During 2001, the Company adopted the Odyssey Re Holdings Corp. Stock Option Plan (the “Option Plan”), which provides for the grant of stock options to directors and key employees of the Company. Under the Option Plan, such options will generally vest and become exercisable in two equal installments on the fifth and tenth anniversary of the date of grant. As of December 31, 2004 and 2003, respectively, 97,685 and 52,654 options wer issued with an exercise price of zero. For the year ended December 31, 2004, 48,472 options were granted, 741 options wer e exercised and 2,700 options were forfeited, pursuant to the Option Plan. The Company has reflected, in other expense, net, $0.5 million, $0.2 million and $0.4 million of expense for the years ended December 31, 2004, 2003 and 2002 respectively which represents the vested portion of the stock options. The Company provides a compensatory employee stock purchase plan through which all employees who meet the eligibility requirements of the plan have the option to purchase OdysseyRe common stock in an amount up to 10% of their annual base salary. The Company purchases, on the employee’ behalf, OdysseyRe common stock equal to 30% of each employee’s contribution. In the event that the Company meets certain financial objectives, additional shares are purchased for the employee’s benefit. The expense related to this plan for the years ended December 31, 2004, 2003 and 2002 was $0.5 million, $0.3 million and $0.2 million, respectively. During 2001, the Company adopted the Odyssey Re Holdings Corp. Restricted Share Plan (the “Restricted Share Plan”), which provides for the grant of restricted shares to directors and key employees of the Company. Shares granted under the Restricted Shar Plan generally vest in two equal installments on the fifth and tenth anniversary of the date of grant. As of December 31, 2004 and 2003, respectively, 506,866 and 439,474 shares of r estricted stock were outstanding. During the year ended December 31, 2004, 184,005 restricted shares were granted, 72,272 restricted shares vested and 44,341 restricted shares were forfeited, pursuant to the Restricted Shar Plan. At the time of grant, the market value of the shares awarded is recorded as unearned compensation and is presented as a separate component of stockholders’ equity. The unearned compensation is charged to operations over the vesting period. In respect to the above grants, the compensation expense incurred for each of the years ended December 31, 2004, 2003 and 2002 was $1.8 million, $1.1 million and $1.1 million, respectively, and is included in other expense, net. Certain employees of the Company have been granted shares of r estricted Fairfax common stock under the Fairfax Financial Holdings Ltd. Restricted Share Plan. The Fairfax restricted stock, which was granted from 1996 to 2000, vests over a three to ten year period. The Company has reflected $0.4 million, $0.3 million and $0.3 million of expense for the years ended December 31, 2004, 2003 and 2002, respectively, which represents the vested portion of the restricted stock. The Company no longer participates in this plan. Pre-tax income, before cumulative effects of a change in accounting principle, from domestic companies, was $150.1 million, $286.1 million and $252.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. Pre-tax income from foreign operations was $128.7 million, $92.2 million and $5.2 million for the years ended December 31, 2004, 2003 and 2002, respectively. 11. FEDERAL AND FOREIGN INCOME TAXES During 2002 and through March 3, 2003, the Company and its United States subsidiaries filed a separate consolidated tax return. On March 4, 2003, Fairfax increased its ownership interest in the Company to approximately 81%. As a result, the Company and its United States subsidiaries ar included in the United States tax group of Fairfax Inc. Inclusion of the Company into Fairfax Inc.’s tax group did not have an effect on the Company’ tax position. The federal income tax provision is allocated to each of the companies in the consolidated group pursuant to a written agr eement, on the basis of each company’s separate return taxable income. As of December 31, 2001, the Company had a net operating loss carry forward of $186.3 million, which was fully utilized during 2002. ODYSSEY RE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 73