EMPLOYMENT AGREEMENT

Exhibit 10.5

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of September 29, 2003, by and between Hythiam, Inc., a Delaware corporation (“Employer”), and Chuck Timpe, an individual (“Employee”).

RECITALS

     A. WHEREAS, Employee has experience and expertise applicable to employment with Employer to perform as the Chief Financial Officer of Employer, Employer has agreed to employ Employee and Employee has agreed to enter into such employment, 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 September 29, 2003 (“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”). After the expiration of the Initial Term, Employee shall be employed on an at-will basis, with either party able to terminate the employment, with or without cause and with or without notice.

     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 the Chief Financial Officer of Employer, reporting 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 powers and duties as may be prescribed from time to time by the CEO and Employer’s Board of Directors (“Board”).

          2.3 Standard of Performance. Employee agrees that he will at all times faithfully and industriously and to the best of his ability, experience and talents perform all of the duties that may be required of and from him pursuant to the terms of this Agreement. Such duties shall be performed at such place or places as the interests, needs, business and opportunities of Employer shall require or render advisable.

          2.4 Exclusive Service. Except as set forth in Attachment A, (a) Employee shall devote all of his business energies and abilities and all of his productive time to the performance of his duties under this Agreement (reasonable absences during holidays and vacations excepted), and shall not, without the prior written consent of Employer, render to others any service of any kind (whether or not for compensation) that, in the opinion of Employer, would materially interfere with the performance of his duties under this Agreement, and (b) Employee shall not, without the prior written consent of Employer, maintain any affiliation with, whether as an agent, consultant, employee, officer, director, trustee or otherwise, nor shall he directly or indirectly render any services of an advisory nature or otherwise to, or participate or engage in, any other business activity. Employee and Employer agree that those items set forth in Attachment A are subject to periodic review by Employer and in the event that Employer determines, in its sole discretion, that such obligations negatively impact Employer, Employer shall have the right to direct Employee to terminate such relationships.

     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 salary of $200,000 annually in equal semi-monthly installments, less applicable taxes. At Employer’s sole discretion, Employee’s base salary may be increased, but not decreased, annually. Notwithstanding the foregoing, commencing on January 1, 2005 and annually thereafter, the Base Salary shall be increased by at least the Consumer Price Index for Los Angeles, CA (or a reasonable proxy thereof).

          3.3 Discretionary Bonus. Except as described in Section 5.1 below, Employee is eligible to receive an annual bonus in the sole discretion of Employer. This discretionary bonus will be targeted at 50% of Employee’s base salary, and will be based on Employee achieving designated individual goals and milestones, and the overall performance and profitability of the Company. 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. To the extent that a discretionary bonus is granted, it will be based on a calendar year and shall be paid no later than April 30^th of the following year. The first annual bonus, to the extent granted at the sole discretion of the Company, shall be prorated based on the Commencement Date.

          3.4 Equity Incentive Plan.

               (a) Employee shall be granted options to purchase 300,000 shares of Employer’s common stock, at fair market value, under the provisions of Employer’s 2003 Stock Incentive Plan, upon approval by the Board. The options will vest as follows: 20% on June 26, 2004, and 20% on the second, third, fourth and fifth anniversaries thereof.

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

          3.5 Fringe Benefits. Subject to Section 3.7 and upon satisfaction of the applicable eligibility requirements, Employee and Employee’s family shall be provided with group medical and dental insurance and group dental coverage through Employer’s plans. Medical and dental benefits will commence on the first day of the month following the Commencement Date. In the event that no benefit plans are in place at that time, the Company will reimburse Employee for COBRA coverage until such time as Employee is covered under the Company’s group medical and dental plans. Employer will pay for $300,000 of term life insurance for the benefit of Employee, 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 beginning on the first day of the month following the Commencement Date.

          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, provided, however, that Employee’s accrued and unused PTO may not exceed a total of seven (7) workweeks. This PTO shall be in addition to normal Company holidays, which shall be determined at the discretion of the Company from time to time. Thereafter, Employee will not continue to accrue PTO benefits until he has used enough PTO time to fall below this maximum amount. Any accrued but unused PTO will be paid to Employee, on a pro rata basis, at the time that his employment is terminated. In addition to PTO, the Employee shall be entitled to normal Company holidays.

          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 those travel, promotional, professional continuing education and licensing costs (to the extent required), professional society membership fees, seminars and similar expenditures incurred by Employee which Employer determines are reasonably necessary for the proper discharge of Employee’s duties under this Agreement and 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, or other liability insurance, consistent with its usual 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 Employee, to the fullest extent under applicable law, for all judgements, fines, settlements, losses, costs or expenses (including attorney’s fees), 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. Such agreement by Employer shall not be deemed to impair any other obligation of Employer respecting indemnification of Employee otherwise arising out of this or any other agreement or promise of Employer or under any statute.

     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. 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 of termination;

               (b) Employer shall pay Employee in a lump sum an amount equal to one (1) year’s salary (at the rate in effect at the time of termination) plus a bonus equal to 100% of the targeted bonus;

               (c) All of Employee’s unvested stock options will vest immediately; and

               (d) In addition to any rights under COBRA, the term for continued medical benefits provided by Employer shall continue for a period of one year from the date of termination, provided that coverage will terminate sooner if Employee becomes eligible for coverage under another employer’s plan.

          To be eligible for the compensation provided for in Section 5.2(b), (c) and (d) above, Employee must execute a full and complete release of any and all claims against

Employer in the standard form then used by Employer (“Release”). Employer shall have no further obligations to Employee under this Agreement or any other agreement.

          5.3 Good Cause. For purposes of this Agreement, a termination shall be for “Good Cause” if Employee, in the subjective, good faith opinion of Employer, shall:

               (a) Commit an act of fraud, moral turpitude, misappropriation of funds or embezzlement in connection with his duties;

               (b) Breach Employee’s fiduciary duty to Employer, including, but not limited to, acts of self-dealing (whether or not for personal profit);

               (c) Materially breach this Agreement, the Confidentiality Agreement (defined below), or Employer’