MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANC IAL CONDITION Earnings per Share Growth The year-over-year percentage change in earnings per share (EPS) is our primary measure for analyzing earnings growth. All references to EPS are to diluted EPS. Reported EPS was $2.68 for the year, compared with $2.66  in 2001. Excluding non-recurring items, EPS rose 11% to $2.76 from $2.48 in the prior year. Cash EPS, excluding non-recurring items, was $2.91, an increase of 8.6% from 2001. The increase was within our target range of 8% to 12% growth, despite the difficult capital markets and credit environment. Net income was $1,417 million, a reduction of $54 million  or 4% from the previous year. Non-recurring items, which are detailed on page 18 and in Table 26 on page 65, favourably affected net income in 2001 but reduced earnings in 2002. Exclud- ing the effect of these non-recurring items, net income rose  $78 million or 6% to $1,456 million from $1,378 million in 2001. Table 2 on page 52 contains various net income and EPS measures for the past 10 years. Revenue declined $4 million from $8,863 million in 2001. Excluding non-recurring items, revenue grew $151 million or 2%. Strong growth in retail and business banking and from acquired wealth management businesses and higher Corporate Support securitization revenue more than offset a sharp reduc- tion in wholesale banking and market-related revenues in Private Client Group. Revenue growth is discussed on page 19. Non-interest expenses increased $359 million or 6% from $5,671 million last year. Excluding non-recurring items in  fiscal 2002, non-interest expenses rose $297 million or 5% year- over-year to $5,968 million, as costs of acquired businesses, continued strategic initiatives spending and other increases were only partially offset by cost containment efforts. Expenses are discussed on page 22. Excluding non-recurring items, the provision for credit losses fell $60 million to $820 million in 2002. The provision for credit losses is discussed on page 22 and also in the discussion of credit risk on page 29. A lower provision for credit losses, the discontinuance of good- will amortization and more favourable income tax rates and benefits were significant contributors to improved net income, excluding non-recurring items. Pages 12 and 14 provide further comment on EPS growth and include peer group comparisons. EPS decreased $0.59 or 18% to $2.66 in fiscal 2001. Excluding non-recurring items, EPS decreased $0.43 or 15% to $2.48, as  a $480 million increase in the provision for credit losses and higher costs outstripped revenue growth in the weak economic environment of the latter half of fiscal 2001. As explained in Note 23 on page 86, new accounting requirements for derivatives will be adopted in 2003 that require that all derivative positions be marked to market unless they meet certain hedging criteria. Our current policies substantially comply with these requirements. As explained in Note 16 on page 81, on November 1, 2002 we will com- mence expensing, over the vesting period, the fair value of stock options issued on or after that date.  As explained in Note 7 on page 77, we are reviewing a new draft guideline on the consolidation of special purpose entities (SPEs) to determine whether it will require us to consolidate any of our off-balance sheet SPEs in 2003. As explained in Note 9 on page 78, in 2002 we adopted new accounting standards under which goodwill and intangibles with indefinite lives  are no longer amortized. In 2001, goodwill amortization was $62 million ($56 million after tax) and there were no intangibles with indefinite lives.  Cash earnings measures are often used by BMO and certain investors when assessing performance. Cash measures adjust net income to add back the amortization of goodwill and intangible assets. Although GAAP no longer requires goodwill to be amortized, it still requires amortization of intangible assets with definite lives. Cash earnings measures are par- ticularly useful in comparing results between periods when there has been an acquisition, because the purchase decision may not consider the non-cash amortization of intangible assets to be a relevant expense. Earnings per share (EPS) is calculated by dividing net income, after deduction of preferred dividends, by the average number of common shares outstanding. Diluted EPS, which is our basis for measuring per- formance, adjusts for possible conversions of financial instruments into  common shares if those conversions would lower EPS, and is more fully explained in Note 19 on page 85 of the financial statements. Cash Earnings Measures  Changes in Accounting Policies Goodwill Amortization Off-Balance Sheet Special Purpose Entities Stock Options Derivatives 2001 Compared with 2000 Cash EPS Annual Growth  (%) EPS  ($) 2002 2001 2000 ( 1 ) ( 16 ) 38 16 ( 12 ) 9 As reported Excluding non-recurring items 2002 2001 2000 2.76 2.91 2.66 2. 4 8 2.68 2.68 3.25 2.91 3.05 As reported Excluding non-recurring items Cash excluding non-recurring items 16 BMO FINANCIAL GROUP ANNUAL REPORT 2002