Index First American Profile Financial Highlights Letter to Stockholders First American's Strength in Numbers Title Information and Services Real Estate Information and Services Consumer Information and Services Management's Discussion and Analysis Selected Financial Data Common Stock Prices and Dividends Quarterly Financial Data Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Accountants Officers Board of Directors Primary Companies Stockholder Information Back Cover

management’s discussion and analysis

 RESULTS OF OPERATIONS

    Overview — The majority of the revenues in the Company’s title insurance and real estate information segments, which today constitute 92% of the total revenue base, depend in large part upon the level of real estate activity and the cost and availability of mortgage funds. Revenues for these segments result primarily from resales and refinancings of residential real estate and, to a lesser extent, from commercial transactions and the construction and sale of new housing. The remaining 8% of the Company’s total revenue base comes from the consumer information segment, which is isolated from the volatility of real estate transactions. Traditionally, the greatest volume of real estate activity, particularly residential resale, has occurred in the spring and summer months. However, changes in interest rates, as well as other economic factors, can cause fluctuations in the traditional pattern of real estate activity.

    Interest rate declines, which started in the fourth quarter of 1997, continued throughout 1998 and into 1999. This, coupled with relatively high consumer confidence, and a particularly strong California real estate market, resulted in record-setting revenues for the first half of 1999. However, commencing in the second quarter of 1999, new orders began to soften as rising interest rates led to a significant decline in refinance transactions, although residential resale and commercial activity remained relatively strong. During the second half of 1999, the trend of higher interest rates continued. Refinance activity, as well as residential resale orders, continued to decline. This, coupled with fourth quarter seasonal factors, led to a decrease in operating revenues for the fourth quarter of 1999 and resulted in a low inventory of open orders going into the first quarter of 2000. The Company instituted personnel reductions and other cost-containment programs during the latter part of 1999; however, because of separation costs, the benefits of these programs were not fully realized in 1999.

    As a result of the low inventory of open orders going into the first quarter of 2000, and the relatively weak real estate economy present during the first half of 2000, revenues and profits during this period decreased significantly when compared with the same period of 1999. During the second half of 2000, real estate activity began to increase as a result of declining mortgage interest rates. New order counts in the latter part of the third quarter began to show favorable comparisons with the same period of 1999. This trend continued into the fourth quarter of 2000 and resulted in a significant increase in revenues and profits in the second half of 2000 when compared with the same period of 1999.

    In 2001, mortgage interest rates decreased to levels comparable to rates experienced in 1998. Refinance activity reached record levels and the demand for residential resale and new home sales continued to be very strong. All four quarters of 2001 compared favorably with the respective quarters of 2000. Closed order counts reached record levels resulting in record operating revenues of $3.66 billion. Income before income taxes and minority interests was $329.5 million, net income was $167.3 million, and diluted earnings per share were $2.27. Equity surpassed the $1.1 billion mark at December 31, 2001.

Operating revenues — A summary by segment of the Company’s operating revenues is as follows:

(in thousands, except percentages)	2001	%			2000	%	1999	%
Title Insurance:
Direct operations	$ 1,463,303	40	$ 1,083,112	38	$ 1,067,133	36
Agency operations	1,185,691	32	983,937	34	1,086,746	37
	2,648,994	72	2,067,049	72	2,153,879	73
Real Estate Information	723,840	20	558,147	19	575,694	20
Consumer Information	290,152	8	252,332	9	206,623	7
	$ 3,662,986	100	$ 2,877,528	100	$ 2,936,196	100

    Operating revenues from direct title operations increased 35.1% in 2001 over 2000 and 1.5% in 2000 over 1999. The increase in 2001 over 2000 was attributable to a 44.1% increase in the number of title orders closed by the Company’s direct operations, offset in part by a decrease in the average revenues per order closed. The increase in 2000 over 1999 was attributable to an increase in the average revenues per order closed, offset in part by a 12.9% decrease in the number of title orders closed. The Company’s direct title operations closed 1,404,600, 975,000 and 1,119,900 title orders during 2001, 2000 and 1999, respectively. The average revenues per order closed were $1,042, $1,111 and $953 for 2001, 2000 and 1999, respectively, representing a decrease of 6.2% in 2001 from 2000 and an increase of 16.6% in 2000 over 1999. The fluctuations noted in closed orders and average revenues per order closed were primarily attributable to the relative changes in the volume of refinance transactions year-over-year, as mentioned above. Operating revenues from agency title operations increased 20.5% in 2001 over 2000 and decreased 9.5% in 2000 from 1999. These fluctuations were primarily attributable to the same factors affecting direct title operations compounded by the inherent delay in the reporting of transactions by agents.

    Real estate information operating revenues increased 29.7% in 2001 over 2000 and decreased 3.0% in 2000 from 1999. These fluctuations were primarily attributable to the same factors affecting title insurance mentioned above, as well as acquisition activity. Operating revenues of $30.6 million and $32.1 million were contributed by new acquisitions in 2001 and 2000, respectively. The Company’s tax service division defers the tax service fee and recognizes that fee as revenue ratably over the expected service period. The amortization rates applied to recognize the revenues assume a 10-year contract life and are adjusted to reflect prepayments. The Company reviews its tax service contract portfolio on a quarterly basis to determine if there have been changes in contract lives and/or changes in the number and/or timing of prepayments and may adjust the rates to reflect current trends. During the current year, the amortization rates remained relatively unchanged.

    Consumer information operating revenues increased 15.0% in 2001 over 2000 and 22.1% in 2000 over 1999. These increases were primarily attributable to an increased awareness and acceptance of this business segment’s products, increased market share and acquisition activity. The increase in 2001 over 2000 was offset in part by a $13.4 million decrease in revenues at the Company’s property and casualty insurance division, as a result of the previously announced exit of the lender-placed homeowner’s insurance business. Excluding this item, operating revenues increased 20.3% in 2001 over 2000. Operating revenues of $22.1 million and $15.0 million were contributed by new acquisitions in 2001 and 2000, respectively.

    Investment and other income — Investment and other income increased $31.0 million in 2001 over 2000 and $4.8 million in 2000 over 1999. The increase in 2001 over 2000 was primarily due to a $23.4 million increase in equity in earnings of unconsolidated affiliates, $3.8 million in increased interest income and a $2.5 million increase in realized investment gains. The increase in 2000 over 1999 was primarily due to a 4.6% increase in the average investment portfolio balance, investment gains totaling $5.7 million relating to the joint venture agreements with LandAmerica Financial Group, Inc, and Transamerica Corporation (see Note 18 to the consolidated financial statements) and $2.5 million of interest income contributed by a new acquisition in the United Kingdom, offset in part by a $4.3 million realized investment loss and reduced equity in earnings of unconsolidated affiliates. See Note 8 to the consolidated financial statements.

    Salaries and other personnel costs — A summary by segment of the Company’s salaries and other personnel costs is as follows:

(in thousands, except percentages)		2001		%			2000			%		1999		%
Title Insurance	$	893,615	71	$	721,417		71		$	729,720	71
Real Estate Information		261,110	20		231,751		23			231,696	22
Consumer Information		84,688	7		67,920		7			59,106	6
Corporate		24,038	2		(6,322	)	(1	)		14,250	1
	$	1,263,451	100	$	1,014,766		100		$	1,034,772	100

    The Company’s title insurance segment (primarily direct operations) is labor intensive; accordingly, a major variable expense component is salaries and other personnel costs. This expense component is affected by two competing factors: the need to monitor personnel changes to match corresponding or anticipated new orders, and the need to provide quality service. In addition, this segment’s growth in operations that specialize in builder and lender business has created ongoing fixed costs required to service accounts.

    Title insurance personnel expenses increased 23.9% in 2001 over 2000 and decreased 1.1% in 2000 from 1999. The increase in 2001 over 2000 was primarily due to: an increase in staff in the production area, where the title company experienced a 50.5% increase in total order volume; increased commissions associated with the increase in closed orders; $3.0 million in severance related to the consolidation of certain back-office functions; and costs associated with new acquisitions; offset in part by cost-containment measures. The decrease in 2000 from 1999 was primarily due to staff reductions in the production area (which reflects the decrease in total order volume), the restructuring of the Company’s principal pension plan and the consolidation of certain administrative functions within the title company’s regional structure, offset in part by personnel costs associated with new acquisitions. The restructuring of the Company’s pension plan contributed $11.8 million to the decrease in title personnel expenses (see Note 11 to the consolidated financial statements). Personnel expenses associated with new acquisitions totaled $15.6 million for 2001 and $36.6 million for 2000. The Company’s direct title operations opened 1,930,300, 1,240,700 and 1,334,100 orders in 2001, 2000 and 1999, respectively, representing an increase of 55.6% in 2001 over 2000 and a decrease of 7.0% in 2000 from 1999. From an efficiency standpoint, personnel costs as a percentage of net operating revenues were 52.9% in 2001, 56.6% in 2000 and 56.9% in 1999.

    Real estate information personnel expenses increased 12.7% in 2001 over 2000 and stayed relatively constant in 2000 when compared with 1999. The increase in 2001 over 2000 was primarily due to personnel costs (primarily bonuses, commissions, overtime pay and temporary help) associated with the significant increase in business volume, as well as costs associated with new acquisitions, offset in part by cost-containment programs. Personnel expenses in 2000 remained relatively flat when compared with 1999, primarily as a result of staff reductions and the restructuring of the Company’s principal pension plan, offset by personnel costs associated with new acquisitions. The restructuring of the Company’s pension plan reduced personnel expenses in 2000 by $3.0 million when compared with 1999. Personnel costs associated with new acquisitions were $3.2 million for 2001 and $15.1 million for 2000. From an efficiency standpoint, personnel costs as a percentage of net operating revenues were 36.1% in 2001, 41.5% in 2000 and 40.2% in 1999.

    Consumer information personnel expenses increased 24.7% in 2001 over 2000 and 14.9% in 2000 over 1999. These increases were primarily attributable to additional personnel required to service the increased business volume and acquisition activity. The increase for 2000 was offset in part by a $0.8 million reduction in personnel expenses related to the restructuring of the Company’s pension plan. Personnel expenses associated with new acquisitions were $10.1 million for 2001 and $4.8 million for 2000, respectively.

    Corporate personnel expenses increased $30.4 million in 2001 over 2000 and decreased $20.6 million in 2000 from 1999. These fluctuations were primarily attributable to a reduction of $23.7 million in 2000 resulting from the restructuring of the Company’s pension plan.

    Premiums retained by agents — A summary of agent retention and agent revenues is as follows:

(in thousands, except percentages)		2001				2000			1999
Agent retention	$	960,215		$	791,940		$	871,036
Agent revenues	$	1,185,691		$	983,937		$	1,086,746
% Retained by agents		81.0	%		80.5	%		80.2	%

    The premium split between underwriter and agents is in accordance with their respective agency contracts and can vary from region to region due to divergencies in real estate closing practices, as well as rating structures. As a result, the percentage of title premiums retained by agents varies due to the geographical mix of revenues from agency operations.

    Other operating expenses — A summary by segment of the Company’s other operating expenses is as follows:

(in thousands, except percentages)	2001	%			2000	%	1999	%
Title Insurance	$ 474,127	55	$ 363,807	53	$ 327,182	48
Real Estate Information	262,190	31	231,975	33	240,469	36
Consumer Information	108,203	13	92,631	13	82,514	12
Corporate	9,084	1	9,259	1 28,691	4
	$ 853,604	100	$ 697,672	100	$ 678,856	100

    Title insurance other operating expenses (principally direct operations) increased 30.3% in 2001 over 2000 and 11.2% in 2000 over 1999. The increase in 2001 over 2000 was primarily due to $8.8 million of costs associated with new acquisitions, as well as incremental costs (i.e., messenger costs, reproduction costs, title plant maintenance costs, etc.) associated with servicing the 50.5% increase in total order volume. The increase in 2000 over 1999 was primarily due to $19.7 million of costs associated with new acquisitions and $15.2 million of lease expense related to a sale-leaseback agreement entered into in December 1999.

    Real estate information other operating expenses increased 13.0% in 2001 over 2000 and decreased 3.5% in 2000 from 1999. The increase in 2001 over 2000 was primarily due to costs incurred to service the increase in business volume, charges of $1.8 million relating to the restructuring of the Company’s field service division, impaired asset write-offs totaling $2.6 million at the appraisal division and $19.5 million in costs associated with new acquisitions. The decrease in 2000 from 1999 was primarily due to a reduction in costs resulting from the Company’s cost-containment programs, offset in part by $15.5 million of costs associated with new acquisitions.

    Consumer information other operating expenses increased 16.8% in 2001 over 2000 and 12.3% in 2000 over 1999. These increases were primarily attributable to costs incurred servicing the increased business volume, as well as acquisition activity. Contributing to the increase for 2001 were $3.6 million of costs incurred to exit the lender-placed homeowner’s insurance business at the Company’s property and casualty insurance division. Other operating expenses associated with new acquisitions were $11.8 million in 2001 and $4.1 million in 2000.

    Corporate other operating expenses remained relatively constant in 2001 compared with 2000 and decreased 67.7% in 2000 from 1999. The decrease in 2000 from 1999 was primarily due to $10.8 million of nonrecurring, merger-related charges incurred in the NAIG acquisition in 1999 and Y2K costs incurred in 1999.

    Provision for title losses and other claims — A summary by segment of the Company’s provision for title losses and other claims is as follows:

(in thousands, except percentages)	2001	%			2000	%	1999	%
Title Insurance	$ 113,812	63	$ 75,790	54	$ 65,925	57
Real Estate Information	8,199	5	9,094	6	10,391	9
Consumer Information	58,635	32	56,748	40	39,902	34
	$ 180,646	100	$ 141,632	100	$ 116,218	100

    The Company provides for title insurance losses by a charge to expense when the related premium revenue is recognized. The amount charged to expense (the loss rate) is calculated by the Company based on historical experience and other factors, including changes and trends in the type of title insurance policies issued, the real estate market and the interest rate environment. Management monitors the adequacy of the estimated loss reserves on a quarterly basis using a variety of techniques, including actuarial models, and adjusts the loss rate as necessary.

    The provision for title insurance losses, expressed as a percentage of title insurance operating revenues (excluding the one-time 2001 adjustment mentioned below), was 4.0% in 2001, 3.7% in 2000 and 3.1% in 1999. The increase in 2001 over 2000 reflected adverse claims development, offset in part by the shift in current year revenue mix from resale to refinance, which is generally less claims intensive. The increase in 2000 over 1999 reflected the shift in revenue mix from refinance to resale, which is generally more claims intensive. During the third quarter of 2001, the Company recorded a $7.9 million adjustment to a purchase accounting estimate for loss reserves at one of its title insurance subsidiaries, which was purchased in 1998. This adjustment strengthened loss reserves to reflect subsequent adverse development.

    The provision for consumer information losses principally reflects home warranty claims. The provision for home warranty claims, expressed as a percentage of home warranty operating revenues, was 53.1% in 2001, 52.8% in 2000 and 49.8% in 1999. These increases were primarily due to increases in the average number of claims per contract, which was primarily attributable to the expansion of this business into new geographical markets. The Company’s management has been eliminating high-cost contractors that are servicing claims in new geographic areas and achieving positive results. The provision for home warranty claims, expressed as a percentage of home warranty operating revenues, has steadily declined throughout the current year, from a high of 56.2% in the first quarter of 2001, to 48.3% in the fourth quarter of 2001.

    Depreciation and amortization — Depreciation and amortization, as well as capital expenditures, are summarized in Note 19 to the consolidated financial statements.

    Premium taxes — A summary by pertinent segment of the Company’s premium taxes is as follows:

(in thousands, except percentages)		2001	%			2000	%	1999	%
Title Insurance	$ 22,762	92	$ 20,289	90	$ 21,265	93
Consumer Information	2,078	8	2,284	10	1,632	7
	$ 24,840	100	$ 22,573	100	$ 22,897	100

    Insurers are generally not subject to state income or franchise taxes. However, in lieu thereof, a “premium” tax is imposed on certain operating revenues, as defined by statute. Tax rates and bases vary from state to state; accordingly, the total premium tax burden is dependent upon the geographical mix of operating revenues. The Company’s underwritten title company (noninsurance) subsidiaries are subject to state income tax and do not pay premium tax. Accordingly, the Company’s total tax burden at the state level is composed of a combination of premium taxes and state income taxes. Premium taxes attributable to title insurance operations, as a percentage of title insurance operating revenues, were approximately 1.0% for 2001, 2000 and 1999, respectively.

    Interest — Interest expense increased 18.1% in 2001 over 2000 and 46.4% in 2000 over 1999. The increase in 2001 over 2000 was primarily due to the issuance of the Company’s $210.0 million senior convertible debentures in April of 2001. The increase in 2000 over 1999 was primarily due to interest expense associated with debt incurred in connection with company acquisitions.

    Income before income taxes, minority interests and cumulative effect of a change in accounting principle — A summary by segment is as follows:

(in thousands, except percentages)	2001	%			2000	%	1999	%
Title Insurance	$ 170,737	44	$   93,205	50	$ 128,738	58
Real Estate Information	184,042	47	58,110	31	65,342	29
Consumer Information	32,954	9	35,198	19	27,652	13
	387,733	100	186,513	100	221,732	100
Corporate	(58,193)		(32,637)		(51,760)
	$ 329,540		$ 153,876		$ 169,972

    The Company’s title insurance profit margins vary according to a number of factors, including the volume, composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity. For example, commercial transactions tend to generate higher revenues and greater profit margins than residential transactions. Further, profit margins from refinancing activities are lower than those from resale activities because in many states there are premium discounts on, and cancellation rates are higher for, refinancing transactions. Cancellations of title orders adversely affect profits because costs are incurred in opening and processing such orders but revenues are not generated. Also, the Company’s direct title insurance business has significant fixed costs in addition to its variable costs. Accordingly, profit margins from the Company’s direct title insurance business improve as the volume of title orders closed increases. Title insurance profit margins are also affected by the percentage of operating revenues generated by agency operations. Profit margins from direct operations are generally higher than from agency operations due primarily to the large portion of the premium that is retained by the agent. Real estate information profits are generally unaffected by the type of real estate activity but increase as the volume of residential real estate loan transactions increases. Consumer information profits increase as the volume of transactions increases and are not affected by the volatility of real estate transactions. In general, the title insurance business is a lower-margin business when compared with the Company’s other segments. The lower margins reflect the high fixed cost of producing title evidence, whereas the corresponding revenues are subject to regulatory and competitive pricing constraints. Corporate expenses increased $25.6 million in 2001 over 2000 and decreased $19.1 million in 2000 from 1999. The increase in 2001 over 2000 was primarily due the previously disclosed $23.7 million reduction in expenses in 2000 resulting from the restructuring of the Company’s pension plan, as well as increased interest expense in 2001 due primarily to the issuance of the Company’s $210.0 million senior convertible debentures in April of 2001, offset in part by an increase in equity in earnings of unconsolidated affiliates. The decrease in 2000 from 1999 was primarily attributable to the restructuring of the Company’s pension plan and a decrease in equity in earnings of unconsolidated affiliates.

    Income taxes — The Company’s effective income tax rate, which includes a provision for state income and franchise taxes for noninsurance subsidiaries, was 35.7%, 35.5% and 36.7% for 2001, 2000 and 1999, respectively. The differences in the effective tax rate were primarily due to changes in the ratio of permanent differences to income before income taxes and minority interests and changes in state income and franchise taxes resulting from fluctuations in the Company’s noninsurance subsidiaries’ contribution to pretax profits. Information regarding items included in the reconciliation of the effective rate with the federal statutory rate is contained in Note 9 to the consolidated financial statements.

    Minority interests — Minority interests in net income of consolidated subsidiaries increased $27.8 million in 2001 over 2000 and decreased $2.1 million in 2000 from 1999. These fluctuations were primarily due to the relative changes in the operating results of the Company’s joint venture with Experian.

    Net income — Net income and per share information are summarized as follows:

(in thousands, except percentages)		2001				2000			1999
Income before cumulative      effect of a change in      accounting for tax      service contracts	$	167,268		$	82,223	$	88,643
Net income	$	167,268		$	82,223	$	33,003
Per share of common stock:      Income before cumulative           effect of a change in           accounting for tax           service contracts:                Basic	$	2.51		$	1.29	$	1.37
Diluted	$	2.27		$	1.24	$	1.34
Net income:                Basic	$	2.51		$	1.29	$	.51
Diluted	$	2.27		$	1.24	$	.50
Weighted-average shares:                Basic		66,568			63,680		64,669
Diluted		75,834			66,050		66,351