Objective: Increasing evidence supports the efficacy of trauma-focused exposure therapy in the treatment of posttraumatic stress disorder (PTSD) and co-occurring substance use disorders. Little is known, however, about the mechanisms of change in treatment for patients with PTSD and co-occurring substance use disorders. The aim of the present study was to examine whether within- and between-session habituation of distress and substance craving during imaginal exposure relates to treatment outcomes among U.S. military veterans with PTSD and a co-occurring substance use disorder (N = 54). Method: Veterans received Concurrent Treatment of PTSD and Substance Use Disorders Using Prolonged Exposure, a manualized integrated treatment combining prolonged exposure with cognitive–behavioral therapy for substance use disorders as part of a larger randomized clinical trial. Self-reported distress and craving ratings were collected during each imaginal exposure session. Results: Data were analyzed using a series of random intercept and slope multilevel linear and generalized linear models. Results revealed that between-session habituation of distress and craving was associated with greater improvement in PTSD symptoms during treatment. Between-session habituation of craving was also associated with a marginally greater reduction in frequency of substance use among participants still reporting use during treatment. Within-session habituation of distress was unrelated to treatment outcome. Conclusion: Together, these findings indicate that habituation in both distress and craving may be important in maximizing treatment outcome for patients with PTSD and comorbid substance use disorders.