exv10w3






Exhibit 10.3




EXECUTION COPY



NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES
INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH
COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.




HYTHIAM, INC.




Amended and Restated Warrant To Purchase Common Stock




Warrant No.: 1

Number of Shares of Common Stock: 1,300,000

Date of Issuance: January 18, 2007 (“Issuance Date”)

Date of Amendment and Restatement: July 31, 2008




     Hythiam, Inc., a Delaware corporation (the “Company”), hereby certifies that, for good and
valuable consideration, the receipt and sufficiency of which are hereby acknowledged, HIGHBRIDGE
INTERNATIONAL LLC, the registered holder hereof or its permitted assigns (the “Holder”), is
entitled, subject to the terms set forth below, to purchase from the Company, at the Exercise Price
(as defined below) then in effect, upon surrender of this Warrant to Purchase Common Stock
(including any Warrants to Purchase Common Stock issued in exchange, transfer or replacement
hereof, the “Warrant”), at any time or times on or after the date hereof, but not after 11:59 p.m.,
New York time, on the Expiration Date (as defined below), One Million Three Hundred Thousand
(1,300,000) fully paid nonassessable shares of Common Stock (as defined below) (the “Warrant
Shares”). Except as otherwise defined herein, capitalized terms in this Warrant shall have the
meanings set forth in Section 15. This Warrant amends, supplements, modifies and completely
restates and supersedes the Warrants (the “Existing Warrants”) dated as of the Issuance Date,
issued by the Company to the Holder for the exercise of Two Hundred Forty Nine Thousand Seven
Hundred Fifty (249,750) shares of Common Stock but shall not, except as specifically amended hereby
or as set forth in the Amendment and Exchange Agreement (as defined below), constitute a release,
satisfaction or novation of any of the obligations under the Existing Warrants or any other
Transaction Document (as defined in the Securities Purchase Agreement, dated as of January 17, 2007
(the “Subscription Date”), by and among the Company and the investors (the “Buyers”) referred to
therein (the “Existing Securities Purchase Agreement”) as amended by the Amendment and



 









 







Exchange Agreement, dated July 31, 2008 (the “Replacement Date”) (the “Amendment and Exchange
Agreement”), by and between the Company and the Holder (as amended, the “Securities Purchase
Agreement”)). This Warrant is one of an issue of Warrants to Purchase Common Stock (the “SPA
Warrants”) issued pursuant to the Amendment and Exchange Agreement amending and restating the terms
of the Existing Warrants.



     1. EXERCISE OF WARRANT.



          (a) Mechanics of Exercise. Subject to the terms and conditions hereof (including,
without limitation, the limitations set forth in Section 1(f)), this Warrant may be exercised by
the Holder on any day on or after the date hereof, in whole or in part, by (i) delivery of a
written notice to the Company, in the form attached hereto as Exhibit A (the “Exercise
Notice”), of the Holder’s election to exercise this Warrant and (ii) (A) payment to the Company of
an amount equal to the applicable Exercise Price multiplied by the number of Warrant Shares as to
which this Warrant is being exercised (the “Aggregate Exercise Price”) in cash or by wire transfer
of immediately available funds or (B) by notifying the Company that this Warrant is being exercised
pursuant to a Cashless Exercise (as defined in Section 1(d)). The Holder shall not be required to
deliver the original Warrant in order to effect an exercise hereunder. Execution and delivery of
the Exercise Notice with respect to less than all of the Warrant Shares shall have the same effect
as cancellation of the original Warrant and issuance of a new Warrant evidencing the right to
purchase the remaining number of Warrant Shares. On or before the first (1st) Business
Day following the date on which the Company has received each of the Exercise Notice and the
Aggregate Exercise Price (or notice of a Cashless Exercise) (the “Exercise Delivery Documents”),
the Company shall transmit by facsimile an acknowledgment of confirmation of receipt of the
Exercise Delivery Documents to the Holder and the Company’s transfer agent (the “Transfer Agent”).
On or before the third (3rd) Business Day following the date on which the Company has
received all of the Exercise Delivery Documents (the “Share Delivery Date”), the Company shall (X)
provided that the Transfer Agent is participating in The Depository Trust Company (“DTC”) Fast
Automated Securities Transfer Program, upon the request of the Holder, credit such aggregate number
of Warrant Shares to which the Holder is entitled pursuant to such exercise to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system, or (Y)
if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program,
issue and dispatch by overnight courier to the address as specified in the Exercise Notice, a
certificate, registered in the Company’s share register in the name of the Holder or its designee,
for the number of shares of Common Stock to which the Holder is entitled pursuant to such exercise,
which certificates shall not bear any restrictive legends unless required pursuant to Section 2(g)
of the Securities Purchase Agreement. Upon delivery of the Exercise Delivery Documents, the Holder
shall be deemed for all corporate purposes to have become the holder of record of the Warrant
Shares with respect to which this Warrant has been exercised, irrespective of the date such Warrant
Shares are credited to the Holder’s DTC account or the date of delivery of the certificates
evidencing such Warrant Shares, as the case may be. If this Warrant is submitted in connection
with any exercise pursuant to this Section 1(a) and the number of Warrant Shares represented by
this Warrant submitted for exercise is greater than the number of Warrant Shares being acquired
upon an exercise, then the Company shall as soon as practicable and in no event later than three
Business Days after any exercise and at its own expense, issue a new Warrant (in accordance with
Section 7(d)) representing the right to purchase the number of Warrant Shares purchasable




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immediately prior to such exercise under this Warrant, less the number of Warrant Shares with
respect to which this Warrant is exercised. No fractional shares of Common Stock are to be issued
upon the exercise of this Warrant, but rather the number of shares of Common Stock to be issued
shall be rounded up to the nearest whole number. The Company shall pay any and all taxes which may
be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this
Warrant.




          (b) Exercise Price. For purposes of this Warrant, “Exercise Price” means $2.15,
subject to adjustment as provided herein.




          (c) Company’s Failure to Timely Deliver Securities. If the Company shall fail for any
reason or for no reason to issue to the Holder within five (5) Business Days of receipt of the
Exercise Delivery Documents, a certificate for the number of shares of Common Stock to which the
Holder is entitled and register such shares of Common Stock on the Company’s share register or to
credit the Holder’s balance account with DTC for such number of shares of Common Stock to which the
Holder is entitled upon the Holder’s exercise of this Warrant, then, in addition to all other
remedies available to the Holder, the Company shall pay in cash to the Holder on each day after
such third Business Day that the issuance of such shares of Common Stock is not timely effected an
amount equal to 1.5% of the product of (A) the sum of the number of shares of Common Stock not
issued to the Holder on a timely basis and to which the Holder is entitled and (B) the Closing Sale
Price of the shares of Common Stock on the Trading Day immediately preceding the last possible date
which the Company could have issued such shares of Common Stock to the Holder without violating
Section 1(a). In addition to the foregoing, if within three (3) Trading Days after the Company’s
receipt of the facsimile copy of a Exercise Notice the Company shall fail to issue and deliver a
certificate to the Holder and register such shares of Common Stock on the Company’s share register
or credit the Holder’s balance account with DTC for the number of shares of Common Stock to which
the Holder is entitled upon the Holder’s exercise hereunder, and if on or after such Trading Day
the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver
in satisfaction of a sale by the Holder of shares of Common Stock issuable upon such exercise that
the Holder anticipated receiving from the Company (a “Buy-In"), then the Company shall, within
three (3) Business Days after the Holder’s request and in the Holder’s discretion, either (i) pay
cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased (the “Buy-In Price"), at which
point the Company’s obligation to deliver such certificate (and to issue such shares of Common
Stock) or credit such Holder’s balance account with DTC shall terminate, or (ii) promptly honor its
obligation to deliver to the Holder a certificate or certificates representing such shares of
Common Stock or credit such Holder’s balance account with DTC and pay cash to the Holder in an
amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock, times (B) the Closing Bid Price on the date of exercise.




          (d) Cashless Exercise. Notwithstanding anything contained herein to the contrary, if
a Registration Statement (as defined in the Registration Rights Agreement) covering the Warrant
Shares that are the subject of the Exercise Notice (the “Unavailable Warrant Shares”) is not
available for the resale of such Unavailable Warrant Shares, the Holder may, in its sole
discretion, exercise this Warrant in whole or in part and, in lieu of making the cash



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payment otherwise contemplated to be made to the Company upon such exercise in payment of the
Aggregate Exercise Price, elect instead to receive upon such exercise the “Net Number” of shares of
Common Stock determined according to the following formula (a “Cashless Exercise”):




Net
Number = (A x B) - (A x C)





B



For purposes of the foregoing formula:





	 	A=	 	the total number of shares with respect to which
this Warrant is then being exercised.
	 
	 	B=	 	the average of the Closing Sale Prices of the
shares of Common Stock (as reported by Bloomberg) for the five (5)
consecutive Trading Days ending on the date immediately preceding
the date of the Exercise Notice.
	 
	 	C=	 	the Exercise Price then in effect for
the applicable Warrant Shares at the time of such
exercise.





          (e) Disputes. In the case of a dispute as to the determination of the Exercise Price
or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the Holder
the number of Warrant Shares that are not disputed and resolve such dispute in accordance with
Section 12.




          (f) Limitations on Exercises. 





(1) Beneficial Ownership. The Company shall not effect the
exercise of this Warrant, and the Holder shall not have the right to
exercise this Warrant, to the extent that after giving effect to such
exercise, such Person (together with such Person’s affiliates) would
beneficially own in excess of 4.99% of the shares of Common Stock
outstanding immediately after giving effect to such exercise. For
purposes of the foregoing sentence, the aggregate number of shares of
Common Stock beneficially owned by such Person and its affiliates
shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which the determination of
such sentence is being made, but shall exclude shares of Common Stock
which would be issuable upon (i) exercise of the remaining,
unexercised portion of this Warrant beneficially owned by such Person
and its affiliates and (ii) exercise or conversion of the unexercised
or unconverted portion of any other securities of the Company
beneficially owned by such Person and its affiliates (including,
without limitation, any convertible notes or convertible preferred
stock or warrants) subject to a limitation on conversion or exercise
analogous to the



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limitation contained herein. Except as set forth in the preceding
sentence, for purposes of this paragraph, beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended. For purposes of this Warrant, in
determining the number of outstanding shares of Common Stock, the
Holder may rely on the number of outstanding shares of Common Stock
as reflected in (1) the Company’s most recent Form 10-K, Form 10-Q,
Current Report on Form 8-K or other public filing with the Securities
and Exchange Commission, as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or
the Transfer Agent setting forth the number of shares of Common Stock
outstanding. For any reason at any time, upon the written or oral
request of the Holder, the Company shall within one Business Day
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 the SPA Warrants, by the Holder and its affiliates since
the date as of which such number of outstanding shares of Common
Stock was reported. By written notice to the Company, the Holder may
from time to time increase or decrease the Maximum Percentage to any
other percentage not in excess of 9.99% specified in such notice;
provided that (i) any such increase will not be effective until the
sixty-first (61st) day after such notice is delivered to
the Company, and (ii) any such increase or decrease will apply only
to the Holder and not to any other holder of SPA Warrants.




(2) Principal Market Regulation. The Company shall not be
obligated to issue any shares of Common Stock upon exercise of this
Warrant if the issuance of such shares of Common Stock would exceed
that number of shares of Common Stock which the Company may issue
upon exercise of this Warrant without breaching the Company’s
obligations under the rules or regulations of the Principal Market
and any applicable Eligible Market (the number of shares which may be
issued without violating such rules and regulations, the “Exchange
Cap”), except that such limitation shall not apply in the event that
the Company (A) obtains the approval of its stockholders as required
by the applicable rules of the Principal Market and any applicable
Eligible Market for issuances of shares of Common Stock in excess of
such amount or (B) obtains a written opinion from outside counsel to
the Company that such approval is not required, which opinion shall
be reasonably satisfactory to the Required Holders. Unless and until
such approval or written opinion is obtained, no Buyer shall be
issued in the aggregate, upon exercise of any SPA Warrants shares



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of Common Stock in an amount greater than the product of the Exchange
Cap multiplied by a fraction, the numerator of which is the total
number of shares of Common Stock underlying the SPA Warrants issued
to such Buyer pursuant to the Securities Purchase Agreement on the
Issuance Date and the denominator of which is the aggregate number of
shares of Common Stock underlying the SPA Warrants issued to the
Buyers pursuant to the Securities Purchase Agreement on the Issuance
Date (with respect to each Buyer, the “Exchange Cap Allocation”). In
the event that any Buyer shall sell or otherwise transfer any of such
Buyer’s SPA Warrants, the transferee shall be allocated a pro rata
portion of such Buyer’s Exchange Cap Allocation, and the restrictions
of the prior sentence shall apply to such transferee with respect to
the portion of the Exchange Cap Allocation allocated to such
transferee. In the event that any holder of SPA Warrants shall
exercise all of such holder’s SPA Warrants into a number of shares of
Common Stock which, in the aggregate, is less than such holder’s
Exchange Cap Allocation, then the difference between such holder’s
Exchange Cap Allocation and the number of shares of Common Stock
actually issued to such holder shall be allocated to the respective
Exchange Cap Allocations of the remaining holders of SPA Warrants on
a pro rata basis in proportion to the shares of Common Stock
underlying the SPA Warrants then held by each such holder. In the
event that the Company is prohibited from issuing any Warrant Shares
for which an Exercise Notice has been received as a result of the
operation of this Section 1(f)(2), the Company shall pay cash in
exchange for cancellation of such Warrant Shares, at a price per
Warrant Share equal to the difference between the Closing Sale Price
and the Exercise Price as of the date of the attempted exercise.



          (g) Insufficient Authorized Shares. If at any time while any of the Warrants remain
outstanding the Company does not have a sufficient number of authorized and unreserved shares of
Common Stock to satisfy its obligation to reserve for issuance upon exercise of the Warrants at
least a number of shares of Common Stock equal to 110% of the number of shares of Common Stock as
shall from time to time be necessary to effect the exercise of all of the Warrants then outstanding
(the “Required Reserve Amount”) (an “Authorized Share Failure”), then the Company shall immediately
take all action necessary to increase the Company’s authorized shares of Common Stock to an amount
sufficient to allow the Company to reserve the Required Reserve Amount for the Warrants then
outstanding. Without limiting the generality of the foregoing sentence, as soon as practicable
after the date of the occurrence of an Authorized Share Failure, but in no event later than sixty
(60) days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting
of its stockholders for the approval of an increase in the number of authorized shares of Common
Stock. In connection with such meeting, the Company shall provide each stockholder with a proxy
statement and shall use its best efforts to solicit its stockholders’ approval of such increase in
authorized shares of Common



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Stock and to cause its board of directors to recommend to the stockholders that they approve
such proposal.




     2. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise Price and
the number of Warrant Shares shall be adjusted from time to time as follows:



          (a) Adjustment upon Issuance of shares of Common Stock. If and whenever on or after
the Subscription Date the Company issues or sells, or in accordance with this Section 2 is deemed
to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of
Common Stock owned or held by or for the account of the Company, but excluding shares of Common
Stock deemed to have been issued by the Company in connection with any Excluded Securities for a
consideration per share less than a price equal to the Exercise Price in effect immediately prior
to such issue or sale or deemed issuance or sale (the “Applicable Price” and the foregoing a
“Dilutive Issuance,” provided, however, that if, in connection with such Dilutive Issuance, the
Holder hereof is granted, and exercises, the Purchase Rights granted to it pursuant to Section 4(a)
hereof, such issuance shall not be deemed to be a Dilutive Issuance and no adjustment for such
issuance shall be made pursuant to this Section 2), then immediately after such Dilutive Issuance
the Exercise Price then in effect shall be reduced to an amount equal to the product of (A) the
Exercise Price in effect immediately prior to such Dilutive Issuance and (B) the quotient
determined by dividing (1) the sum of (I) the product derived by multiplying the Conversion Price
in effect immediately prior to such Dilutive Issuance and the number of shares of Common Stock
Deemed Outstanding immediately prior to such Dilutive Issuance plus (II) the consideration, if any,
received by the Company upon such Dilutive Issuance, by (2) the product derived by multiplying
(I) the Exercise Price in effect immediately prior to such Dilutive Issuance by (II) the number of
shares of Common Stock Deemed Outstanding immediately after such Dilutive Issuance. Upon each such
adjustment of the Exercise Price hereunder, the number of Warrant Shares shall be adjusted to the
number of shares of Common Stock determined by multiplying the Exercise Price in effect immediately
prior to such adjustment by the number of Warrant Shares acquirable upon exercise of this Warrant
immediately prior to such adjustment and dividing the product thereof by the Exercise Price
resulting from such adjustment. For purposes of determining the adjusted Exercise Price under this
Section 2(a), the following shall be applicable:





(i) Issuance of Options. If the Company in any manner grants any
Options and the lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such Option or upon conversion,
exercise or exchange of any Convertible Securities issuable upon exercise of
any such Option is less than the Applicable Price, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by
the Company at the time of the granting or sale of such Option for such
price per share. For purposes of this Section 2(a)(i), the “lowest price
per share for which one share of Common Stock is issuable upon exercise of
any such Options or upon conversion, exercise or exchange of any such
Convertible Securities issuable upon exercise of such Options” shall be
equal to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect



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to any one share of Common Stock upon the granting or sale of the Option,
upon exercise of the Option and upon conversion, exercise or exchange of any
Convertible Security issuable upon exercise of such Option. No further
adjustment of the Exercise Price or number of Warrant Shares shall be made
upon the actual issuance of such shares of Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such shares of Common Stock upon conversion, exercise or
exchange of such Convertible Securities.




(ii) Issuance of Convertible Securities. If the Company in any
manner issues or sells any Convertible Securities and the lowest price per
share for which one share of Common Stock is issuable upon the conversion,
exercise or exchange thereof is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the issuance or sale of such
Convertible Securities for such price per share. For the purposes of this
Section 2(a)(ii), the “lowest price per share for which one share of Common
Stock is issuable upon the conversion, exercise or exchange” shall be equal
to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to one share of Common Stock upon the
issuance or sale of the Convertible Security and upon conversion, exercise
or exchange of such Convertible Security. No further adjustment of the
Exercise Price or number of Warrant Shares shall be made upon the actual
issuance of such shares of Common Stock upon conversion, exercise or
exchange of such Convertible Securities, and if any such issue or sale of
such Convertible Securities is made upon exercise of any Options for which
adjustment of this Warrant has been or is to be made pursuant to other
provisions of this Section 2(a), no further adjustment of the Exercise Price
or number of Warrant Shares shall be made by reason of such issue or sale.




(iii) Change in Option Price or Rate of Conversion. If the purchase
price provided for in any Options, the additional consideration, if any,
payable upon the issue, conversion, exercise or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exercisable or exchangeable for shares of Common Stock increases or
decreases at any time, the Exercise Price and the number of Warrant Shares
in effect at the time of such increase or decrease shall be adjusted to the
Exercise Price and the number of Warrant Shares which would have been in
effect at such time had such Options or Convertible Securities provided for
such increased or decreased purchase price, additional consideration or
increased or decreased conversion rate, as the case may be, at the time
initially granted, issued or sold. For purposes of this Section 2(a)(iii),
if the terms of any Option or Convertible Security that was outstanding as
of the date of issuance of this Warrant are increased or decreased in the
manner described in the immediately



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preceding sentence, then such Option or Convertible Security and the shares
of Common Stock deemed issuable upon exercise, conversion or exchange
thereof shall be deemed to have been issued as of the date of such increase
or decrease. No adjustment pursuant to this Section 2(a) shall be made if
such adjustment would result in an increase of the Exercise Price then in
effect or a decrease in the number of Warrant Shares.




(iv) Calculation of Consideration Received. In case any Option is
issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a consideration of $0.01. If
any shares of Common Stock, Options or Convertible Securities are issued or
sold or deemed to have been issued or sold for cash, the consideration
received therefor will be deemed to be the net amount received by the
Company therefor. If any shares of Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash, the
amount of such consideration received by the Company will be the fair value
of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such security on the date of
receipt. If any shares of Common Stock, Options or Convertible Securities
are issued to the owners of the non-surviving entity in connection with any
merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion
of the net assets and business of the non-surviving entity as is
attributable to such shares of Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any consideration other
than cash or securities will be determined jointly by the Company and the
Required Holders. If such parties are unable to reach agreement within ten
(10) days after the occurrence of an event requiring valuation (the
“Valuation Event”), the fair value of such consideration will be determined
within five (5) Business Days after the tenth day following the Valuation
Event by an independent, reputable appraiser jointly selected by the Company
and the Required Holders. The determination of such appraiser shall be
final and binding upon all parties absent manifest error and the fees and
expenses of such appraiser shall be borne by the Company.




(v) Record Date. If the Company takes a record of the holders of
shares of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in shares of Common Stock, Options or
in Convertible Securities or (B) to subscribe for or purchase shares of
Common Stock, Options or Convertible Securities, then such record date will
be deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the



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declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case
may be.



          (b) Adjustment upon Subdivision or Combination of Common Stock. If the Company at any
time on or after the Subscription Date subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to such subdivision will
be proportionately reduced and the number of Warrant Shares will be proportionately increased. If
the Company at any time on or after the Subscription Date combines (by combination, reverse stock
split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller
number of shares, the Exercise Price in effect immediately prior to such combination will be
proportionately increased and the number of Warrant Shares will be proportionately decreased. Any
adjustment under this Section 2(b) shall become effective at the close of business on the date the
subdivision or combination becomes effective.




          (c) Other Events. If any event occurs of the type contemplated by the provisions of
this Section 2 but not expressly provided for by such provisions (including, without limitation,
the granting of stock appreciation rights, phantom stock rights or other rights with equity
features), then the Company’s Board of Directors will make an appropriate adjustment in the
Exercise Price and the number of Warrant Shares so as to protect the rights of the Holder; provided
that no such adjustment pursuant to this Section 2(c) will increase the Exercise Price or decrease
the number of Warrant Shares as otherwise determined pursuant to this Section 2.




     3. RIGHTS UPON DISTRIBUTION OF ASSETS. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares
of Common Stock, by way of return of capital or otherwise (including, without limitation, any
distribution of cash, stock or other securities, property or options by way of a dividend, spin
off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction)
(a “Distribution”), at any time after the issuance of this Warrant, then, in each such case:



          (a) any Exercise Price in effect immediately prior to the close of business on the record date
fixed for the determination of holders of shares of Common Stock entitled to receive the
Distribution shall be reduced, effective as of the close of business on such record date, to a
price determined by multiplying such Exercise Price by a fraction of which (i) the numerator shall
be the Closing Bid Price of the shares of Common Stock on the Trading Day immediately preceding
such record date minus the value of the Distribution (as determined in good faith by the Company’s
Board of Directors) applicable to one share of shares of Common Stock, and (ii) the denominator
shall be the Closing Bid Price of the shares of Common Stock on the Trading Day immediately
preceding such record date; and




          (b) the number of Warrant Shares shall be increased to a number of shares equal to the number
of shares of Common Stock obtainable immediately prior to the close of business on the record date
fixed for the determination of holders of shares of Common Stock



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entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in
the immediately preceding paragraph (a); provided that in the event that the Distribution is of
shares of Common Stock (or common stock) (“Other Shares of Common Stock”) of a company whose common
shares are traded on a national securities exchange or a national automated quotation system, then
the Holder may elect to receive a warrant to purchase Other Shares of Common Stock in lieu of an
increase in the number of Warrant Shares, the terms of which shall be identical to those of this
Warrant, except that such warrant shall be exercisable into the number of shares of Other Shares of
Common Stock that would have been payable to the Holder pursuant to the Distribution had the Holder
exercised this Warrant immediately prior to such record date and with an aggregate exercise price
equal to the product of the amount by which the exercise price of this Warrant was decreased with
respect to the Distribution pursuant to the terms of the immediately preceding paragraph (a) and
the number of Warrant Shares calculated in accordance with the first part of this paragraph (b).




     4. PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.



          (a) Purchase Rights. In addition to any adjustments pursuant to Section 2 above, if
at any time the Company grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record holders of any class
of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder
could have acquired if the Holder had held the number of shares of Common Stock acquirable upon
complete exercise of this Warrant (without regard to any limitations on the exercise of this
Warrant) immediately before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the record holders of
shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.




          (b) Fundamental Transactions. The Company shall not enter into or be party to a
Fundamental Transaction unless the Successor Entity assumes in writing all of the obligations of
the Company under this Warrant and the other Transaction Documents in accordance with the
provisions of this Section (4)(b) pursuant to written agreements in form and substance satisfactory
to the Required Holders and approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of Warrants in exchange for such Warrants a security
of the Successor Entity evidenced by a written instrument substantially similar in form and
substance to this Warrant, including, without limitation, an adjusted exercise price equal to the
value for the shares of Common Stock reflected by the terms of such Fundamental Transaction, and
exercisable for a corresponding number of shares of capital stock equivalent to the shares of
Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any
limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and
satisfactory to the Required Holders. Upon the occurrence of any Fundamental Transaction, the
Successor Entity shall succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer
instead to the Successor Entity), and may exercise every right and power of the Company and shall
assume all of the obligations of the Company under this Warrant with the same effect as if such
Successor Entity had been named as the Company herein. Upon consummation of the Fundamental
Transaction, the Successor Entity shall deliver



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to the Holder confirmation that there shall be issued upon exercise of this Warrant at any
time after the consummation of the Fundamental Transaction, in lieu of the shares of the Common
Stock (or other securities, cash, assets or other property) purchasable upon the exercise of this
Warrant prior to such Fundamental Transaction, such shares of stock, securities, cash, assets or
any other property whatsoever (including warrants or other purchase or subscription rights) which
the Holder would have been entitled to receive upon the happening of such Fundamental Transaction
had this Warrant been converted immediately prior to such Fundamental Transaction, as adjusted in
accordance with the provisions of this Warrant. In addition to and not in substitution for any
other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which
holders of shares of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right to receive upon an
exercise of this Warrant at any time after the consummation of the Fundamental Transaction but
prior to the Expiration Date, in lieu of the shares of the Common Stock (or other securities, cash,
assets or other property) purchasable upon the exercise of this Warrant prior to such Fundamental
Transaction, such shares of stock, securities, cash, assets or any other property whatsoever
(including warrants or other purchase or subscription rights) which the Holder would have been
entitled to receive upon the happening of such Fundamental Transaction had this Warrant been
exercised immediately prior to such Fundamental Transaction. Provision made pursuant to the
preceding sentence shall be in a form and substance reasonably satisfactory to the Required
Holders. The provisions of this Section shall apply similarly and equally to successive
Fundamental Transactions and Corporate Events and shall be applied without regard to any
limitations on the exercise of this Warrant.




          (c) Notwithstanding the foregoing, in the event of a Fundamental Transaction other than one in
which the Successor Entity is a Public Successor Entity that assumes this Warrant such that this
Warrant shall be exercisable for the publicly traded common stock of such Public Successor Entity,
at the request of the Holder delivered before the 90th day after such Fundamental Transaction, the
Company (or the Successor Entity) shall purchase this Warrant from the Holder by paying to the
Holder, within five (5) Business Days after such request (or, if later, on the effective date of
the Fundamental Transaaction), cash in an amount equal to the value of the remaining unexercised
portion of this Warrant on the date of such consummation, which value shall be determined by use of
the Black Scholes Option Pricing Model using a volatility equal to the 100 day average historical
price volatility prior to the date of the public announcement of such Fundamental Transaction.




     5. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will
not, by amendment of its Certificate of Incorporation, Bylaws or through any reorganization,
transfer of assets, consolidation, merger, scheme of arrangement, 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, and will at all times in good faith carry out all the provisions
of this Warrant and take all action as may be required to protect the rights of the Holder.
Without limiting the generality of the foregoing, the Company (i) shall not increase the par value
of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price
then in effect, (ii) shall take all such actions as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon
the exercise of this Warrant, and (iii) shall, so long as any of the SPA



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Warrants are outstanding, take all action necessary to reserve and keep available out of its
authorized and unissued shares of Common Stock, solely for the purpose of effecting the exercise of
the SPA Warrants, 110% of the number of shares of Common Stock as shall from time to time be
necessary to effect the exercise of the SPA Warrants then outstanding (without regard to any
limitations on exercise).



     6. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise specifically provided
herein, the Holder, solely in such Person’s capacity as a holder of this Warrant, shall not be
entitled to vote or receive dividends or be deemed the holder of share capital of the Company for
any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder,
solely in such Person’s capacity as the Holder of this Warrant, any of the rights of a stockholder
of the Company or any right to vote, give or withhold consent to any corporate action (whether any
reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise,
prior to the issuance to the Holder of the Warrant Shares which such Person is then entitled to
receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant
shall be construed as imposing any liabilities on the Holder to purchase any securities (upon
exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities
are asserted by the Company or by creditors of the Company. Notwithstanding this Section 6, the
Company shall provide the Holder with copies of the same notices and other information given to the
stockholders of the Company generally, contemporaneously with the giving thereof to the
stockholders.



     7. REISSUANCE OF WARRANTS.



          (a) Transfer of Warrant. If this Warrant is to be transferred, the Holder shall
surrender this Warrant to the Company, whereupon the Company will forthwith issue and deliver upon
the order of the Holder a new Warrant (in accordance with Section 7(d)), registered as the Holder
may request, representing the right to purchase the number of Warrant Shares being transferred by
the Holder and, if less then the total number of Warrant Shares then underlying this Warrant is
being transferred, a new Warrant (in accordance with Section 7(d)) to the Holder representing the
right to purchase the number of Warrant Shares not being transferred.




          (b) Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this
Warrant, and, in the case of loss, theft or destruction, of any indemnification undertaking by the
Holder to the Company in customary form and, in the case of mutilation, upon surrender and
cancellation of this Warrant, the Company shall execute and deliver to the Holder a new Warrant (in
accordance with Section 7(d)) representing the right to purchase the Warrant Shares then underlying
this Warrant.




          (c) Exchangeable for Multiple Warrants. This Warrant is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new Warrant or
Warrants (in accordance with Section 7(d)) representing in the aggregate the right to purchase the
number of Warrant Shares then underlying this Warrant, and each such new Warrant will represent the
right to purchase such portion of such Warrant Shares as is designated



- 13 -









 






by the Holder at the time of such surrender; provided, however, that no Warrants for
fractional shares of Common Stock shall be given.




          (d) Issuance of New Warrants. Whenever the Company is required to issue a new Warrant
pursuant to the terms of this Warrant, such new Warrant (i) shall be of like tenor with this
Warrant, (ii) shall represent, as indicated on the face of such new Warrant, the right to purchase
the Warrant Shares then underlying this Warrant (or in the case of a new Warrant being issued
pursuant to Section 7(a) or Section 7(c), the Warrant Shares designated by the Holder which, when
added to the number of shares of Common Stock underlying the other new Warrants issued in
connection with such issuance, does not exceed the number of Warrant Shares then underlying this
Warrant), (iii) shall have an issuance date, as indicated on the face of such new Warrant which is
the same as the Issuance Date, and (iv) shall have the same rights and conditions as this Warrant.




     8. NOTICES. Whenever notice is required to be given under this Warrant, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Warrant, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of the Exercise Price,
setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least fifteen days prior to the date on which the Company closes its books or takes a record (A)
with respect to any dividend or distribution upon the shares of Common Stock, (B) with respect to
any grants, issuances or sales of any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property to holders of shares of Common Stock or (C) for determining
rights to vote with respect to any Fundamental Transaction, dissolution or liquidation, provided in
each case that such information shall be made known to the public prior to or in conjunction with
such notice being provided to the Holder.



     9. AMENDMENT AND WAIVER. Except as otherwise provided herein, the provisions of this
Warrant may be amended and the Company may take any action herein prohibited, or omit to perform
any act herein required to be performed by it, only if the Company has obtained the written consent
of the Required Holders; provided that no such action may increase the exercise price of any SPA
Warrant or decrease the number of shares or class of stock obtainable upon exercise of any SPA
Warrant without the written consent of the Holder. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the SPA Warrants then outstanding.



     10. GOVERNING LAW. This Warrant shall be governed by and construed and enforced in
accordance with, and all questions concerning the construction, validity, interpretation and
performance of this Warrant shall be governed by, the internal laws of the State of New York,
without giving effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.



     11. CONSTRUCTION; HEADINGS. This Warrant shall be deemed to be jointly drafted by the
Company and all the Buyers and shall not be construed against any person as the



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drafter hereof. The headings of this Warrant are for convenience of reference and shall not
form part of, or affect the interpretation of, this Warrant.



     12. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within two Business Days of
receipt of the Exercise Notice giving rise to such dispute, as the case may be, to the Holder. If
the Holder and the Company are unable to agree upon such determination or calculation of the
Exercise Price or the Warrant Shares within three Business Days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within two Business
Days submit via facsimile (a) the disputed determination of the Exercise Price to an independent,
reputable investment bank selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Warrant Shares to the Company’s independent, outside accountant. The
Company shall cause at its expense the investment bank or the accountant, as the case may be, to
perform the determinations or calculations and notify the Company and the Holder of the results no
later than ten Business Days from the time it receives the disputed determinations or calculations.
Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be
binding upon all parties absent demonstrable error.



     13. REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies
provided in this Warrant shall be cumulative and in addition to all other remedies available under
this Warrant and the other Transaction Documents, at law or in equity (including a decree of
specific performance and/or other injunctive relief), and nothing herein shall limit the right of
the Holder right to pursue actual damages for any failure by the Company to comply with the terms
of this Warrant. The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Holder and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees that, in the event of any such breach or threatened
breach, the holder of this Warrant shall be entitled, in addition to all other available remedies,
to an injunction restraining any breach, without the necessity of showing economic loss and without
any bond or other security being required.



     14. TRANSFER. This Warrant may be offered for sale, sold, transferred or assigned
without the consent of the Company, except as may otherwise be required by Section 2(f) of the
Securities Purchase Agreement.



     15. CERTAIN DEFINITIONS. For purposes of this Warrant, the following terms shall have
the following meanings:



          (a) “Approved Stock Plan” means any employee benefit plan now existing or hereafter adopted
which has been approved by the Board of Directors of the Company, pursuant to which the Company’s
securities may be issued to any employee, officer, director or consultant for services provided to
the Company.




          (b) “Bloomberg” means Bloomberg Financial Markets.




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          (c) “Business Day” means any day other than Saturday, Sunday or other day on which commercial
banks in The City of New York are authorized or required by law to remain closed.




          (d) “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the
last closing bid price and last closing trade price, respectively, for such security on the
Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing trade price, as
the case may be, then the last bid price or last trade price, respectively, of such security prior
to 4:00:00 p.m., New York time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last closing bid price or
last trade price, respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any
market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be
calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price
or the Closing Sale Price, as the case may be, of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 12. All such determinations to be appropriately adjusted for any
stock dividend, stock split, stock combination or other similar transaction during the applicable
calculation period.




          (e) “Common Stock” means (i) the Company’s shares of Common Stock, par value $0.0001 per
share, and (ii) any share capital into which such Common Stock shall have been changed or any share
capital resulting from a reclassification of such Common Stock.




          (f) “Common Stock Deemed Outstanding” means, at any given time, the number of shares of Common
Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be
outstanding pursuant to Sections 2(a)(i) and 2(a)(ii) hereof regardless of whether the Options or
Convertible Securities are actually exercisable at such time, but excluding any shares of Common
Stock owned or held by or for the account of the Company or issuable upon exercise of the SPA
Warrants.




          (g) “Convertible Securities” means any stock or securities (other than Options) directly or
indirectly convertible into or exercisable or exchangeable for shares of Common Stock.




          (h) “Eligible Market” means the Principal Market, The New York Stock Exchange, Inc., The
NASDAQ Global Select Market, The NASDAQ Capital Market, or the American Stock Exchange.




- 16 -









 








          (i) “Excluded Securities” means any Common Stock issued or issuable: (i) in connection with
any Approved Stock Plan; (ii) upon the exercise of the Warrants; (iii) issuance of the Company’s
securities to any employee, officer, director or consultant in exchange for services provided to
the Company; (iv) in connection with any merger or acquisition of any assets or securities of
another business, corporation or entity by the Company, the primary purpose of which is not to
raise equity capital; or (v) upon conversion, exercise or exchange of any Options or Convertible
Securities which are outstanding on the day immediately preceding the Subscription Date, provided
that the terms of such Options or Convertible Securities are not amended, modified or changed on or
after the Subscription Date.




          (j) “Expiration Date” means the date sixty (60) months after the Replacement Date or, if such
date falls on a day other than a Business Day or on which trading does not take place on the
Principal Market (a “Holiday”), the next date that is not a Holiday.




          (k) “Fundamental Transaction” means that the (A) Company shall, directly or indirectly, in one
or more related transactions, (i) consolidate or merge with or into (whether or not the Company is
the surviving corporation) another Person or Persons, or (ii) sell, assign, transfer, convey or
otherwise dispose of all or substantially all of the properties or assets of the Company to another
Person, or (iii) allow another Person to make a purchase, tender or exchange offer that is accepted
by the holders of more than 50% of the outstanding shares of Common Stock (not including any shares
of Common Stock held by the Person or Persons making or party to, or associated or affiliated with
the Persons making or party to, such purchase, tender or exchange offer), (iv) consummate a stock
purchase agreement or other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person
acquires more than the 50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the other Person or other Persons making or party to, or associated or
affiliated with the other Persons making or party to, such stock purchase agreement or other
business combination), or (v) reorganize, recapitalize or reclassify its Common Stock, or (B) any
“person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 50% of the aggregate Common Stock of the Company.




          (l) “Options” means any rights, warrants or options to subscribe for or purchase shares of
Common Stock or Convertible Securities.




          (m) “Parent Entity” of a Person means an entity that, directly or indirectly, controls the
applicable Person and whose common stock or equivalent equity security is quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent
Entity with the largest public market capitalization as of the date of consummation of the
Fundamental Transaction.




          (n) “Person” means an individual, a limited liability company, a partnership, a joint venture,
a corporation, a trust, an unincorporated organization, any other entity and a government or any
department or agency thereof.




          (o) “Principal Market” means The NASDAQ Global Market.




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          (p) “Public Successor Entity” means a Successor Entity that is a publicly traded corporation
whose stock is quoted or listed for trading on an Eligible Market.




          (q) “Registration Rights Agreement” means that certain registration rights agreement by and
among the Company and the Buyers.




          (r) “Required Holders” means the holders of the SPA Warrants representing at least a majority
of shares of Common Stock underlying the SPA Warrants then outstanding.




          (s) “Successor Entity” means the Person (or, if so elected by the Required Holders, the Parent
Entity) formed by, resulting from or surviving any Fundamental Transaction or the Person (or, if so
elected by the Required Holders, the Parent Entity) with which such Fundamental Transaction shall
have been entered into.




          (t) “Trading Day” means any day on which the Common Stock are traded on the Principal Market,
or, if the Principal Market is not the principal trading market for the Common Stock, then on the
principal securities exchange or securities market on which the Common Stock is then traded;
provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to
trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is
suspended from trading during the final hour of trading on such exchange or market (or if such
exchange or market does not designate in advance the closing time of trading on such exchange or
market, then during the hour ending at 4:00:00 p.m., New York time).




[Signature Page Follows]





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     IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock to be duly
executed as of the Issuance Date set out above.



	 	 	 	 	 
	 	HYTHIAM, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 



 









 








EXHIBIT A




EXERCISE NOTICE




TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK




HYTHIAM, INC.





     The undersigned holder hereby exercises the right to purchase                      of the shares
of Common Stock (“Warrant Shares”) of Hythiam, Inc., a Delaware corporation (the “Company”),
evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”). Capitalized terms used
herein and not otherwise defined shall have the respective meanings set forth in the Warrant.



     1. Form of Exercise Price. The Holder intends that payment of the Exercise Price shall be
made as:



                               a “Cash Exercise” with respect to       
            
            Warrant Shares; and/or




                               a “Cashless Exercise” with respect to                      Warrant Shares.




     2. Payment of Exercise Price. In the event that the holder has elected a Cash Exercise with
respect to some or all of the Warrant Shares to be issued pursuant hereto, the holder shall pay the
Aggregate Exercise Price in the sum of $                     to the Company in accordance with the
terms of the Warrant.



     3. Delivery of Warrant Shares. The Company shall deliver to the holder                      Warrant
Shares in accordance with the terms of the Warrant.



Date:                      __,                     




	 	 	 	 	 
	 	 	 
	 Name of Registered Holder	 	 
	 
	By:
	 	 	 	 
	 

	 	 	 	 
	 

	 	Name:	 	 
	 

	 	Title:	 	 






 









 






ACKNOWLEDGMENT




     The Company hereby acknowledges this Exercise Notice and hereby directs American Stock
Transfer & Trust Company to issue the above indicated number of shares of Common Stock in
accordance with the Transfer Agent Instructions dated January 17, 2007 from the Company and
acknowledged and agreed to by American Stock Transfer & Trust Company.



	 	 	 	 	 
	 	HYTHIAM, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	      	 
	 	 	Title: