Revenues for the year were $1.887 billion. After-tax profits were $64.7 million, or $3.64 per diluted share, compared with $3.09 per diluted share in 1996. Our stock price improved 80 percent over the course of the year.

INDUSTRY TRENDS
      At the beginning of the decade, we viewed a markedly different landscape when compared with today. There were 10 national title insurance companies, each offering a very limited array of informational products, most relying heavily on data and software owned outside the industry for production of their primary product. Title searches were produced county-by-county and practices and policy coverages were dictated by local customs. Change was inevitable, and First American changed from a national title insurer to a full service provider of real estate information.

      After a period of intense consolidation, there are now six national underwriters. Our industry now offers a menu of informational products and databases which are, more often than not, controlled by title companies. The searching process is becoming much more automated and central processing is common in several states, as national customers are demanding uniform policy coverages from state to state.

      This process of transformation is far from over. We must continue to look into the future and structure our company to prosper in the world as it will be. As we look ahead, we see several important trends that will shape the future of First American:

1. A greater emphasis will be placed on information. Customers today seek a wide variety of information to support their real estate decisions and First American wants to be the company of choice for these customers. Generally, title insurance accompanies this information but often, as in the case of second mortgage lending, title information (when coupled with borrower credit data, a flood zone determination and tax information) is enough. To meet this trend, First American has continued to expand its control of property data by purchasing more than 20 title operations during 1997. Additionally, a huge step was taken with the creation of the Experian joint venture. In combining most of our information services division with Experian's real estate information arm, First American gained an 80 percent interest in the nation's most extensive database of title and property characteristic records as well as a national real estate tax database. This financially strong and valuable partnership has already provided substantial benefits by bringing excellent new people and technological capabilities to First American.

      The strong profits and potential created by the Experian venture have exceeded expectations. Spanning nearly all of our companies, this venture brings us closer to our goal of operating our divisions as one enterprise. The acquisition strategy of purchasing data bases needed to produce our primary products helps ensure the long-term strength of our company and our industry.

2. Lenders will play a stronger role in shaping our products and product mix. Mortgage originators and servicers continue to expand. As they grow and geographically diversify, the need for efficient systems and uniform products is more urgent. Our strong working relationships with our lender clients will become even more important to us.

      Our strategy of offering the most extensive array of products to lender clients helps us strengthen our lender alliances. Furthering this strategy during the year, First American acquired Strategic Mortgage Services (SMS), a multiple product provider of real estate information including mortgage credit information, appraisal data and document preparation. By adding the SMS customers to our existing systems, our profits were substantially improved in the mortgage credit reporting and appraisal businesses and we also were able to add the mortgage document preparation business to our mix. On top of this, SMS operated an effective computer software company specializing in escrow closing and title plant systems. This unit is evolving into the systems and software hub for our title division.

3. Customers will require that they be able to order and receive all informational products electronically and on a single system. An integral part of our strategy is the completion of our ordering and delivery systems. We are nearing the completion of a system allowing for very high volume ordering and delivery of mortgage credit information, flood certifications, tax monitoring information and title products. We recently completed an Internet-based order and delivery system for smaller volume users. In most cases, orders are now placed with multiple vendors using mail, fax machines, telephones or separate user interfaces. A single customer may deal with 20 or more vendors and their systems, and the informational products are received in many forms. First American's systems, coupled with our extensive product mix, will lead to incredible efficiencies by allowing order entry and delivery on a single system. This is First American's primary initiative for 1998.

      In addition to completing these systems, another important initiative is to expand our national capability to produce title evidence, and then link our operations electronically. We envision a day when policies are delivered electronically throughout the country. Each First American branch and agent will be linked to the customer through a wide area network. This network is well underway, linking over 250 First American offices. When complete, our major nationwide lender clients will receive policies electronically from all parts of the country.

4. Cost efficiencies will become increasingly important. Our customers, and indeed our own companies, strongly resist price increases. This trend will continue, underscoring the need for efficiency. To facilitate a complete re-engineering of the title searching and closing process, First American has been developing its FAST Title and Escrow system which will integrate and revolutionize our production processes. This system will be completed during 1998 and rolled out in 1999.

      Our ongoing effort to improve higher-margin businesses was realized during 1997. Our emphasis on commercial title insurance, a primary company initiative for several years, has resulted in strong market share growth. A strong commercial market together with increases in market share in Dallas and Los Angeles, the acquisition of Settlers Abstract in Philadelphia, and continued strength in New York City and in our National Accounts Department, led to excellent results in 1997.

TRANSITIONS

      During the year, First American Records Management (FARM) redeemed shares that had been held by The First American Financial Corporation. FARM, of which First American previously owned 35 percent, continues to be an excellent investment and we are pleased to retain 7-1/2 percent of the company.

      It is with sadness that we report the passing of Robert McLain, our good friend and longtime board member. Bob was a homebuilder throughout his very successful career and enjoyed a reputation for the highest integrity. He was a loyal and extremely supportive board member since joining in 1981, guiding us through many years of growth. We will miss Bob's friendship and wise counsel.

      We are pleased to add D. Van Skilling to our board. Van began his career with TRW in 1970, rising to the level of executive vice president. When TRW sold its well-known credit reporting division, Van continued to head the unit now known as Experian, and is now chairman and chief executive officer of Experian's North American operations. We welcome Van to our board.

OUTLOOK

      New orders during the early part of 1998 are extremely strong. Mortgage rates are low and the national economy is robust, leading to record order levels in many parts of the country. Many experts look for these conditions to continue. We look to the future with confidence as we integrate and improve our real estate products and services.

      We will continue to expand into new businesses and work diligently to improve our market shares and margins in all of our divisions.

      In December 1997, the board approved a three-for-two stock split which was effective in January 1998, increasing the shares outstanding to 17.4 million. At its February 1998 meeting, the board increased the quarterly dividend from 13-1/2 cents a share to 15 cents a share.

      On behalf of the officers and directors of First American, we thank you for your support.

D. P. Kennedy
Chairman of the Board

Parker S. Kennedy
President