Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated file. See definition of “accelerated file and large accelerated file” in Rule 12b-2 of the Exchange Act).Act (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

As of November 14,May 8, 2005, there were 38,278,75839,808,562 shares of registrant’s common stock, $0.0001 par value, outstanding.

     The accompanying unaudited interim condensed consolidated financial statements for Hythiam, Inc. and itsour subsidiaries have been prepared in accordance with the Securities and Exchange Commission (“SEC”) rules for interim financial information and do not include all information and notes required for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying financial information should be read in conjunction with the financial statements and the notes thereto in our most recent Annual Report on Form 10-K. The10-K, from which the December 31, 20042005 balance sheet has been derived from the auditedderived.

     The condensed consolidated financial statements on Form 10-K.include the accounts of our wholly-owned subsidiaries and The PROMETA Center, Inc., a California professional corporation, which is owned and controlled by our senior vice president of medical affairs. Under the terms of a management services agreement, we provide and perform all nonmedical management and administrative services for the medical group. We also agreed to provide a working capital loan to the PROMETA Center up to a maximum of $1,500,000 (as amended in April 2006) to allow the medical group to pay its obligations, including our management fees. Payment of our management fee is subordinate to payments of other obligations of the medical group, and repayment of the working capital loan is not guaranteed by the shareholder or any other third party. We have determined that the PROMETA Center is a variable interest entity, and that we are the primary beneficiary as defined in Financial Accounting Standards Board (“FASB”) Interpretation 46, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51.” Accordingly, we are required to consolidate the revenues and expenses of the PROMETA Center.

     All intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made toin the prior years’ condensed consolidated financial statementsperiod to conform to classifications used in thebe consistent with current year. All share data has been restated to reflect stock splits.period presentation.

     We invest available cash in short-term commercial paper, certificates of deposit and high grade variable rate securities. Liquid investments with an original maturity of three months or less when purchased are considered to be cash equivalents.

     Investments, including auction rate securities and certificates of deposit, with maturity dates greater than three months when purchased, which have readily determined fair values, are classified as available-for-sale investments and reflected in current assets as marketable securities at fair market value. Auction rate securities are recorded at par value, which equals fair market value, as the rate on such securities resets generally every 7, 28 or 35 days.

     Restricted cash and marketable securities represents deposits secured as collateral for a bank credit card program.

     In accordance with Statement of Financial Accounting Standards (“SFAS”) 128, “Computation of Earnings Per Share,” basic loss per share is computed by dividing the net loss to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing the net loss for the period by the weighted average number of common and dilutive common equivalent shares outstanding during the period.

     Common equivalent shares, consisting of 6,906,0007,122,000 and 6,243,0006,686,000 of incremental common shares as of September 30,March 31, 2006 and 2005, and 2004, respectively, issuable upon the exercise of stock options and warrants have been excluded from the diluted earnings per share calculation because their effect is anti-dilutive.

     A summary of the net loss and shares used to compute net loss per share is as follows (in thousands, except per share data):follows:

     The following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of SFAS 123 to share-based awards granted under our stock option plan for the three months ended March 31, 2005. For purposes of this pro-forma disclosure, the fair value of the options wasis estimated at the date of grant using the Black-Scholes pricing model withand amortized to expense over the following weighted average assumptions for the three and nine months ended September 30, 2005 and 2004:options’ contractual term.

     During the three and nine months ended September 30,March 31, 2006 and 2005, and the three and nine months ended September 30, 2004, we granted options for 397,000, 1,317,000, 652,000596,400 and 1,220,000325,000 shares, respectively, to employees and directors at the weighted average per share exercise price of $5.86, $6.49, $2.80$6.44 and $4.24,$5.72, respectively, which was the fair market valuesvalue of our common stock at the dates of grant. Subsequently, in October 2005 wegrants. Options granted options for 50,000 shares to a consultant at $5.40 per share, the fair market value at date of grant.

     The estimated fair value of approximately $938,000, as of September 30,options granted to employees and directors during the three months ended March, 31, 2006 and 2005 was $2,323,000 and $1,382,000, respectively, calculated using the Black-Scholes pricing model.model with the following assumptions.

     DuringThe expected volatility of our stock has been estimated using the threeaverage expected volatility reported by other public healthcare companies, since we have a limited history as a public company and nine months ended September 30, 2005our actual stock price volatility would not be meaningful. The weighted average expected option term for 2006 reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107, which defines the life as the average of the contractual term of the options and 2004,the weighted average vesting period for all option traunches.

     We have elected to adopt the detailed method provided in SFAS 123(R) for calculating the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based expense relatingcompensation, and to stock options amounteddetermine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123(R).

     As of March 31, 2006, there was $7,124,000 of total unrecognized compensation costs related to $272,000, $1.2 million, $320,000non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.2 years.