MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANC IAL CONDITION Financial Results Private Client Group  ($ millions, except as noted) 2001 Compared with 2000 42 BMO FINANCIAL GROUP ANNUAL REPORT 2002 Net income declined $25 million to $96 million, but increased $14 million excluding non-recurring items. As indicated on the previous page, Private Client Group completed three acquisitions in fiscal 2002 as we expanded our U.S. wealth management operations into selective new markets. This expansion followed the 2001 acquisition of Guardian Group of Funds, which added to our product lines and provided expanded access to mutual fund distribution in Canada. Note 10 on page 78 of the financial statements provides acquisition details. Comparisons of revenue, expense and net income for fiscal 2002 relative to 2001 are  significantly affected by the inclusion of the operating results  of these businesses. In addition, results for 2002 include  $62 million ($39 million after tax) of acquisition-related costs that are categorized as non-recurring for reporting purposes. These costs substantially relate to re-branding, vacating leased premises, contract termination expenses and other costs of integrating operations. To facilitate comparisons, the remainder of this section analyzes results excluding these costs. On this basis, as indicated above, Private Client Group net income increased $14 million or 12% to $135 million. After further adjusting results of 2002 to remove the additive effect of busi- nesses acquired in 2001 and 2002, net income on a comparable basis rose $21 million. Improved earnings were attributable to increased revenues from our expanded sales force and acquired businesses, focused cost management balanced against continued investment in strategic initiatives, and the discontinuance of goodwill amortiza- tion due to a change in generally accepted accounting principles.  Revenues increased $191 million or 13%, driven by acquired businesses and the benefits of strategic initiatives. Excluding acquisitions, revenues on a comparable basis were down $8 mil - lion from 2001. This reduction was modest and was achieved despite weaker equity markets and lower client trading volumes that primarily affected our full-service and direct investing busi- nesses. Our success in sustaining revenues was attributable to our expanded sales force, more effective cross-business refer- rals, award-winning investment tools and our strengthened fee-based business. Non-interest expenses increased $197 million or 15% due  to acquisitions. Excluding acquired businesses, non-interest expenses on a comparable basis were reduced $10 million  from 2001 due to the success of cost management initiatives. The reduction is reflective of the group’s efforts to refine its businesses to achieve profitability in all market conditions. Net income of $121 million in 2001 declined $74 million or 38% due to weaker market conditions in both Canada and the United States that resulted in lower trading volumes and related equity valuations. These conditions most affected our full-service and direct investing businesses as revenues declined $66 million  or 4%, despite increased revenues from acquired businesses. Expenses rose $63 million or 5%, driven by incremental expenses from acquired businesses and increased investment spending, partially offset by lower performance-based compensation. The acquisition of Guardian Group of Funds in the third quarter of 2001 added $2 billion of assets under management in Canada. R eported (As at or for the year ended October 31) 2002 2001 2000 Net interest income (teb) 565 540 513 Non-interest revenue 1,132 966 1,059 Total revenues (teb) 1,697 1,506 1,572 Provision for credit losses 1 2 1 Non-interest expense 1,534 1,275 1,212 I ncome before provision for income taxes,  non-controlling interest in subsidiaries  and goodwill amortization 162 229 359 I ncome taxes (teb) 66 98 156 Amortization of goodwill, net of  applicable income taxes — 10 8 Ne t income 96 121 195 Net economic profit (7) 59 142 Cash return on equity (%) 10.0 17.7 35.8 Average net interest margin (%) 10.26 10.12 11.95 Non-interest expense-to-revenue ratio (%) 90.4 84.7 77.1 Average common equity 1,322 821 572 A verage assets 5,509 5,340 4,289 Total risk-weighted assets 5,184 4,420 4,855 Average current loans  3,060 3,477 2,938 A verage deposits 39,720 39,869 38,331 Assets under administration 160,210 130,548 130,937 Assets under management 74,981 72,980 69,353 Full-time equivalent staff 5,420 5,127 4,735 Excluding non-recurring items Ne t income 135 121 195 Non-interest expense 1,472 1,275 1,212 Cash return on equity (%) 12.9 17.7 35.8 Non-interest expense-to-revenue ratio (%) 86.7 84.7 77.1 North American Investment GLYPH<CR> Sales Professionals 2002 2000 2001 2,240 1,860 2,310 Assets under Management GLYPH<CR> and Administration including GLYPH<CR> Term Deposits  ($ billions) 2002 2001 2000 270 237 234 Assets under Management GLYPH<CR> and Administration including GLYPH<CR> Term Deposits  ($ billions) 2002 2001 2000 126 121 124 144 116 110 Canada United States Canadian Wealth GLYPH<CR> Management Market * 2002 2001 2000 1999 1,160 9.57 1,161 8.88 1,258 8.65 1,040 8.60 Industry assets ($ billions) Market share (%) *where available