----

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**SECURITIESAND EXCHANGE COMMISSION****Washington, D.C. 20549**

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**FORM10–Q**

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**(Mark One)**

| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|-----------------------------------------------------------------------------------------------|
|       |                                                                                          |
|       | **For the Quarterly period  ended June 30, 2001**                                             |
|       |                                                                                          |
|       | **OR**                                                                                        |
|       |                                                                                          |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

**Forthe Transition period from _____ to _____**

**0–26996(Commission File Number)**

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**INVESTORS FINANCIAL SERVICESCORP.**

(Exact name of registrant as specified in itscharter)

----

 

| **Delaware**                                                     | **04–3279817**                |
|------------------------------------------------------------------|------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) | (IRS  Employer Identification No.) |
|                                                             |                               |
| **200 Clarendon Street,  P.O. Box 9130, Boston, MA**             | **02117–9130**                |
| (Address  of principal executive offices)                        | (Zip  Code)                        |

 

**(617)937–6700**(Registrant’s telephone number, including area code)

|              Indicate by check mark whether the registrant  (1) has filed all reports required to be filed by Section 13 or 15(d) of the  Securities Exchange Act of 1934 during the preceding 12 months (or for such  shorter period that the registrant was required to file such reports), and  (2) has been subject to such filing requirements for the past 90 days. Yes ý No o |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|              As of July 31, 2001 there were 31,881,466  shares of Common Stock outstanding.                                                                                                                                                                                                                                                                                               |

----

----

 

 

**INVESTORSFINANCIAL SERVICES CORP.**

**INDEX**

|           |                                                                                                                         |   |
|----------------|------------------------------------------------------------------------------------------------------------------------------|--------|
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                                    |   |
|           |                                                                                                                         |   |
| Item  1.       | Condensed  Consolidated Financial Statements                                                                                 |   |
|           |                                                                                                                         |   |
|           | Condensed  Consolidated Balance Sheets  June 30,  2001 (unaudited) and December 31, 2000 (audited)                      |   |
|           |                                                                                                                         |   |
|           | Condensed  Consolidated Statements of Income and Comprehensive Income (unaudited) Six  months ended June 30, 2001 and 2000   |   |
|           |                                                                                                                         |   |
|           | Condensed  Consolidated Statements of Income and Comprehensive Income (unaudited) Three  months ended June 30, 2001 and 2000 |   |
|           |                                                                                                                         |   |
|           | Condensed  Consolidated Statements of Stockholder’s Equity (unaudited) Six months ended  June 30, 2001 and 2000         |   |
|           |                                                                                                                         |   |
|           | Condensed  Consolidated Statements of Cash Flows (unaudited) Six months ended June 30,  2001 and 2000                        |   |
|           |                                                                                                                         |   |
|           | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                            |   |
|           |                                                                                                                         |   |
| Item  2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  |   |
|           |                                                                                                                         |   |
| Item  3.       | Quantitative  and Qualitative Disclosure about Market Risk                                                                   |   |
|           |                                                                                                                         |   |
| **PART II.**   | **OTHER INFORMATION**                                                                                                        |   |
|           |                                                                                                                         |   |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                                                         |   |
|           |                                                                                                                         |   |
| Item 6.        | Exhibits and  Reports on Form 8-K                                                                                            |   |
|           |                                                                                                                         |   |
| **SIGNATURES** |

 

 

**PARTI. FINANCIAL INFORMATION**

**Item1.              Condensed ConsolidatedFinancial Statements**

**INVESTORS FINANCIAL SERVICES CORP.CONDENSED CONSOLIDATED BALANCESHEETSJune 30, 2001 and December 31, 2000(Dollars in thousands, except per share data)**

 

|                                                                                                                                                                                                                      | **June 30, 2001 (unaudited)**    |       | **December 31, 2000** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|------------|----------------------------|------------|
|                                                                                                                                                                                                                      | ****                             | ** ** | ****                       | ** ** |
| **Assets**                                                                                                                                                                                                                |                             |       |                       |       |
| Cash  and due from banks                                                                                                                                                                                                  | $                                | 21,767     |                       | $          | 30,489 |   |
| Federal  funds sold                                                                                                                                                                                                       | -                                |       | 450,000                    |       |
| Securities  available for sale                                                                                                                                                                                            | 1,287,537                        |       | 772,333                    |       |
| Securities  held to maturity (approximate fair value of $3,085,341 and $2,287,602  at June 30, 2001 and December 31,  2000, respectively)                                                                       | 3,076,440                        |       | 2,299,294                  |       |
| Non–marketable  equity securities                                                                                                                                                                                    | 50,000                           |       | 15,000                     |       |
| Loans,  less allowance for loan losses of $100 at June 30, 2001 and December 31,  2000                                                                                                                               | 130,294                          |       | 129,269                    |       |
| Accrued  interest and fees receivable                                                                                                                                                                                     | 73,407                           |       | 48,003                     |       |
| Equipment  and leasehold improvements, less accumulated depreciation of $11,208 and  $10,563 at    June 30, 2001 and December 31, 2000, respectively                                                  | 32,055                           |       | 15,086                     |       |
| Goodwill,  net                                                                                                                                                                                                            | 81,900                           |       | 34,094                     |       |
| Other  assets                                                                                                                                                                                                             | 42,922                           |       | 17,547                     |       |
|                                                                                                                                                                                                                      |                                  |       |                            |       |
| **Total  Assets**                                                                                                                                                                                                         | $                                | 4,796,322  |                       | $          | 3,811,115 |   |
|                                                                                                                                                                                                                      |                                  |       |                            |       |
|                                                                                                                                                                                                                      |                             |       |                       |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                             |                             |       |                       |       |
| **Liabilities:**                                                                                                                                                                                                          |                             |       |                       |       |
| Deposits:                                                                                                                                                                                                                 |                             |       |                       |       |
|                                                                                                                                                                                                                      | Demand                           | $          | 114,834                    |       | $ | 362,946 |   |
|                                                                                                                                                                                                                      | Savings                          | 2,135,410  |                       | 1,903,938  |   |
|                                                                                                                                                                                                                      | Time                             | 65,000     |                       | 65,000     |   |
|                                                                                                                                                                                                                      |                             |            |                       |            |   |
|                                                                                                                                                                                                                      | Total  deposits                  | 2,315,244  |                       | 2,331,884  |   |
|                                                                                                                                                                                                                      |                             |       |                       |       |
| Securities  sold under repurchase agreements                                                                                                                                                                              | 1,724,903                        |       | 1,251,725                  |       |
| Short-term  and other borrowings                                                                                                                                                                                          | 358,978                          |       | 246                        |       |
| Other  liabilities                                                                                                                                                                                                        | 53,954                           |       | 24,206                     |       |
|                                                                                                                                                                                                                      |                                  |       |                            |       |
|                                                                                                                                                                                                                      | Total  liabilities               | 4,453,079  |                       | 3,608,061  |   |
|                                                                                                                                                                                                                      |                             |            |                       |            |   |
|                                                                                                                                                                                                                      |                             |       |                       |       |
| Commitments  and contingencies                                                                                                                                                                                            | -                                |       | -                          |       |
|                                                                                                                                                                                                                      |                             |       |                       |       |
| Company–obligated,  mandatorily redeemable, preferred securities of subsidiary trust holding  solely junior subordinated deferrable interest debentures of the Company                                               | 24,260                           |       | 24,246                     |       |
|                                                                                                                                                                                                                      |                                  |       |                            |       |
|                                                                                                                                                                                                                      |                             |       |                       |       |
| **Stockholders’  Equity:**                                                                                                                                                                                           |                             |       |                       |       |
| Preferred  stock, par value $0.01 (shares authorized: 1,000,000; issued and outstanding:  0 at June 30, 2001 and December 31, 2000)                                                                                  | -                                |       | -                          |       |
| Common  stock, par value $0.01 (shares authorized: 100,000,000 at June 30, 2001 and  40,000,000 at December 31, 2000; issued and outstanding: 31,873,289 at  June 30, 2001 and 29,912,711 at December 31, 2000) | 319                              |       | 299                        |       |
| Surplus                                                                                                                                                                                                                   | 217,657                          |       | 95,007                     |       |
| Deferred  compensation                                                                                                                                                                                                    | (504                             | )          | (247                       | )          |
| Retained  earnings                                                                                                                                                                                                        | 106,193                          |       | 85,188                     |       |
| Accumulated  other comprehensive loss, net                                                                                                                                                                                | (4,682                           | )          | (1,439                     | )          |
| Treasury  stock, par value $0.01 (10,814 shares at June 30, 2001 and December 31,  2000)                                                                                                                             | -                                |       | -                          |       |
|                                                                                                                                                                                                                      |                                  |       |                            |       |
|                                                                                                                                                                                                                      | Total  stockholders’ equity | 318,983    |                       | 178,808    |   |
|                                                                                                                                                                                                                      |                             |            |                       |            |   |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                                                                                      | $                                | 4,796,322  |                       | $          | 3,811,115 |   |
|                                                                                                                                                                                                                      |                                  |       |                            |       |
|                                                                                                                                                                                                                           |                                  |            |                            |            |  |  |  |  |  |

*SeeNotes to Condensed Consolidated Financial Statements.*

**INVESTORSFINANCIAL SERVICES CORP.CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)Six Months Ended June 30, 2001 and 2000(Dollars in thousands, except per share data)**

|                                                                                                                                | **June 30,****2001**                                                 |       | **June 30, 2000** |       |
|-------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|------------|-------------------|------------|
|                                                                                                                                | ****                                                                 |       | ****              |       |
| **Operating  Revenue:**                                                                                                             |                                                                 | ** ** |              | ** ** |
| Interest  income:                                                                                                                   |                                                                 |       |              |       |
|                                                                                                                                | Federal  funds sold and securities purchased under resale agreements | $          | 1,196             |       | $ | 1,262 |   |
|                                                                                                                                | Investment  securities held to maturity and available for sale       | 120,574    |              | 75,687     |   |
|                                                                                                                                | Loans                                                                | 2,848      |              | 2,812      |   |
|                                                                                                                                |                                                                 |            |              |            |   |
|                                                                                                                                | Total  interest income                                               | 124,618    |              | 79,761     |   |
|                                                                                                                                |                                                                 |            |              |            |   |
| Interest  expense:                                                                                                                  |                                                                 |       |              |       |
|                                                                                                                                | Deposits                                                             | 36,730     |              | 25,356     |   |
|                                                                                                                                | Short-term  and other borrowings                                     | 39,474     |              | 28,418     |   |
|                                                                                                                                |                                                                 |            |              |            |   |
|                                                                                                                                | Total  interest expense                                              | 76,204     |              | 53,774     |   |
|                                                                                                                                |                                                                 |            |              |            |   |
|                                                                                                                                | Net  interest income                                                 | 48,414     |              | 25,987     |   |
|                                                                                                                                |                                                                 |       |              |       |
| Noninterest  income:                                                                                                                |                                                                 |       |              |       |
|                                                                                                                                | Asset  servicing fees                                                | 108,490    |              | 79,155     |   |
|                                                                                                                                | Other  operating income                                              | 1,549      |              | 803        |   |
|                                                                                                                                |                                                                 |            |              |            |   |
|                                                                                                                                | Net  operating revenue                                               | 158,453    |              | 105,945    |   |
|                                                                                                                                |                                                                 |       |              |       |
| **Operating  Expenses:**                                                                                                            |                                                                 |       |              |       |
| Compensation  and benefits                                                                                                          | 75,516                                                               |       | 50,411            |       |
| Technology  and telecommunications                                                                                                  | 18,497                                                               |       | 10,155            |       |
| Occupancy                                                                                                                           | 7,802                                                                |       | 5,107             |       |
| Transaction  processing services                                                                                                    | 7,639                                                                |       | 5,013             |       |
| Depreciation  and amortization                                                                                                      | 3,223                                                                |       | 2,190             |       |
| Travel  and sales promotion                                                                                                         | 2,394                                                                |       | 1,520             |       |
| Professional  fees                                                                                                                  | 1,895                                                                |       | 1,566             |       |
| Amortization  of goodwill                                                                                                           | 1,573                                                                |       | 826               |       |
| Other  operating expenses                                                                                                           | 6,486                                                                |       | 5,308             |       |
|                                                                                                                                |                                                                      |       |                   |       |
|                                                                                                                                | Total  operating expenses                                            | 125,025    |              | 82,096     |   |
|                                                                                                                                |                                                                      |       |                   |       |
|                                                                                                                                |                                                                 |       |              |       |
| **Income  Before Income Taxes and Minority Interest**                                                                               | 33,428                                                               |       | 23,849            |       |
|                                                                                                                                |                                                                 |       |              |       |
| Provision  for income taxes                                                                                                         | 10,394                                                               |       | 7,668             |       |
| Minority  interest expense, net of income taxes                                                                                     | 794                                                                  |       | 794               |       |
|                                                                                                                                |                                                                      |       |                   |       |
| **Net  Income**                                                                                                                     | $                                                                    | 22,240     |              | $          | 15,387 |   |
|                                                                                                                                |                                                                      |       |                   |       |
| **Basic  Earnings Per Share**                                                                                                       | $                                                                    | 0.71       |              | $          | 0.52 |   |
|                                                                                                                                |                                                                      |       |                   |       |
| **Diluted  Earnings Per Share**                                                                                                     | $                                                                    | 0.68       |              | $          | 0.50 |   |
|                                                                                                                                |                                                                      |       |                   |       |
|                                                                                                                                |                                                                 |       |              |       |
| **Comprehensive  Income:**                                                                                                          |                                                                 |       |              |       |
| Net  income                                                                                                                         | $                                                                    | 22,240     |              | $          | 15,387 |   |
| Other  comprehensive loss net of tax of ($1,746) and ($34) for the six months ended  June 30, 2001 and June 30, 2000, respectively: |                                                                 |       |              |       |
|                                                                                                                                | Cumulative  effect of a change in accounting principle               | (3,934     | )                 | -          |   |
|                                                                                                                                | Net  unrealized investment gain/(loss)                               | 2,319      |              | (73        | ) |
|                                                                                                                                | Net  unrealized derivative instrument loss                           | (1,628     | )                 | -          |   |
|                                                                                                                                |                                                                 |            |              |            |   |
|                                                                                                                                | Other  comprehensive loss                                            | (3,243     | )                 | (73        | ) |
|                                                                                                                                |                                                                 |            |              |            |   |
| Comprehensive  income                                                                                                               | $                                                                    | 18,997     |              | $          | 15,314 |   |
|                                                                                                                                |                                                                      |       |                   |       |
|                                                                                                                                     |                                                                      |            |                   |            |  |  |  |  |  |

*SeeNotes to Condensed Consolidated Financial Statements.*

**INVESTORSFINANCIAL SERVICES CORP.CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(unaudited)Three Months Ended June 30, 2001 and2000(Dollars in thousands, except per share data)**

|                                                                                                                                           | **June 30,****2001**                                                 |       | **June 30, 2000** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|------------|-------------------|------------|
|                                                                                                                                           | ****                                                                 |       | ****              |       |
| **Operating  Revenue:**                                                                                                                        |                                                                 | ** ** |              | ** ** |
| Interest  income:                                                                                                                              |                                                                 |       |              |       |
|                                                                                                                                           | Federal  funds sold and securities purchased under resale agreements | $          | 267               |       | $ | 364 |   |
|                                                                                                                                           | Investment  securities held to maturity and available for sale       | 63,553     |              | 40,207     |   |
|                                                                                                                                           | Loans                                                                | 1,481      |              | 1,396      |   |
|                                                                                                                                           |                                                                 |            |              |            |   |
|                                                                                                                                           | Total  interest income                                               | 65,301     |              | 41,967     |   |
|                                                                                                                                           |                                                                 |       |              |       |   |
| Interest  expense:                                                                                                                             |                                                                 |       |              |       |
|                                                                                                                                           | Deposits                                                             | 17,300     |              | 12,846     |   |
|                                                                                                                                           | Short-term  and other borrowings                                     | 21,056     |              | 16,091     |   |
|                                                                                                                                           |                                                                 |            |              |            |   |
|                                                                                                                                           | Total  interest expense                                              | 38,356     |              | 28,937     |   |
|                                                                                                                                           |                                                                 |            |              |            |   |
|                                                                                                                                           | Net  interest income                                                 | 26,945     |              | 13,030     |   |
|                                                                                                                                           |                                                                 |       |              |       |
| Noninterest  income:                                                                                                                           |                                                                 |       |              |       |
|                                                                                                                                           | Asset  servicing fees                                                | 60,058     |              | 39,439     |   |
|                                                                                                                                           | Other  operating income                                              | 768        |              | 407        |   |
|                                                                                                                                           |                                                                 |            |              |            |   |
|                                                                                                                                           | Net  operating revenue                                               | 87,771     |              | 52,876     |   |
|                                                                                                                                           |                                                                 |       |              |       |   |
| **Operating  Expenses:**                                                                                                                       |                                                                 |       |              |       |
| Compensation  and benefits                                                                                                                     | 41,602                                                               |       | 23,884            |       |
| Technology  and telecommunications                                                                                                             | 10,455                                                               |       | 5,560             |       |
| Transaction  processing services                                                                                                               | 5,065                                                                |       | 2,494             |       |
| Occupancy                                                                                                                                      | 4,266                                                                |       | 3,035             |       |
| Depreciation  and amortization                                                                                                                 | 1,861                                                                |       | 1,147             |       |
| Travel  and sales promotion                                                                                                                    | 1,396                                                                |       | 851               |       |
| Professional  fees                                                                                                                             | 1,150                                                                |       | 492               |       |
| Amortization  of goodwill                                                                                                                      | 923                                                                  |       | 405               |       |
| Other  operating expenses                                                                                                                      | 3,454                                                                |       | 2,454             |       |
|                                                                                                                                           |                                                                      |       |                   |       |
|                                                                                                                                           | Total  operating expenses                                            | 70,172     |              | 40,322     |   |
|                                                                                                                                           |                                                                 |            |              |            |   |
|                                                                                                                                           |                                                                 |       |              |       |
| **Income  Before Income Taxes and Minority Interest**                                                                                          | 17,599                                                               |       | 12,554            |       |
|                                                                                                                                           |                                                                 |       |              |       |
| Provision  for income taxes                                                                                                                    | 5,310                                                                |       | 4,036             |       |
| Minority  interest expense, net of income taxes                                                                                                | 397                                                                  |       | 397               |       |
|                                                                                                                                           |                                                                      |       |                   |       |
| **Net  Income**                                                                                                                                | $                                                                    | 11,892     |              | $          | 8,121 |   |
|                                                                                                                                           |                                                                      |       |                   |       |
| **Basic  Earnings Per Share**                                                                                                                  | $                                                                    | 0.38       |              | $          | 0.27 |   |
|                                                                                                                                           |                                                                      |       |                   |       |
| **Diluted  Earnings Per Share**                                                                                                                | $                                                                    | 0.36       |              | $          | 0.26 |   |
|                                                                                                                                           |                                                                      |       |                   |       |
|                                                                                                                                           |                                                                 |       |              |       |
| **Comprehensive  Income:**                                                                                                                     |                                                                 |       |              |       |
| Net  income                                                                                                                                    | $                                                                    | 11,892     |              | $          | 8,121 |   |
| Other  comprehensive income/(loss) net of tax of $6 and ($457) for the three  months ended June 30, 2001 and June 30, 2000, respectively: |                                                                 |       |              |       |
|                                                                                                                                           | Net  unrealized investment loss                                      | (1,463     | )                 | (971       | ) |
|                                                                                                                                           | Net  unrealized derivative instrument gain                           | 1,475      |              | -          |   |
|                                                                                                                                           |                                                                 |            |              |            |   |
|                                                                                                                                           | Other  comprehensive income/(loss)                                   | 12         |              | (971       | ) |
|                                                                                                                                           |                                                                 |            |              |            |   |
| Comprehensive  income                                                                                                                          | $                                                                    | 11,904     |              | $          | 7,150 |   |
|                                                                                                                                           |                                                                      |       |                   |       |
|                                                                                                                                                |                                                                      |            |                   |            |  |  |  |  |

*SeeNotes to Condensed Consolidated Financial Statements.*

**INVESTORSFINANCIAL SERVICES CORP.CONDENSED CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)Six Months Ended June 30, 2001 and 2000(Dollars in thousands, except per share data)**

|                                                                                                  | **June 30,****2001** |       | **June 30,  2000** |       |
|-------------------------------------------------------------------------------------------------------|----------------------|------------|--------------------|------------|
|                                                                                                  | ****                 |       | ****               |       |
| **Common  shares**                                                                                    |                 | ** ** |               | ** ** |
| Balance,  beginning of period                                                                         | 29,912,711           |       | 14,610,154         |       |
| Exercise  of stock options                                                                            | 315,445              |       | 290,958            |       |
| Common  stock issuance                                                                                | 1,645,133            |       | -                  |       |
| Stock  dividend, two-for-one split                                                                    | -                    |       | 14,858,146         |       |
|                                                                                                  |                      |       |                    |       |
| Balance,  end of period                                                                               | 31,873,289           |       | 29,759,258         |       |
|                                                                                                  |                      |       |                    |       |
| **Treasury  shares**                                                                                  |                 | ** ** |               | ** ** |
| Balance,  beginning of period                                                                         | 10,814               |       | 10,814             |       |
|                                                                                                  |                      |       |                    |       |
| Balance,  end of period                                                                               | 10,814               |       | 10,814             |       |
|                                                                                                  |                      |       |                    |       |
| **Common  stock**                                                                                     |                 | ** ** |               | ** ** |
| Balance,  beginning of period                                                                         | $                    | 299        |               | $          | 146 |   |
| Exercise  of stock options                                                                            | 4                    |       | 3                  |       |
| Common  stock issuance                                                                                | 16                   |       | -                  |       |
| Stock  dividend, two-for one split                                                                    | -                    |       | 149                |       |
|                                                                                                  |                      |       |                    |       |
| Balance,  end of period                                                                               | 319                  |       | 298                |       |
|                                                                                                  |                      |       |                    |       |
| **Surplus**                                                                                           |                 |       |               |       |
| Balance,  beginning of period                                                                         | 95,007               |       | 87,320             |       |
| Exercise  of stock options                                                                            | 1,548                |       | 2,320              |       |
| Tax  benefit from exercise of stock options                                                           | 3,741                |       | 2,235              |       |
| Common  stock issuance                                                                                | 117,361              |       | -                  |       |
|                                                                                                  |                      |       |                    |       |
| Balance,  end of period                                                                               | 217,657              |       | 91,875             |       |
|                                                                                                  |                      |       |                    |       |
| **Deferred  compensation**                                                                            |                 |       |               |       |
| Balance,  beginning of the period                                                                     | (247                 | )          | (689               | )          |
| Common  stock issuance                                                                                | (335                 | )          | -                  |       |
| Amortization  of deferred compensation                                                                | 78                   |       | 255                |       |
|                                                                                                  |                      |       |                    |       |
| Balance,  end of period                                                                               | (504                 | )          | (434               | )          |
|                                                                                                  |                      |       |                    |       |
| **Retained  earnings**                                                                                |                 |       |               |       |
| Balance,  beginning of period                                                                         | 85,188               |       | 53,542             |       |
| Net  income                                                                                           | 22,240               |       | 15,387             |       |
| Stock  dividend, two-for-one split                                                                    | -                    |       | (149               | )          |
| Cash  dividend, $0.04 and $0.03 per share in the periods ending June 30, 2001 and  2000, respectively | (1,235               | )          | (887               | )          |
|                                                                                                  |                      |       |                    |       |
| Balance,  end of period                                                                               | 106,193              |       | 67,893             |       |
|                                                                                                  |                      |       |                    |       |
| **Accumulated  other comprehensive income/(loss), net**                                               |                 |       |               |       |
| Balance,  beginning of period                                                                         | (1,439               | )          | (3,481             | )          |
| Cumulative  effect of a change in accounting principle                                                | (3,934               | )          | -                  |       |
| Net  unrealized investment gain/(loss)                                                                | 2,319                |       | (73                | )          |
| Net  unrealized derivative instrument loss                                                            | (1,628               | )          | -                  |       |
|                                                                                                  |                      |       |                    |       |
| Balance,  end of period                                                                               | (4,682               | )          | (3,554             | )          |
|                                                                                                  |                      |       |                    |       |
| **Treasury  stock**                                                                                   |                 |       |               |       |
| Balance,  beginning of period                                                                         | -                    |       | -                  |       |
|                                                                                                  |                      |       |                    |       |
| Balance,  end of period                                                                               | -                    |       | -                  |       |
|                                                                                                  |                      |       |                    |       |
|                                                                                                  |                 |       |               |       |
| **Total  Stockholders’ Equity**                                                                  | $                    | 318,983    |               | $          | 156,078 |   |
|                                                                                                  |                      |       |                    |       |

*SeeNotes to Condensed Consolidated Financial Statements.*

**INVESTORSFINANCIAL SERVICES CORP.CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (unaudited)Six Months Ended June 30, 2001 and 2000(Dollars in thousands)**

|                                                                               | **June 30,  2001**                                                |       | **June 30, 2000** |       |
|------------------------------------------------------------------------------------|------------------------------------------------------------------------|------------|-------------------|------------|
|                                                                               | ****                                                                   |       | ****              |       |
|                                                                               |                                                                   | ** ** |              | ** ** |
| **Cash  Flows From Operating Activities:**                                         |                                                                   |       |              |       |
| Net  income                                                                        | $                                                                      | 22,240     |              | $          | 15,387 |   |
|                                                                               |                                                                        |       |                   |       |
| Adjustments  to reconcile net income to net cash provided by operating activities: |                                                                   |       |              |       |
|                                                                               | Depreciation  and amortization                                         | 4,796      |              | 3,016      |   |
|                                                                               | Amortization  of deferred compensation                                 | (257       | )                 | 255        |   |
|                                                                               | Amortization  of premiums on securities, net of accretion of discounts | (224       | )                 | 1,935      |   |
|                                                                               | Changes  in assets and liabilities:                                    |       |              |       |   |
|                                                                               | Accrued  interest and fees receivable                                  | (25,404    | )                 | (2,111     | ) |
|                                                                               | Other  assets                                                          | (12,383    | )                 | 3,808      |   |
|                                                                               | Other  liabilities                                                     | 13,464     |              | 25,966     |   |
|                                                                               |                                                                   |            |              |            |   |
|                                                                               | Total  adjustments                                                     | (20,008    | )                 | 32,869     |   |
|                                                                               |                                                                   |            |              |            |   |
|                                                                               | Net  cash provided by operating activities                             | 2,232      |              | 48,256     |   |
|                                                                               |                                                                   |            |              |            |   |
|                                                                               |                                                                   |       |              |       |
| **Cash  Flows From Investing Activities:**                                         |                                                                   |       |              |       |
| Proceeds  from maturities of securities available for sale                         | 197,874                                                                |       | 31,031            |       |
| Proceeds  from maturities of securities held to maturity                           | 412,237                                                                |       | 106,547           |       |
| Purchases  of securities available for sale                                        | (306,876                                                               | )          | (209,257          | )          |
| Purchases  of securities held to maturity                                          | (1,591,570                                                             | )          | (358,341          | )          |
| Purchases  of non–marketable equity securities                                | (35,000                                                                | )          | -                 |       |
| Net  decrease in federal funds sold                                                | 450,000                                                                |       | 150,000           |       |
| Net  increase in loans                                                             | (1,025                                                                 | )          | (3,612            | )          |
| Purchase  of businesses                                                            | (49,379                                                                | )          | -                 |       |
| Purchases  of fixed assets and leasehold improvements                              | (20,179                                                                | )          | (4,102            | )          |
|                                                                               |                                                                        |       |                   |       |
|                                                                               | Net  cash used for investing activities                                | (943,918   | )                 | (287,734   | ) |
|                                                                               |                                                                   |            |              |            |   |
|                                                                               |                                                                   |       |              |       |
| **Cash  Flows From Financing Activities:**                                         |                                                                   |       |              |       |
| Net  decrease in demand deposits                                                   | (248,112                                                               | )          | (66,530           | )          |
| Net  increase/(decrease) in time and savings deposits                              | 231,472                                                                |       | (77,930           | )          |
| Net  increase in short–term and other borrowings                              | 831,910                                                                |       | 357,821           |       |
| Proceeds  from exercise of stock options                                           | 1,552                                                                  |       | 2,323             |       |
| Proceeds  from issuance of common stock                                            | 117,377                                                                |       | -                 |       |
| Cash  dividends to shareholders                                                    | (1,235                                                                 | )          | (887              | )          |
|                                                                               |                                                                        |       |                   |       |
|                                                                               | Net  cash provided by financing activities                             | 932,964    |              | 214,797    |   |
|                                                                               |                                                                   |            |              |            |   |
|                                                                               |                                                                   |       |              |       |
| **Net  Decrease In Cash And Due From Banks**                                       | (8,722                                                                 | )          | (24,681           | )          |
|                                                                               |                                                                        |       |                   |       |
| **Cash  and Due From Banks, Beginning of Period**                                  | 30,489                                                                 |       | 37,624            |       |
|                                                                               |                                                                        |       |                   |       |
| **Cash  and Due From Banks, End of Period**                                        | $                                                                      | 21,767     |              | $          | 12,943 |   |
|                                                                               |                                                                        |       |                   |       |
| **Supplemental  Disclosure of Cash Flow Information:**                             |                                                                   |       |              |       |
|                                                                               | Cash  paid for interest                                                | $          | 77,577            |       | $ | 52,211 |   |
|                                                                               |                                                                   |            |              |            |   |
|                                                                               | Cash  paid for income taxes                                            | $          | 9,531             |       | $ | 5,863 |   |
|                                                                               |                                                                        |       |                   |       |
|                                                                                    |                                                                        |            |                   |            |  |  |  |  |  |

*SeeNotes To Condensed Consolidated Financial Statements.*

 

**INVESTORSFINANCIAL SERVICES CORP.NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(Information as of and for the six months and the three months ended June 30,2001 and 2000 is unaudited)**

**1.**          **Descriptionof Business**

Investors Financial Services Corp. (‘IFSC’)provides asset servicing for the financial services industry through itswholly-owned subsidiaries, Investors Bank & Trust Company (the ‘Bank’) andInvestors Capital Services, Inc.  Asused herein, the defined term ‘the Company’ shall mean IFSC together with theBank and its domestic and foreign subsidiaries.  The Company provides globalcustody, multicurrency accounting, mutual fund administration, securitieslending, foreign exchange, cash management, performance measurement,institutional transfer agency and investment advisory services to a variety offinancial asset managers, including mutual fund complexes, investment advisors,banks and insurance companies.  IFSCand the Bank are subject to regulation by the Federal Reserve Board ofGovernors, the Office of the Commissioner of Banks of the Commonwealth ofMassachusetts and the Federal Deposit Insurance Corporation.

On May 15, 2000, theBoard of Directors declared a two-for-one stock split in the form of a 100%stock dividend payable on June 15, 2000 to stockholders of record onMay 31, 2000.  All share numbershave been restated to reflect the two-for-one stock split paid June 15,2000, where applicable.

**2.          Interim Financial Statements**

The condensed consolidated interim financialstatements of the Company and subsidiaries as of June 30, 2001 and 2000 and forthe six–month periods and three-month periods ended June 30, 2001 and2000 have been prepared by the Company, without audit, pursuant to the rulesand regulations of the Securities and Exchange Commission. Certain informationand footnote disclosures normally included in annual financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted as permitted by suchrules and regulations. All adjustments, consisting of normal recurringadjustments, necessary for their fair presentation in conformity withaccounting principles generally accepted in the United States of America areincluded.  Management believes that thedisclosures are adequate to present fairly the financial position, results ofoperations and cash flows at the dates and for the periods presented. It issuggested that these interim financial statements be read in conjunction withthe financial statements and the notes thereto included in the Company’s latestannual report on Form 10–K. Results for interim periods are notnecessarily indicative of those to be expected for the full fiscal year.Certain amounts in the prior periods’ financial statements have beenreclassified to conform to the current periods’ presentation.

Effective January 1, 2001, the Company adoptedSFAS No. 133, as amended and interpreted, which established accounting andreporting standards for derivative instruments.  The Company uses derivative instruments to manage exposures tointerest rate risks. The Company routinely enters into interest rate swapagreements in which the Company pays a fixed interest rate and receives afloating interest rate.  Thesetransactions are designed to hedge a portion of the Company’s liabilities inconnection with securities sold under repurchase agreements.  By entering into a pay-fixed/receive-floatinginterest rate swap, a portion of the liabilities is effectively converted to afixed rate liability for the term of the interest rate swap agreement. Most ofthese derivatives have been designated as highly effective cash flow hedges, asdetermined in accordance with SFAS No. 133. An insignificant portion ofthe derivatives used to manage exposures to interest rate risks were notconsidered highly effective and, therefore, did not qualify for hedgeaccounting.

Hedge ineffectiveness, determined in accordancewith SFAS No. 133, had an insignificant impact on earnings for the sixmonths ended June 30, 2001. No cash flow hedges were dedesignated ordiscontinued for the six months ended June 30, 2001.

Net interest income included net losses of $1.2million and $0.5 million, net of tax, for the six months and three months endedJune 30, 2001, respectively, on interest rate swaps relating to SFASNo. 133.  The net loss consisted ofa $0.2 million loss and a $0.1 million gain, net of tax, for the six- andthree-month periods, respectively, on changes in the fair value of derivativeinstruments not designated as hedging instruments.  There were also $1.0 million and $0.6 million of derivativelosses, net of tax, for the six- and three-month periods, respectively, thatresulted primarily from the reclassification of transition adjustment-related 

derivative losses from OCI to net interestincome in accordance with SFAS No. 133. The Company estimates that $2.3 million, net of tax, of the remainingtransition adjustment of net derivative losses included in OCI will be reclassifiedinto earnings within the next twelve months. The recognition in net interestincome of the transition adjustment derivative losses from OCI will be offsetby derivative gains from changes in the fair value liability of the interestrate swaps as they reach maturity.

In June 2001, the FASB issued SFAS No. 141,“Business Combinations,” which supersedes APB Opinion No. 16, “BusinessCombinations,” and FASB Statement No. 38, “Accounting for PreacquisitonContingencies of Purchased Enterprises.” SFAS No. 141 requires that all business combinations be accounted for bya single method—the purchase method. This statement requires that intangible assets that can be identifiedand named, be recognized as assets apart from goodwill under certaincriteria.  This statement also requiresdisclosure of the primary reasons for a business combination and the allocationof the purchase price paid to the assets acquired and liabilities assumed bymajor balance sheet caption.  When theamounts of goodwill and intangible assets acquired are significant in relationto the purchase price paid, additional disclosures about those assets isrequired.  The provisions of SFAS No.141 apply to all business combinations initiated after June 30, 2001.

In June 2001, the FASB issued SFAS No. 142,“Goodwill and Other Intangible Assets,” and supersedes APB No. 17, “IntangibleAssets.”  SFAS No. 142 addresses howintangible assets that are acquired individually or with a group of otherassets (but not those acquired in a business combination) should be accountedfor in financial statements upon their acquisition.  This statement also addresses how goodwill and other intangibleassets should be accounted for after they have been initially recognized in thefinancial statements.  This statementaffects the accounting of premiums, includes guidelines for the determination,measurement and testing of impairment, and requires disclosure of informationabout goodwill and other intangible assets in the years subsequent to theiracquisition that was not previously required. The provisions of SFAS No. 142 are required to be applied starting withfiscal years beginning after December 15, 2001.

**3.          Loans**

Loans consist of demand loans to custody clientsof the Company, including individuals, and not–for–profitinstitutions located in the greater Boston, Massachusetts metropolitan area andloans to mutual fund clients. The loans to mutual funds include lines of creditand advances pursuant to the terms of the custody agreements between theCompany and those mutual fund clients to facilitate securities transactions andredemptions. Generally, the loans are, or may be, in the event of default,collateralized with marketable securities held by the Company as custodian.There were no impaired or nonperforming loans at June 30, 2001 and December 31,2000.  In addition, there were no loancharge–offs or recoveries during the six months ended June 30, 2001 andthe year ended December 31, 2000. Loans are summarized as follows (Dollars inthousands):

 

|                            | **June 30,  2001** |    | **December 31,  2000** |   |
|---------------------------------|--------------------|---------|-----------------------------|--------|
|                            | ****               |    | ****                        |   |
| Loans  to individuals           | $                  | 78,650  |                        | $      | 42,997 |   |
| Loans  to mutual funds          | 51,679             |    | 86,316                      |   |
| Loans  to others                | 65                 |    | 56                          |   |
|                            |                    |    |                             |   |
|                            | 130,394            |    | 129,369                     |   |
| Less  allowance for loan losses | 100                |    | 100                         |   |
|                            |                    |    |                             |   |
| Total                           | $                  | 130,294 |                        | $      | 129,269 |   |
|                            |                    |    |                             |   |

The Company had commitments to lend ofapproximately $375.9 million and $222.4 million at June 30, 2001 and December31, 2000, respectively. The terms of these commitments are similar to the termsof outstanding loans.

 

 

**4.          Acquisitions**

             Goodwill related to the Company’sacquisitions is summarized as follows (Dollars in thousands):

 

|                           | **For the Six  Months Ended****June 30,  2001** |   | **For the****Year  Ended  December 31, 2000** |   |
|--------------------------------|-------------------------------------------------|--------|----------------------------------------------------|--------|
|                           |                                                 |        |                                               |   |  |   |
| Goodwill,  beginning of period | $                                               | 34,094 |                                               | $      | 39,776 |   |
| Plus  purchase of businesses   | 49,379                                          |   | -                                                  |   |
| Plus  contingent payment       | -                                               |   | 255                                                |   |
| Less  termination fees         | -                                               |   | (4,362                                             | )      |
| Less  amortization             | (1,573                                          | )      | (1,575                                             | )      |
|                           |                                                 |   |                                                    |   |
| Goodwill,  end of period       | $                                               | 81,900 |                                               | $      | 34,094 |   |
|                           |                                                 |   |                                                    |   |
|                                |                                                 |        |                                                    |        |  |  |  |  |

On November 28, 2000, the Bank agreed topurchase the advisor custody unit of The Chase Manhattan Bank (‘Chase’). Thetransaction was consummated on February 1, 2001.  This unit provides institutional custody services to individualaccounts, trusts, endowments and corporate accounts whose assets are managed bythird-party investment advisors.   OnMay 1, 2001, the Bank assumed the operations of the U.S. asset administrationunit of Barclays Global Investors, N.A. (‘BGI’), a large internationalinstitutional investment manager.  BGI’sU.S. asset administration unit provides custody, accounting, administration andother operations functions for BGI’s clients. Acquisitions were accounted forusing the purchase method of accounting.

**5.          Deposits**

Time deposits at June 30, 2001 and December 31,2000 each included noninterest-bearing amounts of approximately $65 million.

All time deposits had a minimum balance of$100,000 and a maturity of less than three months at June 30, 2001 and December31, 2000.

**6.          Short-term and other borrowings**

             The components of short–termand other borrowings are as follows (Dollars in thousands):

 

|                                                 |   | **June 30,  2001** |    | **December 31,  2000** |   |
|------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                 |   | ****               |    | ****                   |   |
|                                                 |   |               |    |                   |   |
| Federal  Home Loan Bank of Boston long-term advances |   | $                  | 350,000 |                   | $      | - |   |
| Federal  funds purchased                             |   | 8,000              |    |                   |   |
| Treasury  tax and loan account                       |   | 978                |    | 246                    |   |
|                                                 |   |                    |    |                        |   |
| Total                                                |   | $                  | 358,978 |                   | $      | 246 |   |
|                                                 |   |                    |    |                        |   |

The Company has a borrowing arrangement with theFederal Home Loan Bank of Boston (‘FHLBB’), which is utilized on an overnightand on a term basis to satisfy temporary funding requirements. The Company hasutilized both short-term and long-term features of the term advances. As ofJune 30, 2001, there were $350 million of long-term term advances outstandingwith interest rates ranging from 4.64% to 5.17% and maturities ranging fromSeptember 2002 to February 2005.   Therewere no short-term advances outstanding at June 30, 2001.  There were no outstanding term advancesunder this agreement at December 31, 2000.

There were no outstanding overnight advancesunder this agreement at June 30, 2001 or at December 31, 2000.  The rate on the outstanding balance offederal funds purchased from other banks at June 30, 2001 was 4.13%. There wereno outstanding balances of federal funds purchased from other banks at December31, 2000.

The Company receives federal tax deposits fromclients as agent for the Federal Reserve Bank and accumulates these deposits inthe Treasury tax and loan account. The Federal Reserve Bank charges the Companyinterest at the Federal funds rate on such deposits. The interest rate on theoutstanding balance was 3.69% at June 30, 2001 and 6.29% at December 31, 2000.

 

**7.          Stockholders’ Equity**

At the Annual Meeting ofShareholders of the Company held on April 18, 2000, shareholders approvedan increase in the number of authorized shares of Common Stock from 20,000,000to 40,000,000. On May 2, 2000, the Company amended its Certificate ofIncorporation increasing the number of authorized shares of Common Stock to40,000,000.

On May 15, 2000, the Board of Directorsapproved a two-for-one stock split in the form of a 100% stock dividend toshareholders of record on May 31, 2000. The dividend was paid onJune 15, 2000. A total of 14,858,146 shares of common stock were issued inconnection with the stock split. The par value of these additional shares wascapitalized by a transfer from retained earnings to common stock. The stocksplit did not cause any change in the $0.01 par value per share of the commonstock or in total stockholders' equity.

At the Annual Meeting of Shareholders of theCompany held on April 17, 2001, shareholders approved an increase in the numberof authorized shares of Common Stock from 40,000,000 to 100,000,000. On April25, 2001, the Company amended itsCertificate of Incorporation increasing the number of authorized shares ofCommon Stock to 100,000,000. Such shares are available for general corporatepurposes as determined by the Company's Board of Directors.  As of June 30, 2001, the Company hadauthorized 1,000,000 shares of Preferred Stock and 100,000,000 shares of CommonStock, all with a par value of $0.01 per share.

The Company has three stock option plans: theAmended and Restated 1995 Stock Plan, the Amended and Restated 1995Non-Employee Director Stock Option Plan, and the 1997 Employee Stock PurchasePlan.

At the Annual Meeting of Shareholders of theCompany held on April 17, 2001, shareholders approved the amendment andrestatement of the Company’s Amended and Restated 1995 Stock Plan to increasethe number of shares available for grant pursuant to the plan from 4,640,000 to6,140,000.  Under the Plan, the Companymay grant options to purchase up to a maximum of 6,140,000 shares of CommonStock to certain employees, consultants, directors and officers.  The options may be awarded as incentivestock options (employees only), nonqualified stock options, stock awards oropportunities to make direct purchases of stock.  No options were granted to consultants during the six monthsended June 30, 2001.  Of the 6,140,000shares of Common Stock authorized for issuance under the plan at June 30, 2001,1,692,622 were available for grant as of that date.

The terms of the Amended and Restated 1995Non-Employee Director Stock Option Plan provide for the grant of options tonon-employee directors to purchase up to a maximum of 400,000 shares of CommonStock. Pursuant to the terms of the Plan, options to purchase 10,000 shares ofCommon Stock were awarded on November 8, 1995 to each director. Anydirector elected or appointed after such date will receive an automatic initialgrant of options to purchase 2,500 shares upon becoming a director. Thereafter,each director will receive an automatic grant of options to purchase 2,500shares effective upon each one-year anniversary of the date of such director'soriginal grant. Additionally, non-employee directors may elect to receiveoptions to acquire shares of the Company's Common Stock in lieu of suchdirector's cash retainer. Any election is subject to certain restrictions underthe Amended and Restated 1995 Non-Employee Director Stock Option Plan. The numberof shares of stock underlying the option is equal to the quotient obtained bydividing the cash retainer by the value of an option on the date of grant asdetermined using the Black-Scholes model. Of the 400,000 shares of Common Stock authorized for issuance under theplan, 79,310 were available for grant at June 30, 2001.

The exercise price of options under the Amendedand Restated 1995 Non-Employee Director Stock Option Plan and the qualifiedincentive options under the Amended and Restated 1995 Stock Plan may not beless than the fair market value at the date of the grant.  The exercise price of the nonqualifiedoptions under the Amended and Restated 1995 Stock Plan is determined by thecompensation committee of the Board of Directors.  All options become exercisable as specified by the compensationcommittee at the date of the grant.

In November 1995, theCompany granted 456,000 shares of Common Stock to certain officers of theCompany under the Amended and Restated 1995 Stock Plan. These grants weresubject to the Company's right to repurchase the shares if the officers'employment with the Company terminated. The Company's right to repurchase theshares lapsed over a five-year period. On March 31, 1998, the Companyrepurchased 4,000 unvested shares for $0.08 million under the terms of theAmended and Restated 1995 Stock Plan. By November 2000, all remainingshares outstanding under these grants were vested.

On May 29, 1998, theCompany granted 40,000 shares of Common Stock to an officer of InvestorsCapital Services, Inc. under the Amended and Restated 1995 Stock Plan.This grant is subject to the Company's right to repurchase the shares if theofficer's employment with the Company terminates. The Company's right torepurchase the shares lapses in five equal annual installments beginning oneyear from the date of grant.

On February 13, 2001, theCompany granted 4,000 shares of Common Stock to former employees of the Chaseadvisor custody unit in connection with the acquisition of the unit under the Amendedand Restated 1995 Stock Plan.  Thisgrant is subject to the Company’s right to repurchase the shares if theemployees’ employment with the Company terminates. The Company’s right torepurchase the shares lapses in five equal annual installments beginning oneyear from the date of grant.

On May 1, 2001, the Companygranted 29,000 nonqualified stock options to former employees of the U.S. assetadministration unit of BGI in connection with the assumption of the operationsof the unit.  The exercise price of the options is 10% ofthe fair market value at the close of market on the date of grant.  The grants are exercisable immediately, butany shares acquired on exercise are subject to the Company’s right to repurchasethe shares at the exercise price if the employees’ employment with the Companyterminates.  The Company’s right to repurchase the shares lapses in five equal annualinstallments beginning one year from the date of grant.

The Company has recordeddeferred compensation of $0.5 million and $0.3 million at June 30,2001 and December 31, 2000, respectively, related to certain optionsgranted under the Amended and Restated 1995 Stock Plan.

 

Under the terms of the 1997 Employee StockPurchase Plan, the Company may issue up to 560,000 shares of Common Stockpursuant to the exercise of nontransferable options granted to participatingemployees. The 1997 Employee Stock Purchase Plan permits eligible employees topurchase up to 1,000 shares of Common Stock per payment period, subject tolimitations provided by Section 423(b) of the Internal Revenue Code,through accumulated payroll deductions. The purchases are made twice a year ata price equal to the lesser of (i) 90% of the average market value of theCommon Stock on the first business day of the payment period, or (ii) 90%of the average market value of the Common Stock on the last business day of thepayment period. The payment periods consist of two six-month periods,January 1 through June 30 and July 1 through December 31.

A summary of option activity under the Amendedand Restated 1995 Non–Employee Director Stock Option Plan and the Amendedand Restated 1995 Stock Plans is as follows:

 

|                                          | **Number of  Shares** |       | **Weighted–Average  Exercise Price** |       |
|-----------------------------------------------|-----------------------|------------|-------------------------------------------|------------|
|                                          | ****                  |       | ****                                      |       |
|                                          |                  | ** ** |                                      | ** ** |
| Outstanding  at December 31, 2000             | 2,896,662             |       | $                                         | 27         |   |
| Granted                                       | 134,357               |       | 60                                        |       |
| Exercised                                     | (341,376              | )          | 10                                        |       |
| Canceled                                      | (12,850               | )          | 59                                        |       |
|                                          |                       |       |                                      |       |
| Outstanding  at June 30, 2001                 | 2,676,793             |       | $                                         | 30         |   |
|                                          |                       |       |                                      |       |
| Outstanding  and exercisable at June 30, 2001 | 1,329,564             |       |                                      |       |
|                                          |                       |       |                                      |       |
|                                          | **Number of  Shares** |       | **Weighted–Average  Exercise Price** | ** ** |
|                                          | ****                  |       | ****                                      |       |
|                                          |                  | ** ** |                                      | ** ** |
| Outstanding  at December 31, 1999             | 2,960,334             |       | $                                         | 13         |   |
| Granted                                       | 203,608               |       | 22                                        |       |
| Exercised                                     | (692,704              | )          | 8                                         |       |
| Canceled                                      | (44,950               | )          | 15                                        |       |
|                                          |                       |       |                                      |       |
| Outstanding  at June 30, 2000                 | 2,426,288             |       | $                                         | 15         |   |
|                                          |                       |       |                                      |       |
| Outstanding  and exercisable at June 30, 2000 | 1,076,619             |       |                                      |       |
|                                          |                       |       |                                      |       |

             A summary of activity under the1997 Employee Stock Purchase Plan is as follows (Number of shares): 

|                                                        | **For the Six  Months Ended  June 30,  2001** |    | **For the  Year Ended  December 31,  2000** |    |
|-------------------------------------------------------------|-----------------------------------------------|---------|---------------------------------------------|---------|
|                                                        | ****                                          |    | ****                                        |    |
| Total  shares available under the Plan, beginning of period | 299,034                                       |    | 357,354                                     |    |
|                                                        | Issued  at June 30                            | (20,988 | )                                           | (34,466 | ) |
|                                                        | Issued  at December 31                        | -       |                                        | (23,854 | ) |
|                                                        |                                          |         |                                        |         |   |
| Total  shares available under the Plan, end of period       | 278,046                                       |    | 299,034                                     |    |
|                                                        |                                               |    |                                             |    |

For the six-month period ended June 30, 2001,the purchase price of the stock was $60.50, or 90% of the average market valueof the Common Stock on the last business day of the payment period ending June30, 2001.

For the year ended December 31, 2000, thepurchase price of the stock was $21.00 and $36.25, or 90% of the average marketvalue of the Common Stock on the first business day of the payment periodsending June 30, 2000 and December 31, 2000, respectively.

*EarningsPer Share—*Under SFAS No. 128, the Company is required todisclose a reconciliation of Basic EPS and Diluted EPS for the six-month andthree-month periods ended June 30, 2001 and 2000 as follows (Dollars inthousands, except per share data):

 

|                                     | **For the Six Months Ended  June 30,** |      | **For the Quarter Ended  June 30,** |      |
|------------------------------------------|----------------------------------------|-----------|-------------------------------------|-----------|
|                                     |                                        |      |                                     |      |
|                                     | **2001**                               |      | **2000**                            |      | **2001** |   | **2000** |   |
|                                     | ****                                   |      | ****                                |      | **** |   | **** |   |
|                                     |                                   |      |                                |      |   |   |   |   |
| Income  available to common stockholders | $                                      | 22,240    |                                | $         | 15,387 |   | $ | 11,892 |   | $ | 8,121 |   |
|                                     |                                        |      |                                     |      |  |   |  |   |
|                                     |                                   |      |                                |      |   |   |   |   |
| Basic  average shares                    | 31,400,929                             |      | 29,578,721                          |      | 31,787,431 |   | 29,671,221 |   |
|                                     | Dilutive  effect of stock options      | 1,276,317 |                                | 1,335,847 |   | 1,227,546 |   | 1,515,817 |   |
|                                     |                                   |           |                                |           |   |  |   |  |   |
| Diluted  average shares                  | 32,677,246                             |      | 30,914,568                          |      | 33,014,977 |   | 31,187,038 |   |
|                                     |                                        |      |                                     |      |  |   |  |   |
|                                     |                                   |      |                                |      |   |   |   |   |
| Earnings  per share                      |                                   |      |                                |      |   |   |   |   |
|                                     | Basic                                  | $         | 0.71                                |      | $ | 0.52 |   | $ | 0.38 |   | $ | 0.27 |   |
|                                     |                                   |           |                                |           |   |  |   |  |   |
|                                     |                                   |      |                                |      |   |   |   |   |   |
|                                     | Diluted                                | $         | 0.68                                |      | $ | 0.50 |   | $ | 0.36 |   | $ | 0.26 |   |
|                                     |                                   |           |                                |           |   |  |   |  |   |

**8.          Off–Balance Sheet Financial Instruments**

*Linesof Credit—*At June 30, 2001, the Company had commitments toindividuals and mutual funds under collateralized open lines of credit totaling$433 million, against which $57 million in loans were drawn. The credit riskinvolved in issuing lines of credit is essentially the same as that involved inextending loan facilities. The Company does not anticipate any loss as a resultof these lines of credit.

**9.          Commitments and Contingencies**

*Restrictionson Cash Balances—*The Company is required to maintain certain averagecash reserve balances. The reserve balance requirement with the Federal ReserveBank (‘FRB’) as of June 30, 2001 was $9.7 million. In addition, another cashbalance in the amount of $13.4 million was pledged to secure clearings with adepository institution, Depository Trust Company, as of June 30, 2001.

*LeaseCommitments—*Minimum future commitments on noncancelableoperating leases at June 30, 2001 were as follows (Dollars in thousands):

| **Fiscal Year Ending** |   | **Premises** |   | **Equipment** |
|----------------------------------|--------|--------------|--------|---------------|
| ****                             |   | ****         |   | ****          |
|                             |   |         |   |          |
| 2001                             |   | $            | 8,134  |          | $ | 2,288 |
| 2002                             |   | 16,034       |   | 3,202         |
| 2003                             |   | 15,976       |   | 1,500         |
| 2004                             |   | 15,737       |   | 140           |
| 2005  and beyond                 |   | 66,401       |   | -             |
|                                  |        |              |        |               |  |  |

Total rent expense was $10.3 million and $6.8million for the six months ended June 30, 2001 and 2000, respectively.

Effective January 1, 2000, the Company renewedits five–year service agreement with Electronic Data Systems (‘EDS’) toexpire on December 31, 2005. Under the terms of the agreement, the Companyagreed to pay certain monthly service fees based on usage. Service expenseunder this contract was $2.1 million for the six months ended June 30, 2001 and$1.7 million for the six months ended June 30, 2000.

*Contingencies—*The Companyprovides global custody, multicurrency accounting, mutual fund administration,securities lending, foreign exchange, cash management, performance measurement,institutional transfer agency and investment advisory services to a variety offinancial asset managers, including mutual fund complexes, investment advisors,banks and insurance companies.  Assetsunder custody and management, held by the Company in a fiduciary capacity, arenot included in the consolidated balance sheets since such items are not assetsof the Company. Management conducts regular reviews of its fiduciary

responsibilities and considers the results inpreparing its consolidated financial statements.  In the opinion of management, there are no contingent liabilitiesat June 30, 2001 that are material to the consolidated financial position orresults of operations of the Company.

On January 16, 2001,Mopex, Inc. filed an action entitled Mopex, Inc. v. Chicago Stock Exchange,Inc., et al., Civil Action No. 01 C 0302, in the United States DistrictCourt for the Northern District of Illinois. In the action, Mopex alleges that the Company and numerous otherentities, including Barclays Global Investors, State Street Bank and TrustCompany, and Merrill Lynch, Pierce, Fenner & Smith, Inc., infringe U.S.Patent No. 6,088,685, entitled, “Open End Mutual Fund Securitization Process,”assigned to Mopex.  In the action, Mopexalleges that the ‘685 patent covers the creation and trading of certainsecurities, including the Barclays iShares exchange traded funds.  The Complaint seeks injunctive relief,damages, and enhanced remedies (including attorneys’ fees and trebledamages).  In a letter dated January 18,2001, Mopex stated that it desired to license the patent in suit “at afavorable royalty rate prior to substantial involvement with the Court.”  On April 3, 2001, the Company filed ananswer and counterclaim, denying any liability on Mopex’s claim and seeking adeclaratory judgment that the ‘685 patent is invalid and not infringed.  On April 26, 2001, Mopex filed a reply tothe Company’s counterclaim, denying that the patent in suit is invalid and notinfringed.  The Company, which isindemnified by the iShares Trust for certain defense costs and damagesresulting from Mopex’s claim, believes the claim is without merit.

**10.        Regulatory Matters**

The Company and the Bank are subject to variousregulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimumcapital requirements can initiate certain mandatory and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial adverse effect on the Company’s and the Bank’s results of operationsand financial condition.  Under capitaladequacy guidelines and the regulatory framework for prompt corrective action,the Bank must meet specific capital guidelines that involve quantitativemeasures of the Bank’s assets, liabilities, and certain off-balance sheet itemsas calculated under regulatory accounting practices.  The Company’s and the Bank’s capital amounts and classificationare also subject to qualitative judgments by the regulators about components,risk weightings, and other factors.

Quantitative measures established by regulationto ensure capital adequacy require the Company and the Bank to maintain minimumamounts and ratios (set forth in the table below) of total and Tier I capital(as defined in the regulations) to risk–weighted assets (as defined), andof Tier I capital (as defined) to average assets (as defined). Managementbelieves, as of June 30, 2001, that the Company and the Bank meet all capitaladequacy requirements to which they are subject.

As of June 30, 2001, the most recentnotification from the FDIC categorized the Company and the Bank as wellcapitalized under the regulatory framework for prompt corrective action. To becategorized as well capitalized, the Company and the Bank must maintain minimumtotal risk–based, Tier I risk–based, and Tier I leverage ratios asset forth in the following table. There are no conditions or events since thatnotification that management believes have changed the Company’s or the Bank’scategory. The following table presents the capital ratios for the Company andthe Bank as of June 30, 2001 and December 31, 2000 (Dollars in thousands): 

|   | **Actual** |   | **For Capital  Adequacy Purposes** |   | **To Be Well Capitalized  Under Prompt  Corrective Action  Provisions** |   |
|--------|------------|--------|------------------------------------|--------|-------------------------------------------------------------------------|--------|
|   | ****       |   | ****                               |   | ****                                                                    |   |
|   | **Amount** |   | **Ratio**                          |   | **Amount**                                                              |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|   | ****       |   | ****                               |   | ****                                                                    |   | **** |   | **** |   | **** |   |

 

| **As  of June 30, 2001:**                                  |   | ** ** |   | ** ** |   | ** ** |    | ** ** |   | ** ** |   | ** ** |
|------------------------------------------------------------|--------|------------|--------|------------|--------|------------|---------|------------|--------|------------|--------|------------|
| Total  Capital (to Risk Weighted Assets—the Company)  | $      | 266,124    |   | 14.96      | %      | $          | 142,339 |       | 8.00   | %          | N/A    |       | N/A |   |
| Total  Capital (to Risk Weighted Assets—the Bank)     | $      | 262,215    |   | 14.74      | %      | $          | 142,272 |       | 8.00   | %          | $      | 177,840    |   | 10.00 | % |
| Tier  I Capital (to Risk Weighted Assets—the Company) | $      | 266,024    |   | 14.95      | %      | $          | 71,170  |       | 4.00   | %          | N/A    |       | N/A |   |
| Tier  I Capital (to Risk Weighted Assets—the Bank)    | $      | 262,115    |   | 14.74      | %      | $          | 71,136  |       | 4.00   | %          | $      | 106,704    |   | 6.00 | % |
| Tier  I Capital (to Average Assets—the Company)       | $      | 266,024    |   | 5.89       | %      | $          | 180,778 |       | 4.00   | %          | N/A    |       | N/A |   |
| Tier  I Capital (to Average Assets—the Bank)          | $      | 262,115    |   | 5.80       | %      | $          | 180,730 |       | 4.00   | %          | $      | 225,913    |   | 5.00 | % |
|                                                       |   |       |   |       |   |       |    |       |   |       |   |       |
| **As  of December 31, 2000:**                              |   | ** ** |   | ** ** |   | ** ** |    | ** ** |   | ** ** |   | ** ** |
| Total  Capital (to Risk Weighted Assets—the Company)  | $      | 170,499    |   | 13.39      | %      | $          | 101,847 |       | 8.00   | %          | N/A    |       | N/A |   |
| Total  Capital (to Risk Weighted Assets—the Bank)     | $      | 166,850    |   | 13.12      | %      | $          | 101,735 |       | 8.00   | %          | $      | 127,169    |   | 10.00 | % |
| Tier  I Capital (to Risk Weighted Assets—the Company) | $      | 170,399    |   | 13.38      | %      | $          | 50,923  |       | 4.00   | %          | N/A    |       | N/A |   |
| Tier  I Capital (to Risk Weighted Assets—the Bank)    | $      | 166,750    |   | 13.11      | %      | $          | 50,867  |       | 4.00   | %          | $      | 76,301     |   | 6.00 | % |
| Tier  I Capital (to Average Assets—the Company)       | $      | 170,399    |   | 5.16       | %      | $          | 132,218 |       | 4.00   | %          | N/A    |       | N/A |   |
| Tier  I Capital (to Average Assets—the Bank)          | $      | 166,750    |   | 5.05       | %      | $          | 132,172 |       | 4.00   | %          | $      | 165,215    |   | 5.00 | % |
|                                                            |        |            |        |            |        |            |         |            |        |            |        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

Under Massachusetts law, trust companies such asthe Bank, like national banks, may pay dividends no more often than quarterly,and only out of ‘net profits’ and to the extent that such payments will notimpair the Bank’s capital stock and surplus account. Moreover, prior approvalof the Commissioner of Banks of the Commonwealth of Massachusetts is requiredif the total dividends for a calendar year would exceed net profits for thatyear combined with retained net profits for the previous two years. Theserestrictions on the ability of the Bank to pay dividends to the Company mayrestrict the ability of the Company to pay dividends to its stockholders.

**11.        Segment Reporting**

The Company does not utilize segment informationfor internal reporting as management views the Company as one segment. Thefollowing represents net operating revenue by geographic area for the sixmonths and quarter ended June 30, 2001 and 2000, and long–lived assets bygeographic area as of June 30, 2001 and December 31, 2000 (Dollars inthousands):

|                        | **Net Operating Revenue**    |    | **Long-Lived Assets**     |   |
|-----------------------------|------------------------------|---------|---------------------------|--------|
|                        | ****                         |    | ****                      |   |
|                        | **For the Six Months Ended** |    | **For the Quarter Ended** |   |   |   |   |   |
|                        | **June 30,**                 |    | **June 30,**              |   | **June 30,  2001** |   | **December 31,  2000** |   |
|                        | ****                         |    | ****                      |   |   |   |
| **Geographic Information:** | **2001**                     |    | **2000**                  |   | **2001** |   | **2000** |   |   |   |
| ****                        | ****                         |    | ****                      |   | **** |   | **** |   | **** |   | **** |   |
|                        |                         |    |                      |   |   |   |   |   |   |   |   |   |
| United  States              | $                            | 153,721 |                      | $      | 102,194 |   | $ | 85,245 |   | $ | 50,885 |   | $ | 113,512 |   | $ | 48,878 |   |
| Ireland                     | 3,637                        |    | 2,606                     |   | 1,969 |   | 1,453 |   | 416 |   | 247 |   |
| Canada                      | 1,052                        |    | 1,106                     |   | 536 |   | 519 |   | 27 |   | 55 |   |
| Cayman  Islands             | 43                           |    | 39                        |   | 21 |   | 19 |   | - |   | - |   |
|                        |                              |    |                           |   |  |   |  |   |  |   |  |   |
| Total                       | $                            | 158,453 |                      | $      | 105,945 |   | $ | 87,771 |   | $ | 52,876 |   | $ | 113,955 |   | $ | 49,180 |   |
|                        |                              |    |                           |   |  |   |  |   |  |   |  |   |

No one customer accounted for 10% of theCompany’s consolidated net operating revenues for the six months ended June 30,2001 and 2000.   BGI accounted for 13.2%of the Company’s consolidated net operating revenues for the quarter ended June30, 2001.

The following represents the Company’s assetservicing fees component of operating revenue by service line for the sixmonths and quarter ended June 30, 2001 and 2000 (Dollars in thousands):

 

|                                                      | **Asset Servicing Fees**                  |    |
|-----------------------------------------------------------|-------------------------------------------|---------|
|                                                      | ****                                      |    |
|                                                      | **For the Six Months Ended****June  30,** |    | **For the Quarter Ended  June 30,** |   |
|                                                      | ****                                      |    | **** |   |
| **Asset servicing fees by service line:**                 | **2001**                                  |    | **2000** |   | **2001** |   | **2000** | ** ** |
| ****                                                      | ****                                      |    | **** |   | **** |   | **** |   |
| Custody, accounting,  transfer agency, and administration | $                                         | 86,646  |   | $ | 62,021 |   | $ | 47,986 |   | $ | 31,177 |   |
| Foreign  exchange                                         | 8,058                                     |    | 5,160 |   | 4,101 |   | 2,214 |   |
| Cash  management                                          | 7,339                                     |    | 5,785 |   | 4,279 |   | 2,983 |   |
| Securities  lending                                       | 4,852                                     |    | 5,392 |   | 2,656 |   | 2,646 |   |
| Investment  advisory                                      | 1,595                                     |    | 797 |   | 1,036 |   | 419 |   |
|                                                      |                                           |    |  |   |  |   |  |   |
| Total                                                     | $                                         | 108,490 |   | $ | 79,155 |   | $ | 60,058 |   | $ | 39,439 |   |
|                                                      |                                           |    |  |   |  |   |  |   |

 

 

**Item2.              Management’s Discussionand Analysis of Financial Condition and Results of Operations**

**Overview**

*             You should read the following discussion together withour Condensed Consolidated Financial Statements**and related notes, which are included elsewhere inthis Report.  The following discussioncontains forward-looking statements that reflect plans, estimates andbeliefs.  Our actual results coulddiffer materially from those discussed in the forward-looking statements.*

             We provide a broad range of services to a variety offinancial asset managers.  Theseservices include our core services, global custody and multicurrencyaccounting, as well as our value-added services, such as mutual fundadministration, securities lending, foreign exchange, cash management,performance measurement, institutional transfer agency and investment advisoryservices.  At June 30, 2001, we providedservices for approximately $840 billion in net assets, includingapproximately $78 billion of foreign assets.

             On May 15, 2000, our board of directors declared atwo-for-one stock split in the form of a 100% stock dividend payable on June 15,2000.  All numbers in this Report havebeen restated to reflect the two-for-one stock split paid June 15, 2000,where applicable.

             On November 28, 2000, the Bank agreed to purchase the advisor custody unit of The ChaseManhattan Bank (‘Chase’).  Thetransaction was consummated on February 1, 2001.  This unit provides institutional custody services to individualaccounts, trusts, endowments and corporate accounts whose assets are managed bythird-party investment advisors.  On May1, 2001, we assumed the operations of the U.S. asset administration unit ofBarclays Global Investors, N.A. (‘BGI’), a large international institutionalinvestment manager.  BGI’s U.S. assetadministration unit provides custody, accounting, administration and otheroperations functions for BGI’s clients. Acquisitions were accounted for usingthe purchase method of accounting.

**Revenue and Expense Overview**

             We derive our revenue from financial asset servicing.Although interest income and noninterest income are reported separately forfinancial statement presentation purposes, our clients view the pricing of ourservice offerings on a bundled basis. In establishing a fee structure for aspecific client, management analyzes all expected revenue and related expenses,as opposed to separately analyzing fee income and interest income and relatedexpenses for each from the relationship. Accordingly, we believe net operating revenue (net interest income plusnoninterest income) and net income are the most meaningful measures of our financialresults. Net operating revenue increased 50% to $158.5 million for the sixmonths ended June 30, 2001 from the same period in 2000 and increased 66% to$87.8 million for the three months ended June 30, 2001 from the same periodlast year.

             Noninterest income consists primarily of fees forfinancial asset servicing and is principally derived from global custody,multicurrency accounting, mutual fund administration and institutional transferagency services for financial asset managers and the assets they control. Ourclients pay fees based on the volume of assets under custody, portfoliotransactions, income collected and whether other value-added services such asforeign exchange, securities lending and performance measurement are needed.  Asset-based fees are usually charged on asliding scale and are subject to minimum fees. As such, when the assets in a portfolio under custody grow as a resultof changes in market values or cash inflows, our fees may be a smallerpercentage of those assets.  If thevalue of equity assets held by our clients were to increase or decrease by 10%,we estimate that this, by itself, would cause a corresponding change ofapproximately 3% in our earnings per share. If the value of fixed income assets held by our clients were to increaseor decrease by 10%, we estimate that this, by itself, would cause acorresponding change of approximately 3% in our earnings per share.

             Net interest income represents the difference betweenincome generated from interest-earning assets and expense on interest-bearingliabilities.  Interest-bearingliabilities are generated by our clients who, in the course of their financialasset management, generate cash balances which they deposit on a short-term basiswith us.  We invest these cash balancesand remit a portion of the earnings on these investments to our clients.  Our share of earnings from these investmentsis viewed as part of the total package of compensation paid to us from ourclients for performing asset servicing.

             Operating expensesconsist of costs incurred in support of our business activities.  As a service provider, our largestexpenditures are staffing costs, including compensation and benefits.  We also rely heavily on technological toolsand services for processing, communicating and storing data.  As a result, our technology andtelecommunication expense is also a large percentage of our operating expenses.

**Certain Factors That May AffectFuture Results**

             From time to time, informationprovided by us, statements made by our employees or information included in ourfilings with the SEC (including this Form 10-Q) may contain statements whichare not historical facts, so-called ‘forward-looking statements,’ and whichinvolve risks and uncertainties.  These statements relate to future events or ourfuture financial performance and are identified by words such as"may," "will," "could," "should,""expect," "plan," "intend," "seek,""anticipate," "believe," "estimate,""potential," or "continue" or other comparable terms or thenegative of those terms.  Forward-lookingstatements in this Form 10-Q include certain statements regarding liquidity,the timing and effect on earnings of derivative gains and losses, and theeffect of certain legal claims against us. Our actual future results may differ significantly from those stated inany forward-looking statements.  Factorsthat may cause such differences include, but are not limited to, the factorsdiscussed below.  Each of these factors,and others, are discussed from time to time in our filings with the SEC.

*The failure to properly manage our growth could adverselyaffect the quality of our services and result in the loss of clients.*

             We have been experiencing a period of rapid growth thathas required the dedication of significant management and other resources,including the recent assumption of the U.S. asset administration unit of BGI.Continued rapid growth could place a strain on our management and otherresources.  To manage future growth effectively,we must continue to invest in our operational, financial and other internalsystems, and our human resources.  Also,we must continue to expand our office space at reasonable rates in acompetitive real estate market.

*Our future results depend, in part, on successfulintegration of pending and possible future acquisitions.*

             Our acquisition of the Chase advisor custody unitpresents us with challenges and will demand management attention that has to bediverted from other matters. Integration of acquisitions is complicated and frequently presentsunforeseen difficulties and expenses which can affect whether and when aparticular acquisition will be accretive to our earnings per share.  Any future acquisitions will present similarchallenges.

*We must hire and retain skilled personnel in a tight labormarket in order to succeed.*

             Qualified personnel, in particular managers and othersenior personnel, are in great demand throughout the financial servicesindustry.  We could find it increasinglydifficult to continue to attract and retain sufficient numbers of these highlyskilled employees.

*Our operating results are subject to fluctuations ininterest rates and the securities markets.*

             We base some of our fees on the market value of theassets we process.  Accordingly, ouroperating results are subject to fluctuations in interest rates in thesecurities markets as these fluctuations affect the market value of assetsprocessed.  Fluctuations in interestrates or the securities markets can also lead to investors seeking alternativesto the investment offerings of our clients, which could result in a lesseramount of assets processed and correspondingly lower fees.  Also, our net interest income is earned byinvesting depositors' funds and making loans. Rapid changes in interest rates or changes in the relationship betweendifferent index rates could adversely affect the market value of, or theearnings produced by, our investment and loan portfolios.

*We face significant competition from other financialservices companies, which could negatively affect our operating results.*

             We are part of an extremely competitive asset servicingindustry.  Many of our current andpotential competitors have longer operating histories, greater name recognitionand substantially greater financial, marketing and other resources than wedo.  These greater resources could, forexample, allow our competitors to develop technology superior to our own. Inaddition, we face the risk that large mutual fund complexes may build in-houseasset servicing capabilities and no longer outsource these services to us.  As a result, we may not be able to competeeffectively with current or future competitors.

*We may not be able to protect our proprietary technology.*

             Our proprietary technology is important to ourbusiness.  We rely on trade secret,copyright and trademark laws and confidentiality agreements with employees andthird parties to protect our proprietary technology, all of which offer onlylimited protection.  These intellectualproperty rights may be invalidated or our competitors may develop similartechnology independently.  Legalproceedings to enforce our intellectual property rights may be unsuccessful,and could also be expensive and divert management's attention.

*We may incur significant costs defending infringement claims.*

             We have been sued in federal court claiming that we andothers are infringing a patent allegedly covering the creation and trading ofcertain securities, including exchange traded funds.  While we believe the claim is without merit, we cannot be surethat we will prevail in the defense of this claim.  Any patent litigation would be costly and could divert theattention of management.  If we werefound to infringe the patent, we would have to pay damages and would be orderedto cease any infringing activity or seek a license under the patent.  We cannot be sure that we will be able toobtain a license on a timely basis or on reasonable terms, if at all.  While we are indemnified against somedefense costs and damages related to this claim, we may incur significantexpense defending the claim.  As aresult, any determination of infringement could have a material adverse effectupon our business, financial condition and results of operations.  We may become subject to other infringementclaims in the future.

*Our quarterly and annual operating results may fluctuate.*

             Our quarterly and annual operating results are difficultto predict and may fluctuate from quarter to quarter and annually for severalreasons, including:

|   | • | The  timing of commencement or termination of client engagements; and                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                        |
|   | • | The  rate of net inflows and outflows of investor funds in the investment vehicles  offered by our clients. |

 

             Most of our expenses, like employee compensation andrent, are relatively fixed.  As aresult, any shortfall in revenue relative to our expectations couldsignificantly affect our operating results, which could adversely affect ourstock price.

*We are subject to extensive federal and state regulationsthat impose complex restraints on our business.*

             Federal and state laws and regulations applicable tofinancial institutions and their parent companies apply to us.  Our primary banking regulators are theFederal Reserve Board (‘FRB’), the Federal Deposit Insurance Commission  (‘FDIC’) and the Massachusetts Commissionerof Banks.  Virtually all aspects of ouroperations are subject to specific requirements or restrictions and generalregulatory oversight including the following:

|   | • | The  FRB and the FDIC maintain capital requirements that we must meet. Failure to  meet those requirements could lead to severe regulatory action or even  receivership. We are currently considered to be "well capitalized;" |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                     |
|   | • | Under  Massachusetts law, the Bank may be restricted in its ability to pay dividends  to Investors Financial, which may in turn restrict our ability to pay  dividends to our stockholders; and                                          |
|   |   |                                                                                                                                                                                                                                     |
|   | • | The  FRB and the FDIC are empowered to assess monetary penalties against, and to  order termination of activities by, companies or individuals who violate the  law.                                                                     |

 

             Banking law restricts our ability to own the stock ofcertain companies and also makes it more difficult for our company to beacquired.  Also, we have not electedfinancial holding company status under the federal Gramm-Leach-Bliley Act of1999.  This may place us at acompetitive disadvantage with respect to other organizations.

**Statement of Operations**

*Comparison of OperatingResults for the Six Months and the Quarter Ended June 30, 2001 and 2000*

*Noninterest Income*

             Noninterest income was $110.0million for the six months ended June 30, 2001, up 38% from the same period in2000, and was $60.8 million for the quarter ended June 30, 2001, up 53% fromthe same period in 2000.  Noninterestincome consists of the following items (Dollars in thousands):

 

|                      | **For the Six Months Ended June 30,** |    | **For the Quarter Ended June 30,** |   |
|---------------------------|---------------------------------------|---------|------------------------------------|--------|
|                      | ****                                  |    | ****                               |   |
|                      | **2001**                              |    | **2000**                           |   | **Change** |   | **2001** |   | **2000** |   | **Change** |   |
|                      |                                       |    |                                    |   |  |   |  |   |  |   |  |   |
| Asset  servicing fees     | $                                     | 108,490 |                               | $      | 79,155 |   | 37 | % | $ | 60,058 |   | $ | 39,439 |   | 52 | % |
| Other  operating income   | 1,549                                 |    | 803                                |   | 93 | % | 768 |   | 407 |   | 89 | % |
|                      |                                       |    |                                    |   |   |   |  |   |  |   |   |   |
| Total  noninterest income | $                                     | 110,039 |                               | $      | 79,958 |   | 38 | % | $ | 60,826 |   | $ | 39,846 |   | 53 | % |
|                      |                                       |    |                                    |   |   |   |  |   |  |   |   |   |

             Asset servicing fees were $108.5million for the six months ended June 30, 2001, up 37% from the same period in2000, and were $60.0 million for the quarter ended June 30, 2001, up 52% fromthe same quarter in 2000. The largest component of asset servicing fees isasset-based fees, which increased in both periods due to the increase in assetsprocessed.  Assets processed is thetotal dollar value of financial assets on the reported date for which weprovide one or more of the following services: global custody, multicurrencyaccounting, mutual fund administration, securities lending, foreign exchange,cash management, performance measurement, and institutional transferagency.   Total net assets processedincreased $537 billion from $303 billion at December 31, 2000 to $840 billionat June 30, 2001.  This net increase includes several components(Dollars in billions):

 

|                                | **For the Six Months Ended  June 30, 2001** |   |
|-------------------------------------|---------------------------------------------|--------|
|                                | ****                                        |   |
|                                |                                        |   |
| Assumed and acquired business units | 542                                         |   |
| Sales to existing clients           | 13                                          |   |
| Sales to new clients                | 3                                           |   |
| Fund flows and market gain/loss     | (21                                         | )      |
|                                |                                             |   |
|                                | Net increase in assets processed            | $      | 537 |   |
|                                |                                             |   |
|                                     |                                             |        |  |  |

             Another significantportion of the increase in asset servicing fees resulted from the success inmarketing ancillary services, such as foreign exchange and securities lendingservices.

             Otheroperating income consists of dividends received relating to the Federal HomeLoan Bank of Boston (‘FHLBB’) stock investment, computer service fees andmiscellaneous fees for systems consulting services. The increase in otheroperating income resulted from the increase in FHLBB stock dividend income dueto an increase in the average investment in FHLBB stock during the six monthsended and the quarter ended June 30, 2001, and increased income from consultingservices performed for clients.

 

 

*OperatingExpenses*

             Total operating expenses were$125.0 million for the six months ended June 30, 2001, up 52% from the sameperiod in 2000.  For the quarter endedJune 30, 2001, total operating expenses were $70.2 million, up 74% from thesame period in 2000.  The components ofoperating expenses were as follows (Dollars in thousands):

 

|                               | **For the  Six Months Ended June 30,** |   | **For the  Quarter Ended June 30,** |   |
|------------------------------------|----------------------------------------|--------|-------------------------------------|--------|
|                               | ****                                   |   | ****                                |   |
|                               | **2001**                               |   | **2000**                            |   | **Change** |   | **2001** |   | **2000** |   | **Change** |   |
|                               | ****                                   |   | ****                                |   | **** |   | **** |   | **** |   | **** |   |
|                               |                                   |   |                                |   |   |   |   |   |   |   |   |   |
| Compensation                       | $                                      | 75,516 |                                | $      | 50,411 |   | 50 | % | $ | 41,602 |   | $ | 23,884 |   | 74 | % |
| Technology and  telecommunications | 18,497                                 |   | 10,155                              |   | 82 | % | 10,455 |   | 5,560 |   | 88 | % |
| Occupancy                          | 7,802                                  |   | 5,107                               |   | 53 | % | 4,266 |   | 3,035 |   | 41 | % |
| Transaction processing  services   | 7,639                                  |   | 5,013                               |   | 52 | % | 5,065 |   | 2,494 |   | 103 | % |
| Depreciation and  amortization     | 3,223                                  |   | 2,190                               |   | 47 | % | 1,861 |   | 1,147 |   | 62 | % |
| Travel and sales  promotion        | 2,394                                  |   | 1,520                               |   | 58 | % | 1,396 |   | 851 |   | 64 | % |
| Professional fees                  | 1,895                                  |   | 1,566                               |   | 21 | % | 1,150 |   | 492 |   | 134 | % |
| Amortization of goodwill           | 1,573                                  |   | 826                                 |   | 90 | % | 923 |   | 405 |   | 128 | % |
| Other operating expenses           | 6,486                                  |   | 5,308                               |   | 22 | % | 3,454 |   | 2,454 |   | 41 | % |
|                               |                                        |   |                                     |   |   |   |  |   |  |   |   |   |
|                               | Total operating expenses               | $      | 125,025                             |   | $ | 82,096 |   | 52 | % | $ | 70,172 |   | $ | 40,322 |   | 74 | % |
|                               |                                   |        |                                |        |   |   |   |  |   |  |   |   |   |

             Compensation and benefits expense was $75.5 millionfor the six months ended June 30, 2001, up 50% from the same period in 2000,and was $41.6 million for the quarter ended June 30, 2001, up 74% from the sameperiod in 2000.  The average number ofemployees increased 32% to 2,045 during the six months ended June 30, 2001 from1,545 for the same period last year. The average number of employees for the quarter ended June 30, 2001 was2,216, up 41% compared to 1,568 during the same period in 2000.  We increased the number of employees tosupport the expansion of client relationships and to service new businessacquisitions.  Approximately 58 and 275employees were acquired as part of the Chase acquisition and the BGI businessunit assumption, respectively. Benefits, including payroll taxes, group insurance plans, retirementplan contributions and tuition reimbursement, increased $3.0 million forthe six months ended June 30, 2001 and $1.6 million for the quarter ended June30, 2001, consistent with the increased headcount.

             Technology and telecommunications expense was$18.5 million for the six months ended June 30, 2001, up 82% from the sameperiod in 2000.  For the quarter endedJune 30, 2001, technology and telecommunications expense was $10.5 million, up88% for the same period last year. Transitional services incurred as a result of the Chase acquisitionagreement accounted for approximately $5.5 million and $3.2 million of the six-and three-month increases, respectively. Increased hardware, software and telecommunications expenditures neededto support the growth in assets processed accounted for $1.6 million ofthe six-month period-to-period increase and $0.9 million of thequarter-to-quarter increase.  Expensesrelated to outsourced network monitoring and help desk service, along withmainframe data processing, disaster recovery and other outsourced servicesaccounted for $0.9 million of the six-month period-to-period increase and$0.4 million of the quarter-to-quarter increase.

             Occupancy expense was $7.8 million for the sixmonths ended June 30, 2001, up 53% from the same period in 2000 and was $4.3million for the quarter ended June 30, 2001, up 41% compared to the same periodin 2000.  These increases were primarilydue to increased rent resulting from the California offices assumed from BGIand the expansion of our office space in Boston, New York, and Dublin atcurrent market rental rates.

             Depreciation and amortization expense was$3.2 million for the six months ended June 30, 2001, up 47% from the sameperiod in 2000, and was $1.9 million for the quarter ended June 30, 2001, up62% compared to the same period in 2000. These increases resulted from capitalized expenditures associated withthe expansion into additional office space and capitalized software.

             Travel and sales promotion expenseconsists of expenses incurred by the sales force, client management staff andother employees in connection with sales calls on potential clients, travelingto existing client sites, and to our offices in New York, California, and ourforeign subsidiaries.  This expense was$2.4 million for the six months ended June 30, 2001, up 58% from the sameperiod in 2000.  For the quarter endedJune 30, 2001, this expense was $1.4 million, up 64% compared to the sameperiod in 2000. These increases were due to the increased level of businessactivity.

             Professional fees were $1.9 million for the six monthsended June 30, 2001, up 21% from the same period in 2000.   Professional fees were $1.2 million for thequarter ended June 30, 2001, up 134% compared to the same period in 2000.  The increases were due primarily to systemconversion consulting costs for the Advisor Custody unit acquired from Chaseand for legal services and other consulting services provided during bothperiods.

             Amortization of goodwill expense was $1.6 millionfor the six months ended June 30, 2001, up 90% from the same period in 2000,and was $0.9 million for the quarter ended June 30, 2001, up 128% compared tothe same period in 2000.  The increaseswere the result of the increase in goodwill from acquisition activities thisyear.  Please refer to the “Overview”section for a further discussion of acquisitions.

*             Net Interest Income*

             Net interest income is affected by the volume and mix ofassets and liabilities, and the movement and level of interest rates. The tablebelow presents the changes in net interest income resulting from changes in thevolume of interest-earning assets or interest-bearing liabilities and changesin interest rates compared to the same periods in 2000. Changes attributed toboth volume and rate have been allocated based on the proportion of change ineach category (Dollars in thousands):

|                              | **For the  Six Months Ended June 30, 2001** |   | **For the  Quarter Ended  June 30, 2001** |   |
|-----------------------------------|---------------------------------------------|--------|------------------------------------------------|--------|
|                              | ****                                        |   | ****                                           |   |
|                              | **Change  Due to Volume**                   |   | **Change  Due to Rate**                        |   | **Net** |   | **Change  Due to Volume** |   | **Change  Due to Rate** |   | **Net** |   |
|                              | ****                                        |   | ****                                           |   | **** |   | **** |   | **** |   | **** |   |
|                              |                                        |   |                                           |   |   |   |   |   |   |   |   |   |
| **Interest-earning assets:**      |                                        |   |                                           |   |   |   |   |   |   |   |   |   |
| Federal funds sold and other      | $                                           | 2      |                                           | $      | (68 | ) | $ | (66 | ) | $ | (2 | ) | $ | (96 | ) | $ | (98 | ) |
| Investment securities             | 46,590                                      |   | (1,703                                         | )      | 44,887 |   | 26,335 |   | (2,988 | ) | 23,347 |   |
| Loans                             | (141                                        | )      | 177                                            |   | 36 |   | (119 | ) | 204 |   | 85 |   |
|                              |                                             |   |                                                |   |  |   |  |   |  |   |  |   |
|                              | Total interest-earning  assets              | $      | 46,451                                         |   | $ | (1,594 | ) | $ | 44,857 |   | $ | 26,214 |   | $ | (2,880 | ) | $ | 23,334 |   |
|                              |                                             |   |                                                |   |  |   |  |   |  |   |  |   |
| **Interest-bearing liabilities:** |                                        |   |                                           |   |   |   |   |   |   |   |   |   |
| Deposits                          | $                                           | 12,595 |                                           | $      | (1,221 | ) | $ | 11,374 |   | $ | 6,328 |   | $ | (1,874 | ) | $ | 4,454 |   |
| Borrowings                        | 15,741                                      |   | (4,685                                         | )      | 11,056 |   | 8,449 |   | (3,484 | ) | 4,965 |   |
|                              |                                             |   |                                                |   |  |   |  |   |  |   |  |   |
|                              | Total interest-bearing  liabilities         | $      | 28,336                                         |   | $ | (5,906 | ) | $ | 22,430 |   | $ | 14,777 |   | $ | (5,358 | ) | $ | 9,419 |   |
|                              |                                             |   |                                                |   |  |   |  |   |  |   |  |   |
| Change in net interest  income    | $                                           | 18,115 |                                           | $      | 4,312 |   | $ | 22,427 |   | $ | 11,437 |   | $ | 2,478 |   | $ | 13,915 |   |
|                              |                                             |   |                                                |   |  |   |  |   |  |   |  |   |

             Net interest income was $48.4 million for the sixmonths ended June 30, 2001, up 86% from the same period in 2000.  Net interest income was $26.9 million forthe quarter ended June 30, 2001, up 107% from the same period in 2000.  The improvement in net interest income inboth periods primarily reflects the positive effect of balance sheet growthdriven by increased client deposits and borrowings.  In addition, thedeclining interest rate environment this year has reduced our deposit andborrowing costs which have outpaced the re-pricing of our earning assets,primarily investment securities.  The net interest margin increased 37 basispoints and 47 basis points to 2.45% and 2.48% for the six months and threemonths ended June 30, 2001, respectively, compared to last year.

             Average interest-earning assets, primarily investmentsecurities, increased $1.5 billion or 58% for the six months ended June30, 2001 and increased $1.7 billion or 67% for the quarter ended June 30, 2001compared to the same periods last year. Funding for the asset growth for the six-month period was provided by anincrease in average borrowings, primarily client repurchase agreements and FHLBlong-term advances, of $780 million and an increase in average clientdeposits of $610 million.  Fundingfor the asset growth for the three-month period was provided by an increase inaverage borrowings, primarily client repurchase agreements and FHLB long-termadvances, of $984 million and an increase in average client deposits of $716million.  The effect of changes involume of interest-earning assets and interest-bearing liabilities was anincrease in net interest income of approximately $18.1 million and $11.4million for the six months and three months ended June 30, 2001, respectively.

             Average yield on interest-earning assets was 6.29% forthe six months ended June 30, 2001, down 9 basis points from the same period in2000, and was 6.02% for the three months ended June 30, 2001, down 46 basispoints from the same period in 2000. The average rate paid on interest-bearing liabilities was 4.32% for thesix months ended June 30, 2001, down 65 basis points from the same period in 2000.The average rate paid on interest-bearing liabilities for the quarter endedJune 30, 2001 was 3.94%, down 124 basis points from the same quarter in2000.  The effect on net interest incomedue to changes in rates were increases of approximately $4.3 million and$2.5 million during the six months and three months ended June 30, 2001,respectively.

             Effective January 1, 2001, weadopted SFAS No. 133, as amended and interpreted, which establishedaccounting and reporting standards for derivative instruments.  We use derivative instruments to manageexposures to interest rate risks.  Weroutinely enter into interest rate swap agreements in which we pay a fixedinterest rate and receive a floating interest rate.  These transactions are designed to hedge a portion of ourliabilities in connection with securities sold under repurchaseagreements.  By entering into apay-fixed/receive-floating interest rate swap, a portion of the liabilities iseffectively converted to a fixed rate liability for the term of the interestrate swap agreement.  Most of thesederivatives have been designated as highly effective cash flow hedges, asdetermined in accordance with SFAS No. 133.  An insignificant portion of the derivatives used to manageexposures to interest rate risks were not considered highly effective and,therefore, did not qualify for hedge accounting.

             Hedge ineffectiveness, determined in accordance withSFAS No. 133, had an insignificant impact on earnings for the six monthsand quarter ended June 30, 2001. No cash flow hedges were dedesignated or discontinuedfor the six months or quarter ended June 30, 2001.

             Net interest income included netlosses of $1.2 million and $0.5 million, net of tax, for the six months andthree months ended June 30, 2001, respectively, on interest rate swaps relatingto SFAS No. 133.  The net lossconsisted of a $0.2 million loss and a $0.1 million gain, net of tax, for thesix- and three-month periods, respectively, on changes in the fair value ofderivative instruments not designated as hedging instruments.  There were also $1.0 million and $0.6million of derivative losses, net of tax, for the six- and three-month periods,respectively, that resulted primarily from the reclassification of transitionadjustment-related derivative losses from OCI to net interest income in accordancewith SFAS No. 133.  The Companyestimates that $2.3 million, net of tax, of the remaining transition adjustmentof net derivative losses included in OCI will be reclassified into earningswithin the next twelve months.  Therecognition in net interest income of the transition adjustment derivativelosses from OCI will be offset by derivative gains from changes in the fairvalue liability of the interest rate swaps as they reach maturity.

*Income Taxes*

             Taxes for the six months ended June30, 2001 were $10.4 million, up 36% from the same period in 2000. Taxes for thequarter ended June 30, 2001 were $5.3 million, up 32% compared to the sameperiod last year.  The increase in taxexpense reflects the higher level of pretax income during both the six monthsand three months ended June 30, 2001. The effective tax rate for the six- and three-month periods ended June30, 2001 were 31% and 30%, respectively, down from 32% for both the six- andthree–month periods last year.  The decrease in the effective tax rate reflects the increased investmentin nontaxable municipal securities this year.

**Financial Condition**

*Investment Portfolio*

             The following table summarizes ourinvestment portfolio for the dates indicated (Dollars in thousands):

|                                | **June 30,  2001**                   |       | **December 31,  2000** |       |
|-------------------------------------|--------------------------------------|------------|------------------------|------------|
|                                | ****                                 |       | ****                   |       |
| **Securities  available for sale:** |                                 |       |                   |       |
| Mortgage–backed  securities    | $                                    | 966,997    |                   | $          | 550,465 |   |
| Federal  agency securities          | 39,510                               |       | 122,235                |       |
| Corporate  debt                     | 58,594                               |       | 54,129                 |       |
| State  and political subdivisions   | 222,436                              |       | 45,504                 |       |
|                                |                                      |       |                        |       |
|                                | Total  securities available for sale | $          | 1,287,537              |       | $ | 772,333 |   |
|                                | ****                                 | ** ** | ****                   | ** ** |
|                                |                                 | ** ** |                   | ** ** |
|                                |                                 | ** ** |                   | ** ** |
| **Securities  held to maturity:**   |                                 | ** ** |                   | ** ** |
| Mortgage–backed  securities    | $                                    | 2,616,575  |                   | $          | 1,900,301 |   |
| Federal  agency securities          | 370,055                              |       | 311,809                |       |
| State  and political subdivisions   | 82,282                               |       | 79,618                 |       |
| Foreign  government securities      | 7,528                                |       | 7,566                  |       |
|                                |                                      |       |                        |       |
|                                | Total  securities held to maturity   | $          | 3,076,440              |       | $ | 2,299,294 |   |
|                                |                                      |       |                        |       |

             Our investment portfolio is used toinvest depositors’ funds and provide a secondary source of earnings forus.  In addition, we use the investmentportfolio to secure open positions at securities clearing institutions inconnection with our custody services. The portfolio is comprised of securities of state and politicalsubdivisions, mortgage-backed securities issued by the Federal NationalMortgage Association (‘FNMA’ or ‘Fannie Mae’) and the Federal Home LoanMortgage Corporation (‘FHLMC’ or ‘Freddie Mac’), and Federal agency callablebonds issued by FHLMC and the FHLB, corporate debt securities, agency debt andagency preferred stock securities, and foreign government bonds issued by theCanadian provinces of Ontario and Manitoba.

             We invest in mortgage-backedsecurities, Federal agency callable bonds and corporate and agency debt toincrease the total return of the investment portfolio.  Mortgage-backed securities generally have ahigher yield than U.S. Treasury securities due to credit and prepaymentrisk.  Credit risk results from thepossibility that a loss may occur if a counterparty is unable to meet the termsof the contract.  Prepayment riskresults from the possibility that changes in interest rates may cause mortgagesecurities to be paid off prior to their maturity dates.  Federal agency callable bonds generally havea higher yield than U.S. Treasury securities due to credit and call risk.  Credit risk results from the possibilitythat the Federal agency issuing the bonds may be unable to meet the terms ofthe bond.  Call risk results from thepossibility that fluctuating interest rates and other factors may result in theexercise of the call option by the Federal agency.  Credit risk related to mortgage-backed securities and Federalagency callable bonds is substantially reduced by payment guarantees and creditenhancements.

             We invest in municipal securitiesto generate stable, tax advantaged income. Municipal securities generally have lower stated yields than Federalagency and U.S. Treasury securities, but the after-tax yields are comparable.  Municipal securities are subject to creditrisk.

             We invest in foreign governmentbonds in order to generate foreign source income to maximize the use of theforeign tax credit.  The foreigngovernment bonds are denominated in U.S. dollars to avoid foreign currencyrisk.  These bonds are subject to creditrisk.

             The book value and weighted average yieldof our securities available for sale at June 30, 2001 by effective maturity,are reflected in the following table (Dollars in thousands):

|                              | **Years**                            |   |
|-----------------------------------|--------------------------------------|--------|
|                              | ****                                 |   |
|                              | **Under 1**                          |   | **1 to 5** |   | **5 to 10** |   | **Over 10** |   |
|                              | ****                                 |   | **** |   | **** |   | **** |   |
|                              | **Amount**                           |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   |
|                              | ****                                 |   | **** |   | **** |   | **** |   | **** |   | **** |   | **** |   | **** |   |
| Mortgage–backed  securities  | $                                    | -      |   | - |   | $ | 934,274 |   | 7.04 | % | $ | 32,723 |   | 8.02 | % | $ | - |   | - |   |
| Federal  agency securities        | -                                    |   | - |   | 30,198 |   | 5.64 | % | 9,312 |   | 5.00 | % | - |   | - |   |
| Corporate  debt                   | -                                    |   | - |   | - |   | - |   | - |   | - |   | 58,594 |   | 3.80 | % |
| State  and political subdivisions | 2,944                                |   | 4.18 | % | 37,862 |   | 4.57 | % | 128,703 |   | 4.73 | % | 52,927 |   | 4.86 | % |
|                              |                                      |   |   |   |  |   |   |   |  |   |   |   |  |   |   |   |
|                              | Total  securities available for sale | $      | 2,944 |   | 4.18 | % | $ | 1,002,334 |   | 6.90 | % | $ | 170,738 |   | 5.38 | % | $ | 111,521 |   | 4.30 | % |
|                              |                                 |        |   |   |   |  |   |   |   |  |   |   |   |  |   |   |   |

             The book value and weighted averageyield of our securities held to maturity at June 30, 2001, by effectivematurity, are reflected in the following table (Dollars in thousands):

|                              | **Years**                          |    |
|-----------------------------------|------------------------------------|---------|
|                              | ****                               |    |
|                              | **Under 1**                        |    | **1 to 5** |   | **5 to 10** |   | **Over 10** |   |
|                              | ****                               |    | **** |   | **** |   | **** |   |
|                              | **Amount**                         |    | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   |
|                              | ****                               |    | **** |   | **** |   | **** |   | **** |   | **** |   | **** |   | **** |   |
| Mortgage–backed  securities  | $                                  | 140,008 |   | 4.22 | % | $ | 1,847,829 |   | 6.62 | % | $ | 405,006 |   | 6.07 | % | $ | 223,732 |   | 5.28 | % |
| Federal  agency securities        | -                                  |    | - |   | 111,937 |   | 5.88 | % | 258,118 |   | 6.10 | % | - |   | - |   |
| State  and political subdivisions | -                                  |    | - |   | - |   | - |   | 4,079 |   | 5.61 | % | 78,203 |   | 5.45 | % |
| Foreign  government securities    | 7,528                              |    | 6.84 | % | - |   | - |   | - |   | - |   | - |   | - |   |
|                              |                                    |    |   |   |  |   |   |   |  |   |   |   |  |   |   |   |
|                              | Total  securities held to maturity | $       | 147,536 |   | 4.35 | % | $ | 1,959,766 |   | 6.57 | % | $ | 667,203 |   | 6.08 | % | $ | 301,935 |   | 5.32 | % |
|                              |                               |         |   |   |   |  |   |   |   |  |   |   |   |  |   |   |   |

*Loan Portfolio*

The following tablesummarizes our loan portfolio for the dates indicated (Dollars in thousands):

|                             | **June 30,  2001** |       | **December 31,  2000** |       |
|----------------------------------|--------------------|------------|------------------------|------------|
|                             | ****               | ** ** | ****                   | ** ** |
| Loans  to individuals            | $                  | 78,650     |                   | $          | 42,997 |   |
| Loans  to mutual funds           | 51,679             |       | 86,316                 |       |
| Loans  to others                 | 65                 |       | 56                     |       |
|                             |                    |       |                        |       |
|                             | 130,394            |       | 129,369                |       |
| Less:  allowance for loan losses | (100               | )          | (100                   | )          |
|                             |                    |       |                        |       |
| Net  loans                       | $                  | 130,294    |                   | $          | 129,269 |   |
|                             |                    |       |                        |       |
| Floating  Rate                   | $                  | 130,367    |                   | $          | 129,337 |   |
| Fixed  Rate                      | 27                 |       | 32                     |       |
|                             |                    |       |                        |       |
|                             | $                  | 130,394    |                   | $          | 129,369 |   |
|                             |                    |       |                        |       |

             We make loans to individually managed account customersand to mutual funds and other pooled product clients.  Virtually all loans to individually managed account customers arewritten on a demand basis, bear variable interest rates tied to the prime rateor LIBOR and are fully secured by liquid collateral, primarily freely tradablesecurities held in custody by us for the borrower.  Loans to mutual funds and other pooled product clients includeunsecured lines of credit that may, in the event of default, be collateralizedat our option by securities held in custody by us for those mutual funds.  Loans to individually managed accountcustomers, mutual funds and other pooled product clients also include advancesthat we make to certain clients pursuant to the terms of our custody agreementswith those clients to facilitate securities transactions and redemptions.

             At June 30, 2001,our only lending concentrations which exceeded 10% of total loan balances, werethe lines of credit to mutual fund clients discussed above.  These loans were made in the ordinary courseof business on the same terms and conditions prevailing at the time forcomparable transactions.

             Our credit loss experience has been excellent.  There have been no loan charge-offs oradverse credit actions in our history. It is our policy to place a loan on nonaccrual status when eitherprincipal or interest becomes 60 days past due and the loan's collateralis not sufficient to cover both principal and accrued interest.  As of June 30, 2001, there were no loans onnonaccrual status, no loans greater than 90 days past due, and no troubleddebt restructurings.  Although virtuallyall of our loans are fully collateralized with freely tradable securities,management recognizes some credit risk inherent in the loan portfolio, and hasrecorded an allowance for loan losses of $0.1 million at June 30,2001.  This amount is not allocated toany particular loan, but is intended to absorb any risk of loss inherent in theloan portfolio. Management actively monitors the loan portfolio and theunderlying collateral and regularly assesses the adequacy of the allowance forloan losses.

**MarketRisk**

             We engage in investment activities to serve clients'investment needs and contribute to overall corporate earnings.  Interest-bearing liabilities are generatedby our clients who, in the course of their financial asset management, maintaincash balances which they deposit on a short-term basis with us.  We invest these cash balances and remit aportion of the earnings on these investments to our clients. In the conduct ofthese activities, we are subject to market risk.  Market risk is the risk of an adverse financial impact fromchanges in market prices and interest rates. The level of risk we assume is a function of our overall strategicobjectives and liquidity needs, client requirements and market volatility.

             The active management of market risk is integral to ouroperations.  The objective of interestrate sensitivity management is to provide sustainable net interest revenueunder various economic conditions.  Wemanage the structure of interest-earning assets and interest-bearingliabilities by adjusting their mix, yield, maturity and/or repricingcharacteristics, based on market conditions. Since client deposits and repurchase agreements, our primary sources offunds, are predominantly short term, we maintain a generally short-termstructure for our interest-earning assets. We also use interest rate swap agreements to augment our management ofinterest rate exposure.  The purpose ofthese agreements is to lengthen short-term variable-rate liabilities intolonger-term fixed-rate liabilities.

             Our board of directors has set asset and liabilitymanagement policies that define the overall framework for managing interestrate sensitivity, including accountabilities and controls over investmentactivities.  These policies delineateinvestment limits and strategies that are appropriate, given our liquidity andregulatory requirements.  For example,we have established a policy limit stating that projected net interest incomeover the next 12 months will not be reduced by more than 10% given a change ininterest rates of up to 200 basis points (+ or -) over 12 months.  Each quarter, our board of directors reviewsour investment position, including simulations of the effect of variousinterest rate scenarios on our capital.

             Our board of directors has delegated day-to-dayresponsibility for oversight of the Asset and Liability Management function toour Asset and Liability Committee (‘ALCO’). ALCO is a senior management committee consisting of the Chief ExecutiveOfficer, the Executive Vice President, the Chief Financial Officer and membersof the Treasury and Finance functions. ALCO meets twice monthly.  Our primary tool in managing interest ratesensitivity is an income simulation model. Key assumptions in the simulationmodel include the timing of cash flows, maturities and repricing of financialinstruments, changes in market conditions, capital planning and depositsensitivity.  The model assumes that thecomposition of our interest-sensitive assets and liabilities existing at thebeginning of a period will change periodically over the period beingmeasured.  The model also assumes that aparticular change in interest rates is reflected uniformly across the yieldcurve regardless of the duration to maturity or repricing of specific assets andliabilities.  These assumptions are inherentlyuncertain and, as a result, the model cannot precisely predict the effect ofchanges in interest rates on our net interest income.  Actual results may differ from simulated results due to thetiming, magnitude and frequency of interest rate changes and changes in marketconditions and management strategies.

             The results of the income simulation model as of June30, 2001 and 2000 indicated that an upward shift of interest rates by 200 basispoints would result in a reduction in projected net interest income of 5.44%and 6.41%, respectively.  A downwardshift of 200 basis points would result in a decrease in projected net interestincome of 2.88% at June 30, 2001 and an increase in projected net interestincome of 6.10% at June 30, 2000.

             We also use gapanalysis as a secondary tool to manage our interest rate sensitivity.  Gap analysis involves measurement of thedifference in asset and liability repricing on a cumulative basis within aspecified time frame.  A positive gapindicates that more interest-earning assets than interest-bearing liabilitiesmature in a time frame, and a negative gap indicates the opposite.  By seeking to minimize the amount of assetsand liabilities that could reprice in the same time frame, we attempt to reducethe risk of significant adverse effects on net interest income caused byinterest rate changes.  As shown in thetable below, at June 30, 2001, interest-bearing liabilities repriced fasterthan interest-earning assets, as has been typical for us.  If all other variables remained constant, inthe short term, falling interest rates would lead to net interest income thatis higher than it would have been; rising rates would lead to lower netinterest income.  Other importantdeterminants of net interest income are rate levels, balance sheet growth andmix, and interest rate spreads.

             The following table presents therepricing schedule our interest-earning assets and interest-bearing liabilitiesat June 30, 2001 (Dollars in thousands):

|                                                                                   | **Within Three Months**                         |       | **Three to Six Months** |       | **Six to Twelve Months** |       | **One Year to Five Years** |       | **Over Five Years** |       | **Total** |       |
|----------------------------------------------------------------------------------------|-------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------|------------|-----------|------------|
|                                                                                   | ****                                            |       | ****                    |       | ****                     |       | ****                       |       | ****                |       | ****      |       |
|                                                                                   |                                            | ** ** |                    | ** ** |                     | ** ** |                       | ** ** |                | ** ** |      | ** ** |
| Interest–earning  assets(1):                                                      |                                            |       |                    |       |                     |       |                       |       |                |       |      |       |
|                                                                                   | Federal  funds sold                             | $          | -                       |       | $                        | -          |                       | $          | -                   |       | $         | -          |   | $ | - |   | $ | - |   |
|                                                                                   | Investment  securities (2)                      | 2,002,355  |                    | 367,448    |                     | 523,597    |                       | 880,806    |                | 589,771    |      | 4,363,977  |   |
|                                                                                   | Loans—variable  rate                       | 130,267    |                    | -          |                     | -          |                       | -          |                | -          |      | 130,267    |   |
|                                                                                   | Loans—fixed  rate                          | 27         |                    | -          |                     | -          |                       | -          |                | -          |      | 27         |   |
|                                                                                   |                                            |            |                    |            |                     |            |                       |            |                |            |      |            |   |
|                                                                                   | Total  interest–earning assets             | $          | 2,132,649               |       | $                        | 367,448    |                       | $          | 523,597             |       | $         | 880,806    |   | $ | 589,771 |   | $ | 4,494,271 |   |
| Interest–bearing  liabilities:                                                    |                                            |       |                    |       |                     |       |                       |       |                |       |      |       |
|                                                                                   | Demand  deposit accounts                        | $          | 3,895                   |       | $                        | -          |                       | $          | -                   |       | $         | -          |   | $ | - |   | $ | 3,895 |   |
|                                                                                   | Savings  accounts                               | 2,075,344  |                    | -          |                     | -          |                       | 18,482     |                | -          |      | 2,093,826  |   |
|                                                                                   | Interest  rate contracts                        | (690,000   | )                       | 70,000     |                     | 100,000    |                       | 520,000    |                | -          |      | -          |   |
|                                                                                   | Short-term  and other borrowings                | 1,733,881  |                    | -          |                     | -          |                       | 350,000    |                | -          |      | 2,083,881  |   |
|                                                                                   |                                            |            |                    |            |                     |            |                       |            |                |            |      |            |   |
|                                                                                   | Total  interest–bearing liabilities        | $          | 3,123,120               |       | $                        | 70,000     |                       | $          | 100,000             |       | $         | 888,482    |   | $ | - |   | $ | 4,181,602 |   |
|                                                                                   |                                            |            |                    |            |                     |            |                       |            |                |            |      |            |   |
|                                                                                   | Net  interest-sensitivity gap during the period | $          | (990,471                | )          | $                        | 297,448    |                       | $          | 423,597             |       | $         | (7,676     | ) | $ | 589,771 |   | $ | 312,669 |   |
|                                                                                   |                                            |            |                    |            |                     |            |                       |            |                |            |      |            |   |
|                                                                                   | Cumulative  gap                                 | $          | (990,471                | )          | $                        | (693,023   | )                          | $          | (269,426            | )          | $         | (277,102   | ) | $ | 312,669 |   |   |   |
|                                                                                   |                                            |            |                    |            |                     |            |                       |            |                |            |      |       |   |
| Interest-sensitive  assets as a percent of interest sensitive liabilities (cumulative) | 68.29                                           | %          | 78.30                   | %          | 91.82                    | %          | 93.37                      | %          | 107.48              | %          |      |       |
|                                                                                   |                                            |            |                    |            |                     |            |                       |            |                |            |      |       |   |
| Interest-sensitive  assets as a percent of total assets (cumulative)                   | 44.46                                           | %          | 52.13                   | %          | 63.04                    | %          | 81.41                      | %          | 93.70               | %          |      |       |
|                                                                                   |                                            |            |                    |            |                     |            |                       |            |                |            |      |       |   |
|                                                                                   |                                            |       |                    |       |                     |       |                       |       |                |       |      |       |
| Net  interest-sensitivity gap as a percent of total assets                             | (20.65                                          | )%         | 6.20                    | %          | 8.83                     | %          | (0.16                      | )%         | 12.30               | %          |      |       |
|                                                                                   |                                            |            |                    |            |                     |            |                       |            |                |            |      |       |   |
| Cumulative  gap as a percent of total assets                                           | (20.65                                          | )%         | (14.45                  | )%         | (5.62                    | )%         | (5.78                      | )%         | 6.52                | %          |      |       |
|                                                                                   |                                            |            |                    |            |                     |            |                       |            |                |            |      |       |   |
|                                                                                        |                                                 |            |                         |            |                          |            |                            |            |                     |            |           |            |  |  |  |  |  |  |  |  |

----

| (1)    | Adjustable rate  assets are included in the period in which interest rates are next scheduled  to adjust rather than in the period in which they are due.  Fixed-rate loans are included in the  period in which they are scheduled to be repaid. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                   |
| (2)    | Mortgage–backed securities are included  in the pricing category that corresponds with their effective maturity.                                                                                                                                  |

**Liquidity**

             Liquidity representsthe ability of an institution to meet present and future financial obligationsthrough either the sale or maturity of existing assets or the acquisition ofadditional funds through liability management. For a financial institution such as us, these obligations arise from thewithdrawals of deposits and the payment of operating expenses.

             Our primary sources of liquidity include cash and cashequivalents, federal funds sold, new deposits, short-term borrowings, interestpayments on securities held to maturity and available for sale, and feescollected from asset administration clients. As a result of our management of liquid assets and the ability togenerate liquidity through liability funds, management believes that wemaintain overall liquidity sufficient to meet our depositors' needs, to satisfyour operating requirements and to fund the payment of an anticipated annualcash dividend of $0.08 per share for 2001 (approximately $2.5 millionbased upon 31,873,289 shares outstanding as of June 30, 2001).

             Our ability to pay dividends on the common stock maydepend on the receipt of dividends from Investors Bank. Any dividend paymentsby Investors Bank are subject to certain restrictions imposed by theMassachusetts Commissioner of Banks.  Inaddition, we may not pay dividends on our common stock if we are in defaultunder certain agreements entered into in connection with the sale of ourCapital Securities.  The CapitalSecurities were issued by Investors Capital Trust I, a Delaware statutorybusiness trust sponsored by us, and qualify as Tier I capital under thecapital guidelines of the Federal Reserve.

             We have informal borrowing arrangements with variouscounterparties.  Each counterparty hasagreed to make funds available to us at the Federal funds overnight rate.  The aggregate amount of these borrowingarrangements as of June 30, 2001 was $813 million.  Each bank may terminate its arrangement atany time and is under no contractual obligation to provide us with requestedfunding.  Our borrowings under these arrangementsare typically on an overnight basis.  Wecannot be certain, however, that such funding will be available.  Lack of availability of liquid funds couldhave a material adverse impact on our operations.

             We also have master repurchase agreements in place withvarious counterparties, pursuant to which brokers have agreed to make fundsavailable to us at various rates in exchange for collateral consisting ofmarketable securities. The aggregate amount of these borrowing arrangements atJune 30, 2001 was $2.0 billion.

             We also have a borrowing arrangement with theFHLBB.  We may borrow amounts determinedby prescribed collateral levels and the amount of FHLBB stock we hold.  We are required to hold FHLBB stock equal tono less than (i) 1% of our outstanding residential mortgage loan principal(including mortgage pool securities), (ii) 0.3% of total assets, or(iii) total advances from the FHLBB, divided by a leverage factor of20.  The aggregate amount of borrowingavailable to us under this arrangement at June 30, 2001 was $1.6 billion.

             Our cash flows are comprised of three primary classifications:  cash flows from operating activities,investing activities, and financing activities.  Net cash provided by operating activities was $2.2 millionfor the six months ended June 30, 2001. Net cash used for investing activities, consisting primarily of theexcess of purchases of investment securities over proceeds from maturities ofinvestment securities and decreased federal funds sold, was $943.9 millionfor the six months ended June 30, 2001. Net cash provided by financing activities, consisting primarily ofincreased borrowings and proceeds from common stock issued, was $933.0 millionfor the six months ended June 30, 2001.

**Capital Resources**

             Historically, we have financed our operationsprincipally through internally generated cash flows.  We incur capital expenditures for furniture, fixtures andmiscellaneous equipment needs.  We leasemicrocomputers through operating leases. Capital expenditures have been incurred and leases entered into on anas-required basis, primarily to meet our growing operating needs and throughbusiness acquisition activities.  As aresult, our capital expenditures were $20.2 million and $4.1 million forthe six months ended June 30, 2001 and 2000, respectively.  For the six months ended June 30, 2001,capital expenditures were comprised of approximately $10.7 million in fixedassets, $6.0 million in capitalized software and $3.5 million in leaseholdimprovements.

             Stockholders' equity at June 30, 2001 was$319.0 million, up 78%, from December 31, 2000.  The ratio of stockholders' equity to assets increased to 6.7% atJune 30, 2001 from 4.7% at December 31, 2000. The increase in stockholders’ equity is the result of the February 1,2001 offering of 1,624,145 shares of Common Stock, which raised approximately$115.8 million in capital.

             The FRB has adopted a system using internationallyconsistent risk-based capital adequacy guidelines to evaluate the capitaladequacy of banks and bank holding companies. Under the risk-based capital guidelines, different categories of assetsare assigned different risk weights, based generally upon the perceived creditrisk of the asset.  These risk weightsare multiplied by corresponding asset balances to determine a"risk-weighted" asset base. Some off-balance sheet items are added to the risk-weighted asset baseby converting them to a balance sheet equivalent and assigning them theappropriate risk weight.

             FRB and FDIC guidelines require that bankingorganizations have a minimum ratio of total capital to risk-adjusted assets andoff-balance sheet items of 8.0%.  Totalcapital is defined as the sum of "Tier I" and"Tier II" capital elements, with at least half of the totalcapital required to be Tier I. Tier I capital includes, with certain restrictions, the sum of commonstockholders' equity, noncumulative perpetual preferred stock, a limited amountof cumulative perpetual preferred stock, and minority interests in consolidatedsubsidiaries, less certain intangible assets. Tier II capital includes, with certain limitations, subordinateddebt meeting certain requirements, intermediate-term preferred stock, certainhybrid capital instruments, certain forms of perpetual preferred stock, as wellas maturing capital instruments and general allowances for loan losses.

             The following table summarizes our Tier Iand total capital ratios at June 30, 2001 (Dollars in thousands):

|                                            | **Amount** |       | **Ratio** |       |
|-------------------------------------------------|------------|------------|-----------|------------|
|                                            | ****       | ** ** | ****      | ** ** |
| Tier  I capital                                 | $          | 266,024    |      | 14.95      | % |
| Tier  I capital minimum requirement             | 71,170     |       | 4.00      | %          |
|                                            |            |       |           |       |
| Excess  Tier I capital                          | $          | 194,854    |      | 10.95      | % |
|                                            |            |       |           |       |
| Total  capital                                  | $          | 266,124    |      | 14.96      | % |
| Total  capital minimum requirement              | 142,339    |       | 8.00      | %          |
|                                            |            |       |           |       |
| Excess  total capital                           | $          | 123,785    |      | 6.96       | % |
|                                            |            |       |           |       |
| Risk  adjusted assets, net of intangible assets | $          | 1,779,238  |      |       |   |
|                                            |            |       |      |       |

             The following table summarizesInvestors Bank’s Tier I and total capital ratios at June 30, 2001 (Dollars inthousands):

|                                            | **Amount** |       | **Ratio** |       |
|-------------------------------------------------|------------|------------|-----------|------------|
|                                            | ****       | ** ** | ****      | ** ** |
| Tier  I capital                                 | $          | 262,115    |      | 14.74      | % |
| Tier  I capital minimum requirement             | 71,136     |       | 4.00      | %          |
|                                            |            |       |           |       |
| Excess  Tier I capital                          | $          | 190,979    |      | 10.74      | % |
|                                            |            |       |           |       |
| Total  capital                                  | $          | 262,215    |      | 14.74      | % |
| Total  capital minimum requirement              | 142,272    |       | 8.00      | %          |
|                                            |            |       |           |       |
| Excess  total capital                           | $          | 119,943    |      | 6.74       | % |
|                                            |            |       |           |       |
| Risk  adjusted assets, net of intangible assets | $          | 1,778,399  |      |       |   |
|                                            |            |       |      |       |

             In addition to the risk–basedcapital guidelines, the FRB and the FDIC use a “Leverage Ratio” as anadditional tool to evaluate capital adequacy. The Leverage Ratio is defined to be a company’s Tier I capital dividedby its adjusted total average assets. The Leverage Ratio adopted by the federal banking agencies requires aratio of 3.0% for top-rated banking institutions not experiencing a period ofrapid growth.  All other bankinginstitutions will be expected to maintain a Leverage Ratio of 4.0% to5.0%.  The computation of the risk–basedcapital ratios and the Leverage Ratio requires that our capital and that ofInvestors Bank be reduced by most intangible assets.  Our Leverage Ratio at June 30, 2001 was 5.89%, which is in excessof regulatory requirements.  The Bank’sLeverage Ratio at June 30, 2001 was 5.80%, which is in excess of regulatoryrequirements.

             The following tables present averagebalances, interest income and expense, and yields earned or paid on the majorcategories of assets and liabilities for the periods indicated (Dollars inthousands):

|                               | **Six Months Ended June 30, 2001**                                          |       | **Six Months Ended June 30, 2000** |       |
|------------------------------------|-----------------------------------------------------------------------------|------------|------------------------------------|------------|
|                               | ****                                                                        |       | ****                               |       |
|                               | **Average  Balance**                                                        |       | **Interest**                       |       | **Average  Yield/Cost** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/Cost** |   |
|                               | ****                                                                        | ** ** | ****                               | ** ** | **** | ** ** | **** | ** ** | **** | ** ** | **** | ** ** |
| **Interest  earning assets:**      |                                                                        |       |                               |       |   |   |   |   |   |   |   |   |
|                               | Federal  funds sold and other                                               | $          | 43,536                             |       | $ | 1,196 |   | 5.49 | % | $ | 43,451 |   | $ | 1,262 |   | 5.81 | % |
|                               | Investment  securities (1)                                                  | 3,805,830  |                               | 120,574    |   | 6.34 | % | 2,333,914 |   | 75,687 |   | 6.49 | % |
|                               | Loans  (2)                                                                  | 110,225    |                               | 2,848      |   | 5.17 | % | 124,662 |   | 2,812 |   | 4.51 | % |
|                               |                                                                        |            |                               |            |   |  |   |  |   |  |   |  |   |
|                               | Total  interest earning assets                                              | 3,959,591  |                               | 124,618    |   | 6.29 | % | 2,502,027 |   | 79,761 |   | 6.38 | % |
|                               |                                                                        |       |                               |            |   |  |   |   |   |  |   |  |   |
|                               | Allowance  for loan losses                                                  | (100       | )                                  |       |   |   |   | (100 | ) |   |   |   |   |
|                               | Noninterest–earning  assets                                            | 223,127    |                               |       |   |   |   | 142,507 |   |   |   |   |   |
|                               |                                                                        |            |                               |       |   |   |   |  |   |   |   |   |   |
|                               | Total  assets                                                               | $          | 4,182,618                          |       |   |   |   |   | $ | 2,644,434 |   |   |   |   |   |
|                               |                                                                        |            |                               |       |   |   |   |  |   |   |   |   |   |
| **Interest  bearing liabilities:** |                                                                        |       |                               |       |   |   |   |   |   |   |   |   |
|                               | Deposits:                                                                   |       |                               |       |   |   |   |   |   |   |   |   |   |
|                               | Demand                                                                      | $          | 3,974                              |       | $ | 39 |   | 1.96 | % | $ | 5,139 |   | $ | 51 |   | 1.98 | % |
|                               | Savings                                                                     | 1,682,005  |                               | 36,678     |   | 4.36 | % | 1,085,859 |   | 24,936 |   | 4.59 | % |
|                               | Time                                                                        | 481        |                               | 13         |   | 5.41 | % | 12,433 |   | 369 |   | 5.94 | % |
|                               | Short-term  borrowings                                                      | 1,643,685  |                               | 34,566     |   | 4.21 | % | 1,061,037 |   | 28,418 |   | 5.36 | % |
|                               | Other  borrowings                                                           | 197,532    |                               | 4,908      |   | 4.97 | % | - |   | - |   | - |   |
|                               |                                                                        |            |                               |            |   |  |   |  |   |  |   |  |   |
|                               | Total  interest bearing liabilities                                         | 3,527,677  |                               | 76,204     |   | 4.32 | % | 2,164,468 |   | 53,774 |   | 4.97 | % |
|                               | Noninterest-bearing  liabilities                                            |       |                               |       |   |   |   |   |   |   |   |   |   |
|                               | Demand  deposits                                                            | 176,483    |                               |       |   |   |   | 175,365 |   |   |   |   |   |
|                               | Savings                                                                     | 63,286     |                               |       |   |   |   | 37,017 |   |   |   |   |   |
|                               | Noninterest-bearing  time deposits                                          | 65,000     |                               |       |   |   |   | 65,000 |   |   |   |   |   |
|                               | Other  liabilities                                                          | 46,459     |                               |       |   |   |   | 31,374 |   |   |   |   |   |
|                               |                                                                        |            |                               |       |   |   |   |  |   |   |   |   |   |
|                               | Total  liabilities                                                          | 3,878,905  |                               |       |   |   |   | 2,473,224 |   |   |   |   |   |
|                               | Trust  preferred stock                                                      | 24,252     |                               |       |   |   |   | 24,224 |   |   |   |   |   |
|                               | Equity                                                                      | 279,461    |                               |       |   |   |   | 146,986 |   |   |   |   |   |
|                               |                                                                        |            |                               |       |   |   |   |  |   |   |   |   |   |
|                               | Total  liabilities and equity                                               | $          | 4,182,618                          |       |   |   |   |   | $ | 2,644,434 |   |   |   |   |   |
|                               |                                                                        |            |                               |       |   |   |   |  |   |   |   |   |   |
|                               | Net  interest income                                                        |       |                               | $          | 48,414 |   |   |   |   |   | $ | 25,987 |   |   |   |
|                               |                                                                        |       |                               |            |   |   |   |   |   |  |   |   |   |
|                               | Net  interest margin (3)                                                    |       |                               |       |   | 2.45 | % |   |   |   |   | 2.08 | % |
|                               |                                                                        |       |                               |       |   |  |   |   |   |   |   |  |   |
|                               | Average  interest rate spread (4)                                           |       |                               |       |   | 1.97 | % |   |   |   |   | 1.41 | % |
|                               |                                                                        |       |                               |       |   |  |   |   |   |   |   |  |   |
|                               | Ratio  of interest–earning assets to interest–bearing liabilities |       |                               |       |   | 112.24 | % |   |   |   |   | 115.60 | % |
|                               |                                                                        |       |                               |       |   |  |   |   |   |   |   |  |   |
|                                    |                                                                             |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)         Average yield/cost on available forsale securities is based on amortized cost.(2)         Average yield on loansincludes accrual loan balances and nonaccrual loan balances, if any.(3)         Net interest income divided bytotal interest–earning assets.(4)         Yield on interest–earningassets less rate paid on interest–bearing liabilities.

**Item3.              Quantitative andQualitative Disclosure about Market Risk**

             The information required by thisitem is contained in the “Market Risk” section in the “Management’s Discussionand Analysis of Financial Condition and Results of Operations,” as part of thisReport.

 

**PART II.  OTHERINFORMATION**

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

Our annualmeeting of stockholders was held on Tuesday, April 17, 2001.  A vote was proposed to:

|   | • | Elect each of Kevin J. Sheehan, James M. Oates  and Thomas P. McDermott as a class III director of the Company, to serve for  a three-year term and until his successor is elected and qualified; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                              |
|   | • | To approve an amendment to our certificate of  incorporation, to increase the number of authorized shares of our common  stock from 40,000,000 to 100,000,000;                                    |
|   |   |                                                                                                                                                                                              |
|   | • | To approve an amendment and restatement of our  amended and restated 1995 stock plan to increase the number of shares  available for grant pursuant to the plan from 4,640,000 to 6,140,000;      |
|   |   |                                                                                                                                                                                              |
|   | • | To approve a senior executive bonus plan; and                                                                                                                                                     |
|   |   |                                                                                                                                                                                              |
|   | • | To ratify the selection of Deloitte &  Touche LLP as our independent auditors for our fiscal year ended December 31,  2001.                                                                   |

 

The votingresults were as follows:

 

|   |                                                               | ** ** | **Votes For** | ** ** | **Votes  Against** | ** ** | **Votes  Withheld** | ** ** | **Broker  Abstained** | ** ** |
|--------|--------------------------------------------------------------------|------------|---------------|------------|--------------------|------------|---------------------|------------|-----------------------|------------|
|   |                                                               |       | ****          |       | ****               |       | ****                |       | ****                  |       |
|   |                                                               |       |          |       |               |       |                |       |                  |       |
| (1)    | Kevin  J. Sheehan                                                  |       | 26,911,593    |       | N/A                |       | 92,104              |       | N/A                   |       |
|   | James  M. Oates                                                    |       | 26,911,032    |       | N/A                |       | 92,665              |       | N/A                   |       |
|   | Thomas  P. McDermott                                               |       | 26,911,164    |       | N/A                |       | 92,533              |       | N/A                   |       |
| (2)    | Amendment  to charter to increase authorized shares                |       | 22,008,295    |       | 4,968,788          |       | N/A                 |       | 26,614                |       |
| (3)    | Amendment  and restatement of amended and restated 1995 stock plan |       | 21,639,241    |       | 5,293,413          |       | N/A                 |       | 71,043                |       |
| (4)    | Approve  senior executive bonus plan                               |       | 25,788,069    |       | 1,153,123          |       | N/A                 |       | 62,505                |       |
| (5)    | Deloitte  & Touche LLP                                         |       | 26,976,438    |       | 15,190             |       | N/A                 |       | 11,709                |       |

 

**Item 6. **Exhibits and Reportson Form 8-K.

                           None

 

**SIGNATURES**

             Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

|                         |   | **INVESTORS FINANCIAL SERVICES CORP.**                                                 |   |
|------------------------------|--------|----------------------------------------------------------------------------------------|--------|
|                         |   |
| Date:   August 14, 2001 | By:    | /s/ Kevin J. Sheehan                                                                   |
|                         |   |                                                                                        |
|                         |   | Kevin J. Sheehan  Chairman, President and Chief Executive Officer                      |
|                         |
|                         | By:    | /s/ Karen C. Keenan                                                                    |
|                         |   |                                                                                        |
|                         |   | Karen C. Keenan  Chief Financial Officer  (Principal Financial and Accounting Officer) |
|                              |        |                                                                                        |        |  |