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The following is an excerpt from a 10-K SEC Filing, filed by EATON VANCE CORP on 1/27/2003.
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EATON VANCE CORP - 10-K - 20030127 - NOTES_TO_FINANCIAL_STATEMENT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

BUSINESS AND ORGANIZATION

Eaton Vance Corp. and subsidiaries (the Company) provide investment advisory and distribution services to mutual funds and other investment funds, and investment management services to high-net-worth and institutional clients. Revenue is largely dependent on the total value and composition of assets under management, which include sponsored funds and other investment portfolios. Accordingly, fluctuations in financial markets and in the composition of assets under management impact revenue and the results of operations.

SEGMENT INFORMATION

Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes disclosure requirements relating to operating segments in annual and interim financial statements. Management has assessed the requirements of SFAS No. 131 and determined that the Company operates in one business segment, namely as an investment adviser managing funds and separate accounts.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Eaton Vance Corp. and its wholly and majority owned subsidiaries. The equity method of accounting is used for investments in affiliates in which the Company's ownership ranges from 20 to 50 percent. The Company consolidates all investments in affiliates in which the Company's ownership exceeds 50 percent.

The Company provides for minority interests in consolidated companies for which the Company's ownership is less than 100 percent. All material intercompany accounts and transactions have been eliminated.

ACCOUNTING ESTIMATES

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to the consolidated financial statements. Changes in these estimates may affect amounts reported in future periods.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year presentation.

CASH EQUIVALENTS

Cash equivalents consist principally of highly liquid investments in sponsored money market mutual funds, which are readily convertible to cash.

INVESTMENTS

Investments classified as available-for-sale consist primarily of investments in sponsored funds and are carried at fair value. Unrealized holding gains or losses are reported net of tax as a separate component of Accumulated other comprehensive income until realized. Realized gains or losses are reflected as a component of Gain (loss) on investments. The average cost method is used to determine the cost of securities sold.

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Investments classified as trading or held in connection with the Company's activities as principal underwriter consist primarily of investments in sponsored funds and are carried at fair value. Net unrealized holding gains or losses on these investments, as well as realized gains or losses, are reflected as a component of Other income. The average cost method is used to determine the cost of securities sold.

Investments in collateralized debt obligation funds are classified as available- for-sale and recorded in Long-term investments. The excess of future cash flows over the initial investment at the date of purchase is recognized as interest income over the life of the investment using the effective yield method.

The Company reviews cash flow estimates throughout the life of each collateralized debt obligation fund. If the updated estimate of future cash flows (taking into account both timing and amounts) is less than the last revised estimate, an impairment loss is recognized based on the excess of the carrying amount of the investment over its fair value.

Certain other investments are carried at the lower of cost or management's estimate of net realizable value owing primarily to restrictions relative to resale of the investments.

DEFERRED SALES COMMISSIONS

Sales commissions paid to brokers and dealers in connection with the sale of shares of open-end and bank loan interval funds are capitalized and amortized over various periods, none of which exceeds six years. Distribution plan payments received from these funds are recorded in income as earned. Contingent deferred sales charges and early withdrawal charges received by the Company from redeeming shareholders of open-end and bank loan interval funds, respectively, reduce unamortized deferred sales commissions first, with any remaining amount recorded in income.

The Company periodically reviews the amortization period for deferred sales commission assets as events or changes in circumstances indicate that the carrying amount of deferred sales commission assets may not be recoverable over their amortization period. In fiscal 2000, the Company adjusted the amortization period of certain deferred sales commission assets in order to better match amortization expense with projected distribution fee income. This adjustment resulted in an increase in amortization expense of $20.0 million in fiscal 2000. There was no such adjustment recorded in either fiscal 2002 or 2001.

Sales commissions paid to brokers and dealers in connection with the sale of shares of traditional closed-end funds are expensed as incurred.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the cost of the Company's investment in the net assets of acquired companies over the fair value of the underlying identifiable net assets at the dates of acquisition. Goodwill is not amortized, but is tested at least annually for impairment.

Identifiable intangible assets generally represent the cost of client relationships and management contracts acquired. Identifiable intangible assets with indefinite useful lives are not amortized, but are tested at least annually for impairment.

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Identifiable intangible assets with discrete useful lives are amortized on a straight-line basis over their weighted average lives.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and other fixed assets are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which range from three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease.

DEBT ISSUANCE COSTS

Deferred debt issuance costs are amortized over the related term of the debt and are included in Other assets.

REVENUE RECOGNITION

Investment advisory, administration, distribution and service fees for the funds and investment advisory fees for separate accounts managed by the Company are accrued as earned. Sales of shares of investment companies in connection with the Company's activities as principal underwriter are accounted for on a settlement date basis, which approximates trade date basis, with the related commission income and expense recorded on a trade date basis.

INCOME TAXES

Deferred income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts and tax bases of the Company's assets and liabilities. Deferred taxes relate principally to capitalized sales commissions paid to brokers and dealers. Prior to January 1, 2001, these commissions were deducted for tax purposes at the time of payment. Effective January 1, 2001, mutual fund sales commissions are deducted for income tax purposes over their estimated useful lives rather than at the time of payment.

EARNINGS PER SHARE

Earnings per share has been computed in accordance with the provisions of SFAS No. 128, "Earnings Per Share." The following table provides a reconciliation of net income and common shares used in the basic and diluted earnings per share computations for the years ended October 31, 2002, 2001 and 2000:

                     2002             2001           2000
-----------------------------------------------------------
(in thousands, except per share data)
Net income         $121,057        $116,020        $116,051
-----------------------------------------------------------
Weighted-
  average
  shares
  outstanding -
  basic              69,151          68,750          70,390
Incremental
  common
  shares from
  stock options
  and restricted
  stock awards        2,261           3,566           2,832
-----------------------------------------------------------
Weighted-
  average
  shares
  outstanding -
  diluted            71,412          72,316          73,222
-----------------------------------------------------------
Earnings per share:
  Basic            $  1.75         $   1.69        $   1.65
  Diluted          $  1.70         $   1.60        $   1.58

Antidilutive incremental common shares related to stock options excluded from the computation of earnings per share were 45,000, 4,000 and 2,000 for the years ended October 31, 2002, 2001 and 2000, respectively.

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STOCK-BASED COMPENSATION

SFAS No. 123, "Accounting for Stock-Based Compensation," encourages entities to use a fair value-based method in accounting for employee stock-based compensation plans but allows the intrinsic value-based method prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Entities may continue to apply the provisions of APB No. 25 provided the entity discloses its pro forma net income and earnings per share as if the fair value-based method had been applied in measuring compensation cost. The Company continues to apply APB No. 25 and has provided the pro forma disclosures required by SFAS No. 123 in Note 9.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at current exchange rates as of the end of the accounting period. Related revenue and expenses are translated at average exchange rates in effect during the accounting period. Net translation exchange gains and losses are excluded from income and recorded in Accumulated other comprehensive income. Foreign currency transaction gains and losses are reflected in income currently.

COMPREHENSIVE INCOME

Comprehensive income is reported in the Consolidated Statements of Shareholders' Equity and Comprehensive Income and is comprised of net income and other comprehensive income (loss), net of tax.

The components of other comprehensive income (loss) at October 31, 2002, 2001, and 2000 are as follows:

                                       Tax
                      Gross        (Expense)           Net
                     Amount       or Benefit         Amount
-----------------------------------------------------------
(in thousands)
2002
Unrealized
  gains
  (losses) on
  investments       $(3,641)        $1,327          $(2,314)
Foreign
  currency
  translation
  adjustments             2             (1)               1
-----------------------------------------------------------
Total               $(3,639)        $1,326          $(2,313)
-----------------------------------------------------------
2001
Unrealized
  gains
  (losses) on
  investments       $  (532)        $  237          $  (295)
-----------------------------------------------------------
Total               $  (532)        $  237          $  (295)
-----------------------------------------------------------
2000
Unrealized
  gains
  (losses) on
  investments       $ 1,712         $ (559)         $ 1,153
----------------------------------------------------------
Total               $ 1,712         $ (559)         $ 1,153
----------------------------------------------------------

During the years ended October 31, 2002, 2001, and 2000, the Company reclassified gains and (losses) of $0.9 million, ($1.6) million and $0.1 million, respectively, from other comprehensive income to net income as gains and losses were realized upon the sale of available-for-sale securities.

Accumulated other comprehensive income is also reported in the Consolidated Statements of Shareholders' Equity and Comprehensive Income. The components of Accumulated other comprehensive income at October 31, 2002, and 2001 are as follows:

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                                       2002            2001
-----------------------------------------------------------
(in thousands)
Unrealized gains (losses)
  on investments                     $2,584          $4,898
Foreign currency
  translation adjustments                 1            --
-----------------------------------------------------------
Total                                $2,585          $4,898
-----------------------------------------------------------

2. Accounting Developments

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses the accounting for business combinations initiated after June 30, 2001, and establishes new criteria for the recognition of intangible assets. Under SFAS No. 141, all business combinations initiated after June 30, 2001, must be accounted for using the purchase method of accounting.

SFAS No. 142 addresses the accounting for goodwill and indefinite-lived intangible assets acquired in a business combination, including those assets acquired before the initial application of the standard. Under SFAS No. 142, goodwill and identifiable intangible assets with indefinite lives are not amortized, but reviewed at least annually for impairment. Identifiable intangible assets with discrete useful lives are amortized over their useful lives.

The Company adopted SFAS Nos. 141 and 142 on July 1, 2001, and November 1, 2001, respectively. The adoption of these standards did not have a material impact on the results of operations or the consolidated financial position of the Company.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for the Company's fiscal year beginning November 1, 2002. The adoption of SFAS No. 144 will not have a material effect on the results of operations or the consolidated financial position of the Company.

In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 addresses the classification of gains and losses from the early extinguishment of debt and the accounting for certain lease arrangements. The Company elected to adopt the provisions of SFAS No. 145 on August 1, 2002, prior to the Company's required adoption date of November 1, 2002. The adoption of SFAS No. 145 did not have a material effect on the results of operations or the consolidated financial position of the Company.

3. Acquisitions

In fiscal 2001, the Company acquired a majority interest in two institutional investment management firms in a strategic effort to expand the Company's managed account and institutional business.

On September 30, 2001, the Company acquired 70 percent of Atlanta Capital Management Company, LLC (Atlanta Capital) for an aggregate initial payment of $75.0 million, consisting of cash of $60.0 million and Eaton Vance Corp. non- voting common stock valued at $15.0 million. The value of the 479,359 shares of non-voting common stock issued in conjunction with the acquisition was determined based on the average market price

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of the Company's non-voting common stock over the 20-day period prior to September 30, 2001. Atlanta Capital's principals will continue to hold 30 percent of the equity of Atlanta Capital through December 31, 2004. Beginning in calendar 2005, Atlanta Capital's principals will have the right to sell and the Company will have the right to purchase the remaining 30 percent of Atlanta Capital over a five-year period. The price for acquiring the remaining 30 percent of Atlanta Capital will be based on a multiple of earnings before taxes (a measure that is intended to approximate fair market value) in those years. Any additional payments made will be treated as additional purchase price for accounting purposes.

On September 30, 2001, the Company also acquired 80 percent of Fox Asset Management LLC (Fox) for an aggregate initial payment of $32.0 million, consisting of cash of $22.4 million and Eaton Vance Corp. non-voting common stock valued at $9.6 million. The value of the 321,544 shares of non-voting common stock issued in conjunction with the acquisition was determined based on the average market price of the Company's non-voting common stock over the 10- day period prior to September 30, 2001. Additional payments to Fox's principals in 2005 and 2006 of up to $30.0 million are contingent upon Fox achieving certain financial performance criteria. Fox's principals will continue to hold 20 percent of the equity of Fox through December 31, 2007. Beginning in calendar 2008, Fox's principals will have the right to sell and the Company will have the right to purchase the remaining 20 percent of Fox over a four-year period. The price for acquiring the remaining 20 percent of Fox will be based on a multiple of earnings before interest and taxes (a measure that is intended to approximate fair market value) in those years. Any additional payments made will be treated as additional purchase price for accounting purposes.

The acquisitions of Atlanta Capital and Fox were accounted for using the purchase method of accounting and, accordingly, the excess of purchase price, including acquisition costs, over the fair value of the net assets acquired resulted in goodwill of $50.3 million and $18.9 million, respectively. Net assets acquired included $24.6 million and $13.4 million of other intangible assets for Atlanta Capital and Fox, respectively, which consisted exclusively of client relationships acquired. These assets are being amortized on a straight- line basis over their estimated useful lives of approximately 19 years. Goodwill and intangible assets acquired are deductible for tax purposes.

These financial statements include the operating results of Atlanta Capital and Fox from September 30, 2001, the date of acquisition. Pro forma results of operations for these acquisitions have not been presented because the results of operations would not have been materially different from those reported in the accompanying consolidated statements of income.

Condensed balance sheets disclosing the amount of each major asset and liability category attributable to the acquired entities at acquisition date have not been provided as the net assets of the acquired entities, excluding goodwill and intangible assets, are not material to the consolidated financial statements of the Company.

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4. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the year ended October 31, 2002, are as follows:

                                                       2002
-----------------------------------------------------------
(in thousands)
Balance, beginning of period                        $69,212
Adjustments to goodwill                                 255
-----------------------------------------------------------
Balance, end of period                              $69,467
-----------------------------------------------------------

The adjustments to goodwill represent additional direct costs incurred in fiscal 2002 associated with the acquisitions of Atlanta Capital and Fox.

The following is a summary of other intangible assets at October 31, 2002, and 2001:

2002              Weighted-
                    average
               amortization           Gross
                     period        carrying     Accumulated
                 (in years)          amount    amortization
-----------------------------------------------------------
(dollars in thousands)
Amortized
  intangible
  assets:
    Client
    relationships
    acquired           18.2         $38,140          $2,155
Non-amortized
  intangible
  assets:
    Mutual fund
    management
    contract
    acquired            --            1,311             --
-----------------------------------------------------------
Total                               $39,451          $2,155
-----------------------------------------------------------

2001              Weighted-
                    average
               amortization           Gross
                     period        carrying     Accumulated
                 (in years)          amount    amortization
-----------------------------------------------------------
(dollars in thousands)
Amortized
  intangible
  assets:
    Client
    relationships
    acquired           19.2         $38,140            $182
Non-amortized
  intangible assets:
    Mutual fund
    management
    contract
    acquired           10.0           2,000             689
-----------------------------------------------------------
Total                               $40,140            $871
-----------------------------------------------------------

Prior to November 1, 2001, a mutual fund management contract acquired in fiscal 1996 was amortized over a 15-year period. Subsequent to the adoption of SFAS No. 142 on November 1, 2001, this asset is no longer amortized.

Amortization expense was $2.0 million and $182,000 for the years ended October 31, 2002, and 2001, respectively. Estimated amortization expense for the next five years is as follows:

                                                  Estimated
                                               amortization
Year ending October 31,                             expense
-----------------------------------------------------------
(in thousands)
2003                                                 $1,989
2004                                                 $1,989
2005                                                 $1,989
2006                                                 $1,989
2007                                                 $1,989

Operating results adjusted to exclude amortization expense related to goodwill, intangible assets that are no longer being amortized and equity method goodwill have not been presented for the years ending October 31, 2001,

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and 2000 because the results of operations, as reported in the accompanying consolidated statements of income, would not have been materially different.

5. Investments

The following is a summary of investments at October 31, 2002, and 2001:

                                       2002            2001
-----------------------------------------------------------
(in thousands)
Short-term investments:
  Sponsored funds:
    Available-for-sale              $43,886         $93,991
    Trading                             --            1,037
-----------------------------------------------------------
    Total                           $43,886         $95,028
-----------------------------------------------------------
Long-term investments:
  Sponsored funds:
    Available-for-sale              $18,826         $16,031
  Collateralized debt
    obligation funds                 13,228          12,759
  Investment
    in affiliates                     7,009           6,995
  Other investments                     919             919
-----------------------------------------------------------
  Total                             $39,982         $36,704
-----------------------------------------------------------

INVESTMENTS IN SPONSORED FUNDS

The following is a summary of the cost and fair value of investments in sponsored funds included in both short-term and long-term investments as of October 31, 2002, and 2001:

2002                             Gross Unrealized
                                 ----------------
                                                        Fair
                     Cost     Gains     Losses         Value
------------------------------------------------------------
(in thousands)
Available-
  for-sale       $ 58,690    $4,827      $(805)      $62,712
Trading              --        --          --           --
------------------------------------------------------------
Total            $ 58,690    $4,827      $(805)      $62,712
------------------------------------------------------------

2001                             Gross Unrealized
                                 ----------------
                                                        Fair
                     Cost     Gains     Losses         Value
------------------------------------------------------------
(in thousands)
Available-
  for-sale       $102,349    $8,395      $(722)     $110,022
Trading             1,050      --          (13)        1,037
------------------------------------------------------------
Total            $103,399    $8,395      $(735)     $111,059
------------------------------------------------------------

Gross unrealized gains and losses on investments in sponsored funds classified as available-for-sale have been excluded from earnings and reported as a component of Accumulated other comprehensive income, net of deferred taxes. Gross unrealized gains and losses on investments in sponsored funds classified as trading have been reported in income currently as a component of Other income.

The following is a summary of the Company's realized gains and (losses) upon disposition of sponsored fund investments for the years ended October 31, 2002, 2001, and 2000.

                       2002            2001            2000
-----------------------------------------------------------
(in thousands)
Gains                $1,888         $   --             $239
Losses                 (544)         (2,423)            --
-----------------------------------------------------------
Net realized
  gain (loss)        $1,344         $(2,423)           $239
-----------------------------------------------------------

INVESTMENTS IN COLLATERALIZED
DEBT OBLIGATION FUNDS

The carrying value of $13.2 million and $12.8 million at October 31, 2002 and 2001, respectively, for these securities is their estimated fair value. In fiscal 2001, the Company recognized a pre-tax impairment loss of $15.1 million related to these investments. The impairment loss resulted from higher than forecasted default rates in the high-yield bond market and the effects of the higher default rates on the value of the Company's investments in these collateralized debt obligation funds.

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INVESTMENT IN AFFILIATES

The Company has a 21 percent equity interest in Lloyd George Management (BVI) Limited (LGM), an independent investment management company based in Hong Kong that manages or co-manages several international funds sponsored by the Company. The Company's investment in LGM was $6.8 million and $6.7 million at October 31, 2002 and 2001, respectively. At October 31, 2002, the Company's investment exceeded its share of the underlying net assets of LGM by $4.8 million. Amortization of this excess was discontinued on November 1, 2001, as a result of the adoption of SFAS No. 142. The Company's investment in LGM will continue to be reviewed annually for impairment pursuant to APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock."

A subsidiary of the Company invests in certain investment limited partnerships in which the subsidiary is a general partner. The investments are recorded on the equity method of accounting owing to the subsidiary's general partner role. The subsidiary's investment in these partnerships was $0.2 million and $0.3 million at October 31, 2002, and 2001, respectively.

OTHER INVESTMENTS

Included in other investments are certain investments carried at cost, amounting to $0.9 million at both October 31, 2002, and 2001. Management believes that the fair value of these investments approximates their carrying value.

6. Equipment and Leasehold Improvements

The following is a summary of equipment and leasehold improvements at October 31, 2002, and 2001:

                                          2002           2001
-------------------------------------------------------------
(in thousands)
Equipment                              $15,756        $14,519
Leasehold improvements                   9,508          9,375
-------------------------------------------------------------
                                        25,264         23,894
Less: Accumulated
  depreciation and
  amortization                          11,367          8,956
-------------------------------------------------------------
Equipment and leasehold
  improvements, net                    $13,897        $14,938
-------------------------------------------------------------

7. Long-term Debt

The following is a summary of long-term debt at October 31, 2002, and 2001:

                               2002                           2001
                   Carrying            Fair        Carrying            Fair
                      Value           Value           Value           Value
---------------------------------------------------------------------------
(in thousands)
6.22% senior
  notes due
  2004             $ 14,286        $ 14,924        $ 21,429        $ 22,460
1.5% zero-
  coupon
  exchangeable
  senior notes
  due 2031          116,975         116,753         201,202         195,599
---------------------------------------------------------------------------
Total               131,261         131,677         222,631         218,059
Less:  current
  maturities         (7,143)         (7,532)         (7,143)         (7,717)
---------------------------------------------------------------------------
Total long-
  term debt        $124,118        $124,145        $215,488        $210,342
---------------------------------------------------------------------------

6.22% SENIOR NOTES

The Company has 6.22% senior notes due March 2004, with a remaining balance of $14.3 million at October 31, 2002. Principal payments on the notes are due in equal annual installments of approximately $7.1 million. The notes may be prepaid in part or in full at any time. Certain covenants in the purchase agreement require the Company to maintain specific levels of cash flow and net income; other covenants restrict additional investment and indebtedness of the Company.

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The senior notes have been fair valued by discounting future cash flows using a market interest rate available for debt with similar terms and remaining maturity.

ZERO-COUPON EXCHANGEABLE SENIOR NOTES

On August 13, 2001, the Company's operating subsidiary, Eaton Vance Management (EVM), issued zero-coupon exchangeable senior notes (Notes) with a principal amount of $314.0 million due August 13, 2031, resulting in gross proceeds of approximately $200.6 million. The net proceeds of the offering were approximately $195.5 million after payment of debt issuance costs. The Notes were issued in a private placement to qualified institutional buyers at an initial offering price of $638.70 per $1,000 principal amount at maturity. The discounted price reflects a yield to maturity of 1.5 percent per year. Upon certain events, each Note is exchangeable into 14.3657 shares of the Company's non-voting common stock, subject to adjustment. EVM may redeem the Notes for cash on or after August 13, 2006, at their accreted value. At the option of Note holders, EVM may be required to repurchase the Notes at their accreted value on various dates beginning on the first, third and fifth anniversaries of the issue date and at five year intervals thereafter until maturity. At the option of the Note holders, EVM may also be required to repurchase the Notes at their accreted value if the credit rating of the Notes is decreased by three or more rating subcategories below its initial rating by either Moody's or Standard & Poor's. Such repurchases can be paid in cash, shares of the Company's non-voting common stock or a combination of both.

On August 9, 2002, EVM amended the terms of the Notes to permit the Note holders, at their option, to require the repurchase of the Notes on November 13, 2002. EVM further amended the terms of the Notes to provide that each holder electing not to require EVM to repurchase the holder's Notes on August 13, 2002, would receive a one-time cash payment equal to 0.50 percent of each Note's accreted value. On August 14, 2002, EVM repurchased for cash $87.0 million of the Notes at accreted value ($134.1 million principal amount at maturity). On August 15, 2002, EVM made a one-time cash interest payment totaling $0.6 million to holders of the Notes as of the close of business on August 14, 2002.

The Company expensed approximately $2.1 million of deferred debt issuance costs in conjunction with the repurchase of Notes in the fourth quarter of fiscal 2002.

On November 12, 2002, EVM further amended the terms of Notes to provide that each holder electing not to require EVM to repurchase the holder's Notes on November 13, 2002, would receive incremental cash interest payments equal to 1.672 percent per year of each Note's principal amount at maturity for a period of 21 months. The first interest payment due on February 13, 2003, will be paid in arrears for the three-month period ending on that date. The three remaining interest payments will be made on a semiannual basis in arrears on their respective payment dates. No Notes were tendered for repurchase on November 13, 2002. Holders of the Notes may next require EVM to repurchase the Notes on August 13, 2004.

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The Notes have been valued by discounting future cash flows using a market interest rate available for debt with similar terms and remaining maturity.

REVOLVING CREDIT FACILITY

In December 2001, EVM executed a revolving credit facility with several banks. This facility, which expires December 2004, provides that EVM may borrow up to $170 million at market rates of interest that vary depending on level of usage of the facility and credit ratings of the Notes. The agreement contains financial covenants with respect to leverage and interest coverage and requires EVM to pay an annual commitment fee on any unused portion. At October 31, 2002, EVM had no borrowings outstanding under its revolving credit facility.

8. Commitments and Contingencies

The Company leases certain office space and equipment under noncancelable operating leases. Rent expense under these leases in 2002, 2001 and 2000 amounted to $5.2 million, $4.6 million and $4.5 million, respectively. Future minimum lease commitments are as follows:

Year Ending
October                                              Amount
-----------------------------------------------------------
(in thousands)
2003                                                $ 5,157
2004                                                  5,340
2005                                                  5,202
2006                                                  5,021
2007                                                  5,008
2008 - thereafter                                     7,534
-----------------------------------------------------------
Total                                               $33,262
-----------------------------------------------------------

In fiscal 1999, the Company, through a wholly owned subsidiary, sold a shopping center and office building in Troy, New York. At the time of the sale, the purchaser agreed to assume the related indebtedness. A wholly owned subsidiary of the Company will remain as a guarantor on the related indebtedness (amounting to $1.7 million) until such time as certain net operating income and debt service requirements on the property are met.

The Company and its subsidiaries are subject to various legal proceedings. In the opinion of management, after discussions with legal counsel, the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial condition or results of operations of the Company.

9. Stock Plans

STOCK OPTION PLAN

The Company has a Stock Option Plan (the 1998 Plan) administered by the Option Committee of the Board of Directors under which options to purchase shares of the Company's non-voting common stock may be granted to all eligible employees of the Company. No stock options may be granted under the plan with an exercise price of less than the fair market value of the stock at the time the stock option is granted. The options expire five to ten years from the date of grant and vest over a five-year period as stipulated in each grant. The 1998 Plan contains provisions which, in the event of a change in control of the Company, may accelerate the vesting of awards. A total of 12.0 million shares has been reserved for issuance under the 1998 Plan. Through October 31, 2002, 6.5 million shares have been issued pursuant to this plan.

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Stock option transactions under the 1998 Plan and predecessor plans are summarized as follows:

                                              2002                    2001                    2000
                                                   Weighted                Weighted                Weighted
                                                    Average                 Average                  Average
                                                   Exercise                Exercise                Exercise
                                        Shares        Price       Shares      Price       Shares      Price
-----------------------------------------------------------------------------------------------------------
(share figures in thousands)
Balance, beginning of period             6,453      $ 15.42        5,395     $10.04        5,130     $ 7.52
Granted                                  1,881        28.88        2,009      25.44        1,239      17.40
Exercised                               (2,109)        7.43         (918)      5.66         (898)      5.46
Forfeited/Expired                          (98)       22.81          (33)     18.14          (76)     13.60
-----------------------------------------------------------------------------------------------------------
Balance, end of period                   6,127      $ 22.18        6,453     $15.42        5,395     $10.04
-----------------------------------------------------------------------------------------------------------

Outstanding options to purchase shares of non-voting common stock issued under the 1998 Plan and predecessor plans are summarized as follows:

                                        Options Outstanding                 Options Exercisable
-----------------------------------------------------------------------------------------------------------
                                                   Weighted
                                      Shares        Average         Weighted           Shares      Weighted
                                Outstanding       Remaining          Average     Exerciseable       Average
                                      as of     Contractual         Exercise            as of      Exercise
Range of Exercise Prices           10/31/02            Life            Price         10/31/02         Price
-----------------------------------------------------------------------------------------------------------
(share figures in thousands)
$ 8.92  - $11.56                      1,215             3.6           $11.22              807        $11.11
$12.62                                   17             1.0            12.62              --            --
$17.19  - $18.91                      1,059             6.9            17.22              377         17.22
$21.16  - $24.03                         50             7.3            21.67               20         21.62
$24.53  - $28.13                      1,644             8.0            24.63              326         24.57
$28.67  - $31.54                      2,088             8.9            28.89               49         29.99
$33.16  - $35.65                         38             9.0            35.13                1         31.16
$37.09  - $40.32                         16             9.3            37.91                1         37.09
-----------------------------------------------------------------------------------------------------------
                                      6,127             7.2           $22.18            1,581        $16.09
-----------------------------------------------------------------------------------------------------------

In November 2002, the Company granted options for the purchase of an additional 2.4 million shares under
the 1998 Plan at prices ranging from $29.10 to $32.01.

RESTRICTED STOCK PLAN

The Company has a Restricted Stock Plan administered by the Compensation Committee of the Board of Directors under which restricted stock may be granted to key employees. Shares of the Company's non-voting common stock granted under the plan are subject to restrictions on transferability and carry the risk of forfeiture, based in each case on such considerations as the Compensation Committee shall determine. Unless the Compensation Committee determines otherwise, restricted stock that is still subject to restrictions upon termination of employment shall be forfeited. Restrictions on shares granted lapse in three to seven years from date of grant. A total of 1,000,000 shares has been reserved under the plan.

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In fiscal 2001 and 2000, 12,228 and 290,910 shares, respectively, were issued pursuant to the plan at a weighted average grant date fair value of $24.53 and $17.19 per share, respectively. No such shares were issued in fiscal 2002. Because these shares are contingently forfeitable, compensation expense is recorded over the forfeiture period. The Company recorded compensation expense of $1.1 million, $1.1 million and $1.0 million for the years ended October 31, 2002, 2001, and 2000, respectively, relating to those shares.

EMPLOYEE STOCK PURCHASE PLAN

A total of 4.5 million shares of the Company's non-voting common stock has been reserved for issuance under the Employee Stock Purchase Plan. The plan qualifies under Section 423 of the United States Internal Revenue Code and permits eligible employees to direct up to 15 percent of their salaries to a maximum of $12,500 toward the purchase of Eaton Vance Corp. non-voting common stock at the lower of 90 percent of the market price of the non-voting common stock at the beginning or at the end of each six-month offering period. Through October 31, 2002, 3.3 million shares have been issued pursuant to this plan. No compensation expense has been recorded for the discounted purchase price because the Company's plan qualifies under Section 423.

INCENTIVE PLAN-STOCK ALTERNATIVE

A total of 2.4 million shares of the Company's non-voting common stock has been reserved for issuance under the Incentive Plan-Stock Alternative, a plan that qualifies under Section 423 of the United States Internal Revenue Code. The plan permits employees and officers to direct up to half of their monthly and annual incentive bonuses toward the purchase of non-voting common stock at 90 percent of the average market price of the stock for the five days subsequent to the end of the six-month offering period. Through October 31, 2002, 1.2 million shares have been issued pursuant to this plan. No compensation expense has been recorded for the discounted purchase price because the plan qualifies under
Section 423.

STOCK OPTION INCOME DEFERRAL PLAN

The Company has established an unfunded, non-qualified Stock Option Income Deferral Plan. The Plan is intended to permit key employees to defer recognition of income on exercise of non-qualified stock options previously granted by the Company. As of October 31, 2002, 609,346 options have been exercised and placed in trust with the Company.

EXECUTIVE LOAN PROGRAM

The Company has established an Executive Loan Program under which a program maximum of $10.0 million is available for loans to directors and key employees for purposes of financing the exercise of employee stock options. Loans are written for a seven-year period, at varying fixed interest rates (currently ranging from 3.8 percent to 7.1 percent), are payable in annual installments commencing with the third year in which the loan is outstanding, and are collateralized by the stock issued upon exercise of the option. The Company ceased making new loans

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under the Executive Loan Program to directors or executive officers in conformity with a federal law effective July 30, 2002. Other key employees remain eligible for new loans under the program. Loans outstanding under this program are reflected as Notes receivable from stock option exercises in shareholders' equity and amounted to $3.5 million and $2.6 million at October 31, 2002 and 2001, respectively.

Loans receivable have been valued by discounting expected future cash flows using management's estimates of current market interest rates for such receivables. The fair value of these receivables approximates their carrying value (see Note 13).

PRO FORMA DISCLOSURE

The Company continues to apply APB Opinion No. 25 in accounting for stock-based compensation arrangements. Had compensation cost for the Company's stock-based compensation plans been determined consistent with the fair value method as described in SFAS No. 123, the Company's net income and earnings per share for the years ended October 31, 2002, 2001, and 2000 would have been reduced to the following pro forma amounts:

                       2002            2001            2000
-----------------------------------------------------------
(net income figures in thousands)
Net income:
   As reported     $121,057        $116,020        $116,051
   Pro forma       $110,957        $109,189        $112,232
Earnings per share:
   As reported:
      Basic        $   1.75        $   1.69        $   1.65
      Diluted      $   1.70        $   1.60        $   1.58
   Pro forma:
      Basic        $   1.60        $   1.59        $   1.59
      Diluted      $   1.55        $   1.51        $   1.53

The weighted average fair value of options granted on the date of grant using the Black-Scholes option pricing model was as follows:

                       2002            2001            2000
-----------------------------------------------------------
Weighted average
   fair value of
   options granted   $28.88         $ 25.44         $ 17.40
Assumptions:
Dividend yield        1.11%           1.03%           0.96%
Volatility              30%             33%             29%
Risk-free
   interest rate       4.0%            4.7%            5.9%
Expected life of
   options          8 years        10 years        10 years

For purposes of pro forma disclosure, the estimated fair value of each option grant is amortized to expense ratably over the option-vesting period.

10. Employee Benefit Plans

PROFIT SHARING RETIREMENT PLANS

The Company has two profit sharing retirement plans for the benefit of substantially all employees. The Company has contributed $5.6 million, $4.0 million and $4.3 million, for the years ended October 31, 2002, 2001, and 2000, respectively, representing 15 percent of eligible compensation for each of the three years.

SAVINGS PLAN AND TRUST

The Company has a Savings Plan and Trust that is qualified under Section 401 of the Internal Revenue Code. All full-time employees who have met certain age and length of service requirements are eligible to participate in the plan. This plan allows participating employees to make elective deferrals up to the plan's annual limitations. The Company then matches each participant's contribution on a dollar-for-dollar basis up to a maximum of $1,040. The Company's expense under the plan was $0.4 million,

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$0.3 million and $0.3 million for each of the years ended October 31, 2002, 2001, and 2000, respectively.

SUPPLEMENTAL PROFIT SHARING PLAN

The Company has an unfunded, non-qualified Supplemental Profit Sharing Plan whereby certain key employees of the Company may receive profit sharing contributions in excess of the amounts allowed under the profit sharing retirement plans. No employee may receive combined contributions in excess of $30,000 to the Profit Sharing Retirement Plans and the Supplemental Profit Sharing Plan. The Company's expense under the supplemental plan for each of the years ended October 31, 2002, 2001, and 2000 was $47,000, $2,000 and $176,000, respectively.

11. Common Stock Repurchases

On October 17, 2001, the Company's Board of Directors authorized the purchase by the Company of up to 4.0 million shares of the Company's non-voting common stock. Through October 31, 2002, 1.6 million shares have been acquired under this authorization. An additional 2.4 million shares were purchased in fiscal 2001 under a previous authorization. Shares repurchased by the Company are constructively retired.

12. Income Taxes

The provision for income taxes for the years ended October 31, 2002, 2001, and 2000 consists of the following:

                       2002            2001            2000
-----------------------------------------------------------
(in thousands)
Current:
   Federal         $ 82,442       $  78,179       $  55,954
   State              5,049           5,075           7,692
Deferred:
   Federal          (18,679)        (16,484)          6,546
   State             (3,628)         (4,301)            936
-----------------------------------------------------------
Total             $  65,184       $  62,469       $  71,128
-----------------------------------------------------------

Deferred income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts and tax bases of the Company's assets and liabilities. The significant components of deferred income taxes are as follows:

                                                              2002      2001
----------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
   Tax benefit of stock option awards                      $  --     $ 1,010
   Deferred rent                                               852       716
   Differences between book and tax bases of investments     5,404     5,761
   Other                                                     1,004     1,058
----------------------------------------------------------------------------
Total                                                      $ 7,260   $ 8,545
----------------------------------------------------------------------------
Deferred tax liabilities:
   Deferred sales commissions                              $51,380   $76,923
   Differences between book and tax bases of property        2,924       678
   Unrealized net holding gains on investments               1,479     2,806
Other                                                        1,593       877
----------------------------------------------------------------------------
Total                                                      $57,376   $81,284
----------------------------------------------------------------------------
Net deferred tax liability                                 $50,116   $72,739
----------------------------------------------------------------------------
                                                                              47


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Deferred tax assets and liabilities are reflected on the Company's Consolidated Balance Sheets at October 31, 2002, and 2001 as follows:

                                                              2002      2001
----------------------------------------------------------------------------
(in thousands)
Net current deferred tax asset                             $   415   $ 1,139
Net non-current deferred tax liability                      50,531    73,878
----------------------------------------------------------------------------
Net deferred tax liability                                 $50,116   $72,739
----------------------------------------------------------------------------

The Company's effective tax rate was 35 percent, 35 percent and 38 percent in fiscal 2002, 2001 and 2000, respectively. In 2002 and 2001, there is no difference between the statutory federal tax rate and the effective tax rate primarily due to mutual fund industry state tax incentives. In 2000, the difference between the statutory federal tax rate and the effective tax rate is due primarily to state income taxes.

The exercise of non-qualified stock options resulted in a reduction of taxes payable of approximately $4.8 million and $1.6 million for the years ended October 31, 2002, and 2001. Such benefit has been reflected in equity.

The Massachusetts Department of Revenue (MDOR) examined the tax returns for the Company and its subsidiaries for the fiscal years 1993 through 1995. In connection with this examination, the MDOR assessed additional taxes and interest of $5.8 million. Massachusetts general laws required the Company to pay the assessment in advance. At October 31, 2001, the payment was recorded in Other assets. The Company contested this assessment and recovered the $5.8 million plus interest of $2.1 million in the third quarter of fiscal 2002.

13. Fair Value of Financial Instruments

The following is a summary of the carrying amounts and estimated fair values of the Company's financial instruments as of October 31, 2002, and 2001:

                                               2002                  2001
                                      Carrying      Fair    Carrying       Fair
                                         Value      Value      Value      Value
-------------------------------------------------------------------------------
(in thousands)
Investments:
   Sponsored funds                    $ 58,690   $ 62,712   $103,399   $111,059
   Collateralized debt obligation
     funds                              13,228     13,228     12,759     12,759
   Other investments                     7,928      7,928      7,914      7,914
-------------------------------------------------------------------------------
Total                                 $ 79,846   $ 83,868   $124,072   $131,732
-------------------------------------------------------------------------------
Notes receivable from stock option
  exercises                           $  3,530   $  3,530   $  2,641   $  2,641
-------------------------------------------------------------------------------
Debt                                  $124,118   $124,145   $215,488   $210,342
-------------------------------------------------------------------------------

Assumptions used in the determination of fair value have been described in Notes 5, 7 and 9.

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14. Regulatory Requirements

Eaton Vance Distributors, Inc., a wholly owned subsidiary of the Company and principal underwriter of the Eaton Vance Funds, is subject to the Securities and Exchange Commission uniform net capital rule (Rule 15c3-1), which requires the maintenance of minimum net capital. For purposes of this rule, the subsidiary had net capital of $54.1 million, which exceeds its minimum net capital requirement of $0.9 million at October 31, 2002. The ratio of aggregate indebtedness to net capital at October 31, 2002 was .24-to-1.

15. Concentration of Credit Risk and Significant Relationships

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains cash and cash equivalents with various financial institutions. Cash deposits maintained at a financial institution may exceed the federally insured limit.

The portfolios and related funds that provided over 10 percent of the total revenue of the Company are as follows:

                                                                    2002          2001          2000
----------------------------------------------------------------------------------------------------
(dollar figures in thousands)

Tax-Managed Growth Portfolio and related funds:
   Investment adviser and administration fees,
      underwriting commissions, distribution plan payments,
      contingent deferred sales charges and service fees      $  180,244    $  188,484    $  157,415
   Percent of revenue                                               34.5%         37.5%         35.7%

Senior Debt Portfolio and related funds:
   Investment adviser and administration fees, distribution
      fees, early withdrawal charges and service fees         $   65,885    $   93,181    $  118,929
   Percent of revenue                                               12.6%         18.5%         27.0%

16. Comparative Quarterly Financial Information (Unaudited)

                                                                 2002
------------------------------------------------------------------------------------------------
                                               First     Second      Third     Fourth       Full
                                             Quarter    Quarter    Quarter    Quarter       Year
------------------------------------------------------------------------------------------------
(in thousands, except per share figures)
Total revenue                               $135,670   $132,824   $130,673   $123,818   $522,985
Operating income                            $ 49,518   $ 49,926   $ 46,406   $ 38,073   $183,923
Net income                                  $ 33,193   $ 32,835   $ 31,181   $ 23,848   $121,057
Earnings per share:
   Basic                                    $   0.48   $   0.47   $   0.45   $   0.35   $   1.75
   Diluted                                  $   0.46   $   0.46   $   0.44   $   0.34   $   1.70

                                                                 2001
------------------------------------------------------------------------------------------------
                                               First     Second      Third     Fourth       Full
                                             Quarter    Quarter    Quarter    Quarter       Year
-----------------------------------------------------------------------------------------------
(in thousands, except per share figures)
Total revenue                               $123,554   $119,299   $128,966   $130,740   $502,559
Operating income                            $ 47,310   $ 44,701   $ 47,389   $ 51,493   $190,893
Net income                                  $ 32,040   $ 20,802   $ 31,654   $ 31,524   $116,020
Earnings per share:
   Basic                                    $   0.46   $   0.30   $   0.46   $   0.46   $   1.69
   Diluted                                  $   0.44   $   0.29   $   0.44   $   0.44   $   1.60

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BROKERAGE PARTNERS