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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-K



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Year Ended December 31, 2004



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File No. 0-21417



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CAPITAL TITLE GROUP, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 87-0399785                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



|                                                 |  |           
|------------------------------------------------ |  | ----------
|14648 N. Scottsdale Rd., Ste 125, Scottsdale, AZ |  | 85254     
|(Address of principal executive offices)         |  | (Zip Code)



Registrantss
telephone number, including area code: (480) 624-4200



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Securities registered under Section 12(b) of the Act:

NONE



Securities registered under Section 12(g) of the Act:

Common Stock, $.001 par value

(Title of class)



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Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈.



Indicate by check mark if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. ̈.



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes ̈No  x.



The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $69.9
million. This figure was estimated based on the last business day of the registrants most recently completed second fiscal quarter which was June 30, 2004. The number of shares of Common Stock outstanding on June 30, 2004 was
21,284,468.



The number of shares of Common Stock outstanding on March
11, 2005 was 21,680,540, and the closing price on this date was $6.29 per share.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Registrants Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on May 20, 2005 are incorporated by reference into Part III hereof.



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FORWARD-LOOKING STATEMENTS



We have made some statements in this report on Form 10-K, including those in Item 1 and Item 7. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any results, levels of activity, performance or achievements expressed or implied by any
forward-looking statements. These factors include, among other things, changes in national and regional housing demand and values, the levels of interest and inflation rates, the availability and cost of mortgage loans, employment trends, default
rates on mortgage loans, the factors listed under Risk Factors and other factors set forth elsewhere in this report on Form 10-K. In some cases, you can identify forward-looking statements by terminology such as may,
will, should, could, expects, intends, plans, anticipates, believes, estimates, predicts, potential or
continue or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements.



Particular factors in the title insurance
industry that may cause actual results to differ materially from those contemplated by forward-looking statements include the following:



| |  |  | The costs of producing title evidence are relatively high, while premiums are subject to regulatory and competitive restraints.
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| |  |  | Real estate activity levels have historically been cyclical and are influenced by the overall economy, particularly interest rates.
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| |  |  | The title insurance industry may be exposed to substantial claims by large classes of claimants.
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| |  |  | The industry is regulated by state laws that require the maintenance of minimum levels of capital and surplus and that restrict the amount of dividends that maybe paid by our
insurance subsidiary.
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We caution you that the foregoing
list of important factors is not exclusive. We do not undertake to update any forward-looking statements that maybe made from time to time by us or on our behalf.



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Part I



Item 1. Business



Overview



We offer
services throughout the United States for title insurance, real estate appraisal and valuation services, and other related services to residential and commercial customers in the real estate and mortgage lending industries. We currently operate
approximately 130 offices located in Arizona, California, Nevada, Ohio, Pennsylvania and Texas and employ approximately 2,500 individuals. We are also licensed to issue and underwrite title insurance policies in Arizona, California, Nevada, New York
and Texas through our subsidiary United Capital Title Insurance Company. Through acquisitions and the expansion of existing operations, we have achieved substantial growth during the last several years. Our revenue increased from $64.4 million in
2001 to $290.9 million in 2004. We believe that our concentrated regional operations provide us with additional opportunities for national growth and to operate as a national title insurance company with the capacity to act as a one-stop
shop for our customers by providing a bundle of real estate settlement services.



Operating Strategy



We
attribute our success to an operating strategy which emphasizes the following factors:



Commitment to Service.



| |  |  | We believe that title insurance policies and escrow functions are generally standardized, and that the level of service provided is therefore the key differentiating factor among
title industry competitors. We are committed to providing an unparalleled quality of service to our customers, and we emphasize the importance of that culture of service to all of our employees. Our advanced technology platform facilitates our
prompt and efficient delivery of title and escrow services. Through our commitment to service, we build lasting and personal relationships with our real estate industry clients. We believe that our focus on providing high levels of personal service
to our customers is the principal differentiating factor, which has enabled us to compete effectively with the major title insurers.
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| |  |  | We believe that the quality of our service is best reflected by our ability to increase market share in each of our geographic markets.
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Customer and Market Focus.



| |  |  | Our services and marketing are directed primarily to real estate agents and lenders in the residential resale and refinance sectors of the market, which we believe are less prone to
the cyclical industry downturns associated with changing interest rates than the commercial real estate and new home sectors.
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| |  |  | In the residential resale market, we focus on establishing relationships with real estate agents who typically direct the selection of escrow and title insurance services by their
clients. Although title insurance premiums are typically paid by the buyer or seller of residential property, depending on local custom, the real estate agent responsible for the closing generally selects the title agent because of his or her
greater familiarity with service levels. All parties to the home closing are concerned with personal time schedules and the costs associated with settlement delays. We provide title search and escrow services in connection with the resale
transaction, and we arrange for the issuance of owner and lender title insurance policies at closing either directly through our United Capital Title Insurance Company subsidiary or as agent for other national title insurers.
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| |  |  | In the residential refinance market, we actively promote relationships with community banks and other lenders who refinance existing mortgage loans. Although the borrower pays our
fees, we view these lenders as our customers because they typically direct the selection of escrow and title insurance by their borrowers. Our services in a refinance transaction also include title search and escrow services in connection with the
refinancing of the existing mortgage loan, and the issuance of a lender title insurance policy in favor of the new lender.
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Experienced Management Team.



| |  |  | We focus on attracting and retaining the highest quality management and operational personnel available. Our executives and other key managers have an average of over 20 years
experience in the title insurance industry, and directly participated in the successful development and operation of several large regional title agency networks, major title insurance underwriters and providers of bundled real estate settlement
services. In addition, our entrepreneurial culture, growth record, incentive compensation structure and dedication to customer service helps us to continually attract top producers with established client relationships.
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| |  |  | Our operational management is decentralized, with our key regional managers maintaining primary control over operations in their respective areas of geographic responsibility. Title
insurance operations vary significantly from state to state, and sometimes even from county to county, based on local regulation, industry custom and personal relationships with key persons in local real estate and financing markets. The extensive
experience of our key managers in their respective regions enables them to understand and respond effectively to local industry conditions.
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Operating Flexibility.



| |  |  | The cyclical nature of the title industry requires us to consistently manage operating expense levels in response to market fluctuations. Our executives and key managers have
extensive experience in controlling expenses to reflect cyclical industry movements. We control our most significant cost item, personnel expenses, through use of temporary personnel and overtime personnel as needed, reduction in staffing levels
when appropriate, and the commission and incentive elements of our compensation structure which vary significantly with changes in our revenue levels. In addition, new orders typically close in 30 to 60 days after being opened, thereby providing us
a period of time to assess expected revenues and make appropriate changes to our staffing and cost structure.
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| |  |  | We also seek to maintain financial and other operating flexibility by controlling other significant expense items, including contracts for data services for title and property
information, which are structured based on usage; supply costs, which are variable based on business volume; and provisions for title and escrow losses, which for the most part have a direct correlation to revenue levels. We also manage our fixed
costs such as rent by entering into relatively short term leases, typically three to five years.
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Strong Geographic Markets.



| |  |  | We currently conduct operations in Arizona, California, Nevada, Ohio, Pennsylvania and Texas. Our concentrated operations in the Southwestern United States provide a solid base
resulting from the fact that Arizona, California and Nevada rank high in relation to other states in the rate of new job creation and population growth. We operate branch offices in some of the largest and most active real estate markets in the
nation, including the greater Los Angeles, San Diego, San Francisco, Oakland, San Jose, Las Vegas and Phoenix metropolitan areas. We believe that our success in these diverse and fast growing geographic areas positions us with a solid base in robust
real estate markets that historically have been described as healthy even through periodic downturns in the overall U.S. economy.
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| |  |  | The geographic location of our centralized processing center near Pittsburgh, PA that handles appraisal and title services through a nationwide network of local appraisers and
abstractors also provides us with a strategic proximity to large national lenders based in the Eastern United States.
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Growth Strategies



Our primary long-term objectives are to become a national provider of title insurance and integrated real estate services and to maximize our profits
throughout different real estate cycles. To accomplish these objectives, we are pursuing various growth strategies that include both acquisitions and organic growth, all of which are designed to broaden our market position and maximize
profitability. Specifically, these strategies include:



Increasing Share of Existing Markets.



| |  |  | We intend to expand operations in our existing markets by continually attracting top producers and establishing additional branch offices in those markets. We believe that this
method of adding revenue without corresponding increases in fixed costs should significantly improve our operating margins in those markets. For example, we successfully pursued this element of our growth strategy in the Phoenix marketplace, moving
from twenty-seventh to third in market share in our first three years of operations in that market based upon a third party provider of market share data. Further, in the southern California market, we increased our overall market share from 0.7% to
5.6% from 2001 to 2004 through acquisitions and organic growth. Even though we have been successful in growing our market share in each of our geographic markets, we believe the growth potential in each market remains high.
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Acquisition of Appraisal Companies.



| |  |  | As part of our strategy of becoming a national title insurance company, we acquired Nationwide Appraisal Services Corporation (Nationwide), which provides appraisal,
title and settlement services to its customers in the mortgage and real estate industry through its centralized processing center. Nationwide provides appraisal services in all 50 states and is licensed to conduct title and escrow services in 38
states, primarily in the Eastern part of the United States. We also purchased substantially all of the assets of Real Estate Appraisal Services, Inc., a traditional real estate appraisal services company based in Ohio. We believe the acquisition of
Nationwide was an important step in achieving our goal of becoming a national title insurance company that can offer our clients a bundle of title and related settlement services as more fully described below.
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Acquisition of Nationwide TotalFlood Services.



| |  |  | During 2004 we also acquired Determination Processing Services, Inc., and later renamed it consistent with our branding approach, to Nationwide TotalFlood (TotalFlood).
TotalFlood, through a centralized processing center located in Los Angeles, California, is a provider of residential and commercial flood determination on property throughout the United States. A flood determination is commonly required to obtain a
mortgage or to refinance an existing mortgage on property in the United States. Adding this service to our existing product and service portfolio provides us with the opportunity to capture more revenue in the real estate transactions of our
customers.
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Geographic Expansion.



| |  |  | Our traditional expansion strategy has been to open new offices and to acquire established businesses with branch operations and strong management teams in place in specific
geographic markets. We intend to continue to follow this strategy by acquiring title companies in markets we do not currently serve to build a national presence in substantially all states in which major population centers exist. Acquiring
Nationwide and TotalFlood provides the potential to expand our geographic presence throughout the United States by providing us with an opportunity to issue title insurance policies as an agent and provide escrow, appraisal and flood zone
determination services in all 50 states. We believe that this evolving growth strategy better positions us to more efficiently serve national and larger regional lenders.
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Bundling of Settlement Services and Vertical Integration.



| |  |  | We plan to offer a full bundle of real estate settlement services, so that we can serve as a one-stop shop for real estate lenders and mortgage brokers. We
envision this bundle of settlement services to include underwriting and issuing title insurance policies, as well as providing appraisal, flood zone determination, credit evaluation and other related settlement services to our customers. Completing
the Nationwide and TotalFlood acquisitions represents another significant step toward achieving our goal of becoming a national provider of bundled settlement services because it enables us to provide a wide array of appraisal services to our
customers and provides us with additional opportunities to serve as the underwriter for many of the title policies issued by Nationwide. Either through further acquisitions or contracts with qualified third-party vendors we plan to add credit
evaluation and other services required to originate and service real estate lenders. We believe there will be increasing demand for this type of package of services from lenders responding to consumer and regulatory pressure to offer settlement
services to borrowers at a guaranteed fixed cost. We believe being a provider of bundled settlement services will enable us to enter a real estate sale or finance transaction at an earlier point in the process, serve as the exclusive information
service provider in closing the transaction and generate increased revenue opportunities for each transaction without significant corresponding increases in fixed cost, thereby improving our margins.
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| |  |  | Our September 2002 acquisition of Nations Holding Group and its United Capital Title Insurance Company subsidiary provided us with the capability of underwriting many of the title
insurance policies that we issued. United Capital Title Insurance Company contributed $7.3 million in pre-tax earnings for the year ended December 31, 2004.
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Description of Title Insurance Business



Overview.The title insurance process has become accepted as the most efficient means of determining ownership of, and the priority of interests
in, real estate in nearly all markets of the United States. Virtually all lenders require their borrowers to obtain title insurance policies at the time mortgage loans are made on real property.



The major expense of a title company is the search and examination function
in preparing preliminary title reports, commitments and title policies. Title companies have focused on advancing technology in order to reduce costs, improve accuracy and respond to the continuing pressures within the real estate industry for
faster and more cost effective processing of transactions.



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Title Policies. Title insurance policies state the terms and conditions upon which a title
underwriter will insure title to real property. The beneficiaries of title insurance policies are generally buyers of real property and secured lenders.



A title insurance policy indemnifies the named insured and certain successors in interest against title defects, liens and encumbrances existing as of the
date of the policy and not specifically excepted from its provisions. The policy typically provides coverage for the real property mortgage lender in the amount of its outstanding mortgage loan balance and for the buyer in the amount of the purchase
price of the property, but in some cases might insure for a greater amount where the buyer anticipates constructing improvements on the property. Coverage under a title insurance policy issued to a real property mortgage lender generally terminates
upon the refinance or sale of the insured property unless the owner carries back a mortgage or makes certain warranties as to the title.



Title insurance is different from other types of insurance because it relates to past events that affect title to property at the time of closing rather
than future events. Prior to issuing policies, underwriters can significantly reduce or eliminate future losses by accurately performing searches and examinations. The premium for title insurance is due in full on the closing date of the real estate
transaction and is based upon the purchase price of the property insured or the amount of the secured loan. Title insurance policies are issued on the basis of a preliminary report or commitment. These reports are prepared after a search of public
records, maps and other relevant documents to ascertain title ownership and the existence of easements, restrictions, rights of way, conditions, encumbrances or other matters affecting the title to, or use of, real property. A visual inspection of
the property may also be made prior to the issuance of certain title insurance policies.



To facilitate the preparation of preliminary reports without the necessity of manually searching public records, copies of public records, maps and other relevant historical documents are compiled and indexed in a
title plant. Each title plant relates to a particular county and is kept current on a daily or other frequent basis by the addition of copies of recorded documents that affect rights in real property in the particular county. We primarily subscribe
for title information services provided by title plants owned and operated by independent entities to assist us in the preparation of preliminary title reports. To a lesser extent, we, like many other title companies, own, lease or participate with
other title insurance companies or agents in the cooperative operation of such plants.



The Title Policy Process. A brief description of the process of issuing a title insurance policy is as follows:



| |  |  | First, a real estate salesperson or broker, escrow agent or lender places an order for a title policy.
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| |  |  | Second, after the relevant historical data on the property is compiled, a preliminary report is prepared. The preliminary report sets forth the current status of title to the
property; any exemptions, exceptions and/or limitations that might be attached to the policy; and specific issues that need to be addressed and resolved by the parties to the transaction before the title policy will be issued (such as removal of
prior tax liens and payment of prior loans on the property). The preliminary report is circulated to all parties of the transaction for satisfaction of any specific issues.
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| |  |  | Third, after all specific issues identified in the preliminary report are satisfied, the escrow agent closes the transaction in accordance with the instructions of the parties and
the policy conditions. Local customs generally dictate which party in a transaction pays the title insurance premium.
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| |  |  | Fourth, after the transaction has closed and all monies have been released, a final policy is issued to the owner and the lender in a sale transaction, and to the lender only in a
refinancing transaction.
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Direct vs. Agency
Sales. Preliminary reports and commitments to issue policies are prepared by title underwriters (direct sales) or by independent agents on behalf of the underwriters (agency sales). The terms and conditions upon which the real property will be
insured are determined in accordance with the standard policies and procedures of the title underwriter. In direct sales, the title underwriter issues the preliminary report and commitment and retains the entire title premium paid in connection with
the transaction. In agency sales, the search and examination function is performed by the agent and the vast majority of the premium collected is retained by the agent, with the balance remitted to the title underwriter. Independent agents may
select among several title underwriters based upon the amount of the premium split offered by the underwriter, the overall terms and conditions of the agency agreement and the scope of services offered to the agent. Premium splits vary
by geographic region. We compete against both title underwriters and independent title agencies.



Losses and Reserves. While most other forms of insurance provide for the assumption of risk of loss arising out of unforeseen events, title
insurance serves to protect the policyholder from risk of loss from events that predate the issuance of the policy. As a result, claim losses associated with issuing title policies are typically lower when compared to other types of insurance
underwriters. The maximum amount of liability under a title insurance policy is usually the face amount of the policy plus the cost of defending the insureds title against an adverse claim.



Reserves for claim losses are based upon known claims, as well as unknown
losses we expect to incur based upon historical experience and other factors, including claim loss history, industry averages, legal environment, geographic considerations, expected recoupments and the types of policies written. We also accrue
reserves for unknown losses arising from escrow, closing and disbursement functions due to fraud or operational error.



A title insurance company can minimize its losses by having strict quality control systems and underwriting standards in place. These controls increase
the likelihood that the appropriate level of diligence is conducted in completing a title search so that the possibility of potential claims is significantly reduced. In the case of agents, who conduct their own title searches, the agency agreement
between the agent and the title insurance underwriter gives the underwriter the ability to proceed against the agent when a loss arises from a flawed title search.



U.S. Title Insurance Market



The market for title insurance in the United States is closely tied to the real estate and real estate lending markets. Growth in the industry is
dependent upon various overall economic factors, including, but not limited to, interest rates, sales of new and existing homes, the refinancing of previously issued mortgages, as well as growth in the gross national product and inflation.



Other real estate services such as credit evaluation,
appraisal, flood zone determination, document preparation and tax services in the United States are also closely tied to the overall real estate market.



Home sales, which are the primary driver of demand for title insurance and related real estate services, have recently experienced all-time highs, fueled
by historically low interest rates. Despite the fact that the Mortgage Bankers Association in January 2005 has predicted that both new housing starts and existing home sales will decline 4.9% and 7.2%, respectively during 2005, the Mortgage Bankers
Association is anticipating a 22.4% decline in mortgage refinancings, but only a 1.6% decline in mortgage originations related to home sales in 2005. We believe our marketing strategy of focusing on residential real estate sale transactions will
continue to prove to be beneficial as interest rates rise and mortgage originations decline.



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Company Operations



We conduct our business through several operating subsidiaries. We provide title insurance and real estate settlement services to our customers through
Capital Title Agency, Inc. in Arizona, New Century Title Company, United Title Company and First California Title Company, Inc. in California, and Land Title of Nevada in Nevada. We provide title insurance and real estate settlement services as well
as appraisal services to customers throughout most of the United States through Nationwide Appraisal Services Corporation, based near Pittsburgh, Pennsylvania. Additionally, we provide flood zone determinations in all 50 states through TotalFlood
via a centralized processing center located in Los Angeles, California.



Entrepreneurship and close customer relationships are an integral part of our company culture and emphasized at each of our subsidiaries. We believe that this culture of independence and decentralized management also aids in employee
recruitment and retention, which is critical to the operating success of each of our subsidiaries.



Title Insurance. The customers of title insurance companies typically buy title insurance for the accuracy and reliability of the title report as
well as the indemnity component of the policy. The beneficiaries of title insurance policies are generally owners or buyers of real property or parties who make loans using real property as security. An owners policy protects the named insured
against title defects, liens and encumbrances existing as of the date of the policy and not specifically excluded or excepted from its provisions, while a lenders policy, in addition to the foregoing, insures the validity of the lien of the
insured mortgage and insures the priority of the lien as stated in the title policy.



When real property is conveyed from one party to another, occasionally there is a hidden defect in the title or mistake in a prior deed, will, mortgage or a number of other issues that may give a third party a legal
claim against such property. If a claim is made against real property, title insurance provides a guarantee against insured defects, pays legal expenses to eliminate title defects, pays claims arising from errors in title examination and recording,
and pays any losses arising from hidden defects in title and defects that are not of record. Title insurance provides an assurance that the insurance holders ownership and use of such property will be defended promptly against claims whether
or not the claim is valid.



A title defect is one of any number
of things that could jeopardize the property owners interest. It could be an unsatisfied mortgage, lien, judgment or other unrecorded claim against the property. It could arise through easements, use restrictions or other existing covenants,
or it could be a hidden risk. Title insurance generally protects against four kinds of hidden risks: errors in the public records such as incorrect information in deeds and mortgages regarding names, signatures and legal descriptions; judgments,
liens and mortgages or any other claims against the property or the seller which become the new owners responsibility after closing, such as unpaid taxes, assessments and other debts to creditors; claims to ownership by the spouse of a former
owner or by the missing heir of a deceased owner who did not receive his share of the estate; and invalid deeds or other transfers by sellers who did not actually own the property or by previous owners who were minors or not mentally
competent.



Our subsidiary, United Capital Title Insurance
Company, underwrote approximately 78% of the title insurance policies that we issued in 2004, with the remaining balance being underwritten by five other third party title insurance companies. With respect to title insurance policies underwritten by
these other title insurance companies, we act as an independent agent for the title insurance underwriter. We have entered into underwriting agreements with these underwriters. The underwriting agreements state the conditions under which we may
issue a title insurance policy on behalf of the underwriter, and prescribe the circumstances under which we may be liable if a loss or claim is attributable to our acts, errors or omissions.



Escrow and Closing Services. In addition to issuing title insurance
policies, we provide escrow and closing services to a broad-based group that includes lenders, home buyers and sellers, developers, real estate agents and lenders. Our role is generally that of an intermediary completing all of the necessary
documentation and services required to complete a real estate transaction.



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In a typical residential transaction, a title insurance order is received from a real estate agent,
mortgage lender, developer or buyer. When we receive the order, the title search begins and the title order is now considered opened. Once documentation has been prepared and signed, mortgage lender payoff demands are in hand and
documents have been ordered, the title order is considered closed.



An escrow company or a title insurance company typically performs the closing function, commonly referred to as an escrow. The entity providing the closing function, or closer, holds the
sellers deed of trust and buyers mortgage until all issues related to the transaction have been settled. The closer then delivers the transaction documents, records the appropriate title documents in the county recorders office and
arranges the transfer of funds to pay off prior loans and extinguish the liens securing such loans. Title policies are then issued.



Fees for escrow and closing services are generally separate and distinct from premiums paid for title insurance premiums and other real-estate services.
However, because escrow and closing services are integral to the title insurance business, they are a key component of our business operations, a significant source of revenue and the cornerstone of our bundled settlement service growth strategy.



Our escrow officers and assistants typically prepare escrow
documents pursuant to real estate contracts. The escrow instructions provide guidance to all concerned parties as to the conditions required for the real estate transaction. Our escrow officers then receive funds and disburse them according to the
escrow instructions. Escrow officers are held accountable by state governmental agencies for strict compliance with their fiduciary duties outlined by the escrow instructions. Our escrow officers must possess a high degree of skill, professionalism
and confidentiality in the preparation, collection and recordation of all escrow matters among buyers, sellers, real estate brokers and their agents, developers and lenders.



Administration of Claims. Claims against title insurance policies, though infrequent, typically arise out of human
error. During the process of accumulation and analysis of the public record, certain inaccuracies and inconsistencies are encountered that sometimes result in a situation in which interpretation of these documents could lead to a claim. The exposure
for our title agencies is typically limited to a $5,000 deductible for any loss resulting from a title insurance claim. Our title agencies assume the entire risk of losses incurred in errors made during the escrow process; however, we have secured
insurance coverage up to $10.0 million, subject to a $100,000 deductible, to limit any significant losses.



Claims against our wholly owned title insurance underwriter, United Capital Title Insurance Company, are typically limited to $2.0 million for any loss
resulting from a title insurance claim. For policies with liability amounts in excess of $2.0 million, we utilize a third-party underwriter and we have a $5,000 deductible for any loss resulting form a title insurance claim on such policies.



Some claimants seek damages in excess of policy limits. Those
claims are based on various legal theories usually alleging misrepresentation by an issuing office. Although we vigorously defend against spurious claims, we have from time to time incurred a loss in excess of policy limits.



Experience shows that most claims against policies and claim payments are
made relatively soon after the policy has been issued, although claims may be made many years later. By their nature, claims are often complex, vary greatly in dollar amounts and are affected by economic and market conditions and the legal
environment existing at the time of settlement of the claims. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts
of individual claims and other factors.



The total reserve for
all reported and unreported losses incurred is represented by the reserve for title insurance and escrow losses. The reserve is established using estimated amounts required to settle claims for which notice has been received (reported) and the
amount estimated to be required to satisfy incurred claims of policyholders which may be reported in the future. Provisions for the reserve are charged to income and are based upon our estimates after analyzing reported claims, historical loss
experience, title industry averages, current and projected legal environment and types of policies written. Despite the variability of such estimates, we believe that the reserves are adequate to cover claim losses which might result from pending
and future claims.



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Although we believe that our reserves for claims are reasonable, it is possible that our actual incurred
claims will not conform to our assumptions underlying our reserves. The ultimate settlement of claims may vary significantly from the estimates included in our financial statements. We continually review our estimated liability for future loss
payments for reasonableness and make appropriate adjustments as needed. Additionally we utilize an a third-party actuary to review the adequacy of the title insurance underwriter reserve for title insurance losses on a quarterly and annual basis.



We place a high priority on maintaining effective quality
assurance and claims administration programs. The service to our customer focuses on quality control, claims prevention and product risk assessment. Our claims administration practices emphasize improving liability analysis, prompt, fair and
effective handling of claims, early evaluation of settlement or litigation, and appropriate use of alternative dispute resolution. We generally pay losses in cash, but have sometimes settled legal claims by purchasing the interest of the insured in
the real property or the interest of the claimant adverse to the insured.



Marketing and Customers



We market and
distribute our products and services primarily to customers in the residential real estate industry. We actively encourage our sales personnel to develop new business relationships with key referral sources in this market, such as real estate sales
agents and brokers, financial institutions, local and regional home builders, real estate developers, mortgage brokers and attorneys.



While our focus on regional and local clients remains important, we recently have begun to target more of our marketing resources toward larger national
clients. The buying criteria of national clients such as large residential lenders, real estate investment trusts and developers tend to emphasize the ability to provide multiple settlement services and consistent product delivery. This marketing
strategy correlates with our acquisitions of Nationwide and Nationwide TotalFlood and our overall growth strategy of becoming a national title insurance and appraisal company with the ability to provide a bundle of related settlement services.



Our marketing activities are performed by our escrow officers
as well as our marketing representatives, whose sole function is the solicitation of business from real estate agents, community banks, developers and owners. We believe customer service and consistent product delivery are the most important factors
in attracting and retaining customers, and we measure customer service in terms of quality, consistency and timeliness in the delivery of our services.



Because we have many, varied customers in both the residential and institutional lender market sectors, we are not dependent upon any single customer or
single group of customers. The loss of any one of our customers would not have a material adverse effect on us.



Competition



The title insurance, appraisal and real estate settlement services business is highly competitive. We believe that quality and timeliness of service are
the key competitive factors in the industry because parties to a real estate transaction are usually concerned with time schedules and costs associated with delays in the closing of transactions. Other competitive factors include pricing, ability to
provide a bundle of settlement services and the financial strength of the title insurance underwriter.



Companies with significant market share in the local and national markets in which we compete include First American, Old Republic, Stewart Title,
Fidelity National Title and LandAmerica. The number and size of competing companies varies in different geographic markets. In those markets where we operate and intend to operate, we will face competition from other independent agencies and major
national insurance underwriters, many of which have financial and other resources significantly greater than ours. Despite the



11



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greater resources of our larger national competitors, we believe that we can effectively compete against these larger
competitors in the markets that we serve. We believe that our level of service is the principal differentiating factor which has enabled us to compete effectively with our competitors.



We also compete with other title agencies to attract talented sales agents. We believe that our incentive-based compensation
system and entrepreneurial culture will assist us in retaining our key sales agents and effectively compete with other title insurance companies to attract additional key employees.



Regulation



Overview. Title insurance companies and title agencies generally are subject to extensive regulation under applicable state laws, including, in
California, requirements to maintain minimum levels of net worth and working capital. These state laws also establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses, regulating trade practices,
licensing agents, approving policy forms and approving rate schedules, among other things. Failure to comply with these regulations or an inability to secure or maintain any required licenses could materially adversely affect our business. We
believe that we are in compliance with applicable laws and regulations and can maintain and obtain all licenses required for the conduct of our business.



Title insurance underwriters are also typically subject to a holding company act in their state of domicile that regulates, among other issues, payment of
dividends and investment policies. As a condition to continue its authority to underwrite title insurance policies in the states in which United Capital Title Insurance Company, our title insurance underwriting subsidiary, conducts its business, it
is required to pay certain fees and file information regarding its officers, directors and financial results and condition. Further, pursuant to statutory regulations, United Capital Title Insurance Company must defer a portion of its underwriting
premiums as an unearned premium reserve as well as maintain qualified assets in an amount set by statutory requirements. The level of unearned premium reserve required is determined on a quarterly basis by statutory formula based on several factors
including the number, age and dollar amount of policies written. California law also requires United Capital Title Insurance Company to maintain assets of statutorily defined quality and amount. See  Investments, below.



United Capital Title Insurance Company is regulated by the California
Department of Insurance. Examinations by the California Department of Insurance typically occur at three-year intervals and an examination of United Capital Title Insurance Company for the years ended December 31, 2004, 2003 and 2002 commenced in
early 2005. We do not believe any findings in the California Department of Insurances report of their examination will have a material impact on the statutory results of United Capital Title Insurance Company for the periods under examination.
United Capital Title Insurance Company is also subject to laws and regulations in the other states in which it conducts business.



Ratings



United Capital Title Insurance Company is regularly reviewed and assigned ratings by independent rating agencies designed to indicate its financial condition and/or claims paying ability. Financial data and other
similar information are supplied to the rating agencies, as requested, and analysis is performed by agencies to arrive at a particular rating. At December 31, 2004, Lace Financial Corporation rated United Capital Title Insurance Company
A+, the highest financial rating that it gives for claims-paying ability. Also at December 31, 2004, United Capital Title Insurance Company was rated A Prime by Demotech, Inc., the second highest rating that Demotech, Inc.
gives to title insurance companies for their financial stability rating.



Investments



United Capital Title Insurance
Company derives a portion of its income from investments. Its investment portfolio consists of short-term investments, predominately certificates of deposit with maturities greater than 90 days, but less than one year, and investments in fixed
maturity bonds and equity securities.



12



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The investment policy of United Capital Title Insurance Company is to maintain a diversified investment portfolio and to
purchase investment grade fixed maturity bonds and preferred and common stocks of large, seasoned and well-managed companies. The investment policy is designed to comply with California law, maximize investment income, maintain adequate cash flow
and provide financial stability within a limited risk tolerance. The carrying amount of all investments, which approximates the fair value of the investments, was approximately $30.8 million at December 31, 2004. See Note 5 to our consolidated
financial statements for information regarding major categories of investments, earnings by investment categories, scheduled maturities and amortized cost and market values of investment securities.



Employees



As of December 31, 2004, we had a total of 2,522 employees, the majority of which are in Arizona, California, Nevada, Ohio
and Pennsylvania. We believe our relations with our employees are excellent.



Intellectual Property



We regard our products,
services and technology as proprietary and attempt to protect them with copyrights, trademarks, service marks, trade secret laws, restrictions on disclosure and other methods. Despite our precautions, we may not be able to prevent misappropriation
or infringement of our products, services and technology. However, while we maintain and operate under a variety of trademarks, trade names, service marks, our management believes such trademarks, trade names and service marks are not material to
our business.



Our logo and some titles and logos of our
services mentioned in this Form 10-K are either our trademarks, trade names or service marks or trademarks, trade names or service marks that have been licensed to us. Each trademark, trade name or service mark of any other company appearing in this
Form 10-K belongs to its holder.



Risk Factors



The risk factors listed in this section and other factors noted herein or
incorporated by reference could cause our actual results to differ materially from those contained in any forward-looking statements.



The demand for our title insurance and related services is highly dependent upon the volume of real estate transactions and other general economic
conditions, and we expect that our 2005 revenues and profits will decline as interest rates stabilize or rise.



The demand for title insurance and appraisal services is dependent upon, among other things, the volume of commercial and residential real estate
transactions. The volume of these transactions has historically been influenced by factors such as mortgage interest rates and the state of the overall economy. When mortgage interest rates are increasing or during an economic downturn or recession,
real estate activity typically declines and the title insurance and appraisal industries tend to experience lower revenues and profitability. For example, stable mortgage interest rates and strength in the real estate market, especially in
California and throughout the West Coast, contributed to very positive conditions for the title insurance industry throughout 1997 and 1998. However, during the second half of 1999 and through 2000, steady interest rate increases resulted in a
significant decline in refinancing transactions. As a result, the market shifted from a refinance-driven market in 1998 to a more traditional market driven by new home purchases and resales in 1999 and 2000. Beginning in 2002 and into 2003, the
level of real estate activity increased, including refinancing transactions, new home sales and resales, due in significant part to substantial decreases in mortgage interest rates. The volume of refinance activity declined in 2004 as a result of
interest rates stabilizing or increasing from 2003 levels, and the favorable industry conditions that existed in 2002 and 2003 may not occur again in the foreseeable future. We cannot predict changes in the interest rate environment in future
periods and its complete impact on residential resale refinance activity. If mortgage interest rates rise quickly and significantly during 2005, it would likely negatively affect opened orders and, in turn, have a negative impact on our revenue
levels and profitability, particularly in comparison to our financial



13



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performance in recent years, which saw record levels of residential resale activity. If mortgage interest rates remain
near 2004 levels or rise slightly over time, it may allow us to better manage expense levels in relation to potentially lower opened orders if mortgage interest rates rise.



Our success depends on our ability to attract and retain key personnel.



Competition for personnel in our industry is intense. We may have difficulty
hiring the necessary sales, marketing and management personnel to support our growth. The successful implementation of our business model and growth strategy depends on the continued contributions of our seasoned executives and key managers. The
loss of any key employee, the failure of any key employee to perform in his or her current position, or the inability of our officers and key managers to expand, train and manage our employee base could prevent us from executing our growth strategy
and have a material adverse effect on our business.



The title insurance
industry experiences seasonal fluctuations.



Historically,
residential real estate activity has been generally slower in the winter, when fewer families move, buy or sell homes, with increased volumes in the spring and summer. Residential refinancing activity is generally more uniform throughout the year,
subject to interest rate stability. Demand for our title insurance and related services generally tracks these seasonal demand patterns of the residential real estate market, although acquisitions of other title insurance companies and changes in
interest rates may alter these traditional seasonal demand patterns. We typically report our lowest revenues and earnings in the first quarter, with revenues and earnings increasing into the second quarter and through the third quarter and declining
again in the fourth quarter.



Our business is highly competitive and
increased competition could reduce our revenues and profitability.



The title insurance and appraisal industries are highly competitive, particularly with respect to price, service and expertise. Companies with significant market share in the local and national markets in which we compete include First
American, Old Republic, Stewart Title, Fidelity National Title and LandAmerica. All of the top five title insurers have larger distribution networks, greater financial resources, more extensive computerized databases and longer standing
relationships than us. The number and size of competing companies varies in the different geographic areas in which we conduct our business. Competition with the major title insurance companies, expansion by smaller regional companies and new
entrants such as diversified financial service companies could adversely affect our business operations and financial condition.



We may encounter difficulties managing and integrating our acquisitions.



Part of our continued growth strategy is to pursue additional opportunities to diversify and expand our operations by acquiring other companies. The
success of each acquisition will depend upon our ability:



| |  | to integrate the acquired businesses operations, products and personnel to achieve synergies and economies of scale;
|- |  | ---------------------------------------------------------------------------------------------------------------------



| |  | to retain key personnel of the acquired businesses; and
|- |  | -------------------------------------------------------



| |  | to expand our financial and management controls and reporting systems and procedures.
|- |  | -------------------------------------------------------------------------------------



In addition, our growth strategy of providing bundled services subjects us to associated risks, including lack of experience
in operating such businesses. Our inability to successfully integrate acquired businesses and manage our growth strategy could have a material adverse effect on our business.



14



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We may not be able to keep pace with rapid technological changes in the title insurance, appraisal and real estate
settlement services industries.



The title insurance and
appraisal industries are subject to rapid technological change, new product and service introductions and evolving industry standards. We believe that our future success will depend on our ability to anticipate technological changes and to offer
products and services that meet evolving standards on a timely and cost-effective basis. The development and implementation of new technologies to effectively compete will require us to expend significant capital and other resources. We may not
successfully identify new product and service opportunities or develop and introduce new products and services in a timely and cost-effective manner. In addition, products and services that our competitors and other real estate industry participants
develop or introduce may render our products and services obsolete or noncompetitive. Advances in technology could also reduce the useful lives of our information systems, preventing us from recovering fully our investment in particular
technologies. Our failure to keep pace with technological change may have a material adverse effect on our business.



We may experience significant claims relating to our title insurance operations and losses resulting from fraud, defalcation or misconduct.



A significant component of our revenue arises from issuing title insurance
policies which typically provides coverage for the real property mortgage lender and the buyer of the real property. As a result, we retain insurance risk on policies we issue up to $2.0 million in some cases. We may also be subject to a legal claim
arising from the handling of escrow transactions. We carry errors and omissions insurance coverage for errors made during the real estate settlement process of up to $10.0 million per occurrence, $10.0 million in the aggregate, subject to a
deductible of $100,000 per occurrence. The occurrence of a significant title or escrow claim in any given period could have a material adverse effect on our financial condition and results of operations during the period.



Fraud, defalcation and misconduct by employees are also risks inherent in our
business. As of December 31, 2004, we were the custodian of approximately $789.7 million of cash deposited by customers with specific instructions as to its disbursement from escrow, trust and account servicing files. We carry insurance covering the
loss or theft of funds of up to $10.0 million annually in the aggregate, subject to a deductible of $150,000 per occurrence. To the extent that any loss or theft of funds substantially exceeded our insurance coverage, our business could be
materially adversely affected.



Insurance regulations limit the ability of
our insurance subsidiary to pay dividends to us.



Our
insurance subsidiary is subject to regulations that limit its ability to pay dividends or make loans or advances to us, principally to protect policy holders. Generally, these regulations limit the total amount of dividends and distributions to the
greater of 10% of our insurance subsidiarys surplus, which amount was $16.8 million as of December 31, 2004, or 100% of net income for the previous calendar year, which was $3.4 million for the year ended December 31, 2004. At December 31,
2004, $32.5 million of cash, short-term investments, fixed maturity bonds and equity securities were subject to this dividend restriction. These restrictions could limit our ability to pay dividends to our stockholders, repay our indebtedness, make
acquisitions or otherwise grow our business. For further discussion of the regulation of dividend payments and other transactions between affiliates, see Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.



We are subject to
substantial government regulation which could have the effect of delaying or preventing a change of control of our insurance subsidiary or our Company.



Many state insurance regulatory laws intended primarily for the protection of policyholders contain provisions that require advance approval by state
agencies of any change in control of an insurance company or an insurance holding company that is domiciled (or, in some cases, doing business) in that state. Any future transaction that would constitute a change of control of our insurance
underwriting subsidiary or us may require regulatory approval by the state insurance agencies of the states in which we are currently licensed. In addition, any person or group that beneficially owns more than a particular threshold percentage of
our issued and outstanding common stock may be required to obtain approval from various state insurance departments. All states where we are currently subject to regulation have laws that impose filing requirements



15



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on persons who beneficially own 10% or more of our voting shares. Such regulatory requirements could have the effect of
delaying or preventing transactions affecting the control of us or the ownership of our common stock, including transactions that could be advantageous to our common stockholders.



Our insurance subsidiary is subject to substantial government regulation.



State authorities regulate our insurance subsidiary in the states in which
it does business. These regulations generally are intended for the protection of policyholders rather than stockholders. The nature and extent of these regulations vary from jurisdiction to jurisdiction, but typically involve:



| |  | approval of premium rates for insurance;
|- |  | ----------------------------------------



| |  | standards of solvency and minimum amounts of statutory capital surplus that must be maintained;
|- |  | -----------------------------------------------------------------------------------------------



| |  | limitations on types and amounts of investments;
|- |  | ------------------------------------------------



| |  | establishing reserves, including statutory premium reserves, for losses and loss adjustment expenses;
|- |  | -----------------------------------------------------------------------------------------------------



| |  | regulation of dividend payments and other transactions between affiliates;
|- |  | --------------------------------------------------------------------------



| |  | prior approval of the acquisition and control of an insurance company or of any company controlling an insurance company;
|- |  | -------------------------------------------------------------------------------------------------------------------------



| |  | licensing of insurers and agents;
|- |  | ---------------------------------



| |  | regulation of reinsurance;
|- |  | --------------------------



| |  | restrictions on the size of risks that may be insured by a single company;
|- |  | --------------------------------------------------------------------------



| |  | regulation of underwriting and marketing practices;
|- |  | ---------------------------------------------------



| |  | deposits of securities for the benefit of policyholders;
|- |  | --------------------------------------------------------



| |  | approval of policy forms;
|- |  | -------------------------



| |  | methods of accounting; and
|- |  | --------------------------



| |  | filing of annual and other reports with respect to financial condition and other matters.
|- |  | -----------------------------------------------------------------------------------------



These regulations may impede or impose burdensome conditions on rate increases or other actions that we might want to take
to implement our business strategy and enhance our operating results. Additionally, as a result of having operations within an industry that is governed by various regulatory authorities, the sometimes fast-changing regulatory environment could
impact the way we operate and compete in the markets we serve.



Our common
stock is thinly traded and you may not be able to sell our stock when you want to do so.



Our common stock currently is quoted on the Nasdaq SmallCap Market and currently is thinly traded. Over the past three years, the weekly trading volume for our common stock averaged 203,528 and was as low as
12,100 shares per week and as high as 1,369,000 shares per week. Because of the limited public market for our common stock, you may be unable to sell our common stock when you want to do so if the trading market of our common stock continues to be
limited.



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Our stock price might be volatile and you might not be able to resell your shares at or above the price you have paid.



If you purchase shares of common stock, you might
not be able to resell those shares at or above the price you have paid. The market price of our common stock might fluctuate significantly in response to many factors, some of which are beyond our control, including the following:



| |  |  | actual or anticipated fluctuations in our annual and quarterly results of operations;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | changes in securities analysts expectations;
| | - |  | ---------------------------------------------



| |  |  | variations in our operating results, which could cause us to fail to meet analysts or investors expectations;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | announcements by our competitors or us of significant technical innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | conditions and trends in the title insurance and real estate business;
| | - |  | ----------------------------------------------------------------------



| |  |  | general market, economic, industry and political conditions;
| | - |  | ------------------------------------------------------------



| |  |  | changes in market values of comparable companies;
| | - |  | -------------------------------------------------



| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------



| |  |  | stock market price and volume fluctuations attributable to inconsistent trading volume levels; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | future sales of equity or debt securities, including sales which dilute existing investors.
| | - |  | -------------------------------------------------------------------------------------------



In addition, the stock market has experienced extreme volatility that often has been unrelated to the performance of its
listed companies. Moreover, only a limited number of our shares are traded each day, which could increase the volatility of the price of our stock. These market fluctuations might cause our stock price to fall regardless of our performance. In the
past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation. If we were involved in securities class action litigation, it could result in substantial costs and a
diversion of our attention and resources and have a material adverse effect on our business.



Certain provisions of our certificate of incorporation, granting our board of directors broad discretion to issue shares of preferred stock, may adversely affect your rights as a common stockholder.



Our board of directors may, without further action by our
common stockholders, from time to time, issue shares of our authorized but unissued preferred stock, and determine the rights, preferences and limitations of each series of preferred stock. Upon the vote of a majority of the directors then in
office, our board of directors, without stockholder approval, may issue shares of preferred stock with dividend, liquidation, voting, conversion and other rights superior to the rights of our common stockholders. Satisfaction of any dividend
preferences of our outstanding redeemable preferred stock and future issuances of preferred stock would reduce the amount of funds available for the payment of dividends on shares of common stock. Holders of shares of preferred stock may be entitled
to receive a preference payment in the event of any liquidation, dissolution or winding-up of our Company before any payment to our common stockholders. Under some circumstances, the issuances of shares of preferred stock may make a merger, tender
offer or proxy contest or the assumption of control by a holder of a large block of our securities or the removal of incumbent management more difficult. Any issuances of our preferred stock thus may have a material adverse effect on your rights as
a common stockholder.



17



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Item 2. Properties



We conduct our title insurance business operations primarily in leased office space. We currently lease branch offices in approximately 130 locations. Our
office leases generally provide for initial terms ranging from three to five years, and our current leases have remaining terms ranging from one to 84 months. We believe that the use of short-term office leases enhances our operating flexibility,
which is particularly important because of the cyclical nature of the real estate industry.



We occupy a leased facility of approximately 8,700 square feet in Scottsdale, Arizona, in which our executive offices are located. In addition, we have a 50-year ground lease, through December 2047, for a 24,000
square foot building in Phoenix, Arizona, which includes our Arizona administration, a title department, and two escrow branches. See Note 10 to our consolidated financial statements for additional information relating to our lease commitments.



We believe that our facilities are adequate to meet our
current needs and that additional facilities are available to meet our development and expansion needs in existing and projected target markets.



Item 3. Legal Proceedings



In the ordinary course of business, our insurance subsidiaries are subject to claims and are named as defendants in litigation relating to policies of
insurance or other related services performed on behalf of insured policyholders and other customers. While the results of insurance claims and litigation cannot be predicted with certainty, management believes, based on the advice of legal counsel,
that the final outcome of such lawsuits and claims will not have a material adverse effect on our financial position, results of operations, or liquidity.



United Title Company has been named in a lawsuit brought by individuals purporting to act in a representative capacity for consumers doing business with
lenders and title companies in the State of California which seeks restitution of alleged violations of law in connection with title and escrow practices. Additionally, the California State Controller is conducting an audit of United Title Company
including, among other things, its practices related to unclaimed property. In conjunction with the acquisition of Nations Holding Group in September, 2002 the Company has access to a funded indemnification account which we believe is sufficient to
cover any potential exposure on these matters. Accordingly, management does not believe this potential exposure would have a material affect to our financial position, results of operations or cash flows. The results of legal proceedings cannot be
predicted with certainty, but United Title Company intends to vigorously defend the lawsuit and any adverse findings of the State Controller.



In February 2005, three of our competitors were named as part of a multi-state investigation by the California Department of Insurance relating to an
alleged kickback scheme involving three large title insurance companies, home builders, lenders and real estate agents. We do not anticipate being a party to the investigation as we did not participate in the activities alleged in the announcement
made by the Commissioner of the California Department of Insurance.



18



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Item 4. Submission of Matters to a Vote of Security Holders



No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 2004.



Part II



Item 5. Market For Registrants Common Equity and Related
Stockholder Matters



Price Range of our Common Stock



Our common stock is quoted on the Nasdaq SmallCap Market under the symbol
CTGI. On March 11, 2005, the last reported closing sale price of our common stock as reported on the Nasdaq SmallCap Market was $6.29 per share. On December 31, 2004, there were approximately 257 holders of record and approximately 3,908
beneficial owners of our common stock. High and low sales prices of our common stock since the first quarter of 2003, as reported on the Nasdaq SmallCap Market, are set forth below.



|                                     |      |             |      |  |   |     
|------------------------------------ | ---- | ----------- | ---- |  | - | ----
|Date                                 |      | Sales Price
|                                     | High |             | Low 
|2003                                 |      |             |      |  |   |     
|First Quarter                        |      | $           | 3.23 |  | $ | 2.53
|Second Quarter                       |      |             | 5.60 |  |   | 2.76
|Third Quarter                        |      |             | 5.25 |  |   | 3.80
|Fourth Quarter                       |      |             | 4.85 |  |   | 3.36
|                                     |      |            
|2004                                 |      |             |      |  |   |     
|First Quarter                        |      |             | 5.44 |  |   | 3.99
|Second Quarter                       |      |             | 4.45 |  |   | 3.46
|Third Quarter                        |      |             | 5.22 |  |   | 3.86
|Fourth Quarter                       |      |             | 5.75 |  |   | 4.72
|                                     |      |            
|2005                                 |      |             |      |  |   |     
|First Quarter (as of March 11, 2005) |      |             | 6.29 |  |   | 5.25



Dividend Policy



We declared our first quarterly cash dividend on common shares in October
2003, and have continued to declare and pay cash dividends of $0.02 per common share on a quarterly basis. We intend to continue paying a comparable quarterly cash dividend on our common stock. However, the payment of dividends depends entirely upon
the discretion of our board of directors and may be discontinued at any time for any reason. Further, under Delaware corporate law, in the absence of current or retained earnings, we may be prohibited from paying dividends (whether in cash or
otherwise). Our title insurance underwriting subsidiary, United Capital Title Insurance Company, is subject to regulations that limit its ability to pay dividends or make loans or advances to us, principally for the protections of policy holders.
See Managements Discussion and Analysis of Financial Condition and Results of Operation  Liquidity and Capital Resources.



19



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Item 6. Selected Financial Data



The following table contains our selected consolidated financial data as of and for the five fiscal years ended December 31,
2004, which have been derived from our audited consolidated financial statements and notes thereto, with the exception of Other Data. You should review the information that we have presented below in conjunction with our consolidated
financial statements, related notes and other financial information included elsewhere herein.



|                                                          |  |                                                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|--------------------------------------------------------- |  | -------------------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                          |  | Year Ended December 31,                                  |           
|                                                          |  | 2004                                                     |            |   | 2003 |   |            | 2002 |  |   | 2001       |   |  | 2000 |           
|                                                          |  | ($ in thousands except per share and segment statistics) |           
|Operating Data:                                           |  |                                                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Title service revenue, net                                |  | $                                                        | 170,888    |   |      | $ | 160,745    |      |  | $ | 81,239     |   |  | $    | 41,161     |   |  | $ | 22,628     |  
|Escrow and related fees                                   |  |                                                          | 92,469     |   |      |   | 85,080     |      |  |   | 42,632     |   |  |      | 20,468     |   |  |   | 11,447     |  
|Appraisal service revenue (1)                             |  |                                                          | 17,885     |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Other income                                              |  |                                                          | 9,634      |   |      |   | 4,420      |      |  |   | 3,840      |   |  |      | 2,807      |   |  |   | 2,823      |  
|                                                          |  |                                                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total revenue                                             |  |                                                          | 290,876    |   |      |   | 250,245    |      |  |   | 127,711    |   |  |      | 64,436     |   |  |   | 36,898     |  
|                                                          |  |                                                          |            |   |     
|Income (loss) before income taxes                         |  |                                                          | 25,678     |   |      |   | 27,453     |      |  |   | 12,283     |   |  |      | 5,838      |   |  |   | (2,285     | )
|Income tax expense (benefit)(2)                           |  |                                                          | 10,090     |   |      |   | 10,893     |      |  |   | 5,001      |   |  |      | 768        |   |  |   | (33        | )
|Net income (loss)                                         |  |                                                          | 15,588     |   |      |   | 16,560     |      |  |   | 7,282      |   |  |      | 5,070      |   |  |   | (2,252     | )
|Dividends on preferred stock                              |  |                                                          | 1,405      |   |      |   | 1,401      |      |  |   | 403        |   |  |      |           |   |  |   |           |  
|Earnings (loss) attributable to common shares             |  |                                                          | 14,183     |   |      |   | 15,159     |      |  |   | 6,879      |   |  |      | 5,070      |   |  |   | (2,252     | )
|Net cash flows provided by operating activities           |  |                                                          | 22,928     |   |      |   | 26,357     |      |  |   | 15,650     |   |  |      | 9,674      |   |  |   | 121        |  
|Net cash flows used in investing activities               |  |                                                          | (46,665    | ) |      |   | (21,929    | )    |  |   | (17,885    | ) |  |      | (583       | ) |  |   | (1,369     | )
|Net cash flows provided by (used in) financing activities |  |                                                          | 14,212     |   |      |   | (3,741     | )    |  |   | 14,173     |   |  |      | (2,190     | ) |  |   | 140        |  
|                                                          |  |                                                          |            |   |     
|Per Share Data:                                           |  |                                                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net income (loss) per common share  Diluted              |  |                                                          | 0.64       |   |      |   | 0.77       |      |  |   | 0.38       |   |  |      | 0.28       |   |  |   | (0.13      | )
|Weighted average shares outstanding  Diluted             |  |                                                          | 22,258,012 |   |      |   | 19,755,104 |      |  |   | 18,121,419 |   |  |      | 18,031,252 |   |  |   | 17,158,414 |  
|                                                          |  |                                                          |            |   |     
|Balance Sheet Data (end of period):                       |  |                                                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total assets                                              |  | $                                                        | 146,083    |   |      | $ | 101,686    |      |  | $ | 83,287     |   |  | $    | 21,025     |   |  | $ | 14,301     |  
|Long term debt                                            |  |                                                          | 23,176     |   |      |   | 13,520     |      |  |   | 16,542     |   |  |      | 3,083      |   |  |   | 5,016      |  
|Redeemable preferred stock(3)                             |  |                                                          | 17,516     |   |      |   | 17,516     |      |  |   | 17,516     |   |  |      |           |   |  |   |           |  
|Stockholders equity                                      |  |                                                          | 57,603     |   |      |   | 35,431     |      |  |   | 19,452     |   |  |      | 11,104     |   |  |   | 6,730      |  
|                                                          |  |                                                          |            |   |     
|Title and Escrow Services Segment Statistics (unaudited): |  |                                                          |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Opened orders                                             |  |                                                          | 367,186    |   |      |   | 382,249    |      |  |   | 185,349    |   |  |      | 110,620    |   |  |   | 49,616     |  
|Closed orders                                             |  |                                                          | 237,406    |   |      |   | 246,261    |      |  |   | 122,471    |   |  |      | 69,320     |   |  |   | 33,789     |  
|Average revenue per closed order                          |  | $                                                        | 1,033      |   |      | $ | 998        |      |  | $ | 1,011      |   |  | $    | 889        |   |  | $ | 1,008      |  
|Percent of premium directly written (4)                   |  |                                                          | 78         | % |      |   | 82         | %    |  |   | 36         | % |  |      | N/A        |   |  |   | N/A        |  

---

|(1) | Appraisal service revenue was a new revenue stream in 2004, resulting from providing appraisal services to customers through Nationwide, our newly acquired subsidiary.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | An income tax benefit was recorded in 2000 reflecting the net loss reported in 1999 and 2000. The availability of net operating loss carryforwards resulted in a lower tax provision
in 2001 than would be expected based on statutory income tax rates. The net operating loss carryforwards were fully utilized in 2001.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Preferred stock is non-convertible and may be redeemed after 2023 for $17.5 million. The preferred stock has an 8% cumulative dividend, payable quarterly.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Represents the percentage of title insurance premiums from policies we issued through our own insurance underwriting subsidiary, which we acquired in September 2002. This percentage
declined in 2004 resulting from our acquisition of Nationwide Appraisal, which has historically utilized third-party title insurance underwriters exclusively for the title policies it issued. During 2004, United Capital Title Insurance Company, our
title insurance underwriter, commenced efforts to become licensed in additional states in order to capture more of the premiums resulting from title policies we issue.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion of our results of operations and financial
condition should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere herein. Historical results and percentage relationships among accounts are not necessarily an indication of trends in operating
results for any future period. In these discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result, all such figures are approximations.



Overview



We are engaged in the business of issuing title insurance policies, performing other title-related services, such as escrow activities and performing
valuation services in connection with real estate transactions. We operate through approximately 130 offices located in Arizona, California, Nevada, Ohio, Pennsylvania and Texas and employ over 2,500 individuals. Our managements discussion and
analysis of financial condition and results of operations addresses our key performance indicators (revenue, net income) and non-GAAP, non-financial performance indicators (opened orders, closed orders, average revenue per closed order), as well as
the trends and uncertainties affecting our industry and markets and analyzes our liquidity and capital resources. While management believes the key performance indicators of revenue and net income are the best indicators of the Companys
financial and operating performance, the non-GAAP, non-financial performance indicators may also provide management with additional insight into the volume of transactions and trend in operating performance for the Companys traditional title
and escrow services.



We operate through two reportable
segments which are Title and Escrow Services and Lender Services. Our Title and Escrow Services segment consists of wholly-owned title insurance agencies, a title insurance underwriter and parent holding company operations, including issuance and
repayment of corporate debt obligations. The significant subsidiaries within this segment includes Capital Title Agency, First California Title Company, Land Title of Nevada, New Century Title Company, United Capital Title Insurance Company and
United Title Company. This segment generates its revenue principally from issuing title insurance policies and providing escrow services for residential and commercial real estate transactions, services which are typically marketed to real estate
agents, community banks and regional lenders in selected local markets.



Our Lender Services segment encompasses our bundled services strategy, which currently includes real estate appraisal and valuation services, title insurance and escrow related services and flood zone determination services which are
marketed to regional and national lenders and mortgage brokers. The significant subsidiaries within this segment include Nationwide Appraisal Services Corporation, Nationwide TotalFlood and Real Estate Appraisal Services, Inc. Unlike our traditional
title and escrow services division, this segment typically conducts its business on a national scope from centralized processing centers. This segment generates its revenue principally from providing appraisal and valuation services, issuing title
insurance policies, providing escrow services and flood zone determination services primarily for lenders involved in residential real estate transactions.



We reported net income of $15.6 million, $16.6 million and $7.3 million for the years ended December 31, 2004, 2003 and 2002, respectively. The Company
experienced a decline in net income during 2004 resulting primarily from an increase in the mix of business toward our traditional title and escrow operations in California where we experience historically lower margins due to the highly competitive
market within California. Additionally, we did not achieve anticipated margins in our Lender Services segment primarily resulting from short-term transition and integration costs subsequent to the acquisition of Nationwide and TotalFlood. Despite
the decline in net income, we did post earnings that reflected the continued strong residential real estate market during 2004 and the additional operations acquired during 2004. The operations acquired during 2004 provided $2.0 million of pre-tax
earnings to consolidated results.



Our revenue from title
insurance, escrow and related real estate services is primarily from three sources: residential resale, lender/refinance and commercial real estate transactions. We typically recognize revenue for the services we perform when the corresponding real
estate transaction closes. In the case of



21



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revenue from the flood zone determination services we provide, we defer a portion of revenue that relates to services we are contractually required provide
in future periods. This deferred revenue is reflected in other liabilities on our balance sheet at December 31, 2004. Typically, we receive payment for our services at the time the related real estate transaction closes. In some cases, we bill for
services provided, principally related to our Lender Services business, and collect the accounts receivable at a later date.



During fiscal 2005, we anticipate that refinance transactions will decline from record levels experienced in 2003 and 2004, which we expect will result in
a decrease in our revenues and profits from existing operations. While we believe mortgage interest rates will begin to rise during 2005, we do not anticipate a dramatic increase, so when coupled with a strong economy, we believe this will continue
to provide an attractive environment for residential resales and new home purchases. Additionally, as synergies continue to develop between our Lender Services operations and our traditional title and escrow operations, we believe there is
opportunity for profitable growth. However, despite these potentially positive factors, we continue to believe maintaining operating flexibility in 2005 and beyond is imperative. The cyclical nature of the mortgage industry, and hence the title
insurance and settlement services industry, requires us to tightly manage operating expense levels in response to market fluctuations. Larger than anticipated declines in revenue or the inability to maintain costs could result in a decline in
profitability or future operating losses.



Application of Critical
Accounting Policies



We believe that the estimates and
assumptions that are important to the portrayal of our financial condition and results of operations require us to make difficult, subjective and complex judgments, which form the basis for our critical accounting policies. Our most critical
accounting policies relate to reserves for title insurance and escrow losses, related contingencies and litigation surrounding title and escrow losses and impairment of intangible assets and long lived assets.



Reserves for Title Insurance and Escrow Losses



When evaluating title insurance and escrow losses we estimate reserves for
known claims as well as a provision for incurred but not reported losses based on several factors including, but not limited to, historical loss experience, and the current industry and legal environments. Settlement of claims for known, as well as
incurred but not reported losses, for amounts greater than what has been provided for in these financial statements would require additional provision in future periods.



Contingencies and Litigation



Contingencies and litigation are reviewed by us on an ongoing basis and, in conjunction with legal counsel, determinations
are made as to the outcome of any lawsuits and advice of claims. Based on this assessment, any required reserves are reflected in our financial statements. To the extent a litigation claim or other contingency is settled for an amount greater than
or less than what was anticipated, the difference would be reflected in a future period.



Impairment of Intangible Assets



We perform a test of each reporting unit for which goodwill is attributed to evaluate for any impairment of intangible assets at least annually. This includes, among other things, a review of events or circumstances which would indicate an
impairment of goodwill. As required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, we completed an annual goodwill impairment test on its reporting units and have determined that each of our
reporting units have a fair value in excess of its carrying value. Accordingly, no goodwill impairment has been recorded. Future losses from reporting units to which goodwill is attributed may lead to an impairment charge in future periods.



We believe estimates and assumptions related to these critical
accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial condition or results of operations.



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Transactions Affecting Comparability of Results of Operations



In July of 2004, we acquired DPSI, since renamed Nationwide TotalFlood.
TotalFlood, through a centralized processing center located in Los Angeles, California, is a provider of residential and commercial flood determinations on property throughout the United States. The transaction included payment of $1.7 million in
cash for the total amount of the purchase price.



In May of
2004, we acquired Nationwide Appraisal, which provides appraisal, title and settlement services to its customers in the mortgage and real estate industry through its centralized processing center near Pittsburgh, Pennsylvania. The transaction
included a $25.0 million payment of cash and calls for an additional $1.2 million of payments which is planned to be made in March 2005.



We also acquired the assets of Real Estate Appraisal Services, Inc. in November 2004 for $0.8 million in a combination of $0.3 million in cash and $0.5
million in a one year note payable bearing interest of 5.5%.



Included in the results of operations during 2004 was revenue of approximately $38.3 million and pre-tax income of $2.0 million related to the aforementioned operations.



In January 2003, we acquired Land Title of Nevada, Inc. The acquisition marked our entrance into the Las Vegas, Nevada
market, adding five branch offices and 94 employees. The transaction included payment of $1.25 million in cash and issuance of a $2.25 million, five-year note to the seller for a total purchase price of approximately $3.5 million.



Included in the results of operations during 2003 was revenue of
approximately $10.2 million and pre-tax income of $0.8 million related to the acquisition of Land Title of Nevada, Inc.



In September 2002, we acquired Nations Holding Group, including its wholly owned subsidiaries United Title Company, First California Title Company and
United Capital Title Insurance Company. The acquisition significantly increased our presence in California and enabled us to internally underwrite the vast majority of all title insurance policies that we issued in 2003. This acquisition has
significantly improved the profitability of our existing operations because we no longer have to share all title insurance premiums with third party underwriters on transactions for which we issue and underwrite title insurance policies. The
purchase price, including direct transaction costs, was approximately $36.9 million, which consisted of $19.2 million in cash and $17.5 million in redeemable preferred stock. As part of the purchase we also issued warrants, valued at $213,000, to
purchase up to 300,000 shares of common stock at an exercise price of $2.27 per share. The redeemable preferred stock includes an 8% cumulative dividend, payable quarterly, and is redeemable after September 2023 at a redemption value of $17.5
million. A seven-year term loan provided $14.0 million to assist in the financing of the cash portion of the purchase price. The term loan, which had a balance of $7.0 million at December 31, 2004, currently bears interest at a fixed rate of 4.75%.
We funded the remaining cash portion of the purchase price from our working capital.



23



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Results of Operations



The following table sets forth, for the periods indicated, the components of our revenue and expenses and such income statement data expressed as a
percentage of total revenue ($ in thousands, except segment statistics):



|                                                |  |                         |         |   |       |   |      |   |         |  |       |      |  |   |         |  |       |  
|----------------------------------------------- |  | ----------------------- | ------- | - | ----- | - | ---- | - | ------- |  | ----- | ---- |  | - | ------- |  | ----- | -
|                                                |  | Year Ended December 31, |        
|                                                |  | 2004                    |         | % |       |   | 2003 |   | %       |  |       | 2002 |  | % |        
|Operating Data:                                 |  |                         |         |   |       |   |      |   |         |  |       |      |  |   |         |  |       |  
|Title service revenue, net                      |  | $                       | 170,888 |   | 58.7  | % |      | $ | 160,745 |  | 64.2  | %    |  | $ | 81,239  |  | 63.6  | %
|Escrow and related fees                         |  |                         | 92,469  |   | 31.8  |   |      |   | 85,080  |  | 34.0  |      |  |   | 42,632  |  | 33.4  |  
|Appraisal service revenue                       |  |                         | 17,885  |   | 6.1   |   |      |   |        |  |      |      |  |   |        |  |      |  
|Other income                                    |  |                         | 9,634   |   | 3.4   |   |      |   | 4,420   |  | 1.8   |      |  |   | 3,840   |  | 3.0   |  
|                                                |  |                         |         |   |       |   |      |   |         |  |       |      |  |   |         |  |       |  
|                                                |  |                         | 290,876 |   | 100.0 |   |      |   | 250,245 |  | 100.0 |      |  |   | 127,711 |  | 100.0 |  
|                                                |  |                         |         |   |       |  
|Personnel costs                                 |  |                         | 169,556 |   | 58.3  |   |      |   | 154,528 |  | 61.7  |      |  |   | 79,149  |  | 62.0  |  
|Rent                                            |  |                         | 17,361  |   | 6.0   |   |      |   | 14,254  |  | 5.7   |      |  |   | 7,936   |  | 6.2   |  
|Interest expense                                |  |                         | 1,155   |   | 0.4   |   |      |   | 815     |  | 0.3   |      |  |   | 443     |  | 0.4   |  
|Provision for title insurance and escrow losses |  |                         | 6,250   |   | 2.1   |   |      |   | 9,214   |  | 3.7   |      |  |   | 3,176   |  | 2.4   |  
|Contract service fees                           |  |                         | 17,753  |   | 6.1   |   |      |   |        |  |      |      |  |   |        |  |      |  
|Other operating expenses                        |  |                         | 53,123  |   | 18.3  |   |      |   | 43,981  |  | 17.6  |      |  |   | 24,724  |  | 19.4  |  
|                                                |  |                         |         |   |       |   |      |   |         |  |       |      |  |   |         |  |       |  
|                                                |  |                         | 265,198 |   | 91.2  |   |      |   | 222,792 |  | 89.0  |      |  |   | 115,428 |  | 90.4  |  
|                                                |  |                         |         |   |       |   |      |   |         |  |       |      |  |   |         |  |       |  
|Income before income taxes                      |  |                         | 25,678  |   | 8.8   |   |      |   | 27,453  |  | 11.0  |      |  |   | 12,283  |  | 9.6   |  
|Income tax expense                              |  |                         | 10,090  |   | 3.5   |   |      |   | 10,893  |  | 4.4   |      |  |   | 5,001   |  | 3.9   |  
|                                                |  |                         |         |   |       |   |      |   |         |  |       |      |  |   |         |  |       |  
|Net income                                      |  | $                       | 15,588  |   | 5.3   | % |      | $ | 16,560  |  | 6.6   | %    |  | $ | 7,282   |  | 5.7   | %
|                                                |  |                         |         |   |       |   |      |   |         |  |       |      |  |   |         |  |       |  
|Title and Escrow services segment statistics:   |  |                         |         |   |       |   |      |   |         |  |       |      |  |   |         |  |       |  
|Opened orders                                   |  |                         | 367,186 |   |       |   |      |   | 382,249 |  |       |      |  |   | 185,349 |  |       |  
|Closed orders                                   |  |                         | 237,406 |   |       |   |      |   | 246,261 |  |       |      |  |   | 122,471 |  |       |  
|Average revenue per closed order                |  | $                       | 1,033   |   |       |   |      | $ | 998     |  |       |      |  | $ | 1,011   |  |       |  



Fiscal 2004
Compared to Fiscal 2003



Our revenue, which is reported
net of underwriting fees paid to third party title insurance underwriters, increased by $40.6 million, or 16.2%, for the year ended December 31, 2004 compared to the same period ended December 31, 2003. Operations acquired during 2004 contributed
$38.3 million of the increase in revenue for the year ended December 31, 2004 compared to 2003. The remaining $2.3 million of the increase was primarily the result of strong demand for title insurance and related services, fueled by a strong housing
market resulting from the low mortgage interest rate environment during 2004, as well as an increase in the average revenue per closed order and an increase in investment income due to improved investment returns and higher investment balances
during 2004.



The decrease in opened and closed orders during
the year ended December 31, 2004 was the result of a decline in residential mortgage refinancings during 2004 compared to the prior year. The increase in average revenue per closed order reflects the increase in business mix in favor of residential
resale transactions, which typically garner higher revenue per order, as well as an increase in property values, which is a main driver of the revenue we charge for a transaction.



As a result of anticipated changes in the interest rate environment in 2005, and the impact that it will have on the demand
for our services, we expect a decline in opened orders in 2005 compared to 2004 in our traditional title and escrow operations, resulting in a decrease in title and escrow related revenue. Potential increases in market share and our Lender Services
segment may partially offset this anticipated decrease.



24



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The significant components of other income include interest income from invested cash balances and fixed
maturity bonds, investment dividends, revenue from servicing seller-financed mortgages and revenue from flood zone determinations services. Other income increased as a percentage of revenue for the year ended December 31, 2004 to 3.4% from 1.8%
compared to the prior year. The increase resulted from the inclusion of $1.9 million of flood determination revenue, a new revenue stream in 2004. Additionally, the upward trend in market interest rates and higher investment balances increased
investment income in 2004.



Overall operating expenses have
increased $42.4 million, or 19.0% for the year ended December 31, 2004, compared to the prior year, primarily resulting from expansion of our operations via acquisitions. Operating expenses as a percentage of total revenue increased to 91.2% for the
year ended December 31, 2004 compared to 89.0% for the prior year.



Personnel costs are the most significant component of our operating expenses, and consist of salaries and other related personnel expenses, commissions and incentives. Total personnel expenses increased $15.0 million, or 9.7%, to $169.6
million for the year ended December 31, 2004 compared to the prior year. Personnel costs were higher for the year ended December 31, 2004 resulting from the additional operations acquired as part of our Lender Services segment. Personnel costs were
lower as a percentage of revenue for the year ended December 31, 2004 compared to the prior year as a result of the mix of revenue coming from the operations of Nationwide, which have lower personnel costs than our traditional title and escrow
operations due to the use of third-party appraisers and abstractors rather than employees.



Rent expense increased as a percentage of revenue for the year ended December 31, 2004 to 6.0% from 5.7% for the prior year. The increase in relation to revenue is primarily related to the expansion of branches in
Southern California during the year. Our growth in recent years in this market necessitated an increase in office space to accommodate current and anticipated future space requirements. Rent expense overall is higher in 2004 compared to 2003,
resulting from additional office locations which were acquired during 2004, as previously discussed.



Interest expense increased to $1.2 million for the year ended December 31, 2004 primarily resulting from additional debt obtained during 2004 to assist
with the financing of the Nationwide Appraisal acquisition.



Provision for title insurance and escrow losses decreased as a percentage of revenue for the year ended December 31, 2004 to 2.1% from 3.7% for the prior year. This decrease was primarily due to favorable claim experience in both our
traditional title and escrow agency operations and insurance underwriting operation. In addition, this percentage is expected to decline in 2005 as we increase revenue from our appraisal and real estate settlement services, which have no provision
for such losses.



Contract service fees is a new classification
line item in our financial statements resulting from the acquisition of Nationwide. This line item relates to fees paid to third-party appraisers and abstractors who conduct valuation services and title searches throughout the United States. This
expense is variable in relation to the volume of business generated by Nationwides operations.



The significant components of other operating expenses include title plant maintenance and access, supplies, utilities, insurance, allowance for bad debt,
depreciation, delivery and professional fees. Other operating expenses increased $9.1 million, or 20.8% to $53.1 million for the year ended December 31, 2004 compared to $44.0 million for the prior year. The increase is the result of several costs
in this category that vary directly with our volume of business such as title plant and other data purchased from third parties, supplies and delivery expense. Additionally, we experienced an increase in costs related to title plant and other data
purchased from third parties, which are typically variable in relation to revenue, but these contractual costs rose in relation to the prior year.



An income tax provision of $10.1 million for the year ended December 31, 2004 provides an effective tax rate of 39.3% for the year ended December 31,
2004. This compares to an effective tax rate of 39.7% for the year ended December 31, 2003.



25



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Fiscal 2003 Compared to Fiscal 2002



Our revenue, which is reported net of underwriting fees paid to third party title insurance underwriters, increased by
$122.5 million, or 96%, for the year ended December 31, 2003 compared to the same period ended December 31, 2002. Operations acquired during 2002 and 2003 contributed $94.8 million of the increase in revenue for the year ended December 31, 2003
compared to 2002, including $5.2 million of title remittance fees generated by our agency operations that were retained by directing the underwriting of policies to United Title Insurance Company, for the year ended December 31, 2003. The remaining
$27.7 million of the increase was primarily the result of increased demand for title insurance and related services, fueled by a strong housing market and a high level of mortgage refinance transactions, resulting from the low mortgage interest rate
environment during 2003.



The increase in opened and closed
orders in 2003 compared to the prior year reflects the inclusion of opened and closed orders for Nations Holding Group for the full year 2003, as these operations were acquired in September 2002. Additionally, the favorable housing market and high
level of refinance transactions resulting from low mortgage interest rates also contributed to the increase in order activity. We experienced a slight decline in the average revenue per closed order during 2003 compared to the prior year reflecting
the increase in business mix toward refinance transactions, which typically carry lower revenue in comparison to residential resale and commercial real estate transactions.



The significant components of other income include interest income from invested cash balances and fixed maturity bonds,
investment dividends and revenue from servicing seller-financed mortgages. Other income decreased as a percentage of revenue for the year ended December 31, 2003 to 1.8% from 3.0% compared to the prior year. The decrease was the result of the larger
increase in revenue resulting from title service revenue and escrow and related fees. The overall increases in other income was primarily due to a full year of investment income from our title insurance underwriter, which was acquired in September
2002.



Overall operating expenses have increased $107.4
million, or 93% for the year ended December 31, 2003, compared to the prior year, primarily resulting from expansion of our operations via acquisitions. Operating expenses as a percentage of total revenue decreased to 89.0% for the year ended
December 31, 2003 compared to 90.4% for the prior year. The decrease was the result of higher revenue in relation to the fixed costs component of our operating expenses, which include, but are not limited to, occupancy costs, the fixed component of
our personnel costs related to management and administration salaries, depreciation and insurance.



Personnel costs are the most significant component of our operating expenses, and consist of salaries and other related personnel expenses, commissions
and incentives. Total personnel expenses increased $75.4, or 95.2%, to $154.5 million for the year ended December 31, 2003 compared to the prior year. Salaries and other related personnel expenses, excluding commissions and incentives, decreased as
a percentage of total revenue to 41.1% for the year ended December 31, 2003 compared to 43.8% for the prior year, due primarily to increased productivity during the period. Commissions and incentives increased as a percentage of total revenue to
20.6% for the year ended December 31, 2003 compared to 18.2% for the prior year, primarily due to the growth of our California operations, which typically have higher incentive-based compensation packages.



Rent expense decreased as a percentage of revenue for the year ended December
31, 2003 to 5.7% from 6.2% for the prior year. The decrease was the result of the fixed nature of these costs in relation to the increase in revenue. Rent expense overall is higher in 2003 compared to 2002, resulting from additional office locations
which were acquired during 2002 and early 2003, as previously discussed.



Interest expense increased to $0.8 million for the year ended December 31, 2003 primarily resulting from a term loan with an average balance of approximately $11.3 million during 2003, used to partially fund the
acquisition of Nations Holding Group and the note used to partially fund the acquisition of Land Title of Nevada, Inc.



26



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Provision for title insurance and escrow losses increased as a percentage of revenue for capital the year
ended December 31, 2003 to 3.7% from 2.4% for the prior year. The increase was primarily due to the inclusion of United Title Insurance Company, a title insurance underwriter, in 2003 operating results as a result of the Nations Holding Group
acquisition. Prior to this acquisition, our provision related solely to escrow losses, and title losses that were generally limited to a $5,000 deductible per claim. However, for policies underwritten by United Capital Title Insurance Company, we
were typically responsible for up to $500,000 per claim. These factors also contribute to the $4.5 million increase in the reserve for title insurance and escrow losses on our balance sheet at December 31, 2003 compared to December 31, 2002.



The significant components of other operating expenses include
title plant maintenance and access, supplies, utilities, insurance, allowance for bad debt, depreciation, delivery and professional fees. Other operating expenses increased $19.3 million, or 78% to $44.0 million for the year ended December 31, 2003
compared to $24.7 million for the prior year. The increase is the result of several costs in this category that vary directly with our volume of business such as title plant and other data purchased from third parties, supplies and delivery expense.
As a result, for the year ended December 31, 2003, approximately 61% of this expense category is relatively variable in relation to revenue. Other operating expenses decreased as a percentage of total revenue to 17.6% for the year ended December 31,
2003 from 19.4% for the prior year. The decrease as a percentage of revenue in this expense category is a result of expenses which are relatively fixed, such as telecommunication costs, insurance, depreciation and utilities. During 2003, we provided
$1.7 million for allowance for uncollectible accounts receivable and subsequently charged $1.4 million against the allowance to write-off accounts receivable that became uncollectible during 2003.



An income tax provision of $10.9 million for the year ended December 31, 2003
provides an effective tax rate of 39.7% for the year ended December 31, 2003. This compares to an effective tax rate of 40.7% for the year ended December 31, 2002.



Liquidity and Capital Resources



We require capital above our ongoing operating needs to expand our geographical base, further implement our market penetration program, recruit and train
new personnel and purchase additional property and equipment to implement our expansion program. During the year ended December 31, 2004, we financed our operating, business development and acquisition activities through the use of cash on hand,
operating cash flows, debt borrowings and a private placement of our common stock. The details of our debt borrowings and private placement of common stock are further discussed below.



In April 2004, we completed a private placement of 2.8 million shares of common stock to select qualified institutional and
other investors at a price of $3.60 per share. We also granted to the investors and placement agents warrants to acquire an aggregate 889,252 shares of common stock at an exercise price of $4.00 per share, exercisable for a period of five years. The
net proceeds from the private placement of common stock were $8.7 million and were used to finance a portion of the purchase price for the acquisition of Nationwide in April 2004.



In April 2004, we acquired Nationwide. Under the terms of the acquisition, approved by the Board of Directors for each
company, we paid $25.0 million in cash at closing, with $3.0 million in deferred cash consideration payable if certain conditions are satisfied after the closing of the transaction. We paid for this acquisition through a combination of cash on hand,
proceeds from the private placement of common stock and warrants to purchase common stock, and proceeds from a $16.0 million credit facility with Comerica Bank. The Comerica Bank credit facility included a loan in the amount of $16.0 million bearing
interest at a fixed rate of 4.75%. Under the terms of the Comerica Bank credit facility we made a $6.0 million payment of principal on September 30, 2004. The remaining $10.0 million balance outstanding under the Comerica Bank credit facility is
being amortized over a five year period with monthly payments of approximately $166,667 plus interest and had an outstanding balance of $9.5 million at December 31, 2004. During 2004, it was determined that $1.0 million of the deferred cash
consideration will not become payable as certain conditions surrounding milestones related to development of software were not met as previously required under terms of the agreement. Only $1.2 million of the contingent consideration discussed above
has been earned and this amount will be paid in March 2005.



27



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In July 2004 we acquired Determination Processing Services, Inc., subsequently renamed Nationwide
TotalFlood. Under the terms of the acquisition, approved by the Board of Directors for each company, the purchase price was $1.7 million. The purchase price was financed by cash on hand.



In November 2004, we acquired substantially all of the assets of Real Estate Appraisal Services, Inc. Under the terms of the
asset purchase agreement, approved by the Board of Directors for each company, the purchase price was $0.8 million. The purchase price was financed by $0.3 million in cash and $0.5 million in a seller-financed note with a one year term bearing 5.5%
interest.



Our Board of Directors declared quarterly cash
dividends totaling $0.08 per common share during 2004. We paid a cash dividend totaling $0.4 million on January 10, 2005 to stockholders of record at the close of business on December 27, 2004. This common dividend payable was reflected in accounts
payable and accrued expenses on the consolidated balance sheet at December 31, 2004. We intend to continue paying a comparable quarterly cash dividend on our common stock. However, the payment of dividends depends entirely upon a decision by our
Board of Directors and may be discontinued at any time, for any reason. Further, under Delaware corporate law, in the absence of current or retained earnings, we may be prohibited from paying dividends, whether in cash or otherwise.



We have two $3.0 million revolving lines of credit. Outstanding borrowings
bear interest at the prime rate (5.25% at December 31, 2004). At December 31, 2004, there were no borrowings under either of these credit facilities. There is $0.8 million committed against one of the credit lines for standby letters of credit
pursuant to office leases and an insurance policy.



Cash flows
provided by operating activities were $22.9 million for the year ended December 31, 2004 compared to cash flows provided by operating activities of $26.4 million during the year ended December 31, 2003. The decrease in cash provided is the result of
an increase in accounts receivable, reflecting less earnings being converted directly to cash during 2004. Additionally, the decrease in net income also impacted operating cash flow during 2004. The significant non-operating uses of cash for the
year ended December 31, 2004 included the purchase of Nationwide Appraisal and Nationwide TotalFlood, the purchase of additional property and equipment related to expansion of new offices in our traditional title and escrow operations and net
investment activity related to purchases of equity securities and fixed maturity bonds. Additionally, we invested $1.6 million in a partnership that will own an office building in Washington, Pennsylvania that will house Nationwides
centralized processing center and administration. The companys primary financing activities included debt borrowings and issuance of common stock to assist in the financing of acquisition activity in 2004, and have included repayment of $8.9
million toward outstanding debt.



Our title insurance
underwriter, United Capital Title Insurance Company, is subject to regulations that limit its ability to pay dividends or make loans or advances to its parent, principally for the protection of policyholders. Generally, the total amount of dividends
and distributions is limited to the greater of 10% of United Capital Title Insurance Companys surplus, which amount was $16.8 million as of December 31, 2004, or 100% of net income, which was $3.4 million, for the year period ended December
31, 2004, provided that the amount does not exceed United Capital Title Insurance Companys earned surplus. Under these restrictions, United Capital Title Insurance Company could pay, to its parent, dividends of $3.4 million during 2005 without
prior regulatory approval. Of our $10.8 million in cash and cash equivalents at December 31, 2004, $1.7 million relates to United Capital Title Insurance Company and would be subject to the aforementioned restrictions. Of our $32.5 million
investment portfolio, consisting of short term investments, fixed maturity bonds and equity securities, $30.8 million related to United Capital Title Insurance Company and would be subject to the aforementioned restrictions.



A significant component of personnel expense includes incentive bonuses,
which are earned by employees during the year, a significant portion of which is paid after the end of the year. At December 31, 2004, we had approximately $9.4 million accrued for incentive bonuses that we intend to pay during the first quarter
2005.



28



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We believe that cash on hand, anticipated future cash receipts and borrowings available under our credit
facilities will be sufficient to meet our operating plans and to pay all obligations as they become due for the next twelve months.



Seasonality and Quarterly Results



Historically, residential real estate activity has been generally slower in late autumn and winter, when fewer families move, buy or sell homes, with
increased volume in the spring, summer and early autumn. Residential refinancing activity is generally more uniform throughout the year, subject to interest rate stability. Demand for our title insurance and related settlement services generally
tracks these seasonal demand patterns of the residential real estate market, although acquisitions of other title insurance and related settlement service companies and changes in interest rates may alter these traditional seasonal demand patterns.
We typically report our lowest revenue and earnings in the first quarter, with revenue and earnings increasing into the second quarter and through the third quarter and declining again in the fourth quarter. Operating results for the first quarter
of 2005, which we anticipate will be profitable, will be negatively impacted by costs associated with expanding our northern California operations and lower than anticipated revenue levels from our recent acquisition of Real Estate Appraisal
Services, Inc.



The following table sets forth unaudited
quarterly operating data for the most recent five quarters. Such data has been prepared substantially on the same basis as the audited financial statements appearing in our Form 10-K, and includes all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the data. However, our operating results have fluctuated significantly in the past and we expect that they will continue to fluctuate in the future. Future fluctuations may be a result of a variety
of factors, including interest rates and general real estate economic conditions, seasonality, the timing of acquisitions, and our ability to control costs in response to declining order volume. Accordingly, we believe that period-to-period
comparisons of our historical results may be neither meaningful nor predictive of our future performance. The quarterly data should be read together with the financial statements and accompanying notes appearing elsewhere in our Form 10-K.



|                                       |  |                                         |        |               |   |              |  |                   |        |                  |   |        |  |   |       
|-------------------------------------- |  | --------------------------------------- | ------ | ------------- | - | ------------ |  | ----------------- | ------ | ---------------- | - | ------ |  | - | ------
|                                       |  | Three Months Ended                     
|                                       |  | December 31,2003                        |        | March 31,2004 |   | June 30,2004 |  | September 30,2004 |        | December 31,2004
|                                       |  | ($ in thousands, except per share data)
|Total revenue                          |  | $                                       | 51,970 |               | $ | 51,547       |  | $                 | 79,538 |                  | $ | 79,070 |  | $ | 80,721
|Net income                             |  |                                         | 1,554  |               |   | 597          |  |                   | 5,506  |                  |   | 5,685  |  |   | 3,800 
|Earnings attributable to common shares |  |                                         | 1,201  |               |   | 248          |  |                   | 5,156  |                  |   | 5,332  |  |   | 3,447 
|Earnings per common share              |  | $                                       | 0.06   |               | $ | 0.01         |  | $                 | 0.23   |                  | $ | 0.23   |  | $ | 0.15  



29



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The following table sets forth our contractual commitments and commercial obligations as of December 31,
2004 ($ in thousands):



Contractual Commitments and
Commercial



|                          |  |                                    |        |           |   |           |  |            |        |  |   |      
|------------------------- |  | ---------------------------------- | ------ | --------- | - | --------- |  | ---------- | ------ |  | - | -----
|                          |  | Obligations Payments due by period
|Contractual Obligations   |  | Less than oneyear                  |        | 2006-2007 |   | 2008-2009 |  | Thereafter
|Debt maturities           |  | $                                  | 5,540  |           | $ | 9,790     |  | $          | 7,346  |  | $ | 500  
|Minimum lease commitments |  |                                    | 13,656 |           |   | 21,929    |  |            | 8,454  |  |   | 5,274
|                          |  |                                    |        |           |   |           |  |            |        |  |   |      
|Total                     |  | $                                  | 19,196 |           | $ | 31,719    |  | $          | 15,800 |  | $ | 5,774
|                          |  |                                    |        |           |   |           |  |            |        |  |   |      



Item 7A. Quantitative and
Qualitative Disclosure About Market Risk



Our business is
cyclical due to the effect of interest rate fluctuations on the level of real estate activity. Periods of high interest rates adversely effect real estate activity and therefore title and escrow revenues. In addition, the amount of interest income
derived from available cash is subject to interest rate fluctuations. Our investment portfolio and borrowings are subject to interest rate risk. An increase or decrease in prevailing interest rates typically translate into a decrease or increase in
fair values of interest sensitive financial instruments.



At
December 31, 2004, the carrying amounts reported in our consolidated balance sheets for cash and cash equivalents, short term investments, fixed maturity bonds and equity securities, accounts receivable, accounts payable and debt approximate fair
value. Fair values of fixed maturity bonds may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the security and other general market conditions. Our investments in
equity securities are based on quoted market prices by third party sources. Market prices are subject to variability and as a result, the amount we may realize from a sale of an equity security investment may ultimately be significantly different
than the reported market values at December 31, 2004. Variability in market prices may occur as a result of changes in economic conditions, relative price of similar, alternative investment choices and the markets perceived change in the value
of the security itself.



Our long-term debt is comprised of
three term loans, the smallest of which provides for a variable interest rate. Our other indebtedness consists of capitalized leases. Had interest rates increased 100 basis points, interest expense on the variable portion of indebtedness would have
increased $13,000 for the year ended December 31, 2004. However, because the variable debt had a provision for an interest rate floor at 4.75%, had interest rates decreased 100 basis points, there would have been no impact to interest expense for
the year ended December 31, 2004. Had interest rates increased or decreased 100 basis points, interest expense on outstanding debt would have increased or decreased approximately $138,000 for the year ended 2003.



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement No. 153, Exchanges of Non-monetary Assets  an Amendment of Opinion No. 29. This Statement amends APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges on non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of Statement No. 153 will be



30



---

effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We have evaluated this accounting standard and have
determined it will not have an impact to our consolidated financial statements.



In December 2004, the FASB revised SFAS No. 123, Share-Based Payment(SFAS 123R). SFAS 123R replaces SFAS No. 123 and, although the two pronouncements are similar in most respects, a key difference
among the pronouncements is that SFAS 123R generally requires companies to recognize the cost of employee services rendered in exchange for awards of equity instruments based on the grant-date fair value of those awards. SFAS 123R is effective as of
the beginning of the first interim reporting period that begins after June 15, 2005 and may be adopted earlier. The Company did not adopt SFAS 123R as of December 31, 2004 and as a result, SFAS 123R has not affected the Companys consolidated
financial position or results of operations to date. The adoption of SFAS 123R is expected to result in an increase in the Companys employee costs although the actual impact has not yet been determined as the Company has not yet determined
which option valuation approach it will use to estimate the fair value of the stock option grants.



The Emerging Issues Task Force (EITF) reached a consensus on Issues No. 04-1, Accounting for Pre-existing Relationships between the Parties
to a Business Combinationfor reporting periods beginning after October 13, 2004. This Task Force consensus discusses that consummation of a business combination between two parties that have a pre-existing relationship should be evaluated to
determine whether a settlement of a pre-existing relationship exists. We have evaluated this EITF consensus and have determined it will not have a material impact to our consolidated financial statements.





31



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Item 8. Financial Statements



Report of Independent Registered Public Accounting Firm



Stockholders and Board of Directors

Capital
Title Group, Inc.:



We have audited the accompanying consolidated balance
sheets of Capital Title Group, Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, comprehensive income, stockholders equity and cash flows for each of the years in the
three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital Title Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.



/s/    KPMG LLP



Phoenix, Arizona

February 21, 2005



32



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CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                       |  |                  |         |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ------- | ---- | - | -------
|                                                                                                                                                                                                       |  | December 31,    
|                                                                                                                                                                                                       |  | 2004             |         | 2003
|                                                                                                                                                                                                       |  | ($ in thousands)
|ASSETS                                                                                                                                                                                                 |  |                  |         |      |   |        
|Cash and cash equivalents                                                                                                                                                                              |  | $                | 10,777  |      | $ | 20,302 
|Short term investments                                                                                                                                                                                 |  |                  | 6,250   |      |   | 6,383  
|Fixed maturity bonds, available-for-sale                                                                                                                                                               |  |                  | 21,277  |      |   | 13,784 
|Equity securities, available-for-sale                                                                                                                                                                  |  |                  | 4,975   |      |   | 4,840  
|                                                                                                                                                                                                       |  |                  |         |      |   |        
|Cash and invested assets                                                                                                                                                                               |  |                  | 43,279  |      |   | 45,309 
|Accounts receivable, net                                                                                                                                                                               |  |                  | 12,137  |      |   | 2,642  
|Notes and other receivables                                                                                                                                                                            |  |                  | 4,083   |      |   | 3,341  
|Property and equipment, net                                                                                                                                                                            |  |                  | 23,640  |      |   | 18,077 
|Title plant                                                                                                                                                                                            |  |                  | 7,939   |      |   | 5,788  
|Goodwill                                                                                                                                                                                               |  |                  | 46,058  |      |   | 20,121 
|Other intangibles, net                                                                                                                                                                                 |  |                  | 1,146   |      |   | 153    
|Deposits and other assets                                                                                                                                                                              |  |                  | 7,801   |      |   | 5,416  
|Deferred income taxes, net                                                                                                                                                                             |  |                  |        |      |   | 839    
|                                                                                                                                                                                                       |  |                  |         |      |   |        
|Total Assets                                                                                                                                                                                           |  | $                | 146,083 |      | $ | 101,686
|                                                                                                                                                                                                       |  |                  |         |      |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                   |  |                  |         |      |   |        
|                                                                                                                                                                                                       |  |                 
|Accounts payable and accrued expenses                                                                                                                                                                  |  | $                | 28,114  |      | $ | 22,119 
|Reserve for title insurance and escrow losses                                                                                                                                                          |  |                  | 14,569  |      |   | 10,909 
|Long-term debt                                                                                                                                                                                         |  |                  | 23,176  |      |   | 13,520 
|Deferred income taxes, net                                                                                                                                                                             |  |                  | 1,350   |      |   |       
|Other liabilities                                                                                                                                                                                      |  |                  | 3,755   |      |   | 2,191  
|                                                                                                                                                                                                       |  |                  |         |      |   |        
|Total Liabilities                                                                                                                                                                                      |  |                  | 70,964  |      |   | 48,739 
|                                                                                                                                                                                                       |  |                 
|Redeemable preferred stock, 8% cumulative dividend, redeemable after 2023 for redemption value of $100 per share, $.001 par value, 175,162
shares, authorized, issued and outstanding in 2004 and 2003 |  |                  | 17,516  |      |   | 17,516 
|                                                                                                                                                                                                       |  |                 
|Stockholders Equity:                                                                                                                                                                                  |  |                  |         |      |   |        
|Common stock, $.001 par value, 50,000,000 shares authorized; 21,542,042 and 18,315,793 shares issued and outstanding in 2004 and 2003,
respectively                                                    |  |                  | 22      |      |   | 18     
|Undesignated preferred stock, $.001 par value, 9,824,838 shares authorized, none of which has been issued or outstanding                                                                               |  |                  |        |      |   |       
|Additional paid-in capital                                                                                                                                                                             |  |                  | 23,079  |      |   | 13,468 
|Retained earnings                                                                                                                                                                                      |  |                  | 33,941  |      |   | 21,409 
|Accumulated other comprehensive income                                                                                                                                                                 |  |                  | 561     |      |   | 536    
|                                                                                                                                                                                                       |  |                  |         |      |   |        
|Total Stockholders Equity                                                                                                                                                                             |  |                  | 57,603  |      |   | 35,431 
|                                                                                                                                                                                                       |  |                  |         |      |   |        
|Total Liabilities and Stockholders Equity                                                                                                                                                             |  | $                | 146,083 |      | $ | 101,686
|                                                                                                                                                                                                       |  |                  |         |      |   |        



The accompanying notes
are an integral part

of the consolidated financial statements



33



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CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                |  |                                         |            |      |   |            |  |   |           
|----------------------------------------------- |  | --------------------------------------- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                |  | Years ended December 31,               
|                                                |  | 2004                                    |            | 2003 |   | 2002      
|                                                |  | ($ in thousands, except per share data)
|REVENUE:                                        |  |                                         |            |      |   |            |  |   |           
|Title service revenue, net                      |  | $                                       | 170,888    |      | $ | 160,745    |  | $ | 81,239    
|Escrow and related fees                         |  |                                         | 92,469     |      |   | 85,080     |  |   | 42,632    
|Appraisal service revenue                       |  |                                         | 17,885     |      |   |           |  |   |          
|Other income                                    |  |                                         | 9,634      |      |   | 4,420      |  |   | 3,840     
|                                                |  |                                         |            |      |   |            |  |   |           
|Total Revenue                                   |  |                                         | 290,876    |      |   | 250,245    |  |   | 127,711   
|                                                |  |                                         |            |      |   |            |  |   |           
|EXPENSES:                                       |  |                                         |            |      |   |            |  |   |           
|Personnel costs                                 |  |                                         | 169,556    |      |   | 154,528    |  |   | 79,149    
|Rent                                            |  |                                         | 17,361     |      |   | 14,254     |  |   | 7,936     
|Interest expense                                |  |                                         | 1,155      |      |   | 815        |  |   | 443       
|Provision for title insurance and escrow losses |  |                                         | 6,250      |      |   | 9,214      |  |   | 3,176     
|Contract service fees                           |  |                                         | 17,753     |      |   |           |  |   |          
|Other operating expenses                        |  |                                         | 53,123     |      |   | 43,981     |  |   | 24,724    
|                                                |  |                                         |            |      |   |            |  |   |           
|Total Expenses                                  |  |                                         | 265,198    |      |   | 222,792    |  |   | 115,428   
|                                                |  |                                         |            |      |   |            |  |   |           
|Income before income taxes                      |  |                                         | 25,678     |      |   | 27,453     |  |   | 12,283    
|                                                |  |                                         |           
|Income tax expense                              |  |                                         | 10,090     |      |   | 10,893     |  |   | 5,001     
|                                                |  |                                         |            |      |   |            |  |   |           
|Net income                                      |  |                                         | 15,588     |      |   | 16,560     |  |   | 7,282     
|                                                |  |                                         |           
|Dividends on preferred stock                    |  |                                         | 1,405      |      |   | 1,401      |  |   | 403       
|                                                |  |                                         |            |      |   |            |  |   |           
|Earnings attributable to common shares          |  | $                                       | 14,183     |      | $ | 15,159     |  | $ | 6,879     
|                                                |  |                                         |            |      |   |            |  |   |           
|Earnings per common share:                      |  |                                         |            |      |   |            |  |   |           
|Basic                                           |  | $                                       | 0.70       |      | $ | 0.84       |  | $ | 0.39      
|                                                |  |                                         |            |      |   |            |  |   |           
|Diluted                                         |  | $                                       | 0.64       |      | $ | 0.77       |  | $ | 0.38      
|                                                |  |                                         |            |      |   |            |  |   |           
|Weighted average shares outstanding:            |  |                                         |            |      |   |            |  |   |           
|Basic                                           |  |                                         | 20,393,834 |      |   | 18,142,279 |  |   | 17,417,061
|                                                |  |                                         |            |      |   |            |  |   |           
|Diluted                                         |  |                                         | 22,258,012 |      |   | 19,755,104 |  |   | 18,121,419
|                                                |  |                                         |            |      |   |            |  |   |           



CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME



|                                                               |  |                                         |        |      |   |        |  |   |      
|-------------------------------------------------------------- |  | --------------------------------------- | ------ | ---- | - | ------ |  | - | -----
|                                                               |  | Years ended December 31,               
|                                                               |  | 2004                                    |        | 2003 |   | 2002  
|                                                               |  | ($ in thousands, except per share data)
|Net income                                                     |  | $                                       | 15,588 |      | $ | 16,560 |  | $ | 7,282
|Other comprehensive income:                                    |  |                                         |        |      |   |        |  |   |      
|Unrealized gain on investments, available-for-sale, net of tax |  |                                         | 25     |      |   | 278    |  |   | 258  
|                                                               |  |                                         |        |      |   |        |  |   |      
|Other comprehensive income:                                    |  |                                         | 25     |      |   | 278    |  |   | 258  
|                                                               |  |                                         |        |      |   |        |  |   |      
|Comprehensive income                                           |  | $                                       | 15,613 |      | $ | 16,838 |  | $ | 7,540
|                                                               |  |                                         |        |      |   |        |  |   |      



The accompanying notes
are an integral part

of the consolidated financial statements



34



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CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



|                                                                                       |  |                  |   |                           |           |    |                  |   |        |                                      |  |       |        |   |  |   |     |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ---------------- | - | ------------------------- | --------- | -- | ---------------- | - | ------ | ------------------------------------ |  | ----- | ------ | - |  | - | --- |  | - | ------ | -
|                                                                                       |  | Common Stock     |   | Additional Paid-inCapital |           |    | RetainedEarnings |   |        | AccumulatedOther ComprehensiveIncome |  | Total |       
|                                                                                       |  | Shares           |   |                           | Par Value |    |                  |   |       
|                                                                                       |  | ($ in thousands) |  
|Balance at December 31, 2001                                                           |  | 17,065,381       |   |                           | $         | 17 |                  | $ | 10,911 |                                      |  | $     | 176    |   |  | $ |    |  | $ | 11,104 |  
|                                                                                       |  |                  |   |                           |           |   
|Exercise of stock options and warrants, including associated tax benefit               |  | 1,131,543        |   |                           |           | 1  |                  |   | 1,567  |                                      |  |       |       |   |  |   |    |  |   | 1,568  |  
|Shares issued in connection with acquisition of a subsidiary                           |  | 89,681           |   |                           |           |   |                  |   | 197    |                                      |  |       |       |   |  |   |    |  |   | 197    |  
|Warrants issued in connection with acquisition of a subsidiary                         |  |                 |   |                           |           |   |                  |   | 213    |                                      |  |       |       |   |  |   |    |  |   | 213    |  
|Shares repurchased and cancelled                                                       |  | (362,637         | ) |                           |           |   |                  |   | (328   | )                                    |  |       | (439   | ) |  |   |    |  |   | (767   | )
|Dividends on preferred stock                                                           |  |                 |   |                           |           |   |                  |   |       |                                      |  |       | (403   | ) |  |   |    |  |   | (403   | )
|Net income                                                                             |  |                 |   |                           |           |   |                  |   |       |                                      |  |       | 7,282  |   |  |   |    |  |   | 7,282  |  
|Change in unrealized gain on investments available-for-sale, net of tax effect of $133 |  |                 |   |                           |           |   |                  |   |       |                                      |  |       |       |   |  |   | 258 |  |   | 258    |  
|                                                                                       |  |                  |   |                           |           |    |                  |   |        |                                      |  |       |        |   |  |   |     |  |   |        |  
|Balance at December 31, 2002                                                           |  | 17,923,968       |   |                           |           | 18 |                  |   | 12,560 |                                      |  |       | 6,616  |   |  |   | 258 |  |   | 19,452 |  
|                                                                                       |  |                  |   |                           |           |   
|Exercise of stock options, including associated tax benefit                            |  | 391,825          |   |                           |           |   |                  |   | 908    |                                      |  |       |       |   |  |   |    |  |   | 908    |  
|Dividends on preferred stock                                                           |  |                 |   |                           |           |   |                  |   |       |                                      |  |       | (1,401 | ) |  |   |    |  |   | (1,401 | )
|Dividends declared on common stock                                                     |  |                 |   |                           |           |   |                  |   |       |                                      |  |       | (366   | ) |  |   |    |  |   | (366   | )
|Net income                                                                             |  |                 |   |                           |           |   |                  |   |       |                                      |  |       | 16,560 |   |  |   |    |  |   | 16,560 |  
|Change in unrealized gain on investments available-for-sale, net of tax effect of $143 |  |                 |   |                           |           |   |                  |   |       |                                      |  |       |       |   |  |   | 278 |  |   | 278    |  
|                                                                                       |  |                  |   |                           |           |    |                  |   |        |                                      |  |       |        |   |  |   |     |  |   |        |  
|Balance at December 31, 2003                                                           |  | 18,315,793       |   |                           |           | 18 |                  |   | 13,468 |                                      |  |       | 21,409 |   |  |   | 536 |  |   | 35,431 |  
|                                                                                       |  |                  |   |                           |           |   
|Issuance of common stock                                                               |  | 2,800,000        |   |                           |           | 3  |                  |   | 8,668  |                                      |  |       |       |   |  |   |    |  |   | 8,671  |  
|Exercise of stock options, including associated tax benefit                            |  | 426,249          |   |                           |           | 1  |                  |   | 943    |                                      |  |       |       |   |  |   |    |  |   | 944    |  
|Dividends on preferred stock                                                           |  |                 |   |                           |           |   |                  |   |       |                                      |  |       | (1,405 | ) |  |   |    |  |   | (1,405 | )
|Dividends on common stock                                                              |  |                 |   |                           |           |   |                  |   |       |                                      |  |       | (1,651 | ) |  |   |    |  |   | (1,651 | )
|Net income                                                                             |  |                 |   |                           |           |   |                  |   |       |                                      |  |       | 15,588 |   |  |   |    |  |   | 15,588 |  
|Change in unrealized gain on investments available-for-sale, net of tax effect of $13  |  |                 |   |                           |           |   |                  |   |       |                                      |  |       |       |   |  |   | 25  |  |   | 25     |  
|                                                                                       |  |                  |   |                           |           |    |                  |   |        |                                      |  |       |        |   |  |   |     |  |   |        |  
|Balance at December 31, 2004                                                           |  | 21,542,042       |   |                           | $         | 22 |                  | $ | 23,079 |                                      |  | $     | 33,941 |   |  | $ | 561 |  | $ | 57,603 |  
|                                                                                       |  |                  |   |                           |           |    |                  |   |        |                                      |  |       |        |   |  |   |     |  |   |        |  



The accompanying notes
are an integral part

of the consolidated financial statements



35



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | Years Ended December 31, |        
|                                                                                  |  | 2004                     |         |   | 2003 |   |         | 2002 | 
|                                                                                  |  | ($ in thousands)         |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $                        | 15,588  |   |      | $ | 16,560  |      |  | $ | 7,282   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                     |  |                          | 6,196   |   |      |   | 4,839   |      |  |   | 3,073   |  
|Benefit (expense) for deferred income taxes                                       |  |                          | 2,189   |   |      |   | (1,092  | )    |  |   | (722    | )
|Change in operating assets and liabilities, net of acquisitions:                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                               |  |                          | (4,057  | ) |      |   | 1,611   |      |  |   | (1,317  | )
|Notes and other receivables                                                       |  |                          | (742    | ) |      |   | (906    | )    |  |   | (1,005  | )
|Deposits and other assets                                                         |  |                          | (620    | ) |      |   | (611    | )    |  |   | (1,086  | )
|Accounts payable and accrued expenses                                             |  |                          | (285    | ) |      |   | (818    | )    |  |   | 6,929   |  
|Reserve for title insurance and escrow losses                                     |  |                          | 3,585   |   |      |   | 4,410   |      |  |   | 2,401   |  
|Other operating activity                                                          |  |                          | 1,074   |   |      |   | 2,364   |      |  |   | 95      |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Net Cash Flows provided by Operating Activities                                   |  |                          | 22,928  |   |      |   | 26,357  |      |  |   | 15,650  |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Net additions to property and equipment and title plant                           |  |                          | (10,840 | ) |      |   | (6,099  | )    |  |   | (3,796  | )
|Proceeds from sale of property, equipment and title plant                         |  |                          |        |   |      |   | 280     |      |  |   |        |  
|Purchase of subsidiaries, net of acquired cash                                    |  |                          | (28,355 | ) |      |   | (2,903  | )    |  |   | (13,801 | )
|Purchase of investment securities                                                 |  |                          | (28,471 | ) |      |   | (18,478 | )    |  |   | (2,713  | )
|Sales of investment securities                                                    |  |                          | 21,001  |   |      |   | 5,271   |      |  |   | 732     |  
|Collection of notes receivable                                                    |  |                          |        |   |      |   |        |      |  |   | 1,693   |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Net Cash Flows used in Investing Activities                                       |  |                          | (46,665 | ) |      |   | (21,929 | )    |  |   | (17,885 | )
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Borrowings                                                                        |  |                          | 16,500  |   |      |   | 2,250   |      |  |   | 14,000  |  
|Repayment of debt                                                                 |  |                          | (8,911  | ) |      |   | (5,272  | )    |  |   | (541    | )
|Proceeds from the issuance of common stock, net                                   |  |                          | 9,615   |   |      |   | 682     |      |  |   | 1,765   |  
|Purchase of treasury stock                                                        |  |                          |        |   |      |   |        |      |  |   | (767    | )
|Payment of preferred dividends                                                    |  |                          | (1,405  | ) |      |   | (1,401  | )    |  |   | (284    | )
|Payment of common dividends                                                       |  |                          | (1,587  | ) |      |   |        |      |  |   |        |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|Net Cash Flows provided by (used in) Financing Activities                         |  |                          | 14,212  |   |      |   | (3,741  | )    |  |   | 14,173  |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                         |  |                          | (9,525  | ) |      |   | 687     |      |  |   | 11,938  |  
|                                                                                  |  |                          |        
|CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR                            |  |                          | 20,302  |   |      |   | 19,615  |      |  |   | 7,677   |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  
|CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                                  |  | $                        | 10,777  |   |      | $ | 20,302  |      |  | $ | 19,615  |  
|                                                                                  |  |                          |         |   |      |   |         |      |  |   |         |  



The accompanying notes
are an integral part

of the consolidated financial statements



36



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Organization and Summary of Significant Accounting Policies:



Nature of Operations:



Capital Title Group, Inc. (the Company), a Delaware corporation, through its subsidiaries, is engaged in the business of issuing title insurance policies and
performing other real estate-related services, such as escrow activities, appraisal services and flood zone determinations. The Company is the parent holding company of the following subsidiaries:



Capital Title Agency Inc. (Capital Title) is an Arizona corporation, which has
operated under the authority of the Arizona State Banking Commission since November 1981. Capital Title is an independent title agency that provides escrow services and issues title insurance policies to the real estate industry in Maricopa,
Yavapai, Mohave and Pinal Counties in Arizona.



New Century Title Company
(New Century), a California corporation that commenced operations in July 1998, is an independent title agency that provides escrow and title services to the real estate industry in selected California counties. New Century is licensed
to conduct business in San Diego, Orange, Riverside, San Bernardino and Los Angeles Counties. New Century also has operations in northern California, which it obtained by acquisition in November 1998, and expanded through another acquisition in
April 2002. New Centurys northern California operations is licensed to conduct business in Sonoma, Sacramento, Contra Costa, Alameda, San Mateo and Santa Clara Counties.



Nations Holding Group (Nations), a California corporation, was acquired in September 2002 and includes the following
wholly-owned subsidiaries:



United Title Company (United
Title), a California corporation that commenced operations in 1978, is an independent title agency that provides escrow and title services to the real estate industry in southern California. United Title is licensed in Los Angeles, Riverside,
San Bernardino, Orange, San Diego, Ventura and Santa Barbara Counties in California.



First California Title Company (First California), a California corporation that commenced operations in 1964 and was acquired by Nations in 1997, is an independent title agency serving the real estate
industry with escrow and title services in the northern California Counties of Alameda and Contra Costa.



Land Title of Nevada, Inc. (Land Title) is a Nevada corporation established in 1978. Land Title provides escrow and title services to the real
estate industry in Clark County, Nevada, which comprises the metropolitan area of Las Vegas.



United Capital Title Insurance Company (United Capital), a California domiciled title insurance underwriter, commenced operations in 1997. United Capital is the predominant underwriter for both United
Title and First California and underwrites a portion of the title insurance policies sold by Capital Title, New Century and Land Title.



37



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Nationwide Appraisal Services Corporation (Nationwide Appraisal), a Pennsylvania corporation that commenced operations in 1994, and was acquired in May 2004, provides appraisal, title and related
settlement services to its customers in the mortgage and real estate industry throughout the United States through a centralized processing center located near Pittsburgh, Pennsylvania.



Nationwide TotalFlood, Inc. (formerly known as Determination Processing Services, Inc.), a California corporation acquired in July 2004,
provides residential and commercial flood zone determinations on real property throughout the United States through a centralized processing center located in Los Angeles, California.



Real Estate Appraisal Services, Inc., an Ohio corporation, was established in November 2004 as a result of an asset purchase and provides
appraisal services in five states including Ohio, Pennsylvania, Michigan, Illinois and New York.



Significant Accounting Policies:



Principles of Consolidation:



The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have
been eliminated in consolidation.



Use of Estimates:



The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



Management believes the estimates and assumptions that require managements most difficult, subjective or complex judgments form the basis of identifying the
accounting policies that are most critical to the Company. The critical accounting policies to the Company include policies related to reserves for title insurance and escrow losses, related contingencies and litigation surrounding title and escrow
losses and impairment of intangible assets. Management believes estimates and assumptions related to these critical accounting policies are appropriate under the circumstances however, should future events or occurrences result in unanticipated
consequences, there could be a material impact on our future financial condition or results of operations.



Certain Reclassifications:



Certain reclassifications have been made in the 2003 and 2002 consolidated financial statements to conform to the presentation used in 2004.



Cash and Cash Equivalents:



Cash and cash equivalents include all highly liquid investments purchased with an initial
maturity of three months or less.





38



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Accounts Receivable:



Accounts receivable are reported net of an allowance for doubtful accounts. The allowance is established based on managements estimate including a review of
individual accounts and the Companys collection history.



Investments:



Short term investments consist of certificates
of deposit with original maturities of 91 days to one year.



Investments in
fixed maturity bonds and equity securities are classified as available-for-sale and, accordingly, are carried at fair value. Fair values of fixed maturity bonds and equity securities are based on quoted market prices.



Realized gains and losses on investments are determined using the specific identification
basis and are recognized on a trade-date basis. Unrealized gains and losses on investments, net of deferred income tax expense (benefit), are excluded from income and included as a separate component of stockholders equity. If unrealized
losses on investments are determined to be other than temporary during the reporting period, they are recognized as realized losses.



Revenue Recognition:



Title premiums earned and title and escrow fees are recognized as revenue at the time of closing the related real estate transaction. The Company reports title service
revenue net of underwriting fees paid pursuant to agreements the Company has with third party title insurance underwriters. Underwriting fees incurred relating to third party title insurance underwriters for the years ended December 31, 2004, 2003
and 2002 were $3.7 million, $3.2 million and $5.4 million, respectively. Revenue from real estate appraisal services, account servicing and other fees are generally recognized when the service is performed. For flood zone determination services, the
Company must defer a portion of revenue that relates to services the Company is contractually required to provide in future periods, and recognizes the deferred revenue over the period of time it is contractually required to provide the additional
services.



Property and Equipment:



Property and equipment are recorded at cost and are being depreciated on a straight-line
basis over the estimated useful lives of the related assets, which range from three to forty years. Leasehold improvements are amortized on a straight-line basis over the lesser of the original lease term or the estimated useful lives of such
assets.



Title Plant:



Title plants are recorded at the cost incurred to construct and organize historical title
information to the point it can be used to perform title searches. Cost incurred to maintain, update and operate title plants are expensed as incurred. Title plants are not amortized as they are considered to have an indefinite life if maintained.



39



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Goodwill:



At December 31, 2004, goodwill consisted of cost in excess of net assets acquired. Prior to 2002, goodwill was amortized ratably over twenty years. Effective January 1,
2002, goodwill is no longer amortized, but impairment of goodwill is monitored for recoverability based on guidance set forth by Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and Other Intangible Assets.



Comprehensive Income:



Comprehensive income consists of net income and net unrealized gains (losses) on investments
and is presented in the consolidated statements of stockholders equity and comprehensive income.



Impairment of Long-Lived Assets:



The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. As of December 31, 2004, management has not identified any events or circumstances that indicate that any long-lived assets are
impaired.



Reserve for Title Insurance and Escrow Losses:



The Companys reserve for title insurance losses from its title
insurance underwriter includes known claims as well as a provision of losses expected to be incurred, net of recoveries. Known claims are reserved for, based on a review of the claim amount and estimated costs associated with settling the claim. The
Company also reserves for claims arising from errors made during the escrow process. Reserves for claims which are incurred, but not reported to the Company, are recorded based on several factors including, but not limited to, historical loss
experience, and current industry and legal environments. The occurrence of a significant title or escrow claim in any given period could have a material adverse effect on the Companys financial condition and results of operations during that
period.



The Company also operates under agency agreements with various third
party title insurance companies. In the event of a title insurance policy loss, under these agreements, the Company is generally responsible for the first $5,000 of loss. A provision for future title losses is maintained by periodic charges to the
statements of operations based on historical title loss experience.



Reinsurance:



In the ordinary course of
business, the Company reinsures certain title insurance risks with another insurer for the purpose of limiting its maximum loss exposure. The Company cedes a portion of certain policy liabilities under an excess loss reinsurance agreement.
Reinsurance agreements provide that in the event of loss (including costs, attorneys fees and expenses) exceeding the retained amounts, the reinsurer is liable for the excess amount assumed. However, the ceding company remains primarily liable
in the event the reinsurer does not meet its contractual obligations. Ceded premiums, expense reimbursements, and benefits are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the
reinsurance contracts. Premiums ceded have been reported as reduction of title service revenue.



40



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Income Taxes:



The Company and its subsidiaries file consolidated federal and state income tax returns. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, net of valuation allowances.



Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.



Stock Option Plan:



The Company applies the
intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,and related interpretations including FASB Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, and Interpretation of APB No. 25,issued in March 2000, to account for stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. FASB Statement No. 123, Accounting for Stock-Based Compensation,established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by Statement No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of Statement No. 123. The following
table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period ($ in thousands, except per share data):



|                                                                                                                                |  |                          |        |   |      |   |        |      |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                                                                                                |  | Years ended December 31, |       
|                                                                                                                                |  | 2004                     |        |   | 2003 |   |        | 2002 | 
|Earnings attributable to common shares                                                                                          |  | $                        | 14,183 |   |      | $ | 15,159 |      |  | $ | 6,879 |  
|Deduct pro forma total stock-based employee compensation determined under a fair-value-based method for all rewards, net of
tax |  |                          | (676   | ) |      |   | (544   | )    |  |   | (402  | )
|                                                                                                                                |  |                          |        |   |      |   |        |      |  |   |       |  
|Pro forma earnings attributable to common shares                                                                                |  | $                        | 13,507 |   |      | $ | 14,615 |      |  | $ | 6,477 |  
|                                                                                                                                |  |                          |        |   |      |   |        |      |  |   |       |  
|Pro forma earnings attributable to common shares per share - basic                                                              |  | $                        | 0.66   |   |      | $ | 0.81   |      |  | $ | 0.37  |  
|                                                                                                                                |  |                          |        |   |      |   |        |      |  |   |       |  
|Pro forma earnings attributable to common shares per share - diluted                                                            |  | $                        | 0.61   |   |      | $ | 0.74   |      |  | $ | 0.36  |  
|                                                                                                                                |  |                          |        |   |      |   |        |      |  |   |       |  



Pro forma information regarding net
income and earnings per share has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free interest rate of 3.4 for 2004, 3.0% for 2003 and 1.6% for 2002; dividend yields of 1.5% for 2004, 1.6% for 2003 and 0% for 2002; volatility factors of the expected
market price of the Companys common stock was 40% for 2004, 48% for 2003 and 67% for 2002; and a weighted-average expected life at the date of grant of options of four years for 2004, 2003 and 2002.



41



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock price volatility.



Because the Companys stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value
estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.



Segment Reporting:



The Companys two reportable segments are Title and Escrow Services and Lender Services. Additional information related to the Companys segments are included
in Note 17.



Earnings per Share:



Basic earnings per share (EPS) is computed by dividing earnings available to
stockholders by the weighted-average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or contracts to issue common stock were exercised or converted to stock or
resulted in the issuance of stock that then shared in the earnings of the Company.



The following table sets forth the computation of basic and diluted EPS ($ in thousands, except per share data):



|                                                             |  |                          |            |      |   |            |  |   |           
|------------------------------------------------------------ |  | ------------------------ | ---------- | ---- | - | ---------- |  | - | ----------
|                                                             |  | Years ended December 31,
|                                                             |  | 2004                     |            | 2003 |   | 2002      
|Earnings attributable to common shares                       |  | $                        | 14,183     |      | $ | 15,159     |  | $ | 6,879     
|                                                             |  |                          |            |      |   |            |  |   |           
|Basic EPS  weighted average shares outstanding              |  |                          | 20,393,834 |      |   | 18,142,279 |  |   | 17,417,061
|                                                             |  |                          |            |      |   |            |  |   |           
|Basic earnings per share                                     |  | $                        | 0.70       |      | $ | 0.84       |  | $ | 0.39      
|                                                             |  |                          |            |      |   |            |  |   |           
|Basic EPS  weighted average shares outstanding              |  |                          | 20,393,834 |      |   | 18,142,279 |  |   | 17,417,061
|Effect of dilutive securities                                |  |                          | 1,864,178  |      |   | 1,612,825  |  |   | 704,358   
|                                                             |  |                          |            |      |   |            |  |   |           
|Dilutive EPS  weighted average shares outstanding           |  |                          | 22,258,012 |      |   | 19,755,104 |  |   | 18,121,419
|                                                             |  |                          |            |      |   |            |  |   |           
|Diluted earnings per share                                   |  | $                        | 0.64       |      | $ | 0.77       |  | $ | 0.38      
|                                                             |  |                          |            |      |   |            |  |   |           
|Stock options not included in diluted EPS since antidilutive |  |                          | 37,450     |      |   | 370,100    |  |   | 1,568,200 
|                                                             |  |                          |            |      |   |            |  |   |           



Fair Value of
Financial Instruments:



The Company discloses fair value information about
financial instruments where it is practicable to estimate their value. The Company estimates that the carrying value of its financial instruments, consisting of cash and cash equivalents, short term investments, notes receivable, accounts payable
and accrued expenses approximate their fair values at December 31, 2004 and 2003 due to the short term nature of these items. Fixed maturity bonds and equity securities are classified as available-for-sale and accordingly, are carried at fair value.
The terms of the Companys long term debt instruments provide for fixed rates of interest with the exception of one term loan which has a variable interest rate tied to a market index. All are comparable to what they could be replaced for in
the current market, therefore the carrying value approximates their fair value at December 31, 2004 and 2003.



42



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



New Accounting Pronouncements:



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 153, Exchanges of Non-monetary Assets  an Amendment of Opinion
No. 29. This Statement amends APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges on non-monetary assets that do not have commercial
substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of Statement No. 153 will be effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. We have evaluated this accounting standard and have determined it will not have an impact to our consolidated financial statements.



In December 2004, the FASB revised SFAS No. 123, Share-Based Payment(SFAS
123R). SFAS 123R replaces SFAS No. 123 and, although the two pronouncements are similar in most respects, a key difference among the pronouncements is that SFAS 123R generally requires companies to recognize the cost of employee services
rendered in exchange for awards of equity instruments based on the grant-date fair value of those awards. SFAS 123R is effective as of the beginning of the first interim reporting period that begins after June 15, 2005 and may be adopted earlier.
The Company did not adopt SFAS 123R as of December 31, 2004 and as a result, SFAS 123R has not affected the Companys consolidated financial position or results of operations to date. The adoption of SFAS 123R is expected to result in an
increase in the Companys employee costs although the actual impact has not yet been determined as the Company has not yet determined which option valuation approach it will use to estimate the fair value of the stock option grants.



The Emerging Issues Task Force (EITF) reached a consensus on Issues No. 04-1,
Accounting for Pre-existing Relationships between the Parties to a Business Combinationfor reporting periods beginning after October 13, 2004. This Task Force consensus discusses that consummation of a business combination between two
parties that have a pre-existing relationship should be evaluated to determine whether a settlement of a pre-existing relationship exists. We have evaluated this EITF consensus and have determined it will not have a material impact to our
consolidated financial statements.



2. Cash Held as a Fiduciary:



The Company is the custodian of cash deposited by customers with specific
instructions as to its disbursement from active escrow, trust and account servicing files. The balances in these accounts have not been included in the consolidated financial statements. As of December 31, 2004 and 2003, the accounts contain
balances of approximately $789.7 million and $486.7 million, respectively. As a result of holding these deposits in escrow, the Company is involved in programs for realizing economic benefit during the year through favorable borrowing and vendor
arrangements with the various financial institutions where the deposits are held.



43



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



3. Concentration of Risk:



The Company
maintains cash and cash equivalents with various financial institutions. Deposits which exceed $100,000 at each institution are not insured by the Federal Deposit Insurance Corporation. Of the $17.0 million in cash and cash equivalents and
short-term investments on hand at December 31, 2004, $12.3 million was not insured by the Federal Deposit Insurance Corporation.



The Companys accounts receivable are typically not collateralized. The Company is not dependent upon any single customer or single group of customers. The loss of
any one customer would not have a material adverse effect on the Company.



4. Acquisitions:



In November 2004, the Company acquired the
assets of Real Estate Appraisal Services, Inc. (REAS). Under the terms of the agreement, approved by the Board of Directors of each company, the purchase price was $0.8 million, $0.3 of which was paid in cash and $0.5 million of which
was a note payable in favor of the seller, Citizens Financial Group. REAS, located in Cleveland, Ohio, is a provider of appraisal and flood determination services for residential and commercial property primarily in Ohio, and provides an extension
of services to customers of our Lender Services segment. The operations of REAS have been included in the consolidated financial statements of the Company since November 6, 2004, which was the effective date of the transaction. The allocation of the
purchase price included allocation of $0.3 million to goodwill.



In July 2004,
The Company acquired Determination Processing Services, Inc., which was subsequently renamed Nationwide TotalFlood Services, Inc. (Nationwide TotalFlood). Nationwide TotalFlood, based in Los Angeles, California, provides residential and
commercial flood determinations on property throughout the United States, and increases the Companys service capacity for our Lender Services segment. Under the terms of the acquisition, approved by the Board of Directors of each company, the
purchase price was $1.7 million and was financed from cash on hand. The operations of Nationwide TotalFlood have been included in the consolidated financial statements of the Company since July 1, 2004, which was the effective date of the
transaction.



The purchase price was allocated to the assets purchased and
liabilities assumed, based on their respective fair values at the date of acquisition. Included in this allocation of the purchase was approximately $2.0 million of goodwill. The following table summarizes the estimated fair values of the allocation
of the purchase price and direct acquisition costs to the assets and liabilities acquired at the date of purchase ($ in thousands):



|                                      |  |   |       |  
|------------------------------------- |  | - | ----- | -
|Assets and (Liabilities) Acquired:    |  |   |       |  
|Cash and cash equivalents             |  | $ | 2     |  
|Accounts receivable, net              |  |   | 617   |  
|Deposits and other assets             |  |   | 47    |  
|Property and equipment, net           |  |   | 127   |  
|Goodwill                              |  |   | 1,994 |  
|Accounts payable and accrued expenses |  |   | (683  | )
|Other liabilities                     |  |   | (448  | )
|                                      |  |   |       |  
|Total                                 |  | $ | 1,656 |  
|                                      |  |   |       |  



44



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



In May 2004, the Company acquired Nationwide Appraisal Services Corporation (Nationwide). Under the terms of the acquisition, approved by the Board of Directors for each company, the Company paid $25.0
million in cash at closing, with $3.0 million in deferred cash consideration payable if certain conditions are satisfied after the closing of the transaction. Subsequent to the closing, it was determined that certain conditions relating to $1.0
million of the deferred cash consideration will not be required to be paid, in accordance with provisions of the acquisition agreement. Nationwide provides real estate appraisal services and also issues title insurance policies throughout most large
markets in the United States and is the cornerstone of the Companys Lender Services segment. The purchase price was financed from cash on hand, proceeds from the private placement of common stock and warrants to purchase common stock, and a
credit facility from a bank totaling $16.0 million. The credit facility included a loan currently bearing interest at a fixed rate of 4.75%. The terms of the credit facility required a $6.0 million payment of principal on September 30, 2004. The
remaining balance outstanding under the credit facility is being amortized over a five year period with monthly payments of $166,667 plus interest. The operations of Nationwide have been included in the consolidated financial statements of the
Company since May 1, 2004, which was the effective date of the transaction.



The purchase price, and direct transaction costs were allocated to the assets purchased and liabilities assumed, based on their respective fair values at the date of acquisition. Included in this allocation of the purchase was $23.6 million
of goodwill and three other intangible assets; $1.0 million related to existing customer relationships, which will be amortized over a five-year period, approximately $50,000 for a covenant not to compete agreements with former stockholders of
Nationwide, which is amortized over the three-year term of the agreement, and approximately $456,000 was allocated to Nationwides backlog of opened orders, which was fully amortized during the second quarter 2004. The following table
summarizes the estimated fair values of the allocation of the purchase price and direct acquisition costs to the assets and liabilities acquired at the date of purchase ($ in thousands):



|                                              |  |   |        |  
|--------------------------------------------- |  | - | ------ | -
|Assets and (Liabilities) Acquired:            |  |   |        |  
|Cash and cash equivalents                     |  | $ | 279    |  
|Accounts receivable, net                      |  |   | 4,743  |  
|Deposits and other assets                     |  |   | 118    |  
|Property and equipment, net                   |  |   | 1,866  |  
|Goodwill                                      |  |   | 23,597 |  
|Other intangible assets                       |  |   | 1,490  |  
|Accounts payable and accrued expenses         |  |   | (5,450 | )
|Reserve for title insurance and escrow losses |  |   | (75    | )
|Debt                                          |  |   | (1,568 | )
|                                              |  |   |        |  
|Total                                         |  | $ | 25,000 |  
|                                              |  |   |        |  



45



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



In January 2003, the Company acquired Land Title of Nevada, Inc. (Land Title). Land Title provides title insurance and escrow services to residential and commercial customers in the real estate industry.
The acquisition marks the Companys entrance into the Las Vegas, Nevada market adding five branch offices and 94 employees. The transaction, which was accounted for using guidance set forth in FASB Statement No. 141, BusinessCombinations, included payment of $1.25 million in cash and issuance of a $2.25 million, five-year note to the seller for a total purchase price of approximately $3.5 million. The note provides for monthly installments and accrues interest at
prime, with a floor of 4.75% and a ceiling of 6.75%. The operations of Land Title have been included in the consolidated financial statements of the Company since January 1, 2003, which was the effective date of the transaction.



The purchase price was allocated to the assets purchased based on their respective fair
values at the acquisition date. Included in this allocation of the purchase price was $1.5 million of goodwill and two other intangible assets, approximately $184,000 for a covenant not to compete agreement with the former owner of Land Title, which
is amortized over the five-year life of the agreement, and approximately $47,000 was allocated to Land Titles backlog of opened orders, which was fully amortized during 2003. The following table summarizes the estimated fair values of the
allocation of the purchase price and direct acquisition costs to the assets and liabilities acquired at the date of purchase ($ in thousands):



|                                              |  |   |        |  
|--------------------------------------------- |  | - | ------ | -
|Assets and (Liabilities) Acquired:            |  |   |        |  
|Cash and cash equivalents                     |  | $ | 335    |  
|Accounts receivable, net                      |  |   | 255    |  
|Notes and other receivables                   |  |   | 119    |  
|Deposits and other assets                     |  |   | 66     |  
|Property and equipment, net                   |  |   | 449    |  
|Title plant                                   |  |   | 2,230  |  
|Goodwill                                      |  |   | 1,544  |  
|Other intangible assets                       |  |   | 231    |  
|Accounts payable and accrued expenses         |  |   | (551   | )
|Reserve for title insurance and escrow losses |  |   | (49    | )
|Other liabilities                             |  |   | (1,129 | )
|                                              |  |   |        |  
|Total                                         |  | $ | 3,500  |  
|                                              |  |   |        |  



46



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CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Selected unaudited pro forma combined results of operations for the years ended December 31, 2004 and 2003, assuming acquisitions made in 2004, discussed above, occurred January 1, 2003, are as follows ($ in
thousands, except per share data):



|                                       |  |                            |            |                            |   |           
|-------------------------------------- |  | -------------------------- | ---------- | -------------------------- | - | ----------
|                                       |  | Year endedDecember 31,2004 |            | Year endedDecember 31,2003
|Total revenue                          |  | $                          | 326,498    |                            | $ | 331,954   
|Income before income taxes             |  |                            | 29,707     |                            |   | 36,660    
|Net income                             |  |                            | 18,032     |                            |   | 22,106    
|Earnings attributable to common shares |  |                            | 16,627     |                            |   | 20,705    
|                                       |  |                           
|Net income per common share:           |  |                            |            |                            |   |           
|Basic                                  |  | $                          | 0.78       |                            | $ | 0.99      
|                                       |  |                            |            |                            |   |           
|Diluted                                |  | $                          | 0.72       |                            | $ | 0.91      
|                                       |  |                            |            |                            |   |           
|Weighted average shares outstanding:   |  |                            |            |                            |   |           
|Basic                                  |  |                            | 21,245,705 |                            |   | 20,942,279
|Diluted                                |  |                            | 22,988,794 |                            |   | 22,655,104



|5. | Investments:
|-- | ------------



Under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, securities are generally classified as available-for-sale, held-to-maturity, or trading. The Company has
classified its entire fixed maturity bonds and equity securities portfolios as available-for-sale. Securities classified as available-for-sale are reported at fair value in the consolidated statements of financial position with the related
unrealized holding gains and losses on such available-for-sale securities reported as a separate component of equity after adjustments for related changes in deferred income taxes. The cost, gross unrealized gains and losses and fair value of fixed
maturity bonds available-for-sale as of December 31, 2004 and 2003, are as follows ($ in thousands):



December 31, 2004:



|                                 |  |               |        |                      |   |                       |  |   |                     |   |  |   |       
|-------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ------
|                                 |  | Amortizedcost |        | Grossunrealizedgains |   | Grossunrealizedlosses |  |   | Estimatedfair value
|U.S. government and agencies     |  | $             | 13,349 |                      | $ | 10                    |  | $ | (53                 | ) |  | $ | 13,306
|State and political subdivisions |  |               | 2,488  |                      |   | 136                   |  |   |                    |   |  |   | 2,624 
|Corporate securities             |  |               | 5,222  |                      |   | 139                   |  |   | (14                 | ) |  |   | 5,347 
|                                 |  |               |        |                      |   |                       |  |   |                     |   |  |   |       
|                                 |  | $             | 21,059 |                      | $ | 285                   |  | $ | (67                 | ) |  | $ | 21,277
|                                 |  |               |        |                      |   |                       |  |   |                     |   |  |   |       
|                                 |  |               |        |                     
|December 31, 2003:               |  |               |        |                      |   |                       |  |   |                     |   |  |   |       
|                                 |  | Amortizedcost |        | Grossunrealizedgains |   | Grossunrealizedlosses |  |   | Estimatedfair value
|U.S. government and agencies     |  | $             | 7,409  |                      | $ | 45                    |  | $ | (7                  | ) |  | $ | 7,447 
|State and political subdivisions |  |               | 2,179  |                      |   | 96                    |  |   |                    |   |  |   | 2,275 
|Corporate securities             |  |               | 3,858  |                      |   | 213                   |  |   | (9                  | ) |  |   | 4,062 
|                                 |  |               |        |                      |   |                       |  |   |                     |   |  |   |       
|                                 |  | $             | 13,446 |                      | $ | 354                   |  | $ | (16                 | ) |  | $ | 13,784
|                                 |  |               |        |                      |   |                       |  |   |                     |   |  |   |       



47



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CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Contractual maturities at December 31, 2004, which may differ from expected maturities because certain borrowers have the right to call or prepay obligations with or without prepayment penalties, are as follows ($ in
thousands):



|               |  |                |        |                      |   |       
|-------------- |  | -------------- | ------ | -------------------- | - | ------
|Maturity dates |  | Amortized Cost |        | Estimated fair value
|2005-2009      |  | $              | 17,810 |                      | $ | 17,867
|2010-2014      |  |                | 1,534  |                      |   | 1,570 
|After 2014     |  |                | 1,715  |                      |   | 1,840 
|               |  |                |        |                      |   |       
|               |  | $              | 21,059 |                      | $ | 21,277
|               |  |                |        |                      |   |       



At December 31, 2004 the Company had
fixed maturity bonds with an amortized cost of $14.3 million and fair value of $14.5 million that have provisions, which give borrowers the right to call or prepay their obligations with or without prepayment penalties.



Investment in equity securities at December 31, 2004 and 2003 consists of investments in the
following ($ in thousands):



December 31, 2004:



|                                                                     |  |      |       |                      |   |                       |  |   |                     |   |  |   |      
|-------------------------------------------------------------------- |  | ---- | ----- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -----
|                                                                     |  | Cost |       | Grossunrealizedgains |   | Grossunrealizedlosses |  |   | Estimatedfair value
|Preferred and common stock of banks, trust and insurance companies   |  | $    | 1,612 |                      | $ | 331                   |  | $ | (1                  | ) |  | $ | 1,942
|Preferred and common stocks of public utilities                      |  |      | 147   |                      |   | 21                    |  |   |                    |   |  |   | 168  
|Preferred and common stock of industrial and miscellaneous companies |  |      | 2,597 |                      |   | 313                   |  |   | (45                 | ) |  |   | 2,865
|                                                                     |  |      |       |                      |   |                       |  |   |                     |   |  |   |      
|                                                                     |  | $    | 4,356 |                      | $ | 665                   |  | $ | (46                 | ) |  | $ | 4,975
|                                                                     |  |      |       |                      |   |                       |  |   |                     |   |  |   |      
|                                                                     |  |      |       |                     
|December 31, 2003:                                                   |  |      |       |                      |   |                       |  |   |                     |   |  |   |      
|                                                                     |  | Cost |       | Grossunrealizedgains |   | Grossunrealizedlosses |  |   | Estimatedfair value
|Preferred and common stock of banks, trust and insurance companies   |  | $    | 1,715 |                      | $ | 216                   |  | $ | (1                  | ) |  | $ | 1,930
|Preferred and common stock of industrial and miscellaneous companies |  |      | 2,649 |                      |   | 304                   |  |   | (43                 | ) |  |   | 2,910
|                                                                     |  |      |       |                      |   |                       |  |   |                     |   |  |   |      
|                                                                     |  | $    | 4,364 |                      | $ | 520                   |  | $ | (44                 | ) |  | $ | 4,840
|                                                                     |  |      |       |                      |   |                       |  |   |                     |   |  |   |      



Gross realized gains related to fixed
maturity bonds, available-for-sale were $0, $27,000 and $58,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Gross realized gains related to equity securities, available-for-sale were $289,000, $279,000 and $5,000 for the
years ended December 31, 2004, 2003 and 2002, respectively. Gross realized losses related to equity securities, available-for-sale were $89,000, $0 and $0 for the years ended December 31, 2004, 2003 and 2002, respectively.



48



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Gross unrealized losses on investment securities and the fair values of the related securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at December
31, 2004, were as follows ($ in thousands):



|                                    |  |                     |        |                  |                     |     |           |       |                  |       |  |           |     |                  |  |   |        |  |   |      |  
|----------------------------------- |  | ------------------- | ------ | ---------------- | ------------------- | --- | --------- | ----- | ---------------- | ----- |  | --------- | --- | ---------------- |  | - | ------ |  | - | ---- | -
|                                    |  | Less than 12 months |        |                  | 12 months or longer |     |           | Total |                 
|                                    |  | Fairvalue           |        | Unrealizedlosses |                     |     | Fairvalue |       | Unrealizedlosses |       |  | Fairvalue |     | Unrealizedlosses | 
|U.S. government and agencies        |  | $                   | 10,516 |                  | $                   | (46 | )         |       | $                | 1,312 |  | $         | (7  | )                |  | $ | 11,828 |  | $ | (53  | )
|State and political subdivisions    |  |                     |       |                  |                     |    |           |       |                  |      |  |           |    |                  |  |   |       |  |   |     |  
|Corporate securities                |  |                     | 2,403  |                  |                     | (8  | )         |       |                  | 93    |  |           | (6  | )                |  |   | 2,496  |  |   | (14  | )
|Equity securities                   |  |                     | 226    |                  |                     | (29 | )         |       |                  | 87    |  |           | (17 | )                |  |   | 313    |  |   | (46  | )
|                                    |  |                     |        |                  |                     |     |           |       |                  |       |  |           |     |                  |  |   |        |  |   |      |  
|Total temporary impaired securities |  | $                   | 13,145 |                  | $                   | (83 | )         |       | $                | 1,492 |  | $         | (30 | )                |  | $ | 14,637 |  | $ | (113 | )
|                                    |  |                     |        |                  |                     |     |           |       |                  |       |  |           |     |                  |  |   |        |  |   |      |  



Other income includes net investment
income related to the Companys investment portfolio of approximately $0.9 million and $0.7 million for the years ended December 31, 2004 and 2003, respectively.



6. Property and Equipment:



Property and equipment consists of the following ($ in thousands):



|                                                |  |              |  |      |         |   |      |   |         |  
|----------------------------------------------- |  | ------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                                |  | Useful Lives |  | 2004 |         |   | 2003 |  
|Land                                            |  | N/A          |  | $    | 217     |   |      | $ | 325     |  
|Buildings and leasehold improvements            |  | 3-40 years   |  |      | 11,439  |   |      |   | 9,362   |  
|Office equipment and software                   |  | 3-7 years    |  |      | 27,252  |   |      |   | 20,907  |  
|Furniture and fixtures                          |  | 7 years      |  |      | 7,658   |   |      |   | 5,409   |  
|Vehicles                                        |  | 5 years      |  |      | 50      |   |      |   | 104     |  
|                                                |  |              |  |      |         |   |      |   |         |  
|                                                |  |              |  |      | 46,616  |   |      |   | 36,107  |  
|                                                |  |              | 
|Less: Accumulated depreciation and amortization |  |              |  |      | (22,976 | ) |      |   | (18,030 | )
|                                                |  |              |  |      |         |   |      |   |         |  
|                                                |  |              |  | $    | 23,640  |   |      | $ | 18,077  |  
|                                                |  |              |  |      |         |   |      |   |         |  



7. Income Taxes:



The income tax expense (benefit) consists of the following ($ in thousands):



|          |  |                         |        |      |   |        |      |  |   |       |  
|--------- |  | ----------------------- | ------ | ---- | - | ------ | ---- |  | - | ----- | -
|          |  | Year Ended December 31, |       
|          |  | 2004                    |        | 2003 |   |        | 2002 | 
|Current:  |  |                         |        |      |   |        |      |  |   |       |  
|Federal   |  | $                       | 6,896  |      | $ | 10,941 |      |  | $ | 4,660 |  
|State     |  |                         | 1,028  |      |   | 1,934  |      |  |   | 1,063 |  
|Deferred: |  |                         |        |      |   |        |      |  |   |       |  
|Federal   |  |                         | 1,813  |      |   | (1,745 | )    |  |   | (623  | )
|State     |  |                         | 353    |      |   | (237   | )    |  |   | (99   | )
|          |  |                         |        |      |   |        |      |  |   |       |  
|          |  | $                       | 10,090 |      | $ | 10,893 |      |  | $ | 5,001 |  
|          |  |                         |        |      |   |        |      |  |   |       |  



Total current income tax payable was
$1.0 million, which was included in Accounts payable and accrued expenses on the accompanying consolidated balance sheet at December 31, 2004.





49



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Companys deferred tax assets/liabilities as of December 31, 2004 and 2003 are as follows ($ in thousands):



|                                      |  |      |        |   |      |   |        |  
|------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                      |  | 2004 |        |   | 2003 |  
|Deferred tax assets:                  |  |      |        |   |      |   |        |  
|Accounts receivable                   |  | $    | 533    |   |      | $ | 498    |  
|Alternative minimum credit            |  |      |       |   |      |   |       |  
|Reserve for losses                    |  |      | 1,519  |   |      |   | 1,612  |  
|Deferred gain on sales-leaseback      |  |      |       |   |      |   | 169    |  
|Accrued vacation                      |  |      | 680    |   |      |   | 808    |  
|Other                                 |  |      |       |   |      |   | 148    |  
|                                      |  |      |        |   |      |   |        |  
|Total deferred tax assets             |  |      | 2,732  |   |      |   | 3,235  |  
|                                      |  |     
|Deferred tax liabilities:             |  |      |        |   |      |   |        |  
|Title plant and other intangibles     |  |      | (1,724 | ) |      |   | (1,031 | )
|Property and equipment                |  |      | (746   | ) |      |   | (494   | )
|Unearned premium reserves             |  |      | (998   | ) |      |   | (529   | )
|Investments                           |  |      | (321   | ) |      |   | (282   | )
|Other                                 |  |      | (293   | ) |      |   | (60    | )
|                                      |  |      |        |   |      |   |        |  
|Total deferred tax liabilities        |  |      | (4,082 | ) |      |   | (2,396 | )
|                                      |  |      |        |   |      |   |        |  
|Net deferred tax assets/(liabilities) |  | $    | (1,350 | ) |      | $ | 839    |  
|                                      |  |      |        |   |      |   |        |  



The reconciliation of the provision
for income taxes with the expected income taxes based on the statutory federal income tax rate is as follows ($ in thousands):



|                                                          |  |                         |        |      |   |        |  |   |      
|--------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | -----
|                                                          |  | Year Ended December 31,
|                                                          |  | 2004                    |        | 2003 |   | 2002  
|Expected income tax expense at the federal statutory rate |  | $                       | 8,888  |      | $ | 9,607  |  | $ | 4,176
|State income taxes net of federal benefit                 |  |                         | 1,020  |      |   | 999    |  |   | 636  
|Other                                                     |  |                         | 182    |      |   | 287    |  |   | 189  
|                                                          |  |                         |        |      |   |        |  |   |      
|Income tax expense                                        |  | $                       | 10,090 |      | $ | 10,893 |  | $ | 5,001
|                                                          |  |                         |        |      |   |        |  |   |      



8. Summary of Reserve for Title
Insurance and Escrow Losses:



The activity within the reserve for title
insurance and escrow losses is as follows ($ in thousands):



|                               |  |                         |        |   |      |   |        |      |  |   |       |  
|------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                               |  | Year Ended December 31, |       
|                               |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|Beginning balance              |  | $                       | 10,909 |   |      | $ | 6,450  |      |  | $ | 524   |  
|Provision for claim losses     |  |                         | 6,250  |   |      |   | 9,214  |      |  |   | 3,176 |  
|Reserves acquired              |  |                         | 75     |   |      |   | 49     |      |  |   | 3,525 |  
|Claims paid, net of recoveries |  |                         | (2,665 | ) |      |   | (4,804 | )    |  |   | (775  | )
|                               |  |                         |        |   |      |   |        |      |  |   |       |  
|Ending balance                 |  | $                       | 14,569 |   |      | $ | 10,909 |      |  | $ | 6,450 |  
|                               |  |                         |        |   |      |   |        |      |  |   |       |  





50



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CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



9. Long Term Debt:



Long term debt components are general obligations of the Company and consist of the following ($ in thousands):



|                                                                                                                                                                                                                                              |  |                          |        |      |   |       
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------
|                                                                                                                                                                                                                                              |  | Years Ended December 31,
|                                                                                                                                                                                                                                              |  | 2004                     |        | 2003
|Seven year term loan with Comerica Bank, with 4.75% fixed-rate interest, with monthly installments of $0.2 million including principal and
interest, due September 2009, secured by Companys assets.                                         |  | $                        | 7,000  |      | $ | 9,000 
|                                                                                                                                                                                                                                              |  |                         
|Five year term loan with Comerica Bank with 4.75% fixed-rate interest, with monthly installments of $0.2 million including principal and
interest, due May 2009, secured by Companys assets.                                                 |  |                          | 9,483  |      |   |      
|                                                                                                                                                                                                                                              |  |                         
|8.32% term loan with GMAC Commercial Mortgage, with monthly installments of $0.02 million including principal and interest, due August 2009;
secured by a building.                                                                           |  |                          | 2,976  |      |   | 3,011 
|                                                                                                                                                                                                                                              |  |                         
|Unsecured term loan with former principal of Land Title of Nevada, Inc., due May 2007, at the prime rate with a floor of 4.75% and a ceiling
of 6.75%. At December 31, 2004, the interest rate was 5.25%.                                     |  |                          | 1,060  |      |   | 1,509 
|                                                                                                                                                                                                                                              |  |                         
|Unsecured note payable to Redevelopment Authority of the County of Washington, Pennsylvania. Repayment terms include no interest and provide
for forgiveness at a rate of 10% annually over a ten year period, if certain conditions are met. |  |                          | 1,000  |      |   |      
|                                                                                                                                                                                                                                              |  |                         
|Unsecured note payable to Citizens Financial Bank, one year term with fixed-rate interest of 5.50%                                                                                                                                            |  |                          | 500    |      |   |      
|                                                                                                                                                                                                                                              |  |                         
|Capital leases on equipment, secured by equipment.                                                                                                                                                                                            |  |                          | 1,157  |      |   |      
|                                                                                                                                                                                                                                              |  |                          |        |      |   |       
|                                                                                                                                                                                                                                              |  | $                        | 23,176 |      | $ | 13,520
|                                                                                                                                                                                                                                              |  |                          |        |      |   |       



The Company has two $3 million
revolving lines of credit, which bear interest on any outstanding balance at the prime rate. As of December 31, 2004, there were no cash draws against either credit line. There is $791,000 committed against one credit line for standby letters of
credit required pursuant to office leases and a group insurance policy.



The
Companys lines of credit and term loan agreements are secured by substantially all of the Companys assets and contain certain provisions which may restrict the Companys ability to incur additional debt, make acquisitions or dispose
of significant assets, as well as certain covenants related to the Companys financial position and operating results.



The maturities of long-term debt after December 31, 2004 were as follows ($ in thousands):



|           |  |   |       
|---------- |  | - | ------
|2005       |  | $ | 5,540 
|2006       |  |   | 5,040 
|2007       |  |   | 4,750 
|2008       |  |   | 3,204 
|2009       |  |   | 4,142 
|Thereafter |  |   | 500   
|           |  |   |       
|           |  | $ | 23,176
|           |  |   |       



51



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



10. Operating Lease Commitments:



The Company leases office equipment and offices at approximately 130 locations. These lease periods range from one month to 84 months with renewal options of up to ten
years. In addition, the Company has a 50 year ground lease, through December 2047, for its corporate office with annual payments of approximately $115,000, subject to adjustments based on the consumer price index. For the years ended December 31,
2004, 2003 and 2002 rental expense was $17.4 million, $14.3 million and $7.9 million, respectively.



The Companys future minimum lease commitments after December 31, 2004 were as follows ($ in thousands):



|           |  |   |       
|---------- |  | - | ------
|2005       |  | $ | 13,656
|2006       |  |   | 12,165
|2007       |  |   | 9,764 
|2008       |  |   | 5,784 
|2009       |  |   | 2,670 
|Thereafter |  |   | 5,274 
|           |  |   |       
|           |  | $ | 49,313
|           |  |   |       



11. Commitments and Contingencies:



In the ordinary course of business, the Companys title insurance
subsidiaries are subject to claims and are named as defendants in litigation relating to policies of insurance or other related services performed on behalf of insured policyholders and other customers. While the results of insurance claims and
litigation cannot be predicted with certainty, management believes, based on the advice of legal counsel, that the final outcome of such lawsuits and claims will not have a material adverse effect on the Companys financial position, results of
operations, or liquidity.



United Title has been named in a lawsuit brought by
individuals purporting to act in a representative capacity for consumers doing business with lenders and title companies in the State of California which seeks restitution of alleged violations of law in connection with title and escrow practices.
Additionally, the California State Controller is conducting an audit of United Title including, among other things, its practices related to unclaimed property. In conjunction with the acquisition of Nations Holding Group in September, 2002 the
Company has access to a funded indemnification account which we believe is sufficient to cover any potential exposure on these matters. Accordingly, management does not believe this potential exposure would have a material affect to our financial
position, results of operations or cash flows. The results of legal proceedings cannot be predicted with certainty, but United Title intends to vigorously defend the lawsuit and any adverse findings of the State Controller.



52



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Our title insurance underwriter, United Capital, is subject to regulations that limit its ability to pay dividends or make loans or advances to its parent, principally for the protection of policyholders. Generally,
the total amount of dividends and distributions is limited to the greater of 10% of United Capitals surplus, which amount was $16.8 million as of December 31, 2004, or 100% of net income for the previous calendar year which amount was $3.4
million for the year ended December 31, 2004. Under these restrictions, United Capital could pay, to its parent, dividends of $3.4 million during 2005 without prior regulatory approval. Of our $10.8 million in cash and cash equivalents at December
31, 2004, $1.7 million relates to United Capital and would be subject to the aforementioned restrictions. Of our $32.5 million investment portfolio, consisting of short term investments, fixed maturity bonds and equity securities, $30.8 million
related to United Capital and would be subject to the aforementioned restrictions.



12. Supplemental Cash Flow Information:



The following
supplemental cash flow information is provided with respect to interest and tax payments, as well as certain non-cash investing and financing activities($ in thousands):



|                                                                   |  |                         |       |      |   |        |  |   |       
|------------------------------------------------------------------ |  | ----------------------- | ----- | ---- | - | ------ |  | - | ------
|                                                                   |  | Year Ended December 31,
|                                                                   |  | 2004                    |       | 2003 |   | 2002  
|Cash paid during the year:                                         |  |                         |       |      |   |        |  |   |       
|Interest                                                           |  | $                       | 1,154 |      | $ | 814    |  | $ | 418   
|Income taxes                                                       |  |                         | 6,015 |      |   | 15,790 |  |   | 3,080 
|Non-cash investing and financing activities:                       |  |                         |       |      |   |        |  |   |       
|Issuance of preferred stock to acquire Nations                     |  |                         |      |      |   |       |  |   | 17,516
|Issuance of warrants for common stock to acquire Nations           |  |                         |      |      |   |       |  |   | 213   
|Issuance of common stock in connection with acquisition of Nations |  |                         |      |      |   |       |  |   | 197   
|Cash dividend to common stockholders declared                      |  |                         | 430   |      |   | 366    |  |   |      



Our Board of Directors declared a cash
dividend during the fourth quarter 2004 of $0.02 per share to stockholders of record as of December 27, 2004, and we paid this dividend totaling $0.4 million on January 10, 2005.



14. Employee Benefit Plans:



Profit Sharing Plan:



The Company maintains a profit sharing plan under Section 401(k) of the Internal Revenue Code.



Substantially all of the Companys employees may elect to defer up to 15% of their salary. Under this plan, the Company contributes
$0.33 for every $1.00 the employee contributes, up to a maximum of $1,000. Vesting of matching contributions is based on certain service requirements. Employees are fully vested after three years of service.



The Companys matching contributions were approximately $0.8 million, $0.5 million and
$0.2 million for the years ended December 31, 2004, 2003 and 2002, respectively.



Cafeteria Plan:



The Company maintains
an Internal Revenue Code Section 125 Cafeteria Plan as a benefit to its employees. The plan provides for employee and dependent coverage to be paid from before tax compensation. As such, there is no effect on the consolidated financial statements.



53



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



15. Stock Option Plans:



The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for StockIssued to Employees (APB 25) and related Interpretations in accounting for its 1996 Stock
Option Plan and the Companys Non-Employee Directors Stock Option Plan. Under APB 25, because the exercise price of the Companys stock options equals the market price of the underlying stock on the date of grant, no compensation expense
is recognized in the Companys consolidated financial statements.



The
Companys 1996 Stock Option Plan (The Plan) has authorized the grant of common stock options to all the Companys employees. Currently, 5,650,000 shares of Common Stock are authorized for issuance pursuant to the Plan. As of
December 31, 2004, 3,674,526 options are outstanding under the Plan. All options granted have 5-year terms. Fifty percent of each option grant can be exercised after two years from the date granted; the remaining options can be exercised after three
years provided the optionee remains employed with the Company at such vesting date. Options granted under the Plan are not transferable and the per share exercise price of an incentive stock option granted under the Plan may not be less than the
fair market value of the common stock on the date of grant.



The Companys
Non-Employee Directors Stock Option Plan (Directors Plan) has authorized the grant of options to non-employee members of the Board of Directors and advisory boards. Currently, 750,000 shares of Common Stock are authorized for issuance
pursuant to the Directors Plan. As of December 31, 2004, 290,000 options are outstanding under the Directors Plan. All options granted have 5-year terms. Fifty percent of each option grant can be exercised after two years from the date granted; the
remaining shares can be exercised after three years provided the optionee remains an eligible director at such vesting date. Upon election to the Board of Directors each board member is granted the option to purchase 15,000 shares of common stock.
In addition to the foregoing option grants, each year every non-employee director automatically receives an option to acquire 10,000 shares of the Companys common stock on the third business day following the date the Company publicly
announces its annual financial results, provided that such director has attended at least 75% of the meetings of the Board of Directors and the Board Committees of which such non-employee director is a member in the preceding fiscal year.



A summary of the Companys stock option activity pursuant to its stock
option plans, and related information for the years ended December 31 is as follows:



|                                                               |  |         |           |      |                      |      |         |  |   |                      |   |         |   |      |                      |   |           |   |  |   |     
|-------------------------------------------------------------- |  | ------- | --------- | ---- | -------------------- | ---- | ------- |  | - | -------------------- | - | ------- | - | ---- | -------------------- | - | --------- | - |  | - | ----
|                                                               |  | 2004    |           | 2003 |                      | 2002
|                                                               |  | Options |           |      | WeightedAveragePrice |      | Options |  |   | WeightedAveragePrice |   | Options |   |      | WeightedAveragePrice
|Outstanding - Beginning of year                                |  |         | 3,720,125 |      |                      | $    | 2.42    |  |   | 3,783,000            |   |         | $ | 2.09 |                      |   | 3,418,000 |   |  | $ | 1.82
|Granted                                                        |  |         | 1,068,600 |      |                      |      | 4.43    |  |   | 844,650              |   |         |   | 3.46 |                      |   | 1,664,300 |   |  |   | 2.20
|Exercised                                                      |  |         | (345,849  | )    |                      |      | 2.15    |  |   | (391,825             | ) |         |   | 1.64 |                      |   | (737,750  | ) |  |   | 1.20
|Forfeited                                                      |  |         | (478,350  | )    |                      |      | 3.19    |  |   | (515,700             | ) |         |   | 2.30 |                      |   | (561,550  | ) |  |   | 1.92
|                                                               |  |         |           |      |                      |      |         |  |   |                      |   |         |   |      |                      |   |           |   |  |   |     
|Outstanding - End of year                                      |  |         | 3,964,526 |      |                      |      | 2.85    |  |   | 3,720,125            |   |         |   | 2.42 |                      |   | 3,783,000 |   |  |   | 2.09
|                                                               |  |         |           |      |                      |      |         |  |   |                      |   |         |   |      |                      |   |           |   |  |   |     
|Exercisable at end of year                                     |  |         | 2,017,576 |      |                      |      | 2.16    |  |   | 1,023,825            |   |         |   | 2.02 |                      |   | 530,575   |   |  |   | 1.83
|                                                               |  |         |           |      |                      |      |         |  |   |                      |   |         |   |      |                      |   |           |   |  |   |     
|Weighted average fair value of options granted during the year |  | $       | 1.44      |      |                      |      |         |  | $ | 1.59                 |   |         |   |      |                      | $ | 1.25      |   |  |   |     
|                                                               |  |         |           |      |                      |      |         |  |   |                      |   |         |   |      |                      |   |           |   |  |   |     





54



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



Stock options outstanding at December 31, 2004 were as follows:



|                        |  |                     |  |                                           |  |                               |      |         |           |                               |   |     
|----------------------- |  | ------------------- |  | ----------------------------------------- |  | ----------------------------- | ---- | ------- | --------- | ----------------------------- | - | ----
|                        |  | Options Outstanding |  | Options Exercisable                      
|Range of Exercise price |  | Options             |  | Weighted AverageRemainingContractual life |  | WeightedAverageExercise Price |      | Options |           | WeightedAverageExercise Price
|$1.00-$2.00             |  | 610,492             |  | 1.5 years                                 |  | $                             | 1.51 |         | 488,667   |                               | $ | 1.38
|$2.03-$3.00             |  | 2,057,684           |  | 2.1 years                                 |  |                               | 2.38 |         | 1,478,784 |                               |   | 2.36
|$3.05-$5.25             |  | 1,296,350           |  | 4.1 years                                 |  |                               | 4.23 |         | 50,125    |                               |   | 3.88
|                        |  |                     |  |                                           |  |                               |      |         |           |                               |   |     
|                        |  | 3,964,526           |  | 2.7 years                                 |  | $                             | 2.85 |         | 2,017,576 |                               | $ | 2.16
|                        |  |                     |  |                                           |  |                               |      |         |           |                               |   |     



16. Allowance for Uncollectible
Accounts Receivable:



Changes in the allowance for uncollectible accounts
receivable for the years ended December 31, 2004, 2003 and 2002 are as follows ($ in thousands):



|                                   |  |   |        |  
|---------------------------------- |  | - | ------ | -
|Balance as of December 31, 2001    |  | $ | 193    |  
|Provision charged to operations    |  |   | 64     |  
|Balance resulting from acquisition |  |   | 514    |  
|                                   |  |   |        |  
|Write-offs, net of recoveries      |  |   | (285   | )
|Balance as of December 31, 2002    |  |   | 486    |  
|Provision charged to operations    |  |   | 1,679  |  
|Write-offs, net of recoveries      |  |   | (1,395 | )
|                                   |  |   |        |  
|Balance as of December 31, 2003    |  |   | 770    |  
|Provision charged to operations    |  |   | 304    |  
|Balance resulting from acquisition |  |   | 192    |  
|Write-offs, net of recoveries      |  |   | (281   | )
|                                   |  |   |        |  
|Balance as of December 31, 2004    |  | $ | 985    |  
|                                   |  |   |        |  



17. Segment Information:



The Companys two reportable segments are Title and Escrow Services
and Lender Services. Reportable segments are determined based on the organizational structure, types of products and services and market differentiation. The acquisition of Nationwide precipitated the establishment of the Lender Services segment
based upon these factors. Because the operations included in the Lender Services segment were acquired in 2004, there is no comparison of segment results to the prior year presented, as all of the operations in 2003 related to Title and Escrow
services.



As a result, segment information is from May 1, 2004, the
acquisition date of Nationwide. Summarized financial information concerning the Companys reportable segments is presented as follows for the year ended December 31, 2004 ($ in thousands):



|                              |  |                          |         |                 |   |        |  |   |        
|----------------------------- |  | ------------------------ | ------- | --------------- | - | ------ |  | - | -------
|                              |  | Title and EscrowServices |         | Lender Services |   | Total 
|Revenue                       |  | $                        | 252,604 |                 | $ | 38,272 |  | $ | 290,876
|Depreciation and amortization |  |                          | 5,194   |                 |   | 1,002  |  |   | 6,196  
|Interest expense              |  |                          | 1,110   |                 |   | 45     |  |   | 1,155  
|Pre-tax earnings              |  |                          | 23,658  |                 |   | 2,020  |  |   | 25,678 
|Income tax expense            |  |                          | 9,304   |                 |   | 786    |  |   | 10,090 
|Capital expenditures          |  |                          | 7,350   |                 |   | 3,490  |  |   | 10,840 
|Assets                        |  |                          | 101,633 |                 |   | 44,450 |  |   | 146,083
|Goodwill                      |  |                          | 20,121  |                 |   | 25,937 |  |   | 46,058 
|Other intangibles             |  |                          | 123     |                 |   | 1,023  |  |   | 1,146  



55



---

CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



The activities of the reportable segments include:



Title and Escrow Services



This segment consists of wholly-owned title insurance agencies, a title insurance underwriter and parent holding company operations, including issuance and repayment of
corporate debt obligations. This segment generates its revenue principally from issuing title insurance policies and providing escrow services for residential and commercial real estate transactions, services which are typically marketed to real
estate agents, community banks and regional lenders in selected local markets.



Lender Services



This segment encompasses the Companys
bundled services strategy which currently includes real estate appraisal and valuation services, title insurance and escrow related services and flood zone determination services which are marketed to regional and national lenders and mortgage
brokers. Unlike the Companys traditional title and escrow services division, this segment typically conducts its business on a national scope from centralized processing centers. This segment generates its revenue principally from providing
appraisal and valuation services, issuing title insurance policies, providing escrow services and flood zone determination services primarily for lenders involved in residential real estate transactions.



18. Selected Quarterly Financial Data:



The following table sets forth unaudited selected quarterly financial data for each quarter
of the years ended December 31, 2004 and 2003 ($ in thousands, except per share data):



|                                                         |  |          |        |         |   |              |  |             |        |       |   |        |  |   |        
|-------------------------------------------------------- |  | -------- | ------ | ------- | - | ------------ |  | ----------- | ------ | ----- | - | ------ |  | - | -------
|                                                         |  | March 31 |        | June 30 |   | September 30 |  | December 31 |        | Total
|2004                                                     |  |          |        |         |   |              |  |             |        |       |   |        |  |   |        
|Total revenue                                            |  | $        | 51,547 |         | $ | 79,538       |  | $           | 79,070 |       | $ | 80,721 |  | $ | 290,876
|Net income                                               |  |          | 597    |         |   | 5,506        |  |             | 5,685  |       |   | 3,800  |  |   | 15,588 
|Earnings attributable to common shares                   |  |          | 248    |         |   | 5,156        |  |             | 5,332  |       |   | 3,447  |  |   | 14,183 
|Earnings attributable to common shares per common share: |  |          |        |         |   |              |  |             |        |       |   |        |  |   |        
|Diluted                                                  |  |          | 0.01   |         |   | 0.23         |  |             | 0.23   |       |   | 0.15   |  |   | 0.64   
|                                                         |  |          |        |         |  
|2003                                                     |  |          |        |         |   |              |  |             |        |       |   |        |  |   |        
|Total revenue                                            |  | $        | 56,522 |         | $ | 68,302       |  | $           | 73,451 |       | $ | 51,970 |  | $ | 250,245
|Net income                                               |  |          | 3,368  |         |   | 5,878        |  |             | 5,760  |       |   | 1,554  |  |   | 16,560 
|Earnings attributable to common shares                   |  |          | 3,022  |         |   | 5,529        |  |             | 5,407  |       |   | 1,201  |  |   | 15,159 
|Earnings attributable to common shares per common share: |  |          |        |         |   |              |  |             |        |       |   |        |  |   |        
|Diluted                                                  |  |          | 0.16   |         |   | 0.28         |  |             | 0.27   |       |   | 0.06   |  |   | 0.77   



56



---

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure



Not Applicable.



Item 9A. Controls and Procedures.



We have evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were effective as of the end of the period covered by this report.



There has been no change in our internal control over financial reporting that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



It should be noted that any system of controls, however well designed and operated, can provide only reasonable, not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.



Part III



Item 10. Directors, Executive Officers of the Registrant



The information required by this Item is incorporated by reference to our Proxy Statement for our 2005 Annual Meeting of Stockholders.



Item 11. Executive Compensation



The information required by this Item is incorporated by reference to our
Proxy Statement for our 2005 Annual Meeting of Stockholders.



Item 12.
Security Ownership of Certain Beneficial Owners and Management



The information required by this Item is incorporated by reference to our Proxy Statement for our 2005 Annual Meeting of Stockholders.



Item 13. Certain Relationships and Related Transactions



The information required by this Item is incorporated by reference to our Proxy Statement for our 2005 Annual Meeting of Stockholders.



Item 14. Principal Accountant Fees and Services



The information required by this Item is incorporated by reference to our
Proxy Statement for our 2005 Annual Meeting of Stockholders.



57



---

Part IV



Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K



(a) 1. & 2. Financial Statements and Financial Statement Schedules



The Financial Statements filed as part of this report are listed in Item 8 of Part II of this report.



3. Index to Exhibits



|            |  |                                                                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                 
|2           |  | Share Exchange Agreement between Capital Title Agency, Inc. and Norvex, Inc., dated May 23, 1996. (1)                                                                                       
|            | 
|2.1         |  | Agreement and Plan of Merger, among Capital Title Group, Inc., CTG Acquisition Corporation and Nationwide Appraisal Services Corporation, dated January 26, 2004. (8)                       
|            | 
|3.1         |  | Certificate of Incorporation, as amended to date. (8)                                                                                                                                       
|            | 
|3.2         |  | Amended and Restated By-Laws. (1)                                                                                                                                                           
|            | 
|3.3         |  | Certificate of Designations, Preferences and Privileges of the Series A Cumulative Preferred Stock. (8)                                                                                     
|            | 
|10.1        |  | Underwriting Agreement between Capital Title Agency Inc. and Old Republic National Title Insurance Company dated March 1, 1996. (1)                                                         
|            | 
|10.2        |  | Underwriting Agreement between Capital Title Agency Inc. and First America Title Insurance Company dated August 16, 1996. (1)                                                               
|            | 
|10.5        |  | Title Plant Agreement between Registrant and Security Union Title Insurance Company dated April 29, 1998. (2) (originally filed as Exhibit 10.18)                                           
|            | 
|10.6        |  | Purchase and Sale Agreement between Registrant and KDC-AZ, LLC dated July 1, 1998. (2) (originally filed as Exhibit 10.21)                                                                  
|            | 
|10.7        |  | Merger Agreement among Registrant, Northwestern Consolidated Corporation and related subsidiaries dated September 1, 1998. (3) (originally filed as Exhibit 10)                             
|            | 
|10.8        |  | Credit Agreement between Registrant and Imperial Bank dated February 1, 1999. (2) (originally filed as Exhibit 10.23)                                                                       
|            | 
|10.9        |  | Access Agreement By and Between Security Union Title Insurance Company and New Century Title Company dated September 30, 1999. (4) (originally filed as Exhibit 10.24)                      
|            | 
|10.10       |  | Title Plant Lease and Service Agreement by and between Security Union Title Insurance Company and Capital Title Agency Inc. dated May 19, 1999.(4) (originally filed as Exhibit
10.25)      
|            | 
|10.11       |  | Promissory Note between CTG Building Co. and GMAC Commercial Mortgage Corporation dated July 30, 1999. (4) (originally filed as Exhibit 10.26)                                              
|            | 
|10.12       |  | Amended Underwriting Agreement by and between Stewart Title Guaranty Company and New Century. (4) (originally filed as Exhibit 10.27)                                                       
|            | 
|10.13       |  | Asset Purchase and Sale Agreement by and among BridgeSpan, Inc. and the Registrant. (5) (originally filed as Exhibit 10)                                                                    
|            | 
|10.14       |  | Agreement and Plan of Merger dated June 11, 2002, among the Registrant, Nations Holding Group, and Capital One Merger Corporation, as amended. (6) (originally filed as Exhibit 2.1 and
2.2)
|            | 
|10.15       |  | Variable Rate Installment Note and Business Loan Agreement between Comerica Bank  California and Subsidiaries. (6) (originally filed as Exhibit 2.3)                                       
|            | 
|10.16       |  | Capital Title Group, Inc. 1996 Stock Option Plan (7)                                                                                                                                        
|            | 
|10.17       |  | Capital Title Group, Inc. Non-Employee Directors Stock Option Plan (7)                                                                                                                      
|            | 
|10.18       |  | Fixed Rate Single Payment Note Addendum A to Note and First Modification to Business Loan Agreement between Registrant and Comerica Bank. (9)                                            
|            | 
|10.19       |  | Employment Agreement by and between Capital Title Group, Inc. and Donald R. Head, as amended, dated December 13, 2002. (*)                                                                  
|            | 
|10.20       |  | Employment Agreement by and between Capital Title Group, Inc. and Mark C. Walker, as amended, dated May 27, 2004. (*)                                                                       
|            | 
|10.21       |  | Acquisition Consulting Agreement by and between Capital Title Group, Inc., and Miller Capital Corporation, dated January 28, 2004. (*)                                                      
|            | 
|14.1        |  | Statement of Business Practices, effective as of December 31, 2003 (containing our code of ethics) (8)                                                                                      
|            | 
|21          |  | List of Subsidiaries. (*)                                                                                                                                                                   
|            | 
|23.1        |  | Consent of Independent Registered Public Accounting Firm. (*)                                                                                                                               



58



---

|            |  |                                                                                                                                                               
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                   
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. (*)
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. (*)
|            | 
|32.1        |  | Certification pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (*)                                      
|            | 
|32.2        |  | Certification pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (*)                                      

---

|(*) | Filed herewith.
|--- | ---------------

|(1) | Incorporated by reference to the Registrants Form 10-SB filed with the Securities and Exchange Commission on September 24, 1996.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the Registrants Form 10-KSB for the year ended December 31, 1998, filed with the Securities and Exchange Commission on March 23, 1999.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the Registrants Form 8-K filed with the Securities and Exchange Commission on December 10, 1998.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to the Registrants Form 10-KSB for the year ended December 31, 1999, filed with the Securities and Exchange Commission on March 28, 2000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to the Registrants Form 8-K filed with the Securities and Exchange Commission on April 12, 2002.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to the Registrants Form 8-K filed with the Securities and Exchange Commission on September 23, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to the Registrants Registration Statement on Form S-8 (Reg. No. 333112982) as filed with the Securities and Exchange Commission on February 20, 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to the Registrants Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 5, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to the Registrants Form 8-K filed with the Securities and Exchange Commission on April 30, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K



|During | the year ended December 31, 2004, the Company filed the following reports on Form 8-K:
|------ | --------------------------------------------------------------------------------------



Current Report of Form 8-K dated February 17, 2004  Pursuant to Items 12 and 7, the Company reported that it had issued a news release
concerning the Companys financial results for its fourth quarter ended December 31, 2004. A copy of the news release was furnished as an Exhibit to that Current Report on Form 8-K and was incorporated therein by reference.



Current Report of Form 8-K dated April 29, 2004  Pursuant to Item 5, the Company
reported that it had issued a news release concerning the companys completion of $10.1 million private placement of its common stock and warrants to purchase its common stock. A copy of the news release was furnished as an Exhibit to that
current Report on Form 8-K and was incorporated therein by reference.



Current
Report of Form 8-K dated April 30, 2004 - Pursuant to Items 12 and 7, the Company reported that it had issued a news release concerning the Companys financial results for its first quarter ended March 31, 2004. A copy of the news release was
furnished as an Exhibit to that Current Report on Form 8-K and was incorporated therein by reference.



Current Report of Form 8-K dated April 30, 2004  Pursuant to Items 2, 5 and 7, the Company reported it had completed its acquisition of Nationwide Appraisal Services Corporation and filed all required pro forma
financial statements as part of the Form 8-K.



Current Report of Form 8-K dated
July 1, 2004  Pursuant to Items 5 and 7, the Company reported that it had issued a news release announcing its acquisition of Determination Processing Services, Inc. A copy of the news release was furnished as an Exhibit to that Current Report
on Form 8-K and was incorporated therein by reference.



59



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Current Report of Form 8-K dated July 27, 2004  Pursuant to Items 12 and 7, the Company reported that it had issued
a news release concerning the Companys financial results for its second quarter ended June 30, 2004. A copy of the news release was furnished as an Exhibit to that Current Report on Form 8-K and was incorporated therein by reference.



Current Report of Form 8-K dated August 24, 2004  Pursuant to Item 8.01,
the Company reported that it had issued a news release announcing the Board of Directors declaration to pay a cash dividend on common shares. A copy of the news release was furnished as an Exhibit to that Current Report on Form 8-K and was
incorporated therein by reference.



60



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SIGNATURES



In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.



CAPITAL TITLE GROUP, INC.By

/s/ Donald R. HeadDonald R. HeadChief Executive Officer




Date: March 11, 2005



In accordance with the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                           |  |                                                                  |  |               
|------------------------------------------ |  | ---------------------------------------------------------------- |  | --------------
|/s/ Donald R. HeadDonald R. Head           |  | Chairman of the Board, President and Chief Executive Officer     |  | March 11, 2005
|                                           |  |                                                                 
|/s/ Mark C. WalkerMark C. Walker           |  | Vice President, Chief Financial Officer, Secretary and Treasurer |  | March 11, 2005
|                                           |  |                                                                 
|/s/ David C. DewarDavid C. Dewar           |  | Director                                                         |  | March 11, 2005
|                                           |  |                                                                 
|/s/ Terry S. JacobsTerry S. Jacobs         |  | Director                                                         |  | March 11, 2005
|                                           |  |                                                                 
|/s/ Theo F. LambTheo F. Lamb               |  | Director                                                         |  | March 11, 2005
|                                           |  |                                                                 
|/s/ Robert B. LiverantRobert B. Liverant   |  | Director                                                         |  | March 11, 2005
|                                           |  |                                                                 
|/s/ Stephen A McConnellStephen A McConnell |  | Director                                                         |  | March 11, 2005
|                                           |  |                                                                 
|/s/ Ben T. MorrisBen T. Morris             |  | Director                                                         |  | March 11, 2005



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