                      |   | 4,167  |                          |  |   | 39           |   |              |   |   |  |   | 4,206  |  
|                                                     |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  
|CASH AND CASH EQUIVALENTSEnd of period              |  | $                     |       |   |                      | $ | 3,007  |                          |  | $ | 159          |   |              | $ |  |  | $ | 3,166  |  
|                                                     |  |                       |        |   |                      |   |        |                          |  |   |              |   |              |   |   |  |   |        |  



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Condensed Consolidating Statements of Cash Flows

For the Two Months Ended March 31, 2006 (Successor)

(In thousands)

---



|                                                    |  |                       |          |   |                      |   |        |              |  |              |   |  |   |          |  
|--------------------------------------------------- |  | --------------------- | -------- | - | -------------------- | - | ------ | ------------ |  | ------------ | - |  | - | -------- | -
|                                                    |  | CRC HealthCorporation |          |   | SubsidiaryGuarantors |   |        | Eliminations |  | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |                       |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Net cash (used in) provided by operating activities |  | $                     | (23,151  | ) |                      | $ | 3,898  |              |  | $            |  |  | $ | (19,253  | )
|                                                    |  |                       |          |   |                      |   |        |              |  |              |   |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                       |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Additions of property and equipmentnet             |  |                       | (95      | ) |                      |   | (1,196 | )            |  |              |   |  |   | (1,291   | )
|Proceeds from sale of property and equipment        |  |                       |          |   |                      |   | 3      |              |  |              |   |  |   | 3        |  
|Payment of purchase price to former shareholders    |  |                       | (429,190 | ) |                      |   |        |              |  |              |   |  |   | (429,190 | )
|                                                    |  |                       |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Net cash used in investing activities               |  |                       | (429,285 | ) |                      |   | (1,193 | )            |  |              |  |  |   | (430,478 | )
|                                                    |  |                       |          |   |                      |   |        |              |  |              |   |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                       |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Equity contribution from Bain Capital               |  |                       | 294,475  |   |                      |   |        |              |  |              |   |  |   | 294,475  |  
|Payment of transaction related costs                |  |                       | (5,354   | ) |                      |   |        |              |  |              |   |  |   | (5,354   | )
|Intercompany transfers                              |  |                       | 1,873    |   |                      |   | (1,873 | )            |  |              |   |  |   |          |  
|Debt financing costs                                |  |                       | (22,105  | ) |                      |   |        |              |  |              |   |  |   | (22,105  | )
|Net borrowings under revolving line of credit       |  |                       | (4,500   | ) |                      |   |        |              |  |              |   |  |   | (4,500   | )
|Proceeds from issuance of long-term debt            |  |                       | 442,022  |   |                      |   |        |              |  |              |   |  |   | 442,022  |  
|Repayments of long-term debt                        |  |                       | (253,975 | ) |                      |   |        |              |  |              |   |  |   | (253,975 | )
|                                                    |  |                       |          |   |                      |   |        |              |  |              |   |  |   |          |  
|Net cash provided by (used in) financing activities |  |                       | 452,436  |   |                      |   | (1,873 | )            |  |              |  |  |   | 450,563  |  
|                                                    |  |                       |          |   |                      |   |        |              |  |              |   |  |   |          |  
|INCREASE IN CASH AND CASH EQUIVALENTS               |  |                       |          |   |                      |   | 832    |              |  |              |   |  |   | 832      |  
|CASH AND CASH EQUIVALENTSBeginning of period       |  |                       |          |   |                      |   | 423    |              |  |              |   |  |   | 423      |  
|                                                    |  |                       |          |   |                      |   |        |              |  |              |   |  |   |          |  
|CASH AND CASH EQUIVALENTSEnd of period             |  | $                     |         |   |                      | $ | 1,255  |              |  | $            |  |  | $ | 1,255    |  
|                                                    |  |                       |          |   |                      |   |        |              |  |              |   |  |   |          |  



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Condensed Consolidating Statements of Cash Flows

For the One Month Ended January 31, 2006 (Predecessor)

(In thousands)

---



|                                                    |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  
|--------------------------------------------------- |  | --------------------- | ------ | - | -------------------- | - | ------ | ------------ |  | ------------ | - |  | - | ------ | -
|                                                    |  | CRC HealthCorporation |        |   | SubsidiaryGuarantors |   |        | Eliminations |  | Consolidated |  
|CASH FLOWS FROM OPERATING ACTIVITIES:               |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  
|Net cash (used in) provided by operating activities |  | $                     | (3,563 | ) |                      | $ | 4,764  |              |  | $            |  |  | $ | 1,201  |  
|                                                    |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  
|Additions of property and equipmentnet             |  |                       | (30    | ) |                      |   | (286   | )            |  |              |   |  |   | (316   | )
|Proceeds from sale of property and equipment        |  |                       |        |   |                      |   | 1      |              |  |              |   |  |   | 1      |  
|                                                    |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  
|Net cash used in investing activities               |  |                       | (30    | ) |                      |   | (285   | )            |  |              |  |  |   | (315   | )
|                                                    |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  
|Intercompany transfers                              |  |                       | 4,187  |   |                      |   | (4,187 | )            |  |              |   |  |   |        |  
|Stock options exercised                             |  |                       | 7      |   |                      |   |        |              |  |              |   |  |   | 7      |  
|Debt financing costs                                |  |                       | (547   | ) |                      |   |        |              |  |              |   |  |   | (547   | )
|Repayments of revolver line of credit               |  |                       | (5,000 | ) |                      |   |        |              |  |              |   |  |   | (5,000 | )
|                                                    |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  
|Net cash used in financing activities               |  |                       | (1,353 | ) |                      |   | (4,187 | )            |  |              |  |  |   | (5,540 | )
|                                                    |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  
|(DECREASE) INCREASE IN CASH AND                     |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  
|CASH EQUIVALENTS                                    |  |                       | (4,946 | ) |                      |   | 292    |              |  |              |   |  |   | (4,654 | )
|CASH AND CASH EQUIVALENTSBeginning of period       |  |                       | 4,946  |   |                      |   | 131    |              |  |              |   |  |   | 5,077  |  
|                                                    |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  
|CASH AND CASH EQUIVALENTSEnd of period             |  | $                     |       |   |                      | $ | 423    |              |  | $            |  |  | $ | 423    |  
|                                                    |  |                       |        |   |                      |   |        |              |  |              |   |  |   |        |  



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|14. | SEGMENT INFORMATION
|--- | -------------------

In accordance with the
criteria of SFAS No. 131 the Company has determined that it operates three reportable segments: (1) residential treatment division (Residential) (2) outpatient treatment division (Outpatient) and (3) youth
treatment division (Youth). The Company has aggregated operations into three reportable segments based on the characteristics of the services provided. The reportable segments of Residential and Outpatient have not changed as a result of
the consummation of the Bain Merger. A new reportable segment Youth has been formed after the Aspen Acquisition.

Reportable segments are
based upon the Companys internal organizational structure, the manner in which the operations are managed, the criteria used by the Companys chief operating decision-maker to evaluate segment performance and the availability of separate
financial information. The Companys chief operating decision-maker is its Chief Executive Officer.

The financial information used by
the Companys chief operating decision-maker includes net revenue, operating expenses, income (loss) from operations and capital expenditures.

ResidentialThe Residential segment provides chemical dependency and other behavioral health disorders treatment services 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, 2007, the Residential segment provided
services to patients at 45 facilities located in 12 states.

OutpatientThe Outpatient segment provides substance abuse
treatment services on an outpatient basis. Substantially all of the services are provided to individuals addicted to heroin and other opiates, including prescription painkillers such as oxycodene. Services include medication assisted treatment,
counseling and physical examination. As of March 31, 2007, 24 of our 59 clinics were certified to provide at least one additional comprehensive outpatient substance abuse treatment service. Such additional services include outpatient
detoxification and intensive outpatient services for individuals addicted to drugs or alcohol. As of March 31, 2007, the Outpatient segment provided services to patients at 59 facilities located in 18 states.

YouthThe Youth segment provides a wide variety of therapeutic and educational programs through settings and solutions that match
individual needs with the appropriate learning and therapeutic environment. Its programs are offered in therapeutic boarding schools, experiential outdoor education programs, weight-loss residential schools and summer weight-loss camps. As of
March 31, 2007, the Youth segment operates 35 educational facilities in 12 states and 1 in the United Kingdom.

Corporate/OtherIn addition to the three reportable segments as described above, the Company has activities classified as Corporate/Other which represent revenue and expenses associated with eGetgoing, an online internet
startup and 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 option-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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##### Table of Contents

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



|                                                                                |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ------------------------------- | - | ------ | -------------------------------- |  | - | ------- | -
|                                                                                |  | Successor                         |         |   | Predecessor                     |  
|                                                                                |  | Three Months Ended March 31, 2007 |         |   | Two Months Ended March 31, 2006 |   |        | One Month Ended January 31,
2006 | 
|Net revenue:                                                                    |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Residential                                                                     |  | $                                 | 47,323  |   |                                 | $ | 24,106 |                                  |  | $ | 12,693  |  
|Outpatient                                                                      |  |                                   | 24,796  |   |                                 |   | 14,393 |                                  |  |   | 7,125   |  
|Youth                                                                           |  |                                   | 35,688  |   |                                 |   |       |                                  |  |   |        |  
|Corporate/other                                                                 |  |                                   | 123     |   |                                 |   | 103    |                                  |  |   | 32      |  
|                                                                                |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Total consolidated net revenue                                                  |  | $                                 | 107,930 |   |                                 | $ | 38,602 |                                  |  | $ | 19,850  |  
|                                                                                |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Operating expenses:                                                             |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Residential                                                                     |  | $                                 | 35,184  |   |                                 | $ | 18,378 |                                  |  | $ | 9,112   |  
|Outpatient                                                                      |  |                                   | 16,852  |   |                                 |   | 9,727  |                                  |  |   | 4,447   |  
|Youth                                                                           |  |                                   | 34,797  |   |                                 |   |       |                                  |  |   |        |  
|Corporate/other                                                                 |  |                                   | 6,006   |   |                                 |   | 3,004  |                                  |  |   | 44,623  |  
|                                                                                |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Total consolidated operating expenses                                           |  | $                                 | 92,839  |   |                                 | $ | 31,109 |                                  |  | $ | 58,182  |  
|                                                                                |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Income (loss) from operations:                                                  |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Residential                                                                     |  | $                                 | 12,139  |   |                                 | $ | 5,728  |                                  |  | $ | 3,581   |  
|Outpatient                                                                      |  |                                   | 7,944   |   |                                 |   | 4,666  |                                  |  |   | 2,678   |  
|Youth                                                                           |  |                                   | 891     |   |                                 |   |       |                                  |  |   |        |  
|Corporate/other                                                                 |  |                                   | (5,883  | ) |                                 |   | (2,901 | )                                |  |   | (44,591 | )
|                                                                                |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Total consolidated income (loss) from operations                                |  | $                                 | 15,091  |   |                                 | $ | 7,493  |                                  |  | $ | (38,332 | )
|                                                                                |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Income (loss) from continuing operations before income taxes:                   |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Total consolidated income (loss) from operations                                |  | $                                 | 15,091  |   |                                 | $ | 7,493  |                                  |  | $ | (38,332 | )
|Interest expense, net                                                           |  |                                   | (14,989 | ) |                                 |   | (6,316 | )                                |  |   | (2,505  | )
|Other financing costs                                                           |  |                                   |        |   |                                 |   |       |                                  |  |   | (10,655 | )
|Other income                                                                    |  |                                   | (349    | ) |                                 |   | 566    |                                  |  |   | 55      |  
|                                                                                |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Total consolidated (loss) income from continuing operations before income taxes |  | $                                 | (247    | ) |                                 | $ | 1,743  |                                  |  | $ | (51,437 | )
|                                                                                |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Capital expenditures:                                                           |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Residential                                                                     |  | $                                 | 3,304   |   |                                 | $ | 858    |                                  |  | $ | 336     |  
|Outpatient                                                                      |  |                                   | 330     |   |                                 |   | 577    |                                  |  |   | 45      |  
|Youth                                                                           |  |                                   | 1,683   |   |                                 |   |       |                                  |  |   |        |  
|Corporate/other                                                                 |  |                                   | 658     |   |                                 |   | 168    |                                  |  |   | 30      |  
|                                                                                |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  
|Total consolidated capital expenditures                                         |  | $                                 | 5,975   |   |                                 | $ | 1,603  |                                  |  | $ | 411     |  
|                                                                                |  |                                   |         |   |                                 |   |        |                                  |  |   |         |  



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|                          |  |                |           |                   |   |          
|------------------------- |  | -------------- | --------- | ----------------- | - | ---------
|                          |  | March 31, 2007 |           | December 31, 2006
|Total assets:             |  |                |           |                   |   |          
|Residential               |  | $              | 547,131   |                   | $ | 545,110  
|Outpatient                |  |                | 330,263   |                   |   | 331,491  
|Youth                     |  |                | 363,313   |                   |   | 361,319  
|Corporate/other           |  |                | 48,578    |                   |   | 50,868   
|                          |  |                |           |                   |   |          
|Total consolidated assets |  | $              | 1,289,285 |                   | $ | 1,288,788
|                          |  |                |           |                   |   |          



|15. | SUBSEQUENT EVENT
|--- | ----------------

Effective April 16, 2007,
the Company entered into an Amendment No. 2 (Amendment) and amends the Companys Amended and Restated Credit Agreement dated November 17, 2006. Per the Amendment, the Term Loan interest is payable quarterly at 90 day LIBOR
plus 2.25% (previously 2.50%); provided that on and after such time the Companys corporate rating from Moodys is at least B1 then the interest is payable quarterly at 90 day LIBOR plus 2.0%.



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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 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 (i) for periods prior to the consummation of the Transactions, to CRC Health Group, Inc.
and its consolidated subsidiaries and (ii) for periods following the consummation of the Transactions, to CRC Health Corporation and its consolidated subsidiaries following the mergers described below under The Transactions.

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 substance
abuse and behavioral disorder treatment services through our residential and outpatient treatment programs, which we refer to as our residential and outpatient treatment divisions. We deliver our youth treatment services through our residential
schools, wilderness programs and weight loss programs, which we refer to as our youth treatment division or Aspen Education Group. We have three reporting segments: residential treatment division, outpatient treatment division and youth treatment
division. Our residential treatment division, which currently operates 28 inpatient and 17 outpatient facilities in 12 states, treats patients for addiction to alcohol and drugs and other behavioral health disorders. As of March 31, 2007, our
residential treatment division treated approximately 1,450 patients per day. Our outpatient treatment division, which currently operates 59 outpatient treatment clinics in 18 states, provides services to individuals addicted to opiates, including
heroin and prescription painkillers such as oxycodone. As of March 31, 2007, our outpatient treatment programs treated approximately 24,500 patients per day. Aspen Education Group currently operates 35 education facilities in 12 states and 1
facility in the United Kingdom and enrolled approximately 1,000 new students during the three months ended March 31, 2007. Activities classified as Corporate/other represent revenue and expenses associated with eGetgoing, an online
internet startup, 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) and stock option-based
compensation expense that are not allocated to the segments.

The Transactions

On February 6, 2006, investment funds managed by Bain Capital Partners, LLC (Bain Capital) acquired CRC Health Group, Inc. for a total
cash consideration of approximately $742.3 million (including acquisition and financing transactions related fees and expenses of $28.5 million). As a result of the acquisition, Bain Capital received control of the Company. We refer to our
acquisition by Bain Capital and the related financings as the Transactions.

Basis of Presentation

As a result of the Transactions on February 6, 2006, a new basis of accounting has begun. However, for accounting purposes and to coincide with our
normal financial account closing dates, we have utilized February 1, 2006 as the effective date of the Transactions. For the purpose of presenting a comparison of our 2007 operating results to 2006, we have presented the three months ended
March 31, 2006 as the mathematical addition of our operating results for January 2006 (Predecessor Company) to the operating results of the two months ended March 31, 2006 (Successor Company). This approach is not
consistent with GAAP and may yield results that are not strictly comparable on a period-to-period basis primarily due to the impact of purchase accounting entries recorded as a result of the Transactions. For purposes of this managements
discussion and analysis of financial condition and results of operations, however, management believes that it is the most meaningful way to present our results of operations for the three months ended March 31, 2006.

Acquisitions

2007 Acquisitions

In the three months ended March 31, 2007, we completed one acquisition and paid approximately $1.3 million in cash, including acquisition related
expenses. The acquisition is intended to expand our range of youth treatment services into new geographic regions in the United States. This acquisition is not expected to materially impact our results of operations.

2006 Acquisitions

In November 2006, we acquired all
of the outstanding capital stock of Aspen Education Group for approximately $279.5 million in total purchase consideration, including acquisition related expenses of $1.5 million. We refer to this acquisition as the Aspen Acquisition. We
believe Aspen Education Group is the largest for-profit provider of therapeutic



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educational programs to troubled youth and its offerings include boarding schools, experiential outdoor education programs, weight loss residential high
schools and summer weight loss camps. The Aspen Acquisition is intended to diversify our business into other service offerings and geographic regions. This acquisition will further enhance our overall self payor mix revenue and offers multiple
revenue and cost synergies.

In 2006, in addition, to the Aspen Acquisition, we completed five other acquisitions for which we paid
approximately $36.6 million in cash, including acquisition related expenses. These acquisitions are intended to expand our range of treatment programs into new geographic regions in the United States. In addition, they contribute to the continued
building of a nationwide network of specialized behavioral care services.

SUMMARY

We generate revenue by providing substance abuse treatment services and youth treatment services in the United States. We also generate revenue by
providing treatment services for other specialized behavioral disorders. Revenue is recognized when services are provided. During the three months ended March 31, 2007, we generated 86.2% of our net revenue from non-governmental sources,
including 71.3% from self payors and 14.9% from commercial payors, respectively. Substantially all of our government program net revenue was received from multiple counties and states under Medicaid and similar programs.

In 2007, our consolidated same-facility net revenue increased by 5.9% compared to the consolidated same-facility net revenue in 2006.
Same-facility refers to the comparison of each facility owned during 2007 with the results for the comparable period in 2006.

Our operating expenses include salaries and benefits, supplies, facilities and other operating costs, provision for doubtful accounts, depreciation and amortization and acquisition related costs. Operating expenses for our residential,
outpatient and youth treatment 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 option-based compensation expense and expenses associated with eGetgoing.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accompanying discussion and analysis of our financial condition and results of operations are based on our condensed consolidated
financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). 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. Management believes that there have not been any significant changes during the three months ended March 31, 2007 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, 2006.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Standards No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment to FASB Statement No. 115 (SFAS 159).SFAS 159
expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable,
available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that would otherwise not be recognized at inception
and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be
deferred, e.g., debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to fair value. At the adoption date, unrealized
gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are required to adopt
SFAS 159 on January 1, 2008. We are currently evaluating the effect of the adoption of SFAS 159 will have on our condensed consolidated financial statements.



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In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement
attribute; however SFAS 157 does not apply to SFAS 123(R). SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are required to adopt
SFAS 157 on January 1, 2008. We are currently evaluating the effect of the adoption of SFAS 157 will have on our condensed consolidated financial statements.

We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 (FIN 48) on January 1, 2007. FIN 48 clarifies the
accounting and reporting for uncertainties in income tax law recognized in an enterprises financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in income tax returns. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and
transition. See Note 7 to the condensed consolidated financial statements for additional information, including the effects of adoption on the companys condensed consolidated statement of balance sheet.



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RESULTS OF OPERATIONS

The following tables illustrate our results of operations by segment for the quarters ended March 31, 2007 and 2006 (dollars in thousands, except for percentages; percentages are calculated as percentage of total
net revenue). Each period has a different basis of accounting and, as a result, they are not comparable. For the purpose of presenting a comparison of our 2007 results to 2006, we have presented the quarter ended March 31, 2006 as the
mathematical addition of our operating results for January 2006 (Predecessor Company) to the operating results of February and March 2006 (Successor Company). This approach is not consistent with U.S. GAAP and may yield
results that are not strictly comparable on a period-to-period basis primarily due to the impact of purchase accounting entries recorded as a result of the Transactions. For purposes of this managements discussion and analysis of financial
condition and results of operations, however, management believes that it is the most meaningful way to present our results of operations for the quarter ended March 31, 2006.



|                                          |  |                              |         |   |   |       |   |      |   |         |   |  |       |  
|----------------------------------------- |  | ---------------------------- | ------- | - | - | ----- | - | ---- | - | ------- | - |  | ----- | -
|                                          |  | Three Months Ended March 31, |        
|                                          |  | 2007                         |         |   | % |       |   | 2006 |   |         | % | 
|Net revenue:                              |  |                              |         |   |   |       |   |      |   |         |   |  |       |  
|Residential treatment                     |  | $                            | 47,323  |   |   | 43.8  | % |      | $ | 36,799  |   |  | 63.0  | %
|Outpatient treatment                      |  |                              | 24,796  |   |   | 23.0  | % |      |   | 21,518  |   |  | 36.8  | %
|Youth treatment                           |  |                              | 35,688  |   |   | 33.1  | % |      |   |        |   |  | 0.0   | %
|Corporate / other                         |  |                              | 123     |   |   | 0.1   | % |      |   | 135     |   |  | 0.2   | %
|                                          |  |                              |         |   |   |       |   |      |   |         |   |  |       |  
|Net revenue                               |  |                              | 107,930 |   |   | 100.0 | % |      |   | 58,452  |   |  | 100.0 | %
|                                          |  |                              |         |  
|Operating expenses:                       |  |                              |         |   |   |       |   |      |   |         |   |  |       |  
|Residential treatment                     |  |                              | 35,184  |   |   | 32.6  | % |      |   | 27,490  |   |  | 47.0  | %
|Outpatient treatment                      |  |                              | 16,852  |   |   | 15.6  | % |      |   | 14,174  |   |  | 24.2  | %
|Youth treatment                           |  |                              | 34,797  |   |   | 32.2  | % |      |   |        |   |  | 0.0   | %
|Corporate / other                         |  |                              | 6,006   |   |   | 5.6   | % |      |   | 47,627  |   |  | 81.5  | %
|                                          |  |                              |         |   |   |       |   |      |   |         |   |  |       |  
|Total operating expenses                  |  |                              | 92,839  |   |   | 86.0  | % |      |   | 89,291  |   |  | 152.7 | %
|                                          |  |                              |         |  
|Income (loss) from operations:            |  |                              |         |   |   |       |   |      |   |         |   |  |       |  
|Residential treatment                     |  |                              | 12,139  |   |   | 11.2  | % |      |   | 9,309   |   |  | 16.0  | %
|Outpatient treatment                      |  |                              | 7,944   |   |   | 7.4   | % |      |   | 7,344   |   |  | 12.6  | %
|Youth treatment                           |  |                              | 891     |   |   | 0.9   | % |      |   |        |   |  | 0.0   | %
|Corporate / other                         |  |                              | (5,883  | ) |   | -5.5  | % |      |   | (47,492 | ) |  | -81.3 | %
|                                          |  |                              |         |   |   |       |   |      |   |         |   |  |       |  
|Income (loss) from operations             |  |                              | 15,091  |   |   | 14.0  | % |      |   | (30,839 | ) |  | -52.7 | %
|                                          |  |                              |         |  
|Interest expense, net                     |  |                              | (14,989 | ) |   |       |   |      |   | (8,821  | ) |  |       |  
|Other financing costs                     |  |                              |        |   |   |       |   |      |   | (10,655 | ) |  |       |  
|Other (loss) income                       |  |                              | (349    | ) |   |       |   |      |   | 621     |   |  |       |  
|                                          |  |                              |         |   |   |       |   |      |   |         |   |  |       |  
|Loss from operations before income taxes  |  |                              | (247    | ) |   |       |   |      |   | (49,694 | ) |  |       |  
|Income tax benefit                        |  |                              | (101    | ) |   |       |   |      |   | (11,726 | ) |  |       |  
|Minority interest in loss of a subsidiary |  |                              | (100    | ) |   |       |   |      |   |        |   |  |       |  
|                                          |  |                              |         |   |   |       |   |      |   |         |   |  |       |  
|Net loss                                  |  | $                            | (46     | ) |   |       |   |      | $ | (37,968 | ) |  |       |  
|                                          |  |                              |         |   |   |       |   |      |   |         |   |  |       |  

Quarter Ended March 31, 2007 Compared to Quarter Ended March 31, 2006

Consolidated net revenue increased $49.5 million, or 84.6%, to $107.9 million in the quarter ended March 31, 2007 from $58.5 million in the quarter
ended March 31, 2006. Of the $49.5 million increase, the youth treatment division contributed $35.7 million and the remaining net revenue growth was driven by net revenue increases of $10.5 million, or 28.6% and $3.3 million, or 15.2%, in
our residential and outpatient treatment divisions, respectively. Of the $10.5 million and $3.3 million net revenue increases in the residential and outpatient treatment divisions, respectively, $7.7 million and $1.4 million, respectively was
contributed by the 2006 acquisitions and the Transactions that were not included in results of operations for the first quarter of 2006. In addition, same-facility revenue increases in residential and outpatient treatment divisions of $2.3 million
or 6.1% and $1.2 million or 5.5%, respectively, contributed to the net revenue growth. Our same-facility residential growth was driven in part by a 4.6% increase in patient census and a 1.4% increase in revenue per patient day. Outpatient treatment
same-facility net revenue increase was primarily attributable to an increase in the number of patients receiving treatment at our outpatient treatment clinics. On a same-facility basis, outpatient treatment clinic census increased 3.9% from an
average daily census of 21,030 in the first quarter of 2006 to an average daily census of 21,856 in the first quarter of 2007.



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Consolidated operating expenses increased $3.5 million, or 4.0%, to $92.8 million in the quarter ended
March 31, 2007 from $89.3 million in the quarter ended March 31, 2006. The increases in our residential treatment and outpatient treatment division operating expenses before divisional administration expenses were $6.6 million or
25.2% and $2.3 million or 18.8%, respectively. The increase in residential treatment operating expenses was mainly attributable to $4.9 million in expenses related to the 2006 acquisitions and partially attributable to a $1.4 million, or 5.2%,
same-facility increase in operating expenses. The increase in outpatient treatment operating expenses of $0.8 million or 86.4% was attributable to start-up facilities and $0.7 million or 6.4% was attributable to same-facilities. Division
administration expenses increased $1.1 million or 88.2%, in our residential treatment division and increased $0.4 million or 19.7% in our outpatient treatment division. The youth treatment operating expenses of $34.8 million are attributable mainly
to salaries and wages and other general operating expenses. Corporate/other expenses decreased $41.6 million or 87.4%. Expressed as a percentage of consolidated net revenue, corporate/other expenses decreased to 5.6% in 2007 compared to 81.5%
in 2006. The corporate/other expenses in 2006 was primarily attributable to one-time expenses of $43.7 million related to the Transactions and the corporate/other expenses in 2007 was not impacted by such material one-time expenses.

Our consolidated operating margin was 14.0% in the quarter ended March 31, 2007 compared to (52.7) % in the quarter ended March 31,
2006. One-time expenses of $43.7 million related to the Transactions impacted the first quarter ended March 31, 2006 operating margin. The first quarter ended March 31, 2007 operating margin was not impacted by any material one-time
expenses. On a same-facility basis, our consolidated operating margin increased to 36.4% in the quarter ended March 31, 2007, as compared to 36.2% in the quarter ended March 31, 2006.

Our consolidated net loss decreased by $37.9 million to $0.05 million in the quarter ended March 31, 2007 compared to $38.0 million in the first
quarter ended March 31, 2006. The overall decrease in net loss in the quarter ended March 31, 2007 was mainly due to the increase in income from operations of $45.9 million, offset in part by, an increase in interest expense of $6.2
million resulting mainly from the additional borrowings related to the Aspen acquisition in November 2006.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity for operating activities are payments from self pay patients, students, commercial payors and
government programs for treatment services. We receive most of our cash from self payors in advance or upon completion of treatment. Cash payment from commercial payors and government programs is typically received upon the collection of accounts
receivable, which are generated upon delivery of treatment services.

Working Capital

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

We had negative working capital of $19.8 million at March 31, 2007 and $18.7 million at December 31, 2006, respectively. The
decrease in working capital from December 31, 2006 to March 31, 2007 was primarily attributable to increase in the current portion of long-term debt of $8.5 million resulting from $7.4 million of increase in borrowings in the three months
ended March 31, 2007 under the revolving line of credit, which were used to pay the earn outs related to the Aspen historical acquisition of $4.5 million and the interest payment on the long-term debt. The increase in current debt was partially
offset by other changes in working capital accounts.

Sources and Uses of Cash



|                                                    |  |                               |        |   |      |   |          |  
|--------------------------------------------------- |  | ----------------------------- | ------ | - | ---- | - | -------- | -
|                                                    |  | Three Months Ended March, 31, |       
|                                                    |  | 2007                          |        |   | 2006 |  
|                                                    |  | (In thousands)                |       
|Net cash provided by (used in) operating activities |  | $                             | 244    |   |      | $ | (18,052  | )
|Net cash used in investing activities               |  |                               | (7,257 | ) |      |   | (430,793 | )
|Net cash provided by financing activities           |  |                               | 5,973  |   |      |   | 445,023  |  
|                                                    |  |                               |        |   |      |   |          |  
|Net decrease in cash                                |  | $                             | (1,040 | ) |      | $ | (3,822   | )
|                                                    |  |                               |        |   |      |   |          |  



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Cash provided by operating activities was $0.2 million in the three months ended March 31, 2007,
compared to cash used in operating activities of $18.1 million in the three months ended March 31, 2006. The cash used in operating activities for the three months ended March 31, 2006 was primarily due to the net loss in the January 2006
Predecessor Company statement of operations resulting from one-time acquisition related expenses incurred in connection with the Transactions.

Cash used in investing activities was $7.2 million in the three months ended March 31, 2007, compared to $430.8 million in the three months ended March 31, 2006. The cash used for investing activities during the three months ended
March 31, 2006 was due primarily to the payment of the purchase price to former shareholders in connection with the Transactions.

Cash provided by financing activities was $6.0 million in the three months ended March 31, 2007, compared to $445.0 million in the three months ended March 31, 2006. The cash provided from financing activities in the three months
ended March 31, 2006 was due primarily to an equity contribution of $294.5 million from investment funds managed by Bain Capital Partners, LLC and the increase in net issuances of long-term debt of $188.0 million.

Financing and Liquidity

We intend to fund our
ongoing operations through cash generated by operations, funds available under the revolving portion of our new senior secured credit facility and existing cash and cash equivalents. As of March 31, 2007, our senior secured credit facility is
comprised of a $417.2 million senior secured term loan facility and a $100.0 million revolving credit facility, of which $11.0 million was issued and outstanding at March 31, 2007. In addition, the revolving credit facility had approximately
$3.9 million of letters of credit issued and outstanding at March 31, 2007. As part of the Transactions, we issued $200.0 million in aggregate principal amount of senior subordinated notes. We anticipate that cash generated by current
operations, the remaining funds available under the revolving portion of our new 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 twelve months.

In addition, we may expand existing residential treatment and outpatient treatment facilities
and build or acquire new facilities. Management continually assesses our capital needs and will likely seek additional financing, including debt or equity, to fund potential acquisitions or for other corporate purposes. 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 residential
treatment facilities, outpatient treatment clinics and youth treatment facilities. We expect to spend an approximately $5.0 to $8.0 million for maintenance related expenditure and an additional $20.0 to $30.0 million over the next 12 months for
expansion projects, systems upgrades and other related initiatives.

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, 2007, we are in compliance with all such covenants.

Effective April 16, 2007, the Company entered into an Amendment No. 2 (Amendment) and amends the Companys Amended and Restated Credit Agreement dated November 17, 2006. Per the
Amendment, the Term Loan interest is payable quarterly at 90 day LIBOR plus 2.25%; provided that on and after such time the Companys corporate rating from Moodys is at least B1 then the interest is payable quarterly at 90 day LIBOR plus
2.0%

Funding Commitments

In
connection with an acquisition closed in October 2005, we are obligated to make certain additional payments in the amount of up to $2.0 million upon the achievement of certain performance milestones for the second year period ending October 2007. As
of May 11, 2007, the entity has achieved a pro-rata portion of the second year performance milestones and as a result we recorded additional goodwill and a liability of $0.6 million, respectively. Any additional payments earned will be paid by
us in the fourth quarter of 2007.

Certain acquisition agreements acquired in the acquisition of Aspen contain contingent earnout
provisions that provide for additional consideration to be paid to the sellers if the results of the entitys operations exceed negotiated benchmarks. As a result of one of the entities exceeding the benchmark, the Youth segment recorded
additional liability of $2.3 million, of which $1.1 million was incurred during the three months ended March 31, 2007. The additional consideration consists of a combination of cash and notes payable issued to the seller. The Company expects
the cash payment to be made in the third quarter of 2007.



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

For quantitative and qualitative disclosures about market risk affecting the Company, see Quantitative and Qualitative Disclosure about Market Risk in Item 7A of Part II, of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2006, which is incorporated herein by reference. Our exposure to market risk has not changed materially since December 31, 2006.



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

Evaluation of Disclosure Controls and
Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)), as of the end of the period covered by this Quarterly Report. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective
to ensure that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules
and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. No change in our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

Inherent Limitations on Effectiveness of Controls

The companys management, including the CEO and CFO, 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
|-------- | ------------

There have been no material changes
to the factors disclosed in Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006.



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

The Exhibit Index beginning on page 35 of
this report sets forth a list of exhibits.



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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 15, 2007



CRC HEALTH CORPORATION(Registrant)By

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




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CRC HEALTH CORPORATION

EXHIBIT INDEX



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1e  |  | Form of Fifth Supplemental Indenture dated as of April 27, 2007, by and among CRC Health Corporation, the Guarantors named therein, the New Guarantors named therein and U.S. Bank National
Association, as Trustee, with respect to the 10 3/4% Senior Subordinated Notes due 2016
                                                                                                                                           
|      | 
|10.1d |  | Form of AMENDMENT NO. 2 TO CREDIT AGREEMENT (Amendment) entered into as of April 16, 2007, among CRC Health Group, Inc., CRC Health Corporation, Citibank, N.A., as
administrative agent, collateral agent, swing line lender and L/C issuer, each lender from time to time party thereto, JPMorgan, Chase Bank, N.A., as Syndication Agent, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as documentation
agent. 
|      | 
|10.2f |  | Form of SUPPLEMENT NO. 6 dated as of April 27, 2007, to the Security Agreement dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Health Group, Inc.
(f/k/a/ CRCA Holdings, Inc.), and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as collateral Agent for the Secured Parties, as defined therein.                                                     
|      | 
|10.3f |  | Form of SUPPLEMENT NO. 6 dated as of April 27, 2007, to the Guarantee Agreement dated as of February 6, 2006, among CRC Health Group, Inc., CRC Health Corporation, the Subsidiaries of the
Borrower, as defined herein and Citibank, N.A., as Administrative Agent.                                                                                                                                                           
|      | 
|31.1  |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer                                                                                                                                                                                                                                                                                                                                                          
|      | 
|31.2  |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer and Principal Accounting Officer                                                                                                                                                                                                                                                                                                                         
|      | 
|32.1  |  | Section 1350 Certification of Principal Executive Officer                                                                                                                                                                                                                                                                                                                                                                      
|      | 
|32.2  |  | Section 1350 Certification of Principal Financial Officer and Principal Accounting Officer                                                                                                                                                                                                                                                                                                                                     

---

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

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



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