EMPLOYMENT AGREEMENT

Exhibit 10.3

EMPLOYMENT AGREEMENT

          THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of April 19, 2005, by and between Hythiam, Inc., a Delaware corporation (“Employer”), and Richard A. Anderson, an individual (“Employee”).

RECITALS

          A. WHEREAS, Employer has agreed to employ Employee and Employee has agreed to enter into employment as the Chief Administrative Officer (“CAO”) of Employer, on the terms set forth in this Agreement.

          B. WHEREAS, Employee acknowledges that this Agreement is necessary for the protection of Employer’s investment in its business, good will, products, methods of operation, information, and relationships with its customers and other employees.

          C. WHEREAS, Employer acknowledges that Employee desires definition of his compensation and benefits, and other terms of his employment.

          NOW, THEREFORE, in consideration thereof and of the covenants and conditions contained herein, the parties agree as follows:

AGREEMENT

     1. TERM OF AGREEMENT

          1.1 Initial Term. The initial term of this Agreement shall begin on the date first set forth above, or as soon thereafter as Employee commences services hereunder (“Commencement Date”) and shall continue until the earlier of: (a) the date on which it is terminated pursuant to Section 5; or (b) four (4) years following the Commencement Date (“Initial Term”). At the conclusion of the Initial Term, and each successive term thereafter, the Agreement shall be automatically renewed for an additional three-year term, unless either party gives written notice of its intention to terminate the Agreement at least nine (9) months prior to the automatic renewal date.

     2. EMPLOYMENT

          2.1 Employment of Employee. Employer agrees to employ Employee to render services on the terms set forth herein. Employee hereby accepts such employment on the terms and conditions of this Agreement.

          2.2 Position and Duties. Employee shall serve as Employer’s CAO, reporting directly to Employer’s Chief Executive Officer (“CEO”), and shall have the general powers, duties and responsibilities of management usually vested in that office in a corporation and such other additional powers and duties as may be prescribed from time to time by the CEO and Employer’s Board of Directors (“Board”).

          2.3 Other Services. Employer acknowledges and pre-approves Employee’s current responsibility as member of the Board of Directors of Clearant, Inc. (“Clearant”). Employer is hereby notified and acknowledges that Employee is subject to a Confidentiality Agreement with Clearant. In addition, Employer acknowledges that Employee may do charity work and conduct personal business as long as such activities do not materially interfere with the Employee’s duties hereunder.

          2.4 Relocation or Change of Duties. Employer shall not, without Employee’s consent, require Employee to permanently relocate outside of Los Angeles, California. If Employer relocates more than thirty (30) miles outside of Los Angeles, and Employee elects not to relocate, such action shall be considered a resignation with Good Reason under Section 5.4. If Employer requests and Employee agrees to relocate, Employer will pay for reasonable and standard relocation costs of Employee and Employee’s family, including, but not limited to, closing points on the sale of Employee’s house and purchase of a new house, temporary housing, travel and moving expenses.

     3. COMPENSATION

          3.1 Compensation. During the term of this Agreement, Employer shall pay the amounts and provide the benefits described in this Section 3, and Employee agrees to accept such amounts and benefits in full payment for Employee’s services under this Agreement.

          3.2 Base Salary. Employer shall pay to Employee a base annual salary of $266,800 annually, payable in accordance with Employer’s standard payroll practices, less applicable withholding. At Employer’s sole discretion, Employee’s base salary may be increased, but not decreased. Notwithstanding the foregoing, beginning on January 1, 2006 and annually thereafter, the Employee’s annual salary then in effect shall be increased by at least the Consumer Price Index for Los Angeles, CA (or a reasonable proxy thereof).

          3.3 Bonus Plan. Except as described in Section 5.1 below, Employee is eligible to receive an annual bonus in the reasonable discretion of Employer. This discretionary bonus will be targeted at 50% of Employee’s base salary, based on achieving designated individual goals and milestones and the overall performance and profitability of Employer. The goals and milestones will be established and reevaluated on an annual basis by mutual agreement of Employee and the CEO, subject to review and approval by the Board or its Compensation Committee. In the first year of this Agreement, the goals and objectives related to the 2005 target bonus shall be established by June 30, 2005. The bonus will be based on a calendar year and shall be paid no later than April 30^th of the following year.

          3.4 Equity Incentive Plan.

          (a) Employee shall be entitled to participate in any stock option, stock bonus, phantom stock right, equity pool, or other such plans or arrangements, which may exist during the term of his employment, provided that Employee’s entitlement is not inconsistent with the terms of any such arrangement or plan.

          (b) Employee shall be granted options to purchase two hundred fifty-five thousand (255,000) shares of Employer’s common stock under the provisions of

Employer’s 2003 Stock Incentive Plan (“Plan”), upon approval by the Board. To the extent permissible such options shall be incentive stock options. The options will vest as follows: 20% on the first, second, third, fourth and fifth anniversaries of the Commencement Date.

          (c) Employee’s previous grant of options under the Plan shall continue to be outstanding and vest in accordance with the terms of such grant. For the avoidance of doubt, Employee’s Service (as defined in the Plan) will continue uninterrupted for so long as Employee is a director and/or an employee, or either of the foregoing.

          (d) Except as otherwise set forth herein, vesting of options will cease upon the termination of Employee’s employment with Employer.

          3.5 Fringe Benefits.

          (a) Employer shall provide to Employee, at Employer’s cost, all perquisites to which other senior executives of the Employer are generally entitled and such other perquisites which are suitable to the character of the Employee’s position with the Employer and adequate for the performance of his duties hereunder in accordance with Employer’s policy.

          (b) Upon satisfaction of the applicable eligibility requirements, Employee shall be provided with group medical and dental insurance through Employer’s plans, as well as any fringe benefit plan(s) as Employer may offer from time to time to its personnel. Employee’s spouse and any dependent children of Employee shall be covered under the Employer’s health care and dental plans at Employer’s cost. Employer will pay for term life insurance for the benefit of Employee in the amount of 1 ¹/2 times Employee’s annual base salary, subject to the standard physical examination that is required by the issuing insurance company. In addition, Employee will be provided with accidental death and disability and long-term disability insurance. Employee is also eligible to participate in Employer’s 401K plan.

          (c) To the extent legally permissible, the Employer shall not treat such amounts as income to the Employee.

          3.6 Paid Time Off. Employee shall accrue, on a daily basis, a total of four (4) workweeks of paid time off (PTO) per year following the date of this Agreement. This PTO shall be in addition to normal Company holidays, which shall be determined at the discretion of the Company from time to time. Any accrued but unused PTO will be paid to Employee, on a pro rata basis, at the time that his employment is terminated.

          3.7 Deduction from Compensation. Employer shall deduct and withhold from all compensation payable to Employee all amounts required to be deducted or withheld pursuant to any present or future law, ordinance, regulation, order, writ, judgment, or decree requiring such deduction and withholding.

     4. REIMBURSEMENT OF EXPENSES

          4.1 Travel and Other Expenses. Employer shall pay to or reimburse Employee for reasonable and necessary business, travel, promotional, professional continuing education and licensing costs (to the extent required), professional society membership fees, seminars and similar expenditures incurred by Employee for which Employee submits appropriate receipts and indicates the amount, date, location and business character in a timely manner.

          4.2 Liability Insurance. Employer shall provide Employee with officers and directors’ insurance and other liability insurance, consistent with usual and reasonable business practices to cover Employee against all insurable events related to his employment with Employer.

          4.3 Indemnification. Promptly upon written request from Employee, Employer shall indemnify, defend and hold harmless Employee, to the fullest extent under applicable law, for all defense costs, judgements, fines, settlements, losses, costs or expenses (including attorney’s fees, including fees representing Employee), arising out of Employee’s activities as an agent, employee, officer or director of Employer, or in any other capacity on behalf of or at the request of Employer. Employee shall have the right to approve of counsel selected to represent him (such approval not to be unreasonably withheld), and in the event a conflict of interest arises at any time Employer shall provide Employee with separate and independent counsel at Employer’s cost and expense. Notwithstanding the foregoing, Employer may not enter into any settlement, of any kind, of any claim, which requires Employee to admit liability or responsibility or to have any order or judgment entered against Employee without Employee’s consent.

     5. TERMINATION

          5.1 Termination With Good Cause; Resignation Without Good Reason. Employer may terminate Employee’s employment at any time, with or without notice or Good Cause (as defined below). If Employer terminates Employee’s employment with Good Cause, or if Employee resigns without Good Reason (as defined below), Employer shall pay Employee his salary prorated through the date of termination, at the rate in effect at the time notice of termination is given, together with any benefits accrued through the date of termination. Employer shall have no further obligations to Employee under this Agreement or any other agreement, and all unvested options will terminate.

          5.2 Termination Without Good Cause; Resignation with Good Reason. Employer shall have the right to terminate Employee’s employment under this Agreement without Good Cause at any time. Employee shall have the right to terminate his employment with notice and Good Reason. If Employer terminates Employee’s employment without Good Cause, or Employee resigns for Good Reason:

          (a) Employer shall pay Employee his salary prorated through the date of termination, at the rate in effect at the time notice of termination is given, together with any benefits accrued through the date o