exv10w1



 





Exhibit 10.1




SECURITIES PURCHASE AGREEMENT




     This Securities Purchase Agreement (this “Agreement”) is dated as of November 6, 2007,
between Hythiam, Inc., a Delaware corporation (the “Company”), and each purchaser
identified on the signature pages hereto (each, including its successors and assigns, a
“Purchaser” and collectively the “Purchasers”).



     WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to an
effective registration statement under the Securities Act of 1933, as amended (the “Securities
Act”), the Company desires to issue and sell to each Purchaser, and each Purchaser, severally
and not jointly, desires to purchase from the Company, securities of the Company as more fully
described in this Agreement.



     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for
other good and valuable consideration the receipt and adequacy of which are hereby acknowledged,
the Company and each Purchaser agree as follows:



ARTICLE I.

DEFINITIONS




     1.1 Definitions. In addition to the terms defined elsewhere in this Agreement, for
all purposes of this Agreement, the following terms have the meanings set forth in this Section
1.1:




     “Action” shall have the meaning ascribed to such term in Section 3.1(j).




     “Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a Person as
such terms are used in and construed under Rule 405 under the Securities Act. With respect
to a Purchaser, any investment fund or managed account that is managed on a discretionary
basis by the same investment manager as such Purchaser will be deemed to be an Affiliate of
such Purchaser.




     “Board of Directors” means the board of directors of the Company.




     “Business Day” means any day except any Saturday, any Sunday, any day which is
a federal legal holiday in the United States or any day on which banking institutions in the
State of New York are authorized or required by law or other governmental action to close.




     “Closing” means the closing of the purchase and sale of the Securities pursuant
to Section 2.1.




     “Closing Date” means the Trading Day when all of the Transaction Documents have
been executed and delivered by the applicable parties thereto, and all conditions precedent
to (i) the Purchasers’ obligations to pay the Subscription Amount and (ii) the Company’s
obligations to deliver the Securities have been satisfied or waived.



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     “Closing Price” means on any particular date (a) the last reported closing bid
price per share of Common Stock on such date on the Trading Market (as reported by Bloomberg
L.P. at 4:15 p.m. (New York City time)), or (b) if there is no such price on such date, then
the closing bid price on the Trading Market on the date nearest preceding such date (as
reported by Bloomberg L.P. at 4:15 p.m. (New York City time)), or (c) if the Common Stock
is not then listed or quoted on a Trading Market and if prices for the Common Stock are then
reported in the “pink sheets” published by Pink Sheets LLC (or a similar organization or
agency succeeding to its functions of reporting prices), the most recent bid price per share
of the Common Stock so reported, or (d) if the shares of Common Stock are not then publicly
traded the fair market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by the Purchasers of a majority in interest of the Shares
then outstanding and reasonably acceptable to the Company, the fees and expenses of which
shall be paid by the Company.




     “Commission” means the Securities and Exchange Commission.




     “Common Stock” means the common stock of the Company, par value $.0001 per
share, and any other class of securities into which such securities may hereafter be
reclassified or changed into.




     “Common Stock Equivalents” means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock,
including, without limitation, any debt, preferred stock, rights, options, warrants or other
instrument that is at any time convertible into or exercisable or exchangeable for, or
otherwise entitles the holder thereof to receive, Common Stock.




     “Company Counsel” means Dreier Stein & Kahan, LLP, with offices located at 1620
26th Street, Sixth Floor, North Tower, Santa Monica, California 90404, Attention:
John C. Kirkland, Esq.




     “CompCare” means Comprehensive Care Corporation, a Delaware corporation.




     “Disclosure Schedules” means the Disclosure Schedules of the Company delivered
concurrently herewith.




     “Evaluation Date” shall have the meaning ascribed to such term in Section
3.1(r).




     “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.




     “Exempt Issuance” means the issuance of (a) shares of Common Stock or options
to employees, officers or directors of the Company pursuant to any stock or option plan duly
adopted for such purpose, by a majority of the non-employee members of the Board of
Directors or a majority of the members of a committee of non-employee directors established
for such purpose, (b) securities upon the exercise or exchange of or conversion of any
Securities issued hereunder and/or other securities exercisable or exchangeable for or
convertible into shares of Common Stock issued and outstanding on the date of this
Agreement, provided that such securities have not been amended since the



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date of this Agreement to increase the number of such securities or to decrease the
exercise, exchange or conversion price of such securities and (c) securities issued pursuant
to acquisitions or strategic transactions approved by a majority of the disinterested
directors of the Company, provided that any such issuance shall only be to a Person which
is, itself or through its subsidiaries, an operating company in a business synergistic with
the business of the Company and in which the Company receives benefits in addition to the
investment of funds, but shall not include a transaction in which the Company is issuing
securities primarily for the purpose of raising capital or to an entity whose primary
business is investing in securities.




     “FWS” means Feldman Weinstein & Smith LLP with offices located at 420 Lexington
Avenue, Suite 2620, New York, New York 10170-0002.




     “GAAP” shall have the meaning ascribed to such term in Section 3.1(h).




     “Indebtedness” shall have the meaning ascribed to such term in Section 3.1(z).




     “Intellectual Property Rights” shall have the meaning ascribed to such term in
Section 3.1(o).




     “Liens” means a lien, charge, security interest, encumbrance, right of first
refusal, preemptive right or other restriction.




     “Material Adverse Effect” shall have the meaning assigned to such term in
Section 3.1(b).




     “Material Permits” shall have the meaning ascribed to such term in Section
3.1(m).




     “Participation Maximum” shall have the meaning ascribed to such term in Section
4.12.




     “Per Share Purchase Price” equals $4.79, subject to adjustment for
reverse and forward stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after the date of this Agreement.




     “Person” means an individual or corporation, partnership, trust, incorporated
or unincorporated association, joint venture, limited liability company, joint stock
company, government (or an agency or subdivision thereof) or other entity of any kind.




     “Pre-Notice” shall have the meaning ascribed to such term in Section 4.12.




     “Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an informal investigation or partial proceeding, such as a
deposition), whether commenced or threatened.




     “Prospectus” means the final prospectus filed for the Registration Statement.



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     “Prospectus Supplement” means the supplement to the Prospectus complying with
Rule 424(b) of the Securities Act that is filed with the Commission and delivered by the
Company to each Purchaser at the Closing.




     “Purchaser Party” shall have the meaning ascribed to such term in Section 4.8.




     “Registration Statement” means the effective registration statement with the
Commission, File No. 333-145906, which registers the sale of the Shares and the Warrant
Shares by the Purchasers.




     “Required Approvals” shall have the meaning ascribed to such term in Section
3.1(e).




     “Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same effect as such
Rule.




     “SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).




     “Securities” means the Shares, the Warrants and the Warrant Shares.




     “Securities Act” means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.




     “Shares” means the shares of Common Stock issued or issuable to each Purchaser
pursuant to this Agreement.




     “Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO
under the Exchange Act (but shall not be deemed to include the location and/or reservation
of borrowable shares of Common Stock).




     “Subscription Amount” means, as to each Purchaser, the aggregate amount to be
paid for Shares and Warrants purchased hereunder as specified below such Purchaser’s name on
the signature page of this Agreement and next to the heading “Subscription Amount,” in
United States dollars and in immediately available funds.




     “Subsequent Financing” shall have the meaning ascribed to such term in Section
4.12.




     “Subsequent Financing Notice” shall have the meaning ascribed to such term in
Section 4.12.




     “Subsidiary” means any subsidiary of the Company as set forth on Schedule
3.1(a), and shall, where applicable, include any subsidiary of the Company formed or
acquired after the date hereof.



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     “Trading Day” means a day on which the New York Stock Exchange is open for
trading.




     “Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the American Stock Exchange,
the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the
New York Stock Exchange or the OTC Bulletin Board.




     “Transaction Documents” means this Agreement, the Warrants and any other
documents or agreements executed in connection with the transactions contemplated hereunder.




     “Transfer Agent” means American Stock Transfer & Trust Company, the current
transfer agent of the Company, with a mailing address of 59 Maiden Lane, New York, New York
10038 and a facsimile number of (718) 765-8724, and any successor transfer agent of the
Company.




     “VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed or quoted for
trading as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City
time) to 4:02 p.m. (New York City time); (b) if the OTC Bulletin Board is not a Trading
Market, the volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then quoted for
trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in
the “Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per share of the
Common Stock so reported; or (d) in all other cases, the fair market value of a share of
Common Stock as determined by an independent appraiser selected in good faith by the
Purchasers of a majority in interest of the Shares then outstanding and reasonably
acceptable to the Company, the fees and expenses of which shall be paid by the Company.




     “Warrants” means, collectively, the Common Stock purchase warrants delivered to
the Purchasers at the Closing in accordance with Section 2.2(a) hereof, which Warrants shall
be exercisable immediately and have a term of exercise equal to 5 years, and be in the form
of Exhibit A attached hereto.




     “Warrant Shares” means the shares of Common Stock issuable upon exercise of the
Warrants.



ARTICLE II.

PURCHASE AND SALE




     2.1 Closing. On the Closing Date, upon the terms and subject to the conditions set
forth herein, substantially concurrent with the execution and delivery of this Agreement by the
parties hereto, the Company agrees to sell, and the Purchasers, severally and not jointly, agree to



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purchase, up to an aggregate of $50 million of Shares and Warrants. Each Purchaser shall
deliver to the Company, via wire transfer or a certified check, immediately available funds equal
to its Subscription Amount and the Company shall deliver to each Purchaser its respective Shares
and a Warrant as determined pursuant to Section 2.2(a), and the Company and each Purchaser shall
deliver the other items set forth in Section 2.2 deliverable at the Closing. Upon satisfaction of
the covenants and conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the
offices of Company Counsel or such other location as the parties shall mutually agree.



     2.2 Deliveries. (a) On or prior to the Closing Date, the Company shall deliver
or cause to be delivered to each Purchaser the following:




     (i) this Agreement duly executed by the Company;




     (ii) a legal opinion of Company Counsel, substantially in the form of
Exhibit B attached hereto;




     (iii) a copy of the irrevocable instructions to the Company’s transfer agent
instructing the transfer agent to deliver via the Depository Trust Company Deposit
Withdrawal Agent Commission System (“DWAC”) Shares equal to such Purchaser’s
Subscription Amount divided by the Per Share Purchase Price, registered in the name
of such Purchaser;




     (iv) a Warrant registered in the name of such Purchaser to purchase up to a
number of shares of Common Stock equal to 25% of such Purchaser’s Subscription
Amount divided by the Per Share Purchase Price, with an exercise price equal to
$5.75 per share, subject to adjustment therein (such Warrant certificate may
be delivered within three Trading Days of the Closing Date); and




     (v) the Prospectus and Prospectus Supplement (which may be delivered in
accordance with Rule 172 under the Securities Act).




     (b) On or prior to the Closing Date, each Purchaser shall deliver or cause to be
delivered to the Company the following:




     (i) this Agreement duly executed by such Purchaser; and




     (ii) such Purchaser’s Subscription Amount by wire transfer to the account as
specified in writing by the Company.



     2.3 Closing Conditions. 




     (a) The obligations of the Company hereunder in connection with the Closing are subject
to the following conditions being met:




     (i) the accuracy in all material respects on the Closing Date of the
representations and warranties of the Purchasers contained herein;



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     (ii) all obligations, covenants and agreements of each Purchaser required to be
performed at or prior to the Closing Date shall have been performed; and




     (iii) the delivery by each Purchaser of the items set forth in Section 2.2(b)
of this Agreement.




     (b) The respective obligations of the Purchasers hereunder in connection with the
Closing are subject to the following conditions being met:




     (i) the accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained herein;




     (ii) all obligations, covenants and agreements of the Company required to be
performed at or prior to the Closing Date shall have been performed;




     (iii) the delivery by the Company of the items set forth in Section 2.2(a) of
this Agreement;




     (iv) there shall have been no Material Adverse Effect with respect to the
Company since the date hereof; and




     (v) from the date hereof to the Closing Date, trading in the Common Stock shall
not have been suspended by the Commission or the Company’s principal Trading Market
(except for any suspension of trading of limited duration agreed to by the Company,
which suspension shall be terminated prior to the Closing), and, at any time prior
to the Closing Date, trading in securities generally as reported by Bloomberg L.P.
shall not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by such service, or on any
Trading Market, nor shall a banking moratorium have been declared either by the
United States or New York State authorities nor shall there have occurred any
material outbreak or escalation of hostilities or other national or international
calamity of such magnitude in its effect on, or any material adverse change in, any
financial market which, in each case, in the reasonable judgment of each Purchaser,
makes it impracticable or inadvisable to purchase the Securities at the Closing.



ARTICLE III.

REPRESENTATIONS AND WARRANTIES




     3.1 Representations and Warranties of the Company. Except as set forth in the Disclosure
Schedules, which Disclosure Schedules shall be deemed a part hereof and shall qualify any
representation or otherwise made herein to the extent of the disclosure contained in the
corresponding section of the Disclosure Schedules, the Company hereby makes the following
representations and warranties to each Purchaser:




     (a) Subsidiaries. All of the subsidiaries of the Company are set forth on
Schedule 3.1(a). The Company owns, directly or indirectly, all of the capital stock
or



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other equity interests of each direct Subsidiary, free and clear of any Liens except as
set forth in Schedule 3.1(z). The Company owns an equity interest in CompCare as
set forth in the SEC Reports. All of the issued and outstanding shares of capital stock of
each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive
and similar rights to subscribe for or purchase securities.




     (b) Organization and Qualification. The Company and each of the Subsidiaries
is an entity duly incorporated or otherwise organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization (as applicable),
with the requisite power and authority to own and use its properties and assets and to carry
on its business as currently conducted. Neither the Company nor any Subsidiary is in
violation or default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. Each of the Company and
the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign
corporation or other entity in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except where the
failure to be so qualified or in good standing, as the case may be, could not reasonably be
expected to have or result in (i) a material adverse effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material adverse effect on the results of
operations, assets, properties, business or financial condition of the Company and the
Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability
to perform in any material respect on a timely basis its obligations under any Transaction
Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no Proceeding
has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to
revoke, limit or curtail such power and authority or qualification.




     (c) Authorization; Enforcement. The Company has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by each of the
Transaction Documents and otherwise to carry out its obligations hereunder and thereunder.
The execution and delivery of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby have been duly
authorized by all necessary action on the part of the Company and no further action is
required by the Company, the Board of Directors or the Company’s stockholders in connection
therewith other than in connection with the Required Approvals. Each Transaction Document
has been (or upon delivery will have been) duly executed by the Company and, when delivered
in accordance with the terms hereof and thereof, will constitute the valid and binding
obligation of the Company enforceable against the Company in accordance with its terms,
except (i) as limited by general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting enforcement of
creditors’ rights generally, (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law.




     (d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company, the issuance and sale of the Securities and the consummation by
the Company of the other transactions contemplated hereby and



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thereby do not and will not (i) conflict with or violate any provision of the Company’s
or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational
or charter documents, or (ii) conflict with, or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, result in the creation of any
Lien upon any of the properties or assets of the Company or any Subsidiary, or give to
others any rights of termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument
(evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the
Company or any Subsidiary is a party or by which any property or asset of the Company or any
Subsidiary is bound or affected, or (iii) subject to the Required Approvals, conflict with
or result in a violation of any law, rule, regulation, order, judgment, injunction, decree
or other restriction of any court or governmental authority to which the Company or a
Subsidiary is subject (including federal and state securities laws and regulations), or by
which any property or asset of the Company or a Subsidiary is bound or affected; except in
the case of each of clauses (ii) and (iii), such as could not reasonably be expected to have
or result in a Material Adverse Effect.




     (e) Filings, Consents and Approvals. The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any filing or
registration with, any court or other federal, state, local or other governmental authority
or other Person in connection with the execution, delivery and performance by the Company of
the Transaction Documents, other than (i) filings required pursuant to Section 4.4 of this
Agreement, (ii) the filing with the Commission of the Prospectus Supplement, (iii)
application(s) to each applicable Trading Market for the listing of the Securities for
trading thereon in the time and manner required thereby and (iv) such filings as are
required to be made under applicable state securities laws (collectively, the “Required
Approvals”).




     (f) Issuance of the Securities; Registration. The Securities are duly
authorized and, when issued and paid for in accordance with the applicable Transaction
Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of
all Liens imposed by the Company. The Warrant Shares, when issued and paid for in
accordance with the terms of the Warrants, will be validly issued, fully paid and
nonassessable, free and clear of all Liens imposed by the Company. The Company has reserved
from its duly authorized capital stock the maximum number of shares of Common Stock issuable
pursuant to this Agreement and the Warrants. The Company has prepared and filed the
Registration Statement in conformity with the requirements of the Securities Act, which
became effective on October 5, 2007 (the “Effective Date”), including the
Prospectus, and such amendments and supplements thereto as may have been required to the
date of this Agreement. The Registration Statement is effective under the Securities Act
and no stop order preventing or suspending the effectiveness of the Registration Statement
or suspending or preventing the use of the Prospectus has been issued by the Commission and
no proceedings for that purpose have been instituted or, to the knowledge of the Company,
are threatened by the Commission. The Company, if required by the rules and regulations of
the Commission, proposes to file the Prospectus, with the SEC pursuant to Rule 424(b). At
the time the Registration Statement and any



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amendments thereto became effective, at the date of this Agreement and at the Closing
Date, the Registration Statement and any amendments thereto conformed and will conform in
all material respects to the requirements of the Securities Act and did not and will not
contain any untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading; and the
Prospectus and any amendments or supplements thereto, at time the Prospectus or any
amendment or supplement thereto was issued and at the Closing Date, conformed and will
conform in all material respects to the requirements of the Securities Act and did not and
will not contain an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the circumstances under which
they were made, not misleading.




     (g) Capitalization. The capitalization of the Company is as set forth in the
section of the Prospectus Supplement entitled “Capitalization.” The Company has not issued
any capital stock since its most recently filed periodic report under the Exchange Act,
other than pursuant to the exercise of employee stock options, the issuance of shares of
Common Stock under the Company’s incentive compensation plans, the issuance of shares of
Common Stock to employees pursuant to the Company’s employee stock purchase plans, and
pursuant to the conversion or exercise of Common Stock Equivalents outstanding as of the
date of the most recently filed periodic report under the Exchange Act. No Person has any
right of first refusal, preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by the Transaction Documents. Except as set
forth in the SEC Reports or as a result of the purchase and sale of the Securities, there
are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of
any character whatsoever relating to, or securities, rights or obligations convertible into
or exercisable or exchangeable for, or giving any Person any right to subscribe for or
acquire, any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any Subsidiary is or may become bound to issue
additional shares of Common Stock or Common Stock Equivalents. Except as disclosed in
Schedule 3.1(z) hereto, the issuance and sale of the Securities will not obligate
the Company to issue shares of Common Stock or other securities to any Person (other than
the Purchasers) and will not result in a right of any holder of Company securities to adjust
the exercise, conversion, exchange or reset price under any of such securities. All of the
outstanding shares of capital stock of the Company are validly issued, fully paid and
nonassessable, have been issued in compliance with all federal and state securities laws,
and none of such outstanding shares was issued in violation of any preemptive rights or
similar rights to subscribe for or purchase securities. No further approval or
authorization of any stockholder, the Board of Directors or others is required for the
issuance and sale of the Securities. There are no stockholders agreements, voting
agreements or other similar agreements with respect to the Company’s capital stock to which
the Company is a party or, to the knowledge of the Company, between or among any of the
Company’s stockholders.




     (h) SEC Reports; Financial Statements. The Company has filed all reports,
schedules, forms, statements and other documents required to be filed by the Company under
the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d)
thereof, for the two years preceding the date hereof (or such shorter period as the



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Company was required by law or regulation to file such material) (the foregoing
materials, including the exhibits thereto and documents incorporated by reference therein,
together with the Prospectus and the Prospectus Supplement, being collectively referred to
herein as the “SEC Reports”) on a timely basis or has received a valid extension of
such time of filing and has filed any such SEC Reports prior to the expiration of any such
extension. As of their respective dates, the SEC Reports complied in all material respects
with the requirements of the Securities Act and the Exchange Act, as applicable, and none of
the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the SEC Reports comply in
all material respects with applicable accounting requirements and the rules and regulations
of the Commission with respect thereto as in effect at the time of filing. Such financial
statements have been prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis during the periods involved (“GAAP”),
except as may be otherwise specified in such financial statements or the notes thereto and
except that unaudited financial statements may not contain all footnotes required by GAAP,
and fairly present in all material respects the financial position of the Company and its
consolidated subsidiaries as of and for the dates thereof and the results of operations and
cash flows for the periods then ended, subject, in the case of unaudited statements, to
normal, immaterial, year-end audit adjustments.




     (i) Material Changes; Undisclosed Events, Liabilities or Developments. Since
the date of the latest audited financial statements included within the SEC Reports, except
as specifically disclosed in the Prospectus Supplement or a subsequent SEC Report filed
prior to the date hereof, (i) there has been no event, occurrence or development that has
had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the
Company has not incurred any liabilities (contingent or otherwise) other than (A) trade
payables and accrued expenses incurred in the ordinary course of business consistent with
past practice and (B) liabilities not required to be reflected in the Company’s financial
statements pursuant to GAAP or disclosed in filings made with the Commission, (iii) the
Company has not altered its method of accounting, (iv) the Company has not declared or made
any dividend or distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital stock and
(v) the Company has not issued any equity securities to any officer, director or Affiliate,
except pursuant to existing Company stock option plans. The Company does not have pending
before the Commission any request for confidential treatment of information. Except for the
issuance of the Securities contemplated by this Agreement, no event, liability or
development has occurred or exists with respect to the Company or its Subsidiaries or their
respective business, properties, operations or financial condition, that would be required
to be disclosed by the Company under applicable securities laws at the time this
representation is made or deemed made that has not been publicly disclosed at least 1
Trading Day prior to the date that this representation is made.




     (j) Litigation. There is no action, suit, inquiry, notice of violation,
proceeding or investigation pending or, to the knowledge of the Company, threatened against
or



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affecting the Company, any Subsidiary or any of their respective properties before or
by any court, arbitrator, governmental or administrative agency or regulatory authority
(federal, state, county, local or foreign) (collectively, an “Action”) which (i)
adversely affects or challenges the legality, validity or enforceability of any of the
Transaction Documents or the Securities or (ii) could reasonably be expected to have or
result in a Material Adverse Effect. There has not been, and to the knowledge of the
Company, there is not pending or contemplated, any investigation by the Commission involving
the Company or any current or former director or officer of the Company. The Commission has
not issued any stop order or other order suspending the effectiveness of any registration
statement filed by the Company or any Subsidiary under the Exchange Act or the Securities
Act.




     (k) Labor Relations. No material labor dispute exists or, to the knowledge of
the Company, is imminent with respect to the employees of the Company which could reasonably
be expected to result in a Material Adverse Effect. None of the Company’s or its
Subsidiaries’ employees is a member of a union that relates to such employee’s relationship
with the Company or such Subsidiary, and neither the Company nor any of its Subsidiaries is
a party to a collective bargaining agreement, and the Company and its Subsidiaries believe
that their relationships with their employees are generally good. No executive officer, to
the knowledge of the Company, is, or is now expected to be, in violation of any material
term of any employment contract, confidentiality, disclosure or proprietary information
agreement or non-competition agreement relating to the Company, and, to the knowledge of the
Company, the continued employment of each such executive officer does not subject the
Company or any of its Subsidiaries to any liability with respect to any of the foregoing
matters which could reasonably be expected to result in a Material Adverse Effect. The
Company and its Subsidiaries are in substantial compliance with all U.S. federal, state and
local laws and regulations relating to employment and employment practices, terms and
conditions of employment and wages and hours, except where the failure to be in compliance
could not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.




     (l) Compliance. Neither the Company nor any Subsidiary (i) is in default under
or in violation of (and no event has occurred that has not been waived that, with notice or
lapse of time or both, would result in a default by the Company or any Subsidiary under),
nor has the Company or any Subsidiary received notice of a claim that it is in default under
or that it is in violation of, any indenture, loan or credit agreement or any other
agreement or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in violation of
any order of any court, arbitrator or governmental body, or (iii) is in material violation
of any statute, rule or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws applicable to its business and all
such laws that affect the environment, except in each case as could not reasonably be
expected to have or result in a Material Adverse Effect.




     (m) Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal, state, local or
foreign regulatory authorities necessary to conduct their respective businesses as



12









 







described in the SEC Reports, except where the failure to possess such permits could
not reasonably be expected to result in a Material Adverse Effect (“Material
Permits”), and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.




     (n) Title to Assets. The Company and the Subsidiaries have good and marketable
title in all personal property owned by them that is material to the business of the Company
and the Subsidiaries, in each case free and clear of all Liens, except for Liens as do not
materially affect the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company and the Subsidiaries and Liens
for the payment of federal, state or other taxes, the payment of which is neither delinquent
nor subject to penalties. Any real property and facilities held under lease by the Company
and the Subsidiaries are held by them under valid, subsisting and enforceable leases with
which the Company and the Subsidiaries are in compliance.




     (o) Patents and Trademarks. The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark applications, service
marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual
property rights and similar rights necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to so have could
reasonably be expected to have a Material Adverse Effect (collectively, the
“Intellectual Property Rights”). Neither the Company nor any Subsidiary has
received a notice (written or otherwise) that any of the Intellectual Property Rights used
by the Company or any Subsidiary violates or infringes upon the rights of any Person. To
the knowledge of the Company, all such Intellectual Property Rights are enforceable and
there is no existing infringement by another Person of any of the Intellectual Property
Rights. The Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their intellectual properties, except where
failure to do so could not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect.




     (p) Insurance. The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which the Company and the Subsidiaries are
engaged, including, but not limited to, directors and officers insurance coverage. Neither
the Company nor any Subsidiary reasonably believes that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business.




     (q) Transactions With Affiliates and Employees. Except as set forth in the SEC
Reports or the Prospectus Supplement, none of the officers or directors of the Company and,
to the knowledge of the Company, none of the employees of the Company is presently a party
to any transaction with the Company or any Subsidiary (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or personal property
to or from, or otherwise requiring payments to or from any officer,



13









 







director or such employee or, to the knowledge of the Company, any entity in which any
officer, director, or any such employee has a substantial interest or is an officer,
director, trustee or partner, in each case in excess of $60,000 other than for (i) payment
of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred
on behalf of the Company and (iii) other employee benefits, including stock option
agreements under any stock option plan of the Company.




     (r) Sarbanes-Oxley; Internal Accounting Controls. The Company is in material
compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it
as of the Closing Date. The Company and the Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability, (iii) access to assets is
permitted only in accordance with management’s general or specific authorization, and (iv)
the recorded accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences. The Company has
established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the Company and designed such disclosure controls and procedures to
ensure that information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Commission’s rules and forms. The Company’s certifying
officers have evaluated the effectiveness of the Company’s disclosure controls and
procedures as of the end of the period covered by the Company’s most recently filed periodic
report under the Exchange Act (such date, the “Evaluation Date”). The Company
presented in its most recently filed periodic report under the Exchange Act the conclusions
of the certifying officers about the effectiveness of the disclosure controls and procedures
based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have
been no changes in the Company’s internal control over financial reporting (as such term is
defined in the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.




     (s) Placement Agent Fees. Placement agent fees of up to 7% of the gross
proceeds of the aggregate Subscription Amount of the Purchasers will be payable by the
Company with respect to the transactions contemplated by the Transaction Documents. The
Purchasers shall have no obligation with respect to any such fees or with respect to any
claims made by or on behalf of any broker, financial advisor, consultant, finder, placement
agent, or investment banker to the Company for fees of a type contemplated in this Section
that may be due in connection with the transactions contemplated by the Transaction
Documents.




     (t) Investment Company. The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Securities, will not be or be an Affiliate of,
an “investment company” within the meaning of the Investment Company Act of 1940, as
amended. The Company shall conduct its business in a manner so that it will not become
subject to the Investment Company Act of 1940, as amended.



14









 






     (u) Registration Rights. Except as disclosed in Schedule 3.1(u)
hereto, no Person has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company.




     (v) Listing and Maintenance Requirements. The Common Stock is registered
pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has taken no action
designed to, or which to its knowledge is likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act nor has the Company received any
notification that the Commission is contemplating terminating such registration. The
Company has not, in the 12 months preceding the date hereof, received notice from any
Trading Market on which the Common Stock is or has been listed or quoted to the effect that
the Company is not in compliance with the listing or maintenance requirements of such
Trading Market. The Company is, and reasonably believes that it will in the foreseeable
future continue to be, in compliance with all such listing and maintenance requirements.




     (w) Application of Takeover Protections. The Company and the Board of
Directors have taken all necessary action, if any, in order to render inapplicable any
control share acquisition, business combination, poison pill (including any distribution
under a rights agreement) or other similar anti-takeover provision under the Company’s
certificate of incorporation (or similar charter documents) or the laws of its state of
incorporation that is or could become applicable to the Purchasers as a result of the
Purchasers and the Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation as a result of the Company’s issuance of
the Securities and the Purchasers’ ownership of the Securities.




     (x) Disclosure. Except with respect to the material terms and conditions of
the transactions contemplated by the Transaction Documents, the Company confirms that
neither it nor any other Person acting on its behalf has provided any of the Purchasers or
their agents or counsel with any information that it believes constitutes or might
constitute material, non-public information which is not otherwise disclosed in the
Prospectus Supplement. The Company understands and confirms that the Purchasers will rely
on the foregoing representation in effecting transactions in securities of the Company. All
disclosure furnished by or on behalf of the Company to the Purchasers regarding the Company,
its business and the transactions contemplated hereby, including the Disclosure Schedules to
this Agreement, is true and correct and does not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not misleading. The
press releases disseminated by the Company during the twelve months preceding the date of
this Agreement taken as a whole do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were made and when
made, not misleading. The Company acknowledges and agrees that no Purchaser makes or has
made any representations or warranties with respect to the transactions contemplated hereby
other than those specifically set forth in Section 3.2 hereof.



15









 






     (y) No Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company, nor any of its
Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made
any offers or sales of any security or solicited any offers to buy any security, under
circumstances that would cause this offering of the Securities to be integrated with prior
offerings by the Company for purposes of any applicable shareholder approval provisions of
any Trading Market on which any of the securities of the Company are listed or designated.




     (z) Solvency. Based on the consolidated financial condition of the Company as
of the Closing Date, after giving effect to the receipt by the Company of the proceeds from
the sale of the Securities hereunder, (i) the fair saleable value of the Company’s assets
exceeds the amount that will be required to be paid on or in respect of the Company’s
existing debts and other liabilities (including known contingent liabilities) as they
mature, (ii) the Company’s assets do not constitute unreasonably small capital to carry on
its business as now conducted and as proposed to be conducted including its capital needs
taking into account the particular capital requirements of the business conducted by the
Company, and projected capital requirements and capital availability thereof, and (iii) the
current cash flow of the Company, together with the proceeds the Company would receive, were
it to liquidate all of its assets, after taking into account all anticipated uses of the
cash, would be sufficient to pay all amounts on or in respect of its liabilities when such
amounts are required to be paid. The Company does not intend to incur debts beyond its
ability to pay such debts as they mature (taking into account the timing and amounts of cash
to be payable on or in respect of its debt). The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for reorganization or liquidation
under the bankruptcy or reorganization laws of any jurisdiction within one year from the
Closing Date. Schedule 3.1(z) sets forth as of the date thereof all outstanding
secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the
Company or any Subsidiary has commitments. For the purposes of this Agreement,
“Indebtedness” means (a) any liabilities for borrowed money or amounts owed in
excess of $100,000 (other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent obligations in respect of
indebtedness of others, whether or not the same are or should be reflected in the Company’s
balance sheet (or the notes thereto), except guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary course of
business; and (c) the present value of any lease payments in excess of $100,000 due under
leases required to be capitalized in accordance with GAAP. Neither the Company nor any
Subsidiary is in default with respect to any Indebtedness.




     (aa) Tax Status. Except for matters that would not, individually or in the
aggregate, reasonably be expected to have or result in a Material Adverse Effect, the
Company and each Subsidiary has filed all necessary federal, state and foreign income and
franchise tax returns and has paid or accrued all taxes shown as due thereon, and the
Company has no knowledge of a tax deficiency which has been asserted or threatened against
the Company or any Subsidiary.



16









 






     (bb) Foreign Corrupt Practices. Neither the Company, nor to the knowledge of
the Company, any agent or other person acting on behalf of the Company, has (i) directly or
indirectly, used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful
payment to foreign or domestic government officials or employees or to any foreign or
domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully
any contribution made by the Company (or made by any person acting on its behalf of which
the Company is aware) which is in violation of law, or (iv) violated in any material respect
any provision of the Foreign Corrupt Practices Act of 1977, as amended.




     (cc) Accountants. The Company’s accounting firm is BDO Seidman, LLP. To the
knowledge and belief of the Company, such accounting firm (i) is a registered public
accounting firm as required by the Exchange Act and (ii) shall express its opinion with
respect to the financial statements to be included in the Company’s Annual Report on Form
10-K for the year ending December 31, 2006.




     (dd) Acknowledgment Regarding Purchasers’ Purchase of Securities. The Company
acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an
arm’s length purchaser with respect to the Transaction Documents and the transactions
contemplated thereby. The Company further acknowledges that no Purchaser is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with respect to
the Transaction Documents and the transactions contemplated thereby and any advice given by
any Purchaser or any of their respective representatives or agents in connection with the
Transaction Documents and the transactions contemplated thereby is merely incidental to the
Purchasers’ purchase of the Securities. The Company further represents to each Purchaser
that the Company’s decision to enter into this Agreement and the other Transaction Documents
has been based solely on the independent evaluation of the transactions contemplated hereby
by the Company and its representatives.




     (ee) Regulation M Compliance. The Company has not, and to its knowledge no one
acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or
to result in the stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased,
or, paid any compensation for soliciting purchases of, any of the Securities, or (iii) paid
or agreed to pay to any Person any compensation for soliciting another to purchase any other
securities of the Company, other than, in the case of clauses (ii) and (iii), compensation
paid to the Company’s placement agent in connection with the placement of the Securities.




     (ff) FDA. There is no pending, completed or, to the Company’s knowledge,
threatened, action (including any lawsuit, arbitration, or legal or administrative or
regulatory proceeding, charge, complaint, or investigation) against the Company or any of
its Subsidiaries by the U.S. Food and Drug Administration (“FDA”) under the Federal
Food, Drug and Cosmetic Act, as amended, and the regulations thereunder (“FDCA”) or
similar laws, rules or regulations, and none of the Company or any of its Subsidiaries has
received any notice, warning letter or other communication from the FDA or any similar



17









 







governmental entity, which (i) enters or proposes to enter into a consent decree of
permanent injunction with the Company or any of its Subsidiaries, or (ii) otherwise alleges
any violation of any laws, rules or regulations by the Company or any of its Subsidiaries,
and which, either individually or in the aggregate, would reasonably be expected to have or
result in a Material Adverse Effect. The properties, business and operations of the Company
have been and are being conducted in a manner reasonably designed to comply in all material
respects in accordance with all applicable laws, rules and regulations of the FDA. The
Company has not been informed by the FDA that the FDA (x) will prohibit the marketing, sale,
license or use in the United States of any product proposed to be developed, produced or
marketed by the Company, or (y) has any concern as to any of the foregoing.



     3.2 Representations and Warranties of the Purchasers. Each Purchaser, for itself and
for no other Purchaser, hereby represents and warrants as of the date hereof and as of the Closing
Date to the Company as follows:




     (a) Organization; Authority. Such Purchaser is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its organization
with full right, corporate or partnership power and authority to enter into and to
consummate the transactions contemplated by this Agreement and otherwise to carry out its
obligations hereunder and thereunder. The execution and delivery of this Agreement and
performance by such Purchaser of the transactions contemplated by this Agreement have been
duly authorized by all necessary corporate or similar action on the part of such Purchaser.
Each Transaction Document to which it is a party has been duly executed by such Purchaser,
and when delivered by such Purchaser in accordance with the terms hereof, will constitute
the valid and legally binding obligation of such Purchaser, enforceable against it in
accordance with its terms, except (i) as limited by general equitable principles and
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors’ rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may be limited by
applicable law.




     (b) Own Account. Such Purchaser is acquiring the Securities as principal for
its own account and not with a view to or for distributing or reselling such Securities or
any part thereof in violation of the Securities Act or any applicable state securities law,
has no present intention of distributing any of such Securities in violation of the
Securities Act or any applicable state securities law and has no direct or indirect
arrangement or understandings with any other persons to distribute or regarding the
distribution of such Securities (this representation and warranty not limiting such
Purchaser’s right to sell the Securities immediately pursuant to the Registration Statement
or otherwise in compliance with applicable federal and state securities laws) in violation
of the Securities Act or any applicable state securities law. Such Purchaser is acquiring
the Securities hereunder in the ordinary course of its business.




     (c) Purchaser Status. At the time such Purchaser was offered the Securities,
it was, and at the date hereof it is, and on each date on which it exercises any Warrants,
it



18









 







will be either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2),
(a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified institutional buyer”
as defined in Rule 144A(a) under the Securities Act. Such Purchaser is not required to be
registered as a broker-dealer under Section 15 of the Exchange Act.




     (d) Experience of Such Purchaser. Such Purchaser, either alone or together
with its representatives, has such knowledge, sophistication and experience in business and
financial matters so as to be capable of evaluating the merits and risks of the prospective
investment in the Securities, and has so evaluated the merits and risks of such investment.
Such Purchaser is able to bear the economic risk of an investment in the Securities and, at
the present time, is able to afford a complete loss of such investment.




     (e) Short Sales and Confidentiality Prior To The Date Hereof. Other than
consummating the transactions contemplated hereunder, such Purchaser has not, nor has any
Person acting on behalf of or pursuant to any understanding with such Purchaser, directly or
indirectly executed (A) any sales, including Short Sales, of the securities of the Company
during the period commencing from the earlier of (i) five (5) Business Days prior to the
date of this Agreement and (ii) the time that such Purchaser was first contacted by any
Person concerning a transaction involving the Company or first received a term sheet
(written or oral) from the Company or any other Person representing the Company setting
forth the material terms of the transactions contemplated hereunder (“Discussion Time”) or
(B) any purchases during the period commencing from the earlier of the time that such
Purchaser was first contacted by any Person concerning a transaction involving the Company
or first received a term sheet (written or oral) from the Company or any other Person
representing the Company setting forth the material terms of the transactions contemplated
hereunder. Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage separate
portions of such Purchaser’s assets and the portfolio managers have no direct knowledge of
the investment decisions made by the portfolio managers managing other portions of such
Purchaser’s assets, the representation set forth above shall only apply with respect to the
portion of assets managed by the portfolio manager that made the investment decision to
purchase the Securities covered by this Agreement. Other than to other Persons party to
this Agreement, such Purchaser has maintained the confidentiality of all disclosures made to
it in connection with this transaction (including the existence and terms of this
transaction).




     (f) No Legal, Tax or Investment Advice. Such Purchaser understands that nothing
in this Agreement or any other materials presented by or on behalf of the Company to the
Purchaser in connection with the purchase of the Securities constitutes legal, tax or
investment advice to the Purchasers. Such Purchaser has consulted such legal, tax and
investment advisors as it, in its sole discretion, has deemed necessary or appropriate in
connection with its purchase of the Securities.



19









 





ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES




     4.1 Warrant Shares. (a) If all or any portion of a Warrant is exercised at a time
when there is an effective registration statement to cover the issuance or resale of the Warrant
Shares or if the Warrant is exercised via cashless exercise, the Warrant Shares issued pursuant to
any such exercise shall be issued free of all legends. If at any time following the date hereof
the Registration Statement (or any subsequent registration statement registering the Warrant
Shares) is not effective or is not otherwise available for the sale or resale of the Warrant
Shares, the Company shall immediately notify the holders of the Warrants in writing that such
registration statement is not then effective and thereafter shall promptly notify such holders when
the registration statement is effective again and available for the sale or resale of the Warrant
Shares. The Company shall use best efforts to keep a registration statement (including the
Registration Statement) registering the issuance or resale of the Warrant Shares effective during
the term of the Warrants.



     4.2 Furnishing of Information. Until the earliest of the time that (i) no Purchaser owns
Securities it is not eligible to dispose of pursuant to Rule 144(k) or (ii) the Warrants have
expired, the Company covenants to use reasonable best efforts to timely file (or obtain extensions
in respect thereof and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act even if the Company is not then
subject to the reporting requirements of the Exchange Act. As long as any Purchaser owns
Securities, if the Company is not required to file reports pursuant to the Exchange Act, it will
prepare and furnish to the Purchasers and use reasonable best efforts to make publicly available in
accordance with Rule 144(c) such information as is required for the Purchasers to sell the
Securities under Rule 144. The Company further covenants that it will take such further action as
any holder of Securities may reasonably request, to the extent required from time to time to enable
such Person to sell such Securities without registration under the Securities Act within the
requirements of the exemption provided by Rule 144.



     4.3 Integration. The Company shall not sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that
would be integrated with the offer or sale of the Securities for purposes of the rules and
regulations of any Trading Market such that it would require shareholder approval prior to the
closing of such other transaction unless shareholder approval is obtained before the closing of
such subsequent transaction.



     4.4 Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m. (New York
City time) on the Trading Day immediately following the date hereof, issue a Current Report on Form
8-K, disclosing the material terms of the transactions contemplated hereby, and filing the
Transaction Documents as exhibits thereto. The Company and each Purchaser shall consult with each
other in issuing any other press releases with respect to the transactions contemplated hereby, and
neither the Company nor any Purchaser shall issue any such press release or otherwise make any such
public statement without the prior consent of the Company, with respect to any press release of any
Purchaser, or without the prior consent of each Purchaser, with respect to any press release of the
Company, which consent shall not unreasonably be withheld or delayed, except if such disclosure is
required by law, in which case



20









 







the disclosing party shall promptly provide the other party with prior notice of such public
statement or communication. Notwithstanding the foregoing, the Company shall not publicly disclose
the name of any Purchaser, or include the name of any Purchaser in any filing with the Commission
or any regulatory agency or Trading Market, without the prior written consent of such Purchaser,
except (i) as required by federal securities law in connection with the filing of final Transaction
Documents (including signature pages thereto) with the Commission and (ii) to the extent such
disclosure is required by law or Trading Market regulations, in which case the Company shall
provide the Purchasers with prior notice of such disclosure permitted under this clause (ii).



     4.5 Shareholder Rights Plan. No claim will be made or enforced by the Company or,
with the consent of the Company, any other Person, that any Purchaser is an “Acquiring Person”
under any control share acquisition, business combination, poison pill (including any distribution
under a rights agreement) or similar anti-takeover plan or arrangement in effect or hereafter
adopted by the Company, or that any Purchaser could be deemed to trigger the provisions of any such
plan or arrangement, by virtue of receiving Securities under the Transaction Documents or under any
other agreement between the Company and the Purchasers.



     4.6 Non-Public Information. Except with respect to the material terms and conditions
of the transactions contemplated by the Transaction Documents, the Company covenants and agrees
that neither it nor any other Person acting on its behalf will provide any Purchaser or its agents
or counsel with any information that the Company believes constitutes material non-public
information, unless prior thereto such Purchaser shall have executed a written agreement regarding
the confidentiality and use of such information. The Company understands and confirms that each
Purchaser shall be relying on the foregoing covenant in effecting transactions in securities of the
Company.



     4.7 Use of Proceeds. The Company shall use the net proceeds from the sale of the
Securities hereunder for working capital and general corporate purposes, and shall not use such
proceeds for the redemption of any Common Stock.



     4.8 Indemnification of Purchasers. Subject to the provisions of this Section 4.8,
the Company will indemnify and hold each Purchaser and its directors, officers, shareholders,
members, partners, employees and agents (and any other Persons with a functionally equivalent role
of a Person holding such titles notwithstanding a lack of such title or any other title), each
Person who controls such Purchaser (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act), and the directors, officers, shareholders, agents, members,
partners or employees (and any other Persons with a functionally equivalent role of a Person
holding such titles notwithstanding a lack of such title or any other title) of such controlling
persons (each, a “Purchaser Party”) harmless from any and all losses, liabilities,
obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any
such Purchaser Party may suffer or incur as a result of or relating to (a) any breach of any of the
representations, warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a Purchaser in any capacity,
or any of them or their respective Affiliates, by any stockholder of the Company who is not an
Affiliate of such Purchaser, with respect to any of the transactions contemplated by the



21









 







Transaction Documents (unless such action is based upon a breach of such Purchaser’s
representations, warranties or covenants under the Transaction Documents or any agreements or
understandings such Purchaser may have with any such stockholder or any violations by the Purchaser
of state or federal securities laws or any conduct by such Purchaser which constitutes fraud, gross
negligence, willful misconduct or malfeasance). If any action shall be brought against any
Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such
Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right
to assume the defense thereof with counsel of its own choosing reasonably acceptable to the
Purchaser Party. Any Purchaser Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such counsel shall be
at the expense of such Purchaser Party except to the extent that (i) the employment thereof has
been specifically authorized by the Company in writing, (ii) the Company has failed after a
reasonable period of time to assume such defense and to employ counsel or (iii) in such action
there is, in the reasonable opinion of such separate counsel, a material conflict on any material
issue between the position of the Company and the position of such Purchaser Party, in which case
the Company shall be responsible for the reasonable fees and expenses of no more than one such
separate counsel. The Company will not be liable to any Purchaser Party under this Agreement (i)
for any settlement by a Purchaser Party effected without the Company’s prior written consent, which
shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a
loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the
representations, warranties, covenants or agreements made by such Purchaser Party in this Agreement
or in the other Transaction Documents.



     4.9 Reservation of Common Stock. As of the date hereof, the Company has reserved and
the Company shall continue to reserve and keep available at all times, free of preemptive rights, a
sufficient number of shares of Common Stock for the purpose of enabling the Company to issue Shares
pursuant to this Agreement and Warrant Shares pursuant to any exercise of the Warrants. 



     4.10 Listing of Common Stock.(a) The Company hereby agrees to use reasonable best
efforts to maintain the listing of the Common Stock on a Trading Market, and as soon as reasonably
practicable following the Closing (but not later than the Closing Date) to list all of the Shares
and Warrant Shares on such Trading Market. The Company further agrees, if the Company applies to
have the Common Stock traded on any other Trading Market, it will include in such application all
of the Shares and Warrant Shares, and will take such other action as is necessary to cause all of
the Shares and Warrant Shares to be listed on such other Trading Market as promptly as possible.
The Company will use reasonable best efforts to take all action necessary to continue the listing
and trading of its Common Stock on a Trading Market and comply in all respects with the Company’s
reporting, filing and other obligations under the bylaws or rules of the Trading Market.



     4.11 Equal Treatment of Purchasers. No consideration shall be offered or paid to any
Person to amend or consent to a waiver or modification of any provision of any of the Transaction
Documents unless the same consideration is also offered to all of the parties to the Transaction
Documents. For clarification purposes, this provision constitutes a separate right granted to each
Purchaser by the Company and negotiated separately by each Purchaser, and is



22









 







intended for the Company to treat the Purchasers as a class and shall not in any way be
construed as the Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.



     4.12 Participation in Future Financing.




     (a) From the date hereof until the date that is the twelve month anniversary of the
Closing Date, upon any issuance by the Company or any of its Subsidiaries of Common Stock or
Common Stock Equivalents for cash consideration (a “Subsequent Financing”), each
Purchaser shall have the right to participate in the Subsequent Financing up to an amount
equal to 25% of the Subsequent Financing (the “Participation Maximum”) on the same
terms, conditions and price provided for in the Subsequent Financing, unless the Subsequent
Financing is a registered public offering, in which case the Company shall offer each
Purchaser the right to participate in such public offering when it is lawful for the Company
to do so, but no Purchaser shall be entitled to purchase any particular amount of such
public offering.




     (b) At least 3 Trading Days prior to the closing of the Subsequent Financing, the
Company shall deliver to each Purchaser a written notice of its intention to effect a
Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask such Purchaser if it
wants to review the details of such financing (such additional notice, a “Subsequent
Financing Notice”). Upon the request of a Purchaser, and only upon a request by such
Purchaser, for a Subsequent Financing Notice, the Company shall promptly, but no later than
1 Trading Day after such request, deliver a Subsequent Financing Notice to such Purchaser.
The Subsequent Financing Notice shall describe in reasonable detail the proposed terms of
such Subsequent Financing, the amount of proceeds intended to be raised thereunder and the
Person or Persons through or with whom such Subsequent Financing is proposed to be effected
and shall include a term sheet or similar document relating thereto as an attachment.




     (c) Any Purchaser desiring to participate in such Subsequent Financing must provide
written notice to the Company by not later than 5:30 p.m. (New York City time) on the 2nd
Trading Day after such Purchaser has received the Pre-Notice that the Purchaser is willing
to participate in the Subsequent Financing, the amount of the Purchaser’s participation, and
that the Purchaser has such funds ready, willing, and available for investment on the terms
set forth in the Subsequent Financing Notice. If the Company receives no notice from a
Purchaser as of such 2nd Trading Day, such Purchaser shall be deemed to have notified the
Company that it does not elect to participate.




     (d) If by 5:30 p.m. (New York City time) on the 3rd Trading Day after all of the
Purchasers have received the Pre-Notice, notifications by the Purchasers of their
willingness to participate in the Subsequent Financing (or to cause their designees to
participate) is, in the aggregate, less than the total amount of the Subsequent Financing,
then the Company may effect the remaining portion of such Subsequent Financing on the terms
and with the Persons set forth in the Subsequent Financing Notice.



23









 






     (e) If by 5:30 p.m. (New York City time) on the 3rd Trading Day after all of the
Purchasers have received the Pre-Notice, the Company receives responses to a Subsequent
Financing Notice from Purchasers seeking to purchase more than the aggregate amount of the
Participation Maximum, each such Purchaser shall have the right to purchase its Pro Rata
Portion (as defined below) of the Participation Maximum. “Pro Rata Portion” means
the ratio of (x) the Subscription Amount of Securities purchased on the Closing Date by a
Purchaser participating under this Section 4.12 and (y) the sum of the aggregate
Subscription Amounts of Securities purchased on the Closing Date by all Purchasers
participating under this Section 4.12.




     (f) The Company must provide the Purchasers with a second Subsequent Financing Notice,
and the Purchasers will again have the right of participation set forth above in this
Section 4.12, if the Subsequent Financing subject to the initial Subsequent Financing Notice
is not consummated for any reason on the terms set forth in such Subsequent Financing Notice
within 60 Trading Days after the date of the initial Subsequent Financing Notice.




     (g) Notwithstanding the foregoing, this Section 4.12 shall not apply in respect of (i)
an Exempt Issuance or (ii) an underwritten public offering of Common Stock.



     4.13 Subsequent Equity Sales.




     (a) From the date hereof until 60 days after the Closing Date, neither the Company nor
any Subsidiary (other than Comprehensive Care Corporation) shall issue shares of Common
Stock or Common Stock Equivalents, and Company shall not request, authorize, consent to, or
vote in favor of any such issuance by Comprehensive Care Corporation; provided, however, the
60-day period set forth in this Section 4.13 shall be extended by up to 30 days for the
number of Trading Days during such period in which (i) trading in the Common Stock is
suspended by any Trading Market, or (ii) the Registration Statement is not effective or the
prospectus included in the Registration Statement may not be used by the Purchasers for the
resale of the Shares and Warrant Shares.




     (b) From the date hereof until one year after the Closing Date, the Company shall be
prohibited from effecting or entering into an agreement to effect any Subsequent Financing
involving a Variable Rate Transaction. “Variable Rate Transaction” means a
transaction in which the Company issues or sells (i) any debt or equity securities that are
convertible into, exchangeable or exercisable for, or include the right to receive
additional shares of Common Stock either (A) at a conversion, exercise or exchange rate or
other price that is based upon and/or varies with the trading prices of or quotations for
the shares of Common Stock at any time after the initial issuance of such debt or equity
securities, or (B) with a conversion, exercise or exchange price that is subject to being
reset at some future date after the initial issuance of such debt or equity security or upon
the occurrence of specified or contingent events directly or indirectly related to the
business of the Company or the market for the Common Stock or (ii) enters into any
agreement, including, but not limited to, an equity line of credit, whereby the Company may
sell securities at a future determined price. Any Purchaser shall be entitled to obtain



24









 







injunctive relief against the Company to preclude any such issuance, which remedy shall
be in addition to any right to collect damages.




     (c) Notwithstanding the foregoing, this Section 4.13 shall not apply in respect of an
Exempt Issuance, except that no Variable Rate Transaction shall be an Exempt Issuance.



     4.14 Short Sales and Confidentiality After The Date Hereof. Each Purchaser, severally
and not jointly with the other Purchasers, covenants that neither it nor any Affiliate acting on
its behalf or pursuant to any understanding with it will execute any Short Sales during the period
commencing at the Discussion Time and ending at the time that the transactions contemplated by this
Agreement are first publicly announced as described in Section 4.4. Each Purchaser, severally and
not jointly with the other Purchasers, covenants that until such time as the transactions
contemplated by this Agreement are publicly disclosed by the Company as described in Section 4.4,
such Purchaser will maintain the confidentiality of the existence and terms of this transaction and
the information included in the Disclosure Schedules. Notwithstanding the foregoing, no Purchaser
makes any representation, warranty or covenant hereby that it will not engage in Short Sales in the
securities of the Company after the time that the transactions contemplated by this Agreement are
first publicly announced as described in Section 4.4. Notwithstanding the foregoing, in the case
of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers
manage separate portions of such Purchaser’s assets and the portfolio managers have no direct
knowledge of the investment decisions made by the portfolio managers managing other portions of
such Purchaser’s assets, the covenant set forth above shall only apply with respect to the portion
of assets managed by the portfolio manager that made the investment decision to purchase the
Securities covered by this Agreement.



     4.15  Delivery of Securities After Closing. The Company shall deliver, or cause to be
delivered, the respective Securities purchased by each Purchaser to such Purchaser within 3 Trading
Days of the Closing Date.



     4.16 Capital Changes. Until the one year anniversary of the Closing Date, the Company
shall not undertake a reverse or forward stock split or reclassification of the Common Stock
without the prior written consent of the Purchasers holding a majority in interest of the Shares.



ARTICLE V.

MISCELLANEOUS




     5.1 Termination. This Agreement may be terminated by Company or any Purchaser, as to
such Purchaser’s obligations hereunder only and without any effect whatsoever on the obligations
between the Company and the other Purchasers, by written notice to the other parties, if the
Closing has not been consummated on or before November 6, 2007; provided, however, that no such
termination will affect the right of any party to sue for any breach by the other party (or
parties).



25









 





     5.2 Fees and Expenses. Except as expressly set forth in the Transaction Documents to
the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company shall pay all
Transfer Agent fees, stamp taxes and other taxes and duties levied in connection with the delivery
of any Securities to the Purchasers.



     5.3 Entire Agreement. The Transaction Documents, together with the exhibits and
schedules thereto, the Prospectus and the Prospectus Supplement, contain the entire understanding
of the parties with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties acknowledge have
been merged into such documents, exhibits and schedules.



     5.4 Notices. Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed given and effective on
the earliest of (a) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number set forth on the signature pages attached hereto prior to 5:30
p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto on a day that is not a Trading Day or later than
5:30 p.m. (New York City time) on any Trading Day, (c) the 2nd Trading Day following the
date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon
actual receipt by the party to whom such notice is required to be given. The address for such
notices and communications shall be as set forth on the signature pages attached hereto.



     5.5 Amendments; Waivers. No provision of this Agreement may be waived or amended
except in a written instrument signed, in the case of an amendment, by the Company and the
Purchasers of at least a majority of the Shares still held by the Purchasers or, in the case of a
waiver, by the party against whom enforcement of any such waived provision is sought. No waiver of
any default with respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of
any other provision, condition or requirement hereof, nor shall any delay or omission of any party
to exercise any right hereunder in any manner impair the exercise of any such right.



     5.6 Headings. The headings herein are for convenience only, do not constitute a part
of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.



     5.7 Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and permitted assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written consent of each
Purchaser (other than by merger). Any Purchaser may assign any or all of its rights under this
Agreement to any Person to whom such Purchaser assigns or transfers any Securities, provided such
transferee agrees in writing to be bound, with respect to the transferred Securities, by the
provisions of the Transaction Documents that apply to the “Purchasers.”



     5.8 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective successors and permitted assigns and is not for the benefit of,



26









 







nor may any provision hereof be enforced by, any other Person, except as otherwise set forth
in Section 4.8.



     5.9 Governing Law. All questions concerning the construction, validity, enforcement
and interpretation of the Transaction Documents shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York, without regard to the principles of
conflicts of law thereof. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by mailing a copy thereof
via registered or certified mail or overnight delivery (with evidence of delivery) to such party at
the address in effect for notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any other manner permitted by
law. If either party shall commence an action or proceeding to enforce any provisions of the
Transaction Documents, then the prevailing party in such action or proceeding shall be reimbursed
by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with
the investigation, preparation and prosecution of such action or proceeding.



     5.10 Survival. The representations and warranties contained herein shall survive the
Closing and the delivery of the Shares and Warrant Shares.



     5.11 Execution. This Agreement may be executed in two or more counterparts, all of
which when taken together shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each party and delivered to the other party, it being
understood that both parties need not sign the same counterpart. In the event that any signature
is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such
electronic signature shall create a valid and binding obligation of the party executing (or on
whose behalf such signature is executed) with the same force and effect as if such facsimile or
“.pdf” signature page were an original thereof.



     5.12 Severability. If any term, provision, covenant or restriction of this Agreement
is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in
full force and effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their commercially reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the intention of the parties
that they would have executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or unenforceable.



     5.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) any of the other Transaction
Documents, whenever any Purchaser exercises a right, election, demand or option under a Transaction
Document and the Company does not timely perform its related obligations within the periods therein
provided, then such Purchaser may rescind or withdraw, in its sole discretion from time to time
upon written notice to the Company, any relevant notice, demand or election in whole or in part
without prejudice to its future actions and rights; provided, however, in the case



27









 







of a rescission of an exercise of a Warrant, the Purchaser shall be required to return any
shares of Common Stock delivered in connection with any such rescinded exercise notice.



     5.14 Replacement of Securities. If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued
in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in
lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of
evidence reasonably satisfactory to the Company of such loss, theft or destruction. The applicant
for a new certificate or instrument under such circumstances shall also pay any reasonable
third-party costs (including customary indemnity) associated with the issuance of such replacement
Securities.



     5.15 Remedies. In addition to being entitled to exercise all rights provided herein
or granted by law, including recovery of damages, each of the Purchasers and the Company will be
entitled to specific performance under the Transaction Documents. The parties agree that monetary
damages may not be adequate compensation for any loss incurred by reason of any breach of
obligations contained in the Transaction Documents and hereby agrees to waive and not to assert in
any action for specific performance of any such obligation the defense that a remedy at law would
be adequate.



     5.16 Payment Set Aside. To the extent that the Company makes a payment or payments to
any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights
thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any
part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the
Company, a trustee, receiver or any other person under any law (including, without limitation, any
bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent
of any such restoration the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.



     5.17 Independent Nature of Purchasers’ Obligations and Rights. The obligations of
each Purchaser under any Transaction Document are several and not joint with the obligations of any
other Purchaser, and no Purchaser shall be responsible in any way for the performance or
non-performance of the obligations of any other Purchaser under any Transaction Document. Nothing
contained herein or in any other Transaction Document, and no action taken by any Purchaser
pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the Purchasers are in any
way acting in concert or as a group with respect to such obligations or the transactions
contemplated by the Transaction Documents. Each Purchaser shall be entitled to independently
protect and enforce its rights, including without limitation, the rights arising out of this
Agreement or out of the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such purpose. Each Purchaser
has been represented by its own separate legal counsel in their review and negotiation of the
Transaction Documents. For reasons of administrative convenience only, Purchasers and their
respective counsel have chosen to communicate with the Company through FWS. FWS does not represent
all of the Purchasers but only Rodman & Renshaw, LLC. The Company has



28









 







elected to provide all Purchasers with the same terms and Transaction Documents for the
convenience of the Company and not because it was required or requested to do so by the Purchasers.



     5.18 Liquidated Damages. The Company’s obligations to pay any partial liquidated
damages or other amounts owing under the Transaction Documents is a continuing obligation of the
Company and shall not terminate until all unpaid partial liquidated damages and other amounts have
been paid notwithstanding the fact that the instrument or security pursuant to which such partial
liquidated damages or other amounts are due and payable shall have been canceled.



     5.19 Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of
any action or the expiration of any right required or granted herein shall not be a Business Day,
then such action may be taken or such right may be exercised on the next succeeding Business Day.



     5.20 Construction. The parties agree that each of them and/or their respective counsel
has reviewed and had an opportunity to revise the Transaction Documents and, therefore, the normal
rule of construction to the effect that any ambiguities are to be resolved against the drafting
party shall not be employed in the interpretation of the Transaction Documents or any amendments
hereto.



[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]




29









 








     5.21 Waiver of Jury Trial. In any action, suit or proceeding in any jurisdiction
brought by any party against any other party, the parties each knowingly and intentionally, to the
greatest extent permitted by applicable law, hereby absolutely, unconditionally, irrevocably and
expressly waives forever trial by jury.



     IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be
duly executed by their respective authorized signatories as of the date first indicated above.



HYTHIAM, INC.






	 	 	 	 	 
	By:

	 	 	 	 
	 

	 	 	 	 
	 

	 	Name: Chuck Timpe	 	 
	 

	 	Title: Chief Financial Officer	 	 









Address for Notice:



Hythiam, Inc.

11150 Santa Monica Boulevard,

Suite 1500

Los Angeles, California 90025

Attention: Terren S. Peizer

Facsimile No.: (310) 444-5300









With a copy to (which shall not constitute notice):




Dreier Stein & Kahan, LLP

The Water Garden

1620 26th Street

Sixth Floor, North Tower

Santa Monica, California 90404

Attention: John C. Kirkland, Esq.

Facsimile No.: (424) 202-6250



[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,

SIGNATURE PAGE FOR PURCHASER FOLLOWS]



30









 








PURCHASER SIGNATURE PAGE TO

HYTHIAM, INC. SECURITIES PURCHASE AGREEMENT




     IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement to be duly
executed by their respective authorized signatories as of the date first indicated above.


Name of Purchaser:  




Signature of Authorized Signatory of Purchaser:  




Name of Authorized Signatory:  




Title of Authorized Signatory: 




Email Address of Purchaser:  




Fax Number of Purchaser: 




Address for Notice of Purchaser:



Address for Delivery of Securities for Purchaser (if not same as address for notice):



 


Subscription Amount: $ 





Shares: 





Warrant Shares:  




 

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]




31









 





EXHIBIT A

FORM OF WARRANT














32









 








EXHIBIT A



COMMON STOCK PURCHASE WARRANT


HYTHIAM, INC.



			
	Warrant Shares: [___]
	 	Initial Exercise Date: November 6, 2007







     THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for
value received, [_____________] (the “Holder”) is entitled, upon the terms
and subject to the limitations on exercise and the conditions hereinafter set forth,
at any time on or after the date hereof (the “Initial Exercise Date”) and on
or prior to the close of business on the five year anniversary of the Initial
Exercise Date (the “Termination Date”) but not thereafter, to subscribe for
and purchase from Hythiam, Inc., a Delaware corporation (the “Company”), up
to [___] shares (the “Warrant Shares”) of Common Stock; provided,
however, that the five-year period set forth above as the Termination Date shall be
extended for the number of days during such period in which (i) trading in the
Common Stock is suspended by any Trading Market, or (ii) the Registration Statement
is not effective but in no event later than December 31, 2012. The purchase price
of one share of Common Stock under this Warrant shall be equal to the Exercise
Price, as defined in Section 2(b).




     Section 1. Definitions. Capitalized terms used and not
otherwise defined herein shall have the meanings set forth in that certain
Securities Purchase Agreement (the “Purchase Agreement”), dated November 6,
2007, among the Company and the purchasers signatory thereto.




     Section 2. Exercise.




     a) Exercise of Warrant. Exercise of the purchase rights represented by this
Warrant may be made, in whole or in part, at any time or times on or after the Initial
Exercise Date and on or before the Termination Date by delivery to the Company of a duly
executed facsimile copy of the Notice of Exercise Form annexed hereto (or such other office
or agency of the Company as it may designate by notice in writing to the registered Holder
at the address of the Holder appearing on the books of the Company); and, within 3 Trading
Days of the date said Notice of Exercise is delivered to the Company, the Company shall have
received payment of the aggregate Exercise Price of the shares thereby purchased by wire
transfer or cashier’s check drawn on a United States bank. Notwithstanding anything herein
to the contrary, the Holder shall not be required to physically surrender this Warrant to
the Company until the Holder has purchased all of the Warrant Shares available hereunder and
the Warrant has been exercised in full, in which case, the Holder shall surrender this
Warrant to the Company for cancellation within 3 Trading Days of the date the final Notice
of Exercise is delivered to the



33









 







Company. Partial exercises of this Warrant resulting in purchases of a portion of the
total number of Warrant Shares available hereunder shall have the effect of lowering the
outstanding number of Warrant Shares purchasable hereunder in an amount equal to the
applicable number of Warrant Shares purchased. The Holder and the Company shall maintain
records showing the number of Warrant Shares purchased and the date of such purchases. The
Company shall deliver any objection to any Notice of Exercise Form within 2 Business Days of
receipt of such notice. In the event of any dispute or discrepancy, the records of the
Holder shall be controlling and determinative in the absence of manifest error. The Holder
and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of
the provisions of this paragraph, following the purchase of a portion of the Warrant Shares
hereunder, the number of Warrant Shares available for purchase hereunder at any given time
may be less than the amount stated on the face hereof.




     b) Exercise Price. The exercise price per share of the Common Stock under this
Warrant shall be $5.75, subject to adjustment hereunder (the “Exercise Price”).




     c) Cashless Exercise. If at any time during the term of this Warrant there is
no effective Registration Statement registering, or no current prospectus available for, the
issuance or resale of the Warrant Shares by the Holder, then this Warrant may also be
exercised at such time by means of a “cashless exercise” in which the Holder shall be
entitled to receive a certificate for the number of Warrant Shares equal to the quotient
obtained by dividing [(A-B) (X)] by (A), where:




	 	(A) = 	 	the VWAP on the Trading Day immediately preceding the date
of such election;
	 
	 	(B) = 	 	the Exercise Price of this Warrant, as adjusted; and
	 
	 	(X) = 	 	the number of Warrant Shares issuable upon exercise of this
Warrant in accordance with the terms of this Warrant by means of a cash
exercise rather than a cashless exercise.






     Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant
shall be automatically exercised via cashless exercise pursuant to this Section 2(c).




     d) Holder’s Restrictions. The Company shall not effect any exercise of this
Warrant, and a Holder shall not have the right to exercise any portion of this Warrant,
pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance
after exercise as set forth on the applicable Notice of Exercise, the Holder (together with
the Holder’s Affiliates, and any other person or entity acting as a group together with the
Holder or any of the Holder’s Affiliates), would beneficially own in excess of the
Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence,
the number of shares of Common Stock beneficially owned by the Holder and its Affiliates
shall include the number of shares of Common Stock issuable upon exercise of this Warrant
with respect to which such determination is being made, but shall exclude



34









 







the number of shares of Common Stock which would be issuable upon (A) exercise of the
remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of
its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of
any other securities of the Company (including, without limitation, any other Common Stock
Equivalents) subject to a limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by the Holder or any of its affiliates. Except as set
forth in the preceding sentence, for purposes of this Section 2(d), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder, it being acknowledged by the Holder that the Company is
not representing to the Holder that such calculation is in compliance with Section 13(d) of
the Exchange Act and the Holder is solely responsible for any schedules required to be filed
in accordance therewith. To the extent that the limitation contained in this Section 2(d)
applies, the determination of whether this Warrant is exercisable (in relation to other
securities owned by the Holder together with any Affiliates) and of which portion of this
Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of
a Notice of Exercise shall be deemed to be the Holder’s determination of whether this
Warrant is exercisable (in relation to other securities owned by the Holder together with
any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to
the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or
confirm the accuracy of such determination. In addition, a determination as to any group
status as contemplated above shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder. For purposes of this
Section 2(d), in determining the number of outstanding shares of Common Stock, a Holder may
rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s
most recent periodic or annual report, as the case may be, (y) a more recent public
announcement by the Company or (z) any other notice by the Company or the Company’s Transfer
Agent setting forth the number of shares of Common Stock outstanding. Upon the written or
oral request of a Holder, the Company shall within two Trading Days confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding. In any case,
the number of outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company, including this Warrant, by the
Holder or its Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of
the number of shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon
not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial
Ownership Limitation provisions of this Section 2(d), provided that the Beneficial Ownership
Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to the issuance of shares of Common Stock upon exercise of
this Warrant held by the Holder and the provisions of this Section 2(d) shall continue to
apply. Any such increase or decrease will not be effective until the 61st day
after such notice is delivered to the Company. The provisions of this paragraph shall be
construed and implemented in a manner otherwise than in strict conformity with the terms of
this Section 2(d) to correct this paragraph (or any portion hereof) which may be



35









 







defective or inconsistent with the intended Beneficial Ownership Limitation herein
contained or to make changes or supplements necessary or desirable to properly give effect
to such limitation. The limitations contained in this paragraph shall apply to a successor
holder of this Warrant.




     e) Mechanics of Exercise.




     i. Delivery of Certificates Upon Exercise. Certificates for shares
purchased hereunder shall be transmitted by the transfer agent of the
Company to the Holder by crediting the account of the Holder’s prime broker
with the Depository Trust Company through its Deposit Withdrawal Agent
Commission (“DWAC”) system if the Company is a participant in such
system and either (A) there is an effective Registration Statement for the
issuance or permitting the resale of the Warrant Shares by the Holder or (B)
this Warrant is being exercised via cashless exercise, and otherwise by
physical delivery to the address specified by the Holder in the Notice of
Exercise within 3 Trading Days from the delivery to the Company of the
Notice of Exercise Form, surrender of this Warrant (if required) and payment
of the aggregate Exercise Price as set forth above (“Warrant Share
Delivery Date”). This Warrant shall be deemed to have been exercised on
the date the Exercise Price is received by the Company. The Warrant Shares
shall be deemed to have been issued, and Holder or any other person so
designated to be named therein shall be deemed to have become a holder of
record of such shares for all purposes, as of the date the Warrant has been
exercised by payment to the Company of the Exercise Price (or by cashless
exercise, if permitted) and all taxes required to be paid by the Holder, if
any, pursuant to Section 2(e)(vi) prior to the issuance of such shares, have
been paid.




     ii. Delivery of New Warrants Upon Exercise. If this Warrant
shall have been exercised in part, the Company shall, at the request of a
Holder and upon surrender of this Warrant certificate, at the time of
delivery of the certificate or certificates representing Warrant Shares,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase
the unpurchased Warrant Shares called for by this Warrant, which new Warrant
shall in all other respects be identical with this Warrant.




     iii. Rescission Rights. If the Company fails to cause its
transfer agent to transmit to the Holder a certificate or certificates
representing the Warrant Shares pursuant to Section 2(e)(i) by the Warrant
Share Delivery Date, then the Holder will have the right to rescind such
exercise.




     iv. Compensation for Buy-In on Failure to Timely Deliver
Certificates Upon Exercise. In addition to any other rights available
to the Holder, if the Company fails to cause its transfer agent to transmit
to the Holder a certificate or certificates representing the Warrant Shares



36









 







pursuant to an exercise on or before the Warrant Share Delivery Date,
and if after such date the Holder is required by its broker to purchase (in
an open market transaction or otherwise) or the Holder’s brokerage firm
otherwise purchases, shares of Common Stock to deliver in satisfaction of a
sale by the Holder of the Warrant Shares which the Holder anticipated
receiving upon such exercise (a “Buy-In”), then the Company shall
(1) pay in cash to the Holder the amount by which (x) the Holder’s total
purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased exceeds (y) the amount obtained by multiplying (A)
the number of Warrant Shares that the Company was required to deliver to the
Holder in connection with the exercise at issue times (B) the price at which
the sell order giving rise to such purchase obligation was executed, and (2)
at the option of the Holder, either reinstate the portion of the Warrant and
equivalent number of Warrant Shares for which such exercise was not honored
or deliver to the Holder the number of shares of Common Stock that would
have been issued had the Company timely complied with its exercise and
delivery obligations hereunder. For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to an attempted exercise of shares of Common Stock with an aggregate
sale price giving rise to such purchase obligation of $10,000, under clause
(1) of the immediately preceding sentence the Company shall be required to
pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In and,
upon request of the Company, evidence of the amount of such loss. Nothing
herein shall limit a Holder’s right to pursue any other remedies available
to it hereunder, at law or in equity including, without limitation, a decree
of specific performance and/or injunctive relief with respect to the
Company’s failure to timely deliver certificates representing shares of
Common Stock upon exercise of the Warrant as required pursuant to the terms
hereof.




     v. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of
this Warrant. As to any fraction of a share which Holder would otherwise be
entitled to purchase upon such exercise, the Company shall at its election,
either pay a cash adjustment in respect of such final fraction in an amount
equal to such fraction multiplied by the Exercise Price or round up to the
next whole share.




     vi. Charges, Taxes and Expenses. Issuance of certificates for
Warrant Shares shall be made without charge to the Holder for any issue or
transfer tax or other incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be paid by the Company,
and such certificates shall be issued in the name of the Holder or in such
name or names as may be directed by the Holder; provided, however, that in
the event certificates for Warrant Shares are to be issued in a name other
than the name of the Holder, this Warrant when



37









 







surrendered for exercise shall be accompanied by the Assignment Form
attached hereto duly executed by the Holder; and the Company may require, as
a condition thereto, the payment of a sum sufficient to reimburse it for any
transfer tax incidental thereto.




     vii. Closing of Books. The Company will not close its
stockholder books or records in any manner which prevents the timely
exercise of this Warrant, pursuant to the terms hereof.




     Section 3. Certain Adjustments.




     a) Stock Dividends and Splits. If the Company, at any time while this Warrant
is outstanding: (A) pays a stock dividend or otherwise make a distribution or distributions
on shares of its Common Stock or any other equity or equity equivalent securities payable in
            shares of Common Stock (which, for avoidance of doubt, shall not include any shares of
Common Stock issued by the Company upon exercise of this Warrant), (B) subdivides
outstanding shares of Common Stock into a larger number of shares, (C) combines (including
by way of reverse stock split) outstanding shares of Common Stock into a smaller number of
            shares, or (D) issues by reclassification of shares of the Common Stock any shares of
capital stock of the Company, then in each case the Exercise Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding immediately after such
event and the number of shares issuable upon exercise of this Warrant shall be
proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain
unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective
immediately after the record date for the determination of stockholders entitled to receive
such dividend or distribution and shall become effective immediately after the effective
date in the case of a subdivision, combination or re-classification.




     b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while this Warrant is outstanding, shall sell or grant any option to
purchase, or sell or grant any right to reprice, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other disposition) any Common
Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at
an effective price per share less than the then Exercise Price (such lower price, the
“Base Share Price” and such issuances collectively, a “Dilutive Issuance”)
(if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time,
whether by operation of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or rights per share
which are issued in connection with such issuance, be entitled to receive shares of Common
Stock at an effective price per share which is less than the Exercise Price, such issuance
shall be deemed to have occurred for less than the Exercise Price on such date of the
Dilutive Issuance), then the Exercise Price shall be reduced and only reduced to equal the
Base Share Price and the number of Warrant Shares issuable hereunder shall be increased such
that the aggregate Exercise Price payable hereunder,



38









 







after taking into account the decrease in the Exercise Price, shall be equal to the
aggregate Exercise Price prior to such adjustment. Such adjustment shall be made whenever
such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no
adjustments shall be made, paid or issued under this Section 3(b) in respect of an Exempt
Issuance or for an Exercise Price of less than $4.75, subject to adjustment for reverse and
forward stock splits, stock dividends, stock combinations and other similar transactions of
the Common Stock that occur after the date of the Purchase Agreement. The Company shall
notify the Holder in writing, no later than the Trading Day following the issuance of any
Common Stock or Common Stock Equivalents subject to this Section 3(b), indicating therein
the applicable issuance price, or applicable reset price, exchange price, conversion price
and other pricing terms (such notice the “Dilutive Issuance Notice”). For purposes
of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to
this Section 3(b), upon the occurrence of any Dilutive Issuance, after the date of such
Dilutive Issuance the Holder is entitled to receive a number of Warrant Shares based upon
the Base Share Price regardless of whether the Holder accurately refers to the Base Share
Price in the Notice of Exercise.




     c) Subsequent Rights Offerings. If the Company, at any time while the Warrant
is outstanding, shall issue rights, options or warrants to all holders of Common Stock (and
not to Holders) entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the VWAP at the record date mentioned below, then the Exercise
Price shall be multiplied by a fraction, of which the denominator shall be the number of shares
of the Common Stock outstanding on the date of issuance of such rights or warrants
plus the number of additional shares of Common Stock offered for subscription or purchase,
and of which the numerator shall be the number of shares of the Common Stock outstanding on
the date of issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered (assuming receipt by the
Company in full of all consideration payable upon exercise of such rights, options or
warrants) would purchase at such VWAP. Such adjustment shall be made whenever such rights
or warrants are issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights, options or warrants.




     d) Pro Rata Distributions. If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to Holders of the
Warrants) evidences of its indebtedness or assets (including cash and cash dividends) or
rights or warrants to subscribe for or purchase any security other than the Common Stock
(which shall be subject to Section 3(b)), then in each such case the Exercise Price shall be
adjusted by multiplying the Exercise Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by a fraction
of which the denominator shall be the VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the then per share
fair market value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of the Common Stock as
determined by the Board of Directors in good faith. In either case the adjustments shall be
described in a statement provided to the Holder of the portion of assets or evidences of



39









 







indebtedness so distributed or such subscription rights applicable to one share of
Common Stock. Such adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned above.




     e) Fundamental Transaction. If, at any time while this Warrant is outstanding,
(A) the Company effects any merger or consolidation of the Company with or into another
Person, (B) the Company effects any sale of all or substantially all of its assets in one or
a series of related transactions, (C) any tender offer or exchange offer (whether by the
Company or another Person) is completed pursuant to which holders of Common Stock are
permitted to tender or exchange their shares for other securities, cash or property, or (D)
the Company effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or exchanged for
other securities, cash or property (each “Fundamental Transaction”), then, upon any
subsequent exercise of this Warrant, the Holder shall have the right to receive, for each
Warrant Share that would have been issuable upon such exercise immediately prior to the
occurrence of such Fundamental Transaction, the number of shares of Common Stock of the
successor or acquiring corporation or of the Company, if it is the surviving corporation,
and any additional consideration (the “Alternate Consideration”) receivable as a
result of such merger, consolidation or disposition of assets by a holder of the number of shares of
Common Stock for which this Warrant is exercisable immediately prior to such
event. For purposes of any such exercise, the determination of the Exercise Price shall be
appropriately adjusted to apply to such Alternate Consideration based on the amount of
Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Exercise Price among the Alternate
Consideration in a reasonable manner reflecting the relative value of any different
components of the Alternate Consideration. If holders of Common Stock are given any choice
as to the securities, cash or property to be received in a Fundamental Transaction, then the
Holder shall be given the same choice as to the Alternate Consideration it receives upon any
exercise of this Warrant following such Fundamental Transaction. To the extent necessary to
effectuate the foregoing provisions, any successor to the Company or surviving entity in
such Fundamental Transaction shall issue to the Holder a new warrant consistent with the
foregoing provisions and evidencing the Holder’s right to exercise such warrant into
Alternate Consideration. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or surviving entity
to comply with the provisions of this Section 3(e) and insuring that this Warrant (or any
such replacement security) will be similarly adjusted upon any subsequent transaction
analogous to a Fundamental Transaction. Notwithstanding anything to the contrary, in the
event of a Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3
transaction” as defined in Rule 13e-3 under the Securities Exchange Act of 1934, as amended,
or (3) a Fundamental Transaction involving a person or entity not traded on a national
securities exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, or the
Nasdaq Capital Market, the Company or any successor entity shall pay at the Holder’s option,
exercisable at any time concurrently with or within 30 days after the consummation of the
Fundamental Transaction, an amount of cash equal to the value of this Warrant as determined
in accordance with the Black Scholes Option Pricing Model obtained from the “OV” function on
Bloomberg L.P. using



40









 







     (i) a price per share of Common Stock equal to the VWAP of the Common Stock for the
Trading Day immediately preceding the date of consummation of the applicable Fundamental
Transaction, (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a
period equal to the remaining term of this Warrant as of the date of consummation of the
applicable Fundamental Transaction and (iii) an expected volatility equal to the 100 day
volatility obtained from the “HVT” function on Bloomberg L.P. determined as of the Trading
Day immediately following the public announcement of the applicable Fundamental Transaction.




     f) Calculations. All calculations under this Section 3 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this
Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any)
issued and outstanding.




     g) Notice to Holder.




     i. Adjustment to Exercise Price. Whenever the Exercise Price is
adjusted pursuant to any provision of this Section 3, the Company shall
promptly mail to the Holder a notice setting forth the Exercise Price after
such adjustment and setting forth a brief statement of the facts requiring
such adjustment. If the Company enters into a Variable Rate Transaction (as
defined in the Purchase Agreement), despite the prohibition thereon in the
Purchase Agreement, the Company shall be deemed to have issued Common Stock
or Common Stock Equivalents at the lowest possible conversion or exercise
price at which such securities may be converted or exercised.




     ii. Notice to Allow Exercise by Holder. If (A) the Company
shall declare a dividend (or any other distribution in whatever form) on the
Common Stock; (B) the Company shall declare a special nonrecurring cash
dividend on or a redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock rights or warrants
to subscribe for or purchase any shares of capital stock of any class or of
any rights; (D) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; (E) the Company shall authorize the voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the
Company; then, in each case, the Company shall cause to be mailed to the
Holder at its last address as it shall appear upon the Warrant Register of
the Company, at least 20 calendar days prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the date on which
a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not



41









 







to be taken, the date as of which the holders of the Common Stock of
record to be entitled to such dividend, distributions, redemption, rights or
warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to
exchange their shares of the Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided that the failure to mail such
notice or any defect therein or in the mailing thereof shall not affect the
validity of the corporate action required to be specified in such notice.
The Holder is entitled to exercise this Warrant during the period commencing
on the date of such notice to the effective date of the event triggering
such notice.




     Section 4. Transfer of Warrant.




     a) Transferability. This Warrant and all rights hereunder (including, without
limitation, any registration rights) are transferable, in whole or in part, upon surrender
of this Warrant at the principal office of the Company or its designated agent, together
with a written assignment of this Warrant substantially in the form attached hereto duly
executed by the Holder or its agent or attorney and funds sufficient to pay any transfer
taxes payable upon the making of such transfer. Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees and in the denomination or denominations specified in such instrument
of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this
Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if
properly assigned, may be exercised by a new holder for the purchase of Warrant Shares
without having a new Warrant issued.




     b) New Warrants. This Warrant may be divided or combined with other Warrants
upon presentation hereof at the aforesaid office of the Company, together with a written
notice specifying the names and denominations in which new Warrants are to be issued, signed
by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any
transfer which may be involved in such division or combination, the Company shall execute
and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided
or combined in accordance with such notice. All Warrants issued on transfers or exchanges
shall be dated the original Issue Date and shall be identical with this Warrant except as to
the number of Warrant Shares issuable pursuant thereto.




     c) Warrant Register. The Company shall register this Warrant, upon records to
be maintained by the Company for that purpose (the “Warrant Register”), in the name
of the record Holder hereof from time to time. The Company may deem and treat the
registered Holder of this Warrant as the absolute owner hereof for the purpose of any
exercise hereof or any distribution to the Holder, and for all other purposes, absent actual
notice to the contrary.



42









 






     Section 5. Miscellaneous.




     a) No Rights as Shareholder Until Exercise. This Warrant does not entitle the
Holder to any voting rights or other rights as a shareholder of the Company prior to the
exercise hereof as set forth in Section 2(e)(i).




     b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants
that upon receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant or any stock certificate relating to the
Warrant Shares, and in case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to it (which, in the case of the Warrant, shall not include the
posting of any bond), and upon surrender and cancellation of such Warrant or stock
certificate, if mutilated, the Company will make and deliver a new Warrant or stock
certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or
stock certificate.




     c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein shall not be
a Business Day, then such action may be taken or such right may be exercised on the next
succeeding Business Day.




     d) Authorized Shares.




The Company covenants that during the period the Warrant is outstanding, it will
reserve from its authorized and unissued Common Stock a sufficient number of shares
to provide for the issuance of the Warrant Shares upon the exercise of any purchase
rights under this Warrant. The Company further covenants that its issuance of this
Warrant shall constitute full authority to its officers who are charged with the
duty of executing stock certificates to execute and issue the necessary certificates
for the Warrant Shares upon the exercise of the purchase rights under this Warrant.
The Company will take all such reasonable action as may be necessary to assure that
such Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Trading Market upon
which the Common Stock may be listed. The Company covenants that all Warrant Shares
which may be issued upon the exercise of the purchase rights represented by this
Warrant will, upon exercise of the purchase rights represented by this Warrant, be
duly authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges created by the Company in respect of the issue thereof
(other than taxes in respect of any transfer occurring contemporaneously with such
issue).




     Except and to the extent as waived or consented to by the Holder, the Company
shall not by any action, including, without limitation, amending its certificate of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying



43









 







out of all such terms and in the taking of all such actions as may be necessary
or appropriate to protect the rights of Holder as set forth in this Warrant against
impairment. Without limiting the generality of the foregoing, the Company will (a)
not increase the par value of any Warrant Shares above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable Warrant Shares upon the exercise of
this Warrant, and (c) use commercially reasonable efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable the Company to perform its
obligations under this Warrant.




     Before taking any action which would result in an adjustment in the number of
Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the
Company shall obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies having
jurisdiction thereof.




     e) Jurisdiction. All questions concerning the construction, validity,
enforcement and interpretation of this Warrant shall be determined in accordance with the
provisions of the Purchase Agreement.




     f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon
the exercise of this Warrant, if not registered, will have restrictions upon resale imposed
by state and federal securities laws.




     g) Nonwaiver and Expenses. No course of dealing or any delay or failure to
exercise any right hereunder on the part of Holder shall operate as a waiver of such right
or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding the fact that
all rights hereunder terminate on the Termination Date. If the Company willfully and
knowingly fails to comply with any provision of this Warrant, which results in any material
damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient
to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees,
including those of appellate proceedings, incurred by Holder in collecting any amounts due
pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.




     h) Notices. Any notice, request or other document required or permitted to be
given or delivered to the Holder by the Company shall be delivered in accordance with the
notice provisions of the Purchase Agreement.




     i) Limitation of Liability. No provision hereof, in the absence of any
affirmative action by Holder to exercise this Warrant to purchase Warrant Shares, and no
enumeration herein of the rights or privileges of Holder, shall give rise to any liability
of Holder for the purchase price of any Common Stock or as a stockholder of the Company,
whether such liability is asserted by the Company or by creditors of the Company.



44









 






     j) Remedies. Holder, in addition to being entitled to exercise all rights
granted by law, including recovery of damages, will be entitled to specific performance of
its rights under this Warrant. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the provisions of
this Warrant and hereby agrees to waive and not to assert the defense in any action for
specific performance that a remedy at law would be adequate.




     k) Successors and Assigns. Subject to applicable securities laws, this Warrant
and the rights and obligations evidenced hereby shall inure to the benefit of and be binding
upon the successors of the Company and the successors and permitted assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all Holders from time to
time of this Warrant and shall be enforceable by any the Holder or holder of Warrant Shares.




     l) Amendment. This Warrant may be modified or amended or the provisions hereof
waived with the written consent of the Company and the Holder.




     m) Severability. Wherever possible, each provision of this Warrant shall be
interpreted in such manner as to be effective and valid under applicable law, but if any
provision of this Warrant shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provisions or the remaining provisions of this Warrant.




     n) Headings. The headings used in this Warrant are for the convenience of
reference only and shall not, for any purpose, be deemed a part of this Warrant.



     IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer
thereunto duly authorized as of the date first above indicated.



	 	 	 	 	 
	 	HYTHIAM, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	Chuck Timpe 	 
	 	 	Title:  	Chief Financial Officer 	 



45









 






	 	 	 	 	 



EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

HYTHIAM, INC.





     TO: HYTHIAM, INC.



          (1) The undersigned hereby elects to purchase                      Warrant Shares of the Company pursuant
to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of
the exercise price in full, together with all applicable transfer taxes, if any.




          (2) Payment shall take the form of (check applicable box):





o in lawful money of the United States; or




o [if permitted] the cancellation of such number of Warrant Shares as is
necessary, in accordance with the formula set forth in subsection 2(c), to
exercise this Warrant with respect to the maximum number of Warrant Shares
purchasable pursuant to the cashless exercise procedure set forth in
subsection 2(c).



          (3) Please issue a certificate or certificates representing said Warrant Shares in the name of
the undersigned or in such other name as is specified below:



 




The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery
of a certificate to:



 




 




 





[SIGNATURE OF HOLDER]


Name of Investing Entity:




 






Signature of Authorized Signatory of Investing Entity:




 





Name of Authorized Signatory:




 





Title of Authorized Signatory:




 





Date:




 







46









 







ASSIGNMENT FORM


(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)



     FOR VALUE RECEIVED, all of the shares of the foregoing Warrant and all rights evidenced
thereby are hereby assigned to




 whose address is




 


 .



 




Dated:                     ,                     





	 	 	 	 	 
	 

	 	Holder’s Signature:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Holder’s Address:	 	 
	 

	 	 	 	 
	 
	 
	 	 	 	 
	 

	 	 	 	 




Signature Guaranteed:  




NOTE: The signature to this Assignment Form must correspond with the name as it appears on the
face of the Warrant, without alteration or enlargement or any change whatsoever, and must be
guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or
other representative capacity should file proper evidence of authority to assign the foregoing
Warrant.





47









 







EXHIBIT B


FORM OF OPINION OF DREIER STEIN & KAHAN, LLP



     We have acted as counsel to Hythiam, Inc., a Delaware corporation (the “Company”) in
connection with the preparation, authorization, execution and delivery of, and the consummation by
the Company of the transactions contemplated by, that certain Securities Purchase Agreement dated
November 6, 2007, (the “Purchase Agreement”) between the Company and each purchaser identified on
the signature pages thereto (each, including its successors and assigns, a “Purchaser” and
collectively the “Purchasers”). Capitalized terms used herein and not otherwise defined shall have
the meanings ascribed to them in the Purchase Agreement unless the context otherwise requires.



     For the purpose of furnishing the opinions set forth below, we have examined: (i) the Purchase
Agreement; (ii) the Prospectus; (iii) the Prospectus Supplement; (iv) the Warrant; and (v) such
other documents as we considered necessary for the opinions hereinafter expressed. As used in this
opinion, the documents referenced in this paragraph are hereinafter referred to collectively as the
“Transaction Documents.”



     In so acting, we have examined originals or copies (certified or otherwise identified to our
satisfaction) of the Transaction Documents and such corporate records and certificates or
comparable documents of public officials and governmental authorities and of officers and
representatives of the Company, and have made such inquiries of such officers and representatives,
as we have deemed relevant and necessary as a basis for the opinions hereafter set forth.



     In such examination, we have assumed the genuineness of all signatures, the legal capacity of
natural persons, the authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified, conformed or photostatic copies,
and the authenticity of the originals of such latter documents. As to all questions of fact
material to this opinion that have not independently been established by us, we have relied upon
certifications or comparable documents of officers and representatives of the Company and upon the
representations and warranties of the parties contained in the Transaction Documents.



     As used herein, “to our knowledge,” “to our best knowledge” and all correlative and analogous
phrases mean the conscious awareness of facts or other information by those attorneys in our firm
actively involved in the transactions contemplated by the Purchase Agreement and do not include
constructive notice of any matters or information, and, other than conferences with executive
officers of the Company and our review of the Transaction Documents to the extent stated above, do
not imply that we have undertaken any independent inquiries or investigations (i) with any persons
outside our firm, (ii) as to the accuracy or completeness of any factual representations,
information or any other matters made or furnished in connection with the transactions contemplated
by the Purchase Agreement, or (iii) as to any instruments or agreements other than the Transaction
Documents. Moreover, such phrases mean only that nothing has come to our attention that leads us
to believe that there exists any facts or



48









 







circumstances materially contradicting the statement that follows and do not imply that we
know the statement to be correct or to have any basis, other than the Transaction Documents and
said conversations.



     As used herein, the term “Subsidiaries” includes only direct Subsidiaries of the Company
formed in the United States, as set forth in Schedule 3.1(a) of the Purchase Agreement.



     The opinions contained in this opinion letter merely constitute expressions of our reasoned
professional judgment regarding the matters of law addressed herein and are not intended, and
should not be construed as, a prediction or guarantee that any court of other public or
governmental authority will reach any particular result or conclusion as to the matters of law
addressed herein.



     Based upon and subject to the foregoing and the qualifications and limitations set forth
below, it is our opinion that:



     1. The Company has been duly incorporated and is validly existing as a corporation in good
standing under the laws of the State of Delaware, with full corporate power and authority to own,
lease and operate its properties and conduct its business as described in the Prospectus and the
Prospectus Supplement, to execute and deliver the Purchase Agreement and the Shares and the
Warrants and to perform its obligations thereunder, including, without limitation, to issue, sell
and deliver the Warrants and the Shares as contemplated by the Purchase Agreement.



     2. Based on and in reliance upon a certified statement of a duly elected officer of the
Company as to factual matters and based on certificates of good standing for Subsidiaries obtained
from the applicable state regulatory authorities, respectively, each of the Subsidiaries has been
duly incorporated and is validly existing as a corporation in good standing under the laws of its
respective jurisdiction of incorporation, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the Prospectus and the
Prospectus Supplement.



     3. The Purchase Agreement has been duly authorized, executed and delivered by the Company.



     4. The Shares have been duly authorized by the Company and, when issued and paid for by the
Purchasers as contemplated by the Purchase Agreement, will be validly issued, fully paid and
nonassessable and free of statutory preemptive rights.



     5. The Warrants have been duly authorized by the Company and, when executed and delivered as
contemplated by the Purchase Agreement, will constitute valid and legally binding obligations of
the Company enforceable against the Company in accordance with their terms, except that the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors’ rights generally and general principles of equity.



     6. The maximum Warrant Shares into which the Warrants are exercisable have been duly
authorized and validly reserved for issuance upon the exercise of the Warrants; and such Warrant
Shares, when issued and paid for by the Purchasers upon exercise in accordance with



49









 







the terms of the Warrants, will be duly and validly authorized, fully paid and non-assessable
and free of statutory preemptive rights.



     7. The terms of the Warrants and the capital stock of the Company, including the Shares, each
conform in all material respects to the descriptions thereof contained in the Prospectus and the
Prospectus Supplement.



     8. None of the execution, delivery and performance of the Purchase Agreement and the Warrants
by the Company, the issuance and sale of the Shares and the Warrants by the Company to the
Purchasers pursuant to the Purchase Agreement on the date hereof or the issuance of Warrant Shares
upon conversion of the Warrants do or will:




     (i) violate the Company’s or any Subsidiary’s charter or by-laws or similar governing
documents;




     (ii) violate any federal rule or regulation or the Delaware General Corporation Law or
laws of the State of California or the State of New York (other than federal or state
securities or “blue sky” laws, as to which we express no opinion in this paragraph)




     (iii) violate any judgment, writ, injunction, decree, order or ruling of any California,
New York, Delaware corporate or United States federal court or public or governmental
authority binding on the Company, of which we have knowledge; or




     (iv) require any consents, approvals, or authorization to be obtained by the Company, or
any registrations, declarations or filings to be made by the Company, in each case, under
any federal law, rule or regulation or law, rule or regulation of the State of California or
the State of New York or the Delaware General Corporation Law applicable to the Company that
have not been obtained or made (it being understood that we are expressing no opinion as to
any necessary qualification under the state securities or blue sky laws of the various
jurisdictions in which the Shares or Warrants are being offered and no opinion with respect
to the Conduct Rules of FINRA).



     9. Relying solely on a certificate of an officer of the Company as to factual matters, the
Company is not, and immediately after giving effect to the sale of the Shares and Warrants in
accordance with the Purchase Agreement and the application of the proceeds as described in the
Prospectus Supplement under the caption “Use of Proceeds,” will not be required to be registered as
an “investment company” within the meaning of the Investment Company Act of 1940, as amended.



     10. To our knowledge, (i) the Company is not a party to any legal or governmental action or
proceeding that challenges the validity or enforceability, or seeks to enjoin the performance, of
the Purchase Agreement or the issuance and sale of the Shares and Warrants; and (ii) there are no
actions, suits, claims, investigations or proceedings pending, threatened or contemplated to which
the Company or any Subsidiary or any of their respective directors or officers is or would be a
party or to which any of their respective properties is or would be subject at law or in equity,
before or by any federal, state, local or foreign governmental or regulatory commission, board,
body, authority or agency which are required to be described in



50









 







the Prospectus or the Prospectus Supplement (assuming that the Prospectus and the Prospectus
Supplement were each a prospectus under the Act) but are not so described as required.



     11. The statements in the Prospectus (as of its date) and the Prospectus Supplement (as of its
date and as of the date of this opinion) insofar as such statements constitute summaries of
documents or legal proceedings or refer to matters of law or legal conclusions, are accurate and
complete in all material respects and present fairly the information purported to be shown.



     12. The Company has an authorized capitalization as set forth under the heading
“Capitalization” in the Prospectus Supplement; all the outstanding shares of capital stock of the
Company have been duly and validly authorized and issued and are fully paid and non-assessable; the
capital stock of the Company conforms in all material respects to the description thereof contained
in the Prospectus; and all the outstanding shares of capital stock or other equity interests of
each Subsidiary of the Company have been duly and validly authorized and issued, are fully paid and
non-assessable (except, in the case of any foreign Subsidiary, for directors’ qualifying shares)
and, except as otherwise described in the Prospectus Supplement, are owned directly or indirectly
by the Company.



     We have participated in conferences with officers and other representatives of the Company,
representatives of the independent public accountants of the Company and representatives of the
placement agent at which the contents of the Prospectus and the Prospectus Supplement were
discussed and, although we are not passing upon and do not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus or the Prospectus Supplement
(except as and to the extent stated in paragraphs 1, 11 and 12, above), on the basis of the
foregoing, nothing has come to our attention that causes us to believe that (i) the Prospectus, as
of its effective date, included an untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light of the circumstances under which
they were made, not misleading or (ii) the Prospectus Supplement, as of the date of the Prospectus
Supplement, or as of the date hereof, included or includes an untrue statement of a material fact
or omitted to state a material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading (it being understood that we express
no opinion in this paragraph with respect to the financial statements and schedules, and
other financial data derived therefrom, included in the Prospectus or the Prospectus Supplement or
incorporated therein by reference).



     All opinions expressed herein are qualified in their entirety by the following:



     (a) We express no opinion as to any matters other than as expressly set forth above, and no
opinion is to be implied or inferred therefrom;



     (b) We express no opinion with respect to the effect of any law other than the law of the
State of California, the State of New York, the Delaware General Corporation Law, and the Federal
law of the United States.



     (c) This opinion is made for the benefit of and can be relied on in any manner only by the
addressees hereof, their successors and/or assigns and any counsel representing you in connection
with the Purchase Agreement and the transactions contemplated thereby. Further,



51









 







this opinion is rendered as of the date hereof, and we undertake no, and hereby disclaim any,
obligation to advise you of any changes in, or any new developments which might affect, any matters
or opinions set forth herein. This opinion may not be used, circulated, quoted, or otherwise
referred to for any other purpose, nor relied upon by any other person or for any other purpose
without our prior written consent.



	 	 	 	 	 
	 	Very truly yours,





Dreier Stein & Kahan LLP

 	 
	 	 	 
	 	 	 
	 	 	 



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SCHEDULE 3.1(a)

SUBSIDIARIES




	 	 	 
	Name	 	Jurisdiction
	 
	 	 
	Direct Subsidiaries
	 	 
	Hythiam International (Cayman), Ltd.

	 	Cayman Islands
	Hythiam International, Sarl

	 	Switzerland
	Quit System, Sarl

	 	Switzerland
	Hythiam Switzerland, Sarl

	 	Switzerland
	Quit System Italy, Srl

	 	Italy
	Quit Systems Spain Trading, Sl

	 	Spain
	Quit System Ukraine, Ltd.

	 	Ukraine
	Woodcliff Healthcare Investment Partners, LLC

	 	Delaware
	 
	 	 
	Indirect Subsidiaries
	 	 
	Comprehensive Care Corporation (“CompCare”)

	 	Delaware
	Comprehensive Behavioral Care, Inc.

	 	Nevada
	Comprehensive Care Integration, Inc.

	 	Delaware
	Comprehensive Behavioral Care of Connecticut, Inc.

	 	Florida
	Healthcare Management Services, Inc.

	 	Michigan
	CompCare of Pennsylvania, Inc.

	 	Nevada






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SCHEDULE 3.1(u)

REGISTRATION RIGHTS




     Standard “piggyback” registration rights with respect to 14,000 shares of our common stock
held by CEOcast, Inc.



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SCHEDULE 3.1(z)

SECURED AND UNSECURED INDEBTEDNESS




     On January 17, 2007, the Company entered into a securities purchase agreement pursuant to
which we agreed to issue and sell to Highbridge International LLC (“Highbridge”) a $10
million senior secured note and a warrant to purchase up to 249,750 shares of our common stock
(together, the “Financing”). Highbridge then owned approximately 685,000 shares of Company
common stock. The note bears interest at a rate of prime plus 2.5%, interest payable quarterly
commencing on April 15, 2007 and matures on January 15, 2010. The interest rate in effect at
September 30, 2007 was 10.75%.



     The note is redeemable at the option of Highbridge beginning on July 17, 2008. The note is
redeemable at Company’s option anytime prior to maturity at a redemption price ranging from 103% to
110% of the principal amount during the first 18 months.



     The warrant has a term of five years, and is exercisable at $12.01 per share, or 120% of the
$10.01 closing price of Company common stock on January 16, 2007. The exercise price of the
warrant will be proportionately adjusted for stock splits or dividends, will be reduced and the
number of shares will be adjusted if the Company sells or is deemed to have sold common shares at a
price below $12.01 per share. For example, if the Company were to sell $40 million in Securities
at a Per Share Purchase Price of $4.79, Highbridge would receive 31,130 additional warrant shares,
and the exercise price would be adjusted to $10.68.



     In connection with the Financing, the Company entered into a security agreement granting
Highbridge a first-priority perfected security interest in all assets now owned or thereafter
acquired. The Company also entered into a pledge agreement with Highbridge, as collateral agent,
pursuant to which the Company delivered equity interests evidencing 65% of the Company’s ownership
of its foreign subsidiaries. In the event of a default, the collateral agent is given broad powers
to sell or otherwise deal with the pledged collateral. There are no material financial covenant
provisions associated with this debt.



     Total funds received of $10,000,000 were allocated to the warrant and the senior secured note
in the amounts of $1,380,000 and $8,620,000, respectively, in accordance with their relative fair
values as determined at the date of issuance. The value allocated to the warrant is being treated
as a discount to the note and is being amortized to interest expense over the 18-month period
between the date of issuance and the date that Highbridge has the right to redeem the note using
the effective interest method. As of September 30, 2007, the unamortized discount on the senior
secured notes is approximately $754,000. In addition, the Company paid a $150,000 origination fee
and incurred approximately $150,000 in other costs associated with the financing, which have been
allocated to the warrant and senior secured note in accordance with the relative fair values
assigned to these instruments, and are being deferred and amortized over the 18-month period
between the date of issuance and the date that Highbridge has the right to redeem the note.



     Long term debt of the Company and its Subsidiaries also includes 7.5% convertible subordinated
debentures of CompCare with a remaining principal balance of $2,244,000. As part of the purchase
price allocation, an adjustment of $266,000 was made at the date of



55









 







acquisition to reduce the carrying value of this debt to its estimated fair value. This
adjustment is being treated as a discount and is being amortized over the remaining contractual
maturity term of the note using the effective interest method.



     The following table shows the total principal amount, related interest rates and maturities of
long-term debt. No principal payments on Company debt are due within one year as of September 30,
2007:



	 	 	 	 	 
	Senior secured note due January, 2010, interest payable
	 	$	9,246,000	 
	quarterly at prime plus 2.5%, net of $754,000 unamortized
discount
	 	 	 	 
	 
	 	 	 	 
	7.5% Convertible subordinated debentures due April, 2010,
	 	$	2,036,000	 
	interest payable semi-annually, net of $208,000 unamortized
discount (1)
	 	 	 	 
	 
	 	 	 	 
	Total Long-Term Debt
	 	$	11,282,000	 





(1) At September 30, 2007, the debentures are convertible into 15,051 shares of CompCare common
stock at a conversion price of $149.09 per share.





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