1325228--3/14/2008--CLAYTON_HOLDINGS

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Risks Related to Our Business and Industry The non-agency MBS market, to which we provide our services, suffered a dramatic downturn during the second half of 2007 and we do not expect this market to undergo any meaningful recovery during 2008. Adverse changes in the MBS market, particularly in the non-agency or non-conforming sector, the mortgage lending industry or the housing market have resulted, and will continue to result, in a reduced demand for our services. Our profitability is affected by fluctuations in the volume of activity in the non-prime mortgage lending market. The impact of the investigations into the subprime mortgage industry cannot be predicted and may have a material adverse effect on our customers, customer relationships, business, results of operations and financial condition. Accelerated prepayments of loans that comprise the MBSs for which we provide credit risk management and surveillance services may adversely affect our results of operations. Increasing the amounts of mortgage loans and the size of individual loans the Government Sponsored Enterprises ("GSEs"), may buy or securitize and the expansion of Federal Housing Administration ("FHA") loan programs, may reduce the number of non-agency mortgage loans and consequently the size of the market to which we provide our services. Higher rates of loss in pools of loans that we service could result in lower demand for our services and damage to our reputation as a loan servicer. A sustained downturn in the residential mortgage loan origination business will adversely affect our business and harm our operations. The market for our services is highly competitive, and if we are not able to compete effectively, our business and results of operations may be adversely affected. Many of our largest clients are reducing their operations within the MBS market, which has adversely affected our business and results of operations, and consolidation amongst our clients could further adversely affected our business and results of operations. If we are inefficient in delivering services to our customers, our profit margins may decrease and we may not be able to compete effectively. Clients can terminate engagements with us at any time. Maintaining our professional reputation and our key executives' professional reputation is critical to our future success, and any damage to this reputation may adversely affect our business and results of operations. Our engagements may result in professional liability. If we are not able to maintain accurate, comprehensive or reliable systems and data, we could experience reduced demand for our services. Our business could be adversely affected if we are unable to safeguard the security and privacy of the personal financial information we receive. An interruption in or breach of our information systems may result in lost business. If we lose the services of certain key executive officers, we may not be able to execute our business strategy, manage our growth or compete effectively. Efforts to expand our product offerings beyond our current markets may not succeed. We may make acquisitions that prove unsuccessful or strain or divert our resources. We have been downsizing our operations and may not be able to manage our growth or meet marketplace demands effectively if and when demand for our transaction management products and services resumes. Changes in the regulation of our business and our failure to comply with applicable laws and regulations may adversely affect our business and results of operations. Third parties may claim we are infringing their intellectual property rights, or may infringe upon or design around our intellectual property rights. Our loan agreement contains operating and financial covenants that may restrict our business and financing activities. If we have weaknesses in our internal controls over financial reporting in the future, there could be an adverse effect on our financial reporting. Risks Related to the Common Stock and Our Capital Structure Future sales of our shares could adversely affect the market price of our common stock. Certain significant stockholders exercise significant control over Clayton. We may require additional capital in the future, which may not be available to us. Issuances of our equity securities to provide this capital may dilute your ownership in us. Provisions in our certificate of incorporation and by-laws may deter third parties from acquiring us. Section 203 of the Delaware General Corporation Law may delay, defer or prevent a change in control that our stockholders might consider to be in their best interests.

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1325228--3/14/2008--CLAYTON_HOLDINGS_INC