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

notes to consolidated financial statements

 NOTE 12

Stock Option Plans:

    On April 24, 1996, the Company implemented The First American Corporation 1996 Stock Option Plan (the “Stock Option Plan”). Under the Stock Option Plan, options are granted to certain employees to purchase the Company’s common stock at a price no less than the market value of the shares on the date of the grant. The maximum number of shares that may be subject to options is 11,625,000. Currently, outstanding options become exercisable one to five years, and expire ten years from the grant date. On April 24, 1997, the Company implemented The First American Corporation 1997 Directors’ Stock Plan (the “Directors’ Plan”). The Directors’ Plan is similar to the employees’ Stock Option Plan, except that the maximum number of shares that may be subject to options is 1,800,000 and the maximum number of shares that may be purchased pursuant to options granted shall not exceed 6,750 shares during any consecutive 12-month period.

    In May 2001, in connection with the purchase of Credit Management Solutions, Inc. (CMSI), the Company adjusted the outstanding CMSI stock options to substitute common shares of the Company for the shares of CMSI that were issuable upon exercise of those options. The shares and exercise price for the CMSI options were adjusted by an exchange factor, with the result being that the CMSI options became exercisable with respect to 900,000 common shares of the Company at exercise prices ranging from $3.96 to $43.58.

    In May 1999, in connection with the Company’s business combination with National Information Group (NAIG), which was accounted for under the pooling-of-interests method of accounting, the Company adjusted the outstanding NAIG stock options to substitute common shares of the Company for the shares of NAIG that were issuable upon exercise of those options. At December 31, 2001, 72,293 common shares of the Company were issuable pursuant to exercise of the remaining outstanding adjusted NAIG options with exercise prices ranging from $7.65 to $21.27.

    Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). In accounting for its plan, the Company, as allowable under the provisions of SFAS No. 123, applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” As a result of this election, the Company does not recognize compensation expense for its stock option plans. Had the Company determined compensation cost based on the fair value for its stock options at grant date, as set forth under SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts as follows:

(in thousands, except per share amounts)		2001				2000		1999
Net income:
As reported	$	167,268	$	82,223	$	33,003
Pro forma	$	157,609	$	72,259	$	25,341
Earnings per share:
As reported
Basic	$	2.51	$	1.29	$	.51
Diluted	$	2.27	$	1.24	$	.50
Pro forma
Basic	$	2.37	$	1.13	$	.39
Diluted	$	2.08	$	1.08	$	.38

    The fair value of each option grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2001, 2000 and 1999, respectively; dividend yield of 1.4%, 2.1% and 1.5%; expected volatility of 53.6%, 51.4% and 39.6%; risk-free interest rate of 5.4%, 5.2% and 5.8%; and expected life of eight years, nine years and seven years.

    Transactions involving stock options are summarized as follows:

(in thousands, except weighted-average exercise price)	Number outstanding		Weighted average exercise price
Balance at December 31, 1998	6,907		$	16.94
Granted during 1999	224		$	17.23
Exercised during 1999	(453	)	$	8.54
Forfeited during 1999	(400	)	$	18.61
Balance at December 31, 1999	6,278		$	17.37
Granted during 2000	4,509		$	12.19
Exercised during 2000	(448	)	$	8.78
Forfeited during 2000	(541	)	$	16.36
Balance at December 31, 2000	9,798		$	15.45
Granted during 2001	1,288		$	18.82
Exercised during 2001	(1,009	)	$	11.17
Forfeited during 2001	(371	)	$	18.88
Balance at December 31, 2001	9,706		$	16.22

    Stock options outstanding and exercisable at December 31, 2001, are summarized as follows:

(options in thousands)	Outstanding			Exercisable
Range of exercise prices	Options	Average life (years)(a)	Weighted- average exercise price	Options	Weighted- average exercise price
$ 3.96 – $ 8.95	1,137	4.4	$  5.81	1,129	$  5.80
$ 8.96 – $13.95	3,436	8.1	$10.81	626	$10.96
$13.96 – $20.95	1,559	7.4	$17.59	811	$17.35
$20.96 – $43.58	3,574	6.5	$24.13	2,048	$24.09
$ 3.96 – $43.58	9,706	7.0	$16.22	4,614	$16.65

^(a)Average contractual life remaining in years.