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CORRESP
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    letter.htm

      January
21 2009

      VIA EDGAR
TRANSMISSION

                Securities
      and Exchange Commission

                Division
      of Corporation Finance

                450
      Fifth Street, N.W.

                Washington,
      D.C. 20549

                Attn:
      John Reynolds, Assistant Director

                Re:

                Hythiam,
      Inc.

                Form
      10-K for Fiscal Year Ended December 31, 2007 (“2007 Form
      10-K”)

                Filed
      March 17, 2008

                Definitive
      Revised Proxy Statement on Schedule 14A

                Filed
      June 3, 2008

                Forms
      10-Q for Fiscal Quarters Ended March 31, 2008 (March 31, 2008 10-Q), June
      30, 2008 (June 30, 2008 10-Q) and September 30, 2008 (September 30, 2008
      10-Q)

                File
      No. 001-31932

      Ladies
and Gentlemen:

      Reference
is made to the letter received by Hythiam, Inc. (the “Company”) from
Mr. Reynolds, Assistant Director of the Securities and Exchange Commission
(the “Staff”), dated December 22, 2008 (the “Comment Letter”) relating to the
Staff’s comments on the Form 10-K for Fiscal Year Ended December 31, 2007,
Definitive Revised Proxy Statement on Schedule 14A filed June 3, 2008 and Forms
10-Q for Fiscal Quarters Ended March 31, 2008, June 30, 2008 and September 30,
2008. The Company’s responses to the Staff’s comments contained in the Comment
Letter are set forth below. For the convenience of the Staff, each of the
Staff’s comments has been duplicated below and is set forth in italics
immediately prior to the corresponding response.

      Form 10-K for Fiscal Year
Ended December 31, 2007

      Management’s Discussion and
Analysis of Financial Condition and Results of Operations, page
36

      Liquidity and Capital
Resources, page 49

                1.

                We
      note your disclosure on page 51 that your cash operating expenditures
      average $2.5 million a month for the remainder of 2008. Cash Operating
      expenditures does not appear to be a GAAP measure, thus please include the
      required disclosure for non-GAAP measures under Item 10(e) of Regulation
      S-K.

      RESPONSE: The disclosure on
page 51 provides forward-looking information about expected cash to be paid to
employees of and other suppliers of goods and services to our healthcare
services segment – an amount that is consistent with GAAP (see FASB Statement
95, paragraph 27) and not a non-GAAP financial measure. The expected amount of
cash to be paid to employees and suppliers is broken down into two elements that
we consider meaningful: (1) payments for goods and services other than those
used in research & development activities and (2) payments related to
research & development activities. We consider this breakdown meaningful
because payments related to research & development activities are more
discretionary than the other payments. We believe that

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      this
breakdown is also consistent with paragraph 27 of Statement 95, which states,
“Enterprises are encouraged to provide further breakdowns of operating cash
receipts and payments that they consider meaningful and feasible. For example, a
retailer or manufacturer might decide to further divide cash paid to employees
and suppliers (category (d) above) into payments for costs of inventory and
payments for selling, general, and administrative expenses.” Thus, we do not
consider the term to be a non-GAAP measure. We included the disclosure to
provide investors and readers of our financial statements with information that,
when used in conjunction with the statements of cash flows, enables them to
assess the impact of our streamlining and cost reduction efforts.

      Report of Independent
Registered Public Accounting firm F-2

                2.

                We
      note the reports of the independent registered public accounting firm are
      unsigned. Please amend to provide a signed accountants report and a signed
      attestation report on internal control over financial reporting in
      accordance with Item 302 of Regulation
S-T.

      RESPONSE: In its letter to
the Company dated September 12, 2008, the Staff requested that we confirm that
BDO Seidman, LLP signed the reports dated March 14, 2008, relating to the
consolidated financial statements and the effectiveness of the Company’s
internal control over financial reporting, which appear in the Annual Report on
Form 10-K for the year ended December 31, 2007. In response, our external
counsel confirmed, in a letter to the Staff dated September 19, 2008, that BDO
Seidman, LLP signed the reports dated March 14, 2008 relating to the
consolidated financial statements and the effectiveness of the Company’s
internal control over financial reporting, which appear in the Annual Report on
Form 10-K for the year ended December 31, 2007, and that the original signed
reports are held in the Company’s files. Additionally, the Company would like to
note that it did include signed reports in the 2007 Annual Reports that were
distributed to investors as part of the Proxy solicitation materials and to
prospective investors.

      Notes to Consolidated
Financial Statements

      Note 1. Summary of
Significant Accounting Policies

      Goodwill,
F-15

                3.

                We
      note that you recorded $10.8 million of goodwill in the acquisition of
      CompCare of which you have allocated approximately 95% of the acquired
      goodwill to the healthcare services segment while only 5% of goodwill is
      allocated to the segment which includes CompCare. Please disclose the
      methodologies you used to allocate goodwill to your reporting
      segments.

      RESPONSE: $493,000 of the
goodwill recorded in the CompCare acquisition represents the carryover of the
minority interest in the goodwill already reflected on CompCare’s balance sheet
at the time of the acquisition. The remainder (i.e., all of the goodwill arising
from Hythiam’s acquisition of its controlling interest in CompCare) was assigned
to Hythiam’s healthcare services segment. In accordance with paragraph 34 of FAS
142, we assigned goodwill to the reporting unit that is expected to benefit from
the synergies of the combination. In the case of the CompCare acquisition, the
primary purpose of the acquisition was to create synergies to facilitate the use
of PROMETA treatment programs by managed care treatment providers and to provide
access to an infrastructure for our planned disease management product
offerings, which are part of the healthcare services segment. The Company’s
believes that the creation of such synergies resulted in a significant increase
in the overall market value of the healthcare services segment, but had no
material impact in the market value of the behavioral health managed care
services segment, where CompCare’s operations are included. Therefore, 100% of
the goodwill arising from the acquisition was allocated to the healthcare
services segment. The Company believes that this methodology is consistent with
the objectives of the process of assigning goodwill to reporting units described
in paragraph 35 of FAS 142.

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      We will
expand the discussion of the methodologies we used to assign goodwill to our
reporting segments in future filings.

                4.

                You
      state that your association with CompCare will create synergies and
      provide access to an infrastructure for your planned disease management
      product offerings. Please explain how the acquisition of CompCare will
      create synergies in your healthcare segment. Also, tell us what the fair
      value of the healthcare services segment was prior to and subsequent to
      the acquisition of CompCare using the guidance of paragraph 35 of SFAS
      142.

      RESPONSE: In a letter to
Company dated August 8, 2007, the Staff asked the Company to explain why the
amount allocated to goodwill was so significant in relation to the amounts
allocated to intangible assets. In its response to the Staff, in a letter dated
August 22, 2007, the Company stated:

      “We
believe our association with CompCare creates synergies to facilitate the use of
PROMETA treatment programs by managed care treatment providers and to provide
access to an infrastructure for our planned disease management product
offerings. CompCare’s infrastructure is already in place to provide substance
abuse/dependence disease management to accommodate nationwide third party
reimbursement that we expect will be driven by positive outcomes from PROMETA
pilots currently underway with managed care entities and various criminal
justice systems. These statements were included in Part 1, Item 1. Business on
page 4 of our 2006 Form 10-K where we discussed the key strategies and benefits
expected from our association with CompCare. The first statement was repeated in
Note 3 at the end of the second paragraph on page 13 in the March 31, 2007 Form
10Q”.

      In
addition in Part 1, Item 1, Business on page 6 of our 2007 Form 10-K, we
discussed under ‘Disease Management’ that we utilize CompCare infrastructure to
provide many disease management services, including credentialing, peer review,
monitoring, case management, coaching services, quality assurance and other
standard behavioral healthcare services. As discussed in above in the response
to comment 3, the creation of such synergies resulted in a significant increase
in the overall market value of the healthcare services segment, according to
management’s estimates. The estimated increase in the fair value of our
healthcare services reporting segment, resulting from the acquisition of
CompCare, amounted to approximately $10.4 million, based on pre and
post-acquisition fair value estimates of $55.1 million and $65.5 million,
respectively.

      Note 11. Share-based
Compensation, F-27

                5.

                We
      note that you transferred 695,000 options related to a status change from
      employee to non-employee. However, we did not find any disclosure of how
      you accounted for these options. Please tell us how you considered
      paragraph 51 of SFAS 123(R) in determining the amount of expense to record
      in the period related to this
modification.

      RESPONSE: The 695,000 options
relate to Hythiam employees that terminated during 2007, but were then retained
as part-time consultants upon their resignation from the
company.  Because the employees continued to provide services to
Hythiam, their options continued to vest in accordance with the original terms.
Due to the change in classification of the option awards, the unvested options
were considered modified at the date of termination in accordance with SFAS 123
(R). The modifications were treated as exchanges of the original awards in
return for the issuance of new awards. Of the 695,000 option awards that changed
in classification, 345,666 were fully vested and 349,334 were unvested at the
date of modification. At the date of termination, the unvested options were no
longer accounted for as employee awards under SFAS 123(R) and were accounted for
as new non-employee awards under EITF Issue No. 96-18, “Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services” (EITF 96-18). The accounting for the portion
of the total grants that had already vested and were previously expensed as
employee awards was not changed. We recorded approximately

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      $28,000
of expense in 2007 associated with the modified unvested awards, based on the
number of shares expected to vest, pursuant to the guidance in EITF
96-18.

                6.

                We
      note the statement on page 60. General Instruction G(3) to Form 10-K
      permits an issuer to incorporate Part III information into the Form 10-K
      from its definitive proxy material, if the definitive  proxy
      material is filed within 120 days after the end of the issuer’s fiscal
      year. We note that your definitive proxy statement was not filed within
      120 days after the end of your fiscal year. Please amend your filing
      accordingly. Also, see Question 104.09 of the Compliance and Disclosure
      Interpretations for Exchange Act Form, which is available at
      http://www.sec.gov/divisions/corpfin/guidance/exhangeactforms-interps.htm.

      RESPONSE: The Company filed a
preliminary version of its proxy material on April 29, 2008, within the 120 days
after the end of its fiscal year, that included the disclosure required in Items
10 through 14 of Form 10-K. We filed amendments to the proxy materials,
including the definitive proxy statement on June 3, 2008, that principally
served to amend the notification to shareholders of matters to be brought to a
vote and to make other changes to our proxy soliciting materials, but did not
affect the information disclosed
in Items 10 through 14.

      Form 10-Q for the Period
Ended September 30, 2008

      Notes to Condensed
Consolidated Financial Statements

      Note 2.  Summary
of Significant Accounting Policies

      Goodwill and Other
Intangible Assets, page 16

                7.

                We
      note that you recorded $10.5 million of goodwill related to the
      acquisition of CompCare as of December 31, 2007. You state that you
      evaluated $493,000 of goodwill related to CompCare for impairment with no
      exceptions as of September 30, 2008. We note on page 39 that under the
      current plan there is substantial doubt about CompCare’s ability to
      continue as a going concern. Tell us how you evaluated the remaining
      goodwill of $9.8 million in the healthcare services as of September 30,
      2008. As part of you response, provide a reasonably detailed summary of
      the analysis. Identify, and explain the basis for, all significant
      assumptions used.

      RESPONSE: Because the $9.8
million of goodwill is allocated to the healthcare services reporting segment,
the Company tested goodwill for potential impairment based on the estimated fair
value of that reporting unit. As we stated in ‘CRITICAL ACCOUNTING
ESTIMATES’ on page 42, we evaluate goodwill for impairment annually, or
on a more frequent basis if necessary, based on the estimated fair value of our
healthcare services reportable segment. We also stated that in estimating the
fair value, management considers both the income and market approaches to fair
value determination. As part of the first step of the goodwill impairment test
used to identify potential impairment, we compared the fair value of the
healthcare services reporting unit with its carrying value, including the
goodwill. The fair value of the healthcare services reporting unit was estimated
using both the market and income approaches; however, more weight was placed on
the market approach. Our estimate of the fair value under the market approach
was based primarily on reference to transactions involving the company’s common
stock and the quoted market prices of the company’s common stock, adjusted to
exclude the estimated fair value of the Behavioral Health Managed Care reporting
unit, and amounted to $67.0 million at September 30, 2008. Based on this
analysis, the fair value of the healthcare services reporting unit exceeded its
$25.3 million book value at September 30, 2008; therefore, the goodwill was not
considered to be impaired at that date.

      CompCare’s
operations are included and reported in the behavioral health managed care
services reporting segment and have no impact on the healthcare services
reporting unit. Additionally, as we

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      have
noted in Management’s Discussion and Analysis Liquidity and Capital Resources on
page 39, Hythiam is under no obliga