1220754--3/16/2007--PROVIDENCE_SERVICE

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{regulation, government, change}

{cost, contract, operation}

{financial, litigation, operation}

{tax, income, asset}

{personnel, key, retain}

{acquisition, growth, future}

{loss, insurance, financial}

{regulation, change, law}

{provision, law, control}

{debt, indebtedness, cash}

{cost, operation, labor}

{stock, price, operating}

{competitive, industry, competition}

{product, market, service}

Changes in budgetary priorities of the government entities that fund the services we provide could result in our loss of contracts or a decrease in amounts payable to us under our contracts. Our contracts are not only short-term in nature but can also be terminated prior to expiration, without cause and without penalty to the payers, and there can be no assurance that they will survive until the end of their stated terms or that upon their expiration these contracts will be renewed or extended. Each of our contracts is subject to audit and modification by the payers with whom we contract, in their sole discretion. As a government contractor, we are subject to an increased risk of litigation and other legal actions and liabilities. A loss of our status as a licensed provider in any jurisdiction could result in the termination of a number of our contracts, which could negatively impact our revenues. If we fail to satisfy our contractual obligations, we could be liable for damages and financial penalties and harm our ability to keep our existing contracts or obtain new contracts. We derive a significant amount of our revenues from a few payers, which puts us at risk. Our contract with CPSA requires us to provide a sufficient level of encounters to support the year-to-date payments received under the contract and provide necessary services that may exceed the associated reimbursement. If we fail to estimate accurately the cost of performing certain contracts, we may incur losses on these contracts. Approximately 13% of our revenues for the year ended December 31, 2006 were derived from cost based service contracts in California for which we record revenue at one-twelfth of the annual contract amount less allowances for certain contingencies, which puts us at risk that we may be required to subsequently refund a portion of our recorded revenues for such contracts. Our results of operations will fluctuate due to seasonality. While we obtain some of our business through responses to government requests for proposals, we may not be awarded contracts through this process in the future, and contracts we are awarded may not be profitable. If we fail to establish and maintain important relationships with officials of government entities and agencies, we may not be able to successfully procure or retain government-sponsored contracts, which could negatively impact our revenues. The federal government may refuse to grant consents and/or waivers necessary to permit for-profit entities to perform certain elements of government programs. Our business could be adversely affected by future legislative changes that hinder or reverse the privatization of social services. Our strategic relationships with certain not-for-profit and tax exempt entities are subject to tax and other risks. Government unions may oppose privatizing government programs to outside vendors such as us, which could limit our market opportunities. Inaccurate, misleading or negative media coverage could damage our reputation and harm our ability to procure government sponsored contracts. We may incur costs before receiving related revenues, which could result in cash shortfalls. Our business is subject to risks of litigation. Our use of a self-insurance program to cover certain claims for losses suffered and costs or expenses incurred could negatively impact our business upon the occurrence of an uninsured event. We could be subject to significant state regulation and potential sanctions if our health care benefits program is deemed to be a multiple employer welfare arrangement. We face substantial competition in attracting and retaining experienced social service professionals, and we may be unable to grow our business if we cannot attract and retain qualified employees. Our success depends on our ability to manage growing and changing operations. Any acquisition that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results. Our future debt obligations could impair our liquidity and financial condition. Our success depends on our ability to compete effectively in the marketplace. Our business is subject to state licensing regulations and other regulatory provisions, including regulatory provisions governing surveys, audits, anti-kickbacks, self-referrals, false claims and The Health Insurance Portability and Accountability Act of 1996, and changes to or violations of these regulations could negatively impact our revenues. Provisions in our corporate documents and our certificate of incorporation and bylaws, as well as Delaware General Corporation Law, may hinder a change of control.

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1220754--3/16/2007--PROVIDENCE_SERVICE_CORP