NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND NATURE OF OPERATIONS Radian Group Inc. (the “Company”), provides through its subsidiaries and affiliates, insurance and mortgage services to financial institutions in the United States and globally. The principal business segments of the Company are mortgage insurance, financial guaranty and mortgage services.  Private mortgage insurance and risk management services are provided to mortgage lending institutions located throughout the United States through the Company’s wholly-owned principal operating subsidiaries, Radian Guaranty Inc. (“Radian Guaranty”) and Amerin Guaranty Corporation (“Amerin Guaranty”) (together referred to as “Mortgage Insurance”). Private mortgage insurance generally protects lenders from default-related losses on residential first mortgage loans made to home buyers who make down payments of less than 20% of the purchase price and facilitates the sale of these mortgages in the secondary market. Mortgage Insurance currently offers two principal types of private mortgage insurance coverage, primary and pool. At December 31, 2001, primary insurance comprised 94.3% of Mortgage Insurance’s risk in force and pool insurance comprised 5.7% of Mortgage Insurance’s risk in force. During the third quarter of 2000,  the Company commenced operations in Radian Insurance Inc., a subsidiary that writes credit insurance on non-traditional mortgage related assets such as second mortgages and manufactured housing, and provides credit enhancement to mortgage related capital market transactions. Mortgage Insurance recently began offering an alternative to title insurance providing lien protection mortgage insurance on refinanced second mortgages and home equity loans. On February 28, 2001, the Company acquired the financial guaranty and other businesses of Enhance Financial Services Group Inc. (“Financial Guaranty”), a New York based insurance holding company that primarily insures and reinsures credit-based risks at a purchase price of approximately $581.5 million. The financial guaranty insurance business >20 is conducted through two insurance subsidiaries, Radian Reinsurance Inc. (“Radian Re,” formerly Enhance Reinsurance Company) and Radian Asset Assurance Inc. (“Radian Asset Assurance,” formerly Asset Guaranty Company). In addition,  Financial Guaranty has a partial interest in two active credit- based asset businesses. Several smaller businesses are either in run-off or have been terminated. The purchase price represented the value of the Company’s common stock and stock options issued in connection with the acquisition and other consideration in accordance with an Agreement and Plan of Merger, dated November 13, 2000, by and among the Company, a wholly-owned subsidiary of the Company and Financial Guaranty. The acquisition, which was structured as a merger of a wholly-owned subsidiary of the Company with and into Financial Guaranty, entitled Financial Guaranty stockholders to receive 0.22 shares of the Company’s common stock in a tax-free exchange for each share of Financial Guaranty’s common stock that they owned at the time of the merger. The acquisition was treated as a purchase for accounting purposes, and accordingly, the assets and liabilities were recorded based on their fair values at the date of acquisition. The fair value of assets acquired was $1,357.9 million. The fair value of liabilities assumed at acquisition was $833.1 million. The excess of purchase price over fair value of net assets acquired of $56.7 million represents the future value of insurance profits, which is being amortized over a period that approximates the future life of the insurance book of business. The results of Financial Guaranty’s operations have been included in the Company’s financial statements for the period from the date  of the acquisition through December 31, 2001. The purchase price of Financial Guaranty reflects the issuance of 8,462,861 shares (pre-stock split) of the Company’s common stock at $65.813 per share (pre-stock split) which represented the average closing price of the Company’s common stock for the three days preceding and following the announcement of the acquisition, and the issuance of 1,320,079 options (pre-stock split) to purchase shares of the Company’s common  stock to holders of options to purchase shares of Financial  Guaranty’s common stock. The value of the option grant was based on a Black-Scholes valuation model assuming an average  life of 2.8 years, a risk-free interest rate of 4.75%, volatility of 43.4% and a dividend yield of 0.22%. The following unaudited pro forma information presents a summary of the consolidated operating results of the Company for the year-to-date periods indicated, as if the acquisition of Financial Guaranty had occurred on January 1, 1999 (in thousands, except per-share information): The unaudited pro forma financial information is not necessarily indicative of the combined results that would have occurred had the acquisition occurred on that date, nor is it indicative of the results that may occur in the future. On November 9, 2000, the Company completed the acquisition of RadianExpress.com, Inc. (“RadianExpress,” formerly Expressclose.com, Inc.), an Internet-based settlement company that provides real estate information products and services to the first and second mortgage industry, for approximately $8.0 million consisting of cash, the Company’s common stock and stock options and other consideration. The acquisition was treated as a purchase for accounting purposes, and accordingly, the assets and liabilities were recorded  based on their fair values at the date of acquisition. The excess of purchase price over fair value of net assets acquired of $7.4 million was allocated to goodwill. During 2000 and 2001,  a portion of this amount was amortized into earnings. With  the issuance of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,”  December 31  2001 2000 1999 Total revenues $951,206 $801,665 $768,964 Net income 265,147 239,529 216,762 Net income per share-basic $ 2.89 $ 3.14 $ 2.89 Net income per share-diluted $ 2.85 $ 3.10 $ 2.82