** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

----

**FORM 10-Q**

 

| **(Mark One)**                                    |                                                                                          |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **x**                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| **For the  Quarterly period ended June 30, 2006** |
| **or**                                            |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

**For the Transition periodfrom _____ to _____**

**0-26996****(Commission File Number)**

----

**INVESTORSFINANCIAL SERVICES CORP.**

(Exact name of registrant as specified in its charter)

| **Delaware**                              | ** ** | **04-3279817**                     |
|-------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of          |       | (IRS Employer  Identification No.) |
| incorporation or  organization)           |       |                               |
|                                      |       |                               |
| **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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark whether the registrant is ashell company (as defined by Rule 12b-2 of the Exchange Act).  Yes o  No x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act. (Check one):

| Large accelerated filer x | Accelerated  filer o | Non-accelerated  filer o |
|---------------------------|----------------------|--------------------------|

 

As of July 31, 2006 there were 66,068,041 shares of common stockoutstanding.

 

----

**INVESTORSFINANCIAL SERVICES CORP.**

**INDEX**
|                | ** ** | ** **                                                                                                      | ** ** | **Page**   |
|----------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **     | ** ** | ** **                                                                                                      | ** ** | ** ** |
| **PART  I.**   | ** ** | **FINANCIAL  INFORMATION**                                                                                      |       | 3          |
| ** **     | ** ** | ** **                                                                                                      |       |       |
| Item 1.        |       | Unaudited Consolidated Financial Statements                                                                     |       | 3          |
|           |       |                                                                                                            |       |       |
|           |       | Unaudited Consolidated Balance Sheets June 30, 2006  and December 31, 2005                                      |       | 3          |
|           |       |                                                                                                            |       |       |
|           |       | Unaudited Consolidated Statements of Income and  Comprehensive Income Six months ended June 30, 2006 and 2005   |       | 4          |
|           |       |                                                                                                            |       |       |
|           |       | Unaudited Consolidated Statements of Income and  Comprehensive Income Three months ended June 30, 2006 and 2005 |       | 5          |
|           |       |                                                                                                            |       |       |
|           |       | Unaudited Consolidated Statements of Stockholders’  Equity Six months ended June 30, 2006 and 2005         |       | 6          |
|           |       |                                                                                                            |       |       |
|           |       | Unaudited Consolidated Statements of Cash Flows Six  months ended June 30, 2006 and 2005                        |       | 7          |
|           |       |                                                                                                            |       |       |
|           |       | Notes to Unaudited Consolidated Financial Statements                                                            |       | 8          |
|           |       |                                                                                                            |       |       |
|           |       | Report of Independent Registered Public Accounting  Firm                                                        |       | 24         |
|           |       |                                                                                                            |       |       |
| Item 2.        |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                     |       | 25         |
|           |       |                                                                                                            |       |       |
| Item 3.        |       | Quantitative and Qualitative Disclosures about Market  Risk                                                     |       | 39         |
|           |       |                                                                                                            |       |       |
| Item 4.        |       | Controls and Procedures                                                                                         |       | 39         |
|           |       |                                                                                                            |       |       |
| **PART  II.**  | ** ** | **OTHER  INFORMATION**                                                                                          |       | 40         |
| ** **     | ** ** | ** **                                                                                                      |       |       |
| Item  1.       |       | Legal  Proceedings                                                                                              |       | 40         |
|           |       |                                                                                                            |       |       |
| Item 1A.       |       | Risk Factors                                                                                                    |       | 40         |
|           | ** ** | ** **                                                                                                      | ** ** | ** ** |
| Item 4.        |       | Submission of Matters to a Vote of Security Holders                                                             |       | 44         |
|           |       |                                                                                                            |       |       |
| Item 6.        |       | Exhibits                                                                                                        |       | 45         |
|           |       |                                                                                                            |       |       |
| **SIGNATURES** |       | 45                                                                                                              |

 

----

**PART I. FINANCIAL INFORMATION**

**Item1.    Unaudited Consolidated FinancialStatements**

**InvestorsFinancial Services Corp.Unaudited Consolidated Balance SheetsJune 30, 2006 and December 31, 2005 (Dollars in thousands, except share data)**
| ** **                                                                                                                                                                                                                                                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                                                                                                | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                                                                                | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash and due from banks                                                                                                                                                                                                                                                   |       | $                 | 120,429    |                  | $          | 79,637 |   |
| Federal Funds sold                                                                                                                                                                                                                                                        |       | 520,000           |       | —                |       |
| Other short-term  investments                                                                                                                                                                                                                                             |       | 7,282             |       | —                |       |
| Securities held to  maturity (including securities pledged of $4,354,703 and $4,529,421 at June 30,  2006 and December 31, 2005, respectively) (approximate fair value of  $6,110,925 and $6,725,729 at June 30, 2006 and December 31, 2005,  respectively) (Note 3) |       | 6,143,864         |       | 6,761,930             |       |
| Securities available  for sale (including securities pledged of $3,202,890 and $2,997,958 at June  30, 2006 and December 31, 2005, respectively) (Note 3)                                                                                                                 |       | 4,659,782         |       | 4,369,720             |       |
| Nonmarketable equity  securities                                                                                                                                                                                                                                          |       | 50,000            |       | 50,000                |       |
| Loans, less allowance  for loan losses of $100 at June 30, 2006 and December 31, 2005 (Note 4)                                                                                                                                                                       |       | 335,697           |       | 402,370               |       |
| Accrued interest and  fees receivable                                                                                                                                                                                                                                     |       | 134,178           |       | 119,583               |       |
| Equipment and leasehold  improvements, less accumulated depreciation of $53,505 and $59,156 at June  30, 2006 and December 31, 2005, respectively                                                                                                                         |       | 85,976            |       | 69,401                |       |
| Goodwill, net                                                                                                                                                                                                                                                             |       | 79,969            |       | 79,969                |       |
| Other assets                                                                                                                                                                                                                                                              |       | 230,292           |       | 163,783               |       |
| **Total Assets**                                                                                                                                                                                                                                                          |       | $                 | 12,367,469 |                  | $          | 12,096,393 |   |
| ** **                                                                                                                                                                                                                                                                | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                                                                                                | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Liabilities:**                                                                                                                                                                                                                                                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| Deposits (Note 5):                                                                                                                                                                                                                                                        |       |              |       |                  |       |
| Demand                                                                                                                                                                                                                                                                    |       | $                 | 556,071    |                  | $          | 537,558 |   |
| Savings                                                                                                                                                                                                                                                                   |       | 4,846,925         |       | 4,224,908             |       |
| Time                                                                                                                                                                                                                                                                      |       | 516,297           |       | 230,124               |       |
| Total deposits                                                                                                                                                                                                                                                            |       | 5,919,293         |       | 4,992,590             |       |
|                                                                                                                                                                                                                                                                      |       |              |       |                  |       |
| Securities sold under  repurchase agreements (Note 6)                                                                                                                                                                                                                     |       | 4,632,803         |       | 4,797,868             |       |
| Short-term and other  borrowings (Note 7)                                                                                                                                                                                                                                 |       | 729,742           |       | 1,356,649             |       |
| Due to brokers for open  trades payable                                                                                                                                                                                                                                   |       | 29,314            |       | 21,293                |       |
| Junior subordinated  deferrable interest debentures                                                                                                                                                                                                                       |       | 24,774            |       | 24,774                |       |
| Accrued taxes and other  expenses                                                                                                                                                                                                                                         |       | 49,603            |       | 45,077                |       |
| Other liabilities                                                                                                                                                                                                                                                         |       | 112,759           |       | 85,284                |       |
| Total  liabilities                                                                                                                                                                                                                                                        |       | 11,498,288        |       | 11,323,535            |       |
|                                                                                                                                                                                                                                                                      |       |              |       |                  |       |
| Commitments and  contingencies (Note 12)                                                                                                                                                                                                                                  |       | —            |       | —                |       |
|                                                                                                                                                                                                                                                                      |       |              |       |                  |       |
| **Stockholders’ Equity:**                                                                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Preferred stock, par  value $0.01 (shares authorized: 1,000,000; issued: none at June 30, 2006 and  December 31, 2005)                                                                                                                                                    |       | —            |       | —                |       |
| Common stock, par value  $0.01 (shares authorized: 175,000,000; issued: 68,108,995 and 67,177,306 at  June 30, 2006 and December 31, 2005, respectively)                                                                                                                  |       | 681               |       | 672                   |       |
| Surplus                                                                                                                                                                                                                                                                   |       | 319,847           |       | 286,265               |       |
| Deferred compensation                                                                                                                                                                                                                                                     |       | —            |       | (311                  | )          |
| Retained earnings                                                                                                                                                                                                                                                         |       | 651,303           |       | 572,549               |       |
| Accumulated other  comprehensive loss, net                                                                                                                                                                                                                                |       | (29,702           | )          | (13,369               | )          |
| Treasury stock, at cost  (2,124,669 shares at June 30, 2006 and December 31, 2005)                                                                                                                                                                                        |       | (72,948           | )          | (72,948               | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                          |       | 869,181           |       | 772,858               |       |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                       |       | $                 | 12,367,469 |                  | $          | 12,096,393 |   |

* *

*See Notes to Unaudited Consolidated Financial Statements.*

3

----

* *

**InvestorsFinancial Services Corp.Unaudited Consolidated Statements of Income and Comprehensive IncomeSix Months Ended June 30, 2006 and 2005 (Dollars in thousands, except per sharedata)**
| ** **                                | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2006**          | ** ** | **2005**          | ** ** |
| **Fees  and Other Revenue:**              | ** ** | ** **        | ** ** | ** **        | ** ** |
| Asset servicing  fees:                    |       |              |       |              |       |
| Core service fees                         |       | $                 | 220,002    |              | $          | 178,703 |   |
| Value-added service fees                  |       | 94,436            |       | 58,998            |       |
| Total asset servicing fees                |       | 314,438           |       | 237,701           |       |
| Other operating  income                   |       | 1,634             |       | 1,411             |       |
| Gain on sale of  investments              |       | 2,523             |       | 9,740             |       |
| Total fees and other revenue              |       | 318,595           |       | 248,852           |       |
|                                      |       |              |       |              |       |
| Interest income                           |       | 272,358           |       | 206,158           |       |
| Interest expense                          |       | 190,472           |       | 116,499           |       |
| Net interest income                       |       | 81,886            |       | 89,659            |       |
| Net operating revenue                     |       | 400,481           |       | 338,511           |       |
|                                      |       |              |       |              |       |
| **Operating  Expenses:**                  |       |              |       |              |       |
| Compensation and  benefits                |       | 164,207           |       | 120,351           |       |
| Technology and  telecommunications        |       | 35,125            |       | 25,913            |       |
| Transaction  processing services          |       | 29,469            |       | 22,776            |       |
| Occupancy                                 |       | 15,563            |       | 12,840            |       |
| Depreciation and  amortization            |       | 15,542            |       | 15,984            |       |
| Professional  fees                        |       | 5,404             |       | 6,379             |       |
| Travel and sales  promotion               |       | 4,077             |       | 3,174             |       |
| Insurance                                 |       | 1,967             |       | 2,275             |       |
| Other operating  expenses                 |       | 13,255            |       | 8,337             |       |
| Total operating expenses                  |       | 284,609           |       | 218,029           |       |
| ** **                                |       |              |       |              |       |
| **Income  Before Income Taxes**           |       | 115,872           |       | 120,482           |       |
|                                      |       |              |       |              |       |
| Provision for  income taxes               |       | 34,170            |       | 35,407            |       |
| ** **                                |       |              |       |              |       |
| **Net Income**                            |       | $                 | 81,702     |              | $          | 85,075 |   |
| **Basic Earnings Per Share**              |       | $                 | 1.25       |              | $          | 1.27 |   |
| **Diluted Earnings Per Share**            |       | $                 | 1.21       |              | $          | 1.24 |   |
|                                      |       |              |       |              |       |
| **Comprehensive  Income:**                |       |              |       |              |       |
| Net income                                |       | $                 | 81,702     |              | $          | 85,075 |   |
| Other  comprehensive (loss) income:       |       |              |       |              |       |
| Net unrealized investment loss            |       | (20,830           | )          | (12,694           | )          |
| Net unrealized derivative instrument gain |       | 3,398             |       | 2,692             |       |
| Cumulative translation adjustment         |       | 1,099             |       | (224              | )          |
| Other comprehensive loss                  |       | (16,333           | )          | (10,226           | )          |
| Comprehensive income                      |       | $                 | 65,369     |              | $          | 74,849 |   |

 

***See Notes to Unaudited Consolidated Financial Statements.***

4

----

** **

**InvestorsFinancial Services Corp.Unaudited Consolidated Statements of Income and Comprehensive IncomeThree Months Ended June 30, 2006 and 2005 (Dollars in thousands, except pershare data)**
| ** **                                       | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                       | ** ** | **2006**          | ** ** | **2005**          | ** ** |
| **Fees  and Other Revenue:**                     | ** ** | ** **        | ** ** | ** **        | ** ** |
| Asset servicing  fees:                           |       |              |       |              |       |
| Core service fees                                |       | $                 | 112,243    |              | $          | 90,159 |   |
| Value-added service fees                         |       | 53,892            |       | 32,339            |       |
| Total asset servicing fees                       |       | 166,135           |       | 122,498           |       |
| Other operating  income                          |       | 470               |       | 626               |       |
| Gain on sale of  investments                     |       | 2,523             |       | 5,552             |       |
| Total fees and other revenue                     |       | 169,128           |       | 128,676           |       |
|                                             |       |              |       |              |       |
| Interest income                                  |       | 137,921           |       | 108,103           |       |
| Interest expense                                 |       | 99,356            |       | 66,057            |       |
| Net interest income                              |       | 38,565            |       | 42,046            |       |
| Net operating revenue                            |       | 207,693           |       | 170,722           |       |
| ** **                                       |       |              |       |              |       |
| **Operating  Expenses:**                         |       |              |       |              |       |
| Compensation and  benefits                       |       | 87,209            |       | 63,432            |       |
| Technology and  telecommunications               |       | 17,787            |       | 13,077            |       |
| Transaction  processing services                 |       | 15,797            |       | 11,656            |       |
| Occupancy                                        |       | 8,012             |       | 6,227             |       |
| Depreciation and  amortization                   |       | 7,736             |       | 8,093             |       |
| Professional  fees                               |       | 1,943             |       | 3,406             |       |
| Travel and sales  promotion                      |       | 2,146             |       | 1,825             |       |
| Insurance                                        |       | 994               |       | 1,146             |       |
| Other operating  expenses                        |       | 7,301             |       | 4,375             |       |
| Total operating expenses                         |       | 148,925           |       | 113,237           |       |
| ** **                                       |       |              |       |              |       |
| **Income  Before Income Taxes**                  |       | 58,768            |       | 57,485            |       |
|                                             |       |              |       |              |       |
| Provision for  income taxes                      |       | 14,469            |       | 13,358            |       |
| **Net Income**                                   |       | $                 | 44,299     |              | $          | 44,127 |   |
| **Basic Earnings Per Share**                     |       | $                 | 0.68       |              | $          | 0.66 |   |
| **Diluted Earnings Per Share**                   |       | $                 | 0.65       |              | $          | 0.64 |   |
|                                             |       |              |       |              |       |
| **Comprehensive  Income:**                       |       |              |       |              |       |
| Net income                                       |       | $                 | 44,299     |              | $          | 44,127 |   |
| Other  comprehensive (loss) income:              |       |              |       |              |       |
| Net unrealized investment (loss) gain            |       | (11,633           | )          | 13,545            |       |
| Net unrealized derivative instrument gain (loss) |       | 707               |       | (5,991            | )          |
| Cumulative translation adjustment                |       | 970               |       | (104              | )          |
| Other comprehensive (loss) income                |       | (9,956            | )          | 7,450             |       |
| Comprehensive income                             |       | $                 | 34,343     |              | $          | 51,577 |   |

 

***See Notes to Unaudited Consolidated Financial Statements.***

5

----

** **

**InvestorsFinancial Services Corp.Unaudited Consolidated Statements of Stockholders’ EquitySix Months Ended June 30, 2006 and 2005 (Dollars in thousands, except sharedata)**
| ** **                                                                  | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                  | ** ** | **2006**          | ** ** | **2005**          | ** ** |
| **Common  shares**                                                          |       |              |       |              |       |
| Balance,  beginning of period                                               |       | $                 | 67,177,306 |              | $          | 66,668,584 |   |
| Exercise of  stock options                                                  |       | 863,186           |       | 225,416           |       |
| Common stock  issuance                                                      |       | 68,503            |       | 54,862            |       |
| Balance, end of  period                                                     |       | 68,108,995        |       | 66,948,862        |       |
| ** **                                                                  |       |              |       |              |       |
| **Treasury  shares**                                                        | ** ** | ** **        | ** ** | ** **        | ** ** |
| Balance, beginning  of period                                               |       | 2,124,669         |       | 73,235            |       |
| Balance, end of  period                                                     |       | 2,124,669         |       | 73,235            |       |
| ** **                                                                  |       |              |       |              |       |
| **Common  stock**                                                           | ** ** | ** **        | ** ** | ** **        | ** ** |
| Balance,  beginning of period                                               |       | $                 | 672        |              | $          | 667 |   |
| Exercise of  stock options                                                  |       | 9                 |       | 2                 |       |
| Balance, end of  period                                                     |       | 681               |       | 669               |       |
| ** **                                                                  |       |              |       |              |       |
| **Surplus**                                                                 | ** ** | ** **        | ** ** | ** **        | ** ** |
| Balance, beginning  of period                                               |       | 286,265           |       | 272,536           |       |
| Share-based  awards and exercise of stock options                           |       | 26,700            |       | 6,208             |       |
| Tax benefit from  exercise of stock options                                 |       | 4,599             |       | 1,246             |       |
| Common stock  issuance                                                      |       | 2,296             |       | 1,878             |       |
| Transfer of  deferred compensation to surplus                               |       | (311              | )          | —            |       |
| Amortization of  deferred compensation                                      |       | 298               |       | —            |       |
| Balance, end of  period                                                     |       | 319,847           |       | 281,868           |       |
| ** **                                                                  |       |              |       |              |       |
| **Deferred  compensation**                                                  | ** ** | ** **        | ** ** | ** **        | ** ** |
| Balance,  beginning of period                                               |       | (311              | )          | (572              | )          |
| Transfer of  deferred compensation to surplus                               |       | 311               |       | —            |       |
| Amortization of  deferred compensation                                      |       | —            |       | 212               |       |
| Balance, end of  period                                                     |       | —            |       | (360              | )          |
| ** **                                                                  |       |              |       |              |       |
| **Retained  earnings**                                                      | ** ** | ** **        | ** ** | ** **        | ** ** |
| Balance,  beginning of period                                               |       | 572,549           |       | 418,034           |       |
| Net income                                                                  |       | 81,702            |       | 85,075            |       |
| Cash dividend,  $0.045 and $0.040 per share in the six-month periods ending |       |              |       |              |       |
|  June 30, 2006 and 2005, respectively                                  |       | (2,948            | )          | (2,669            | )          |
| Balance, end of  period                                                     |       | 651,303           |       | 500,440           |       |
| ** **                                                                  |       |              |       |              |       |
| **Accumulated  other comprehensive (loss) income, net**                     | ** ** | ** **        | ** ** | ** **        | ** ** |
| Balance,  beginning of period                                               |       | (13,369           | )          | 23,888            |       |
| Net unrealized  investment loss                                             |       | (20,830           | )          | (12,694           | )          |
| Net unrealized  derivative instrument gain                                  |       | 4,251             |       | 3,091             |       |
| Amortization of  terminated interest rate swap agreements                   |       | (853              | )          | (399              | )          |
| Cumulative  translation adjustment                                          |       | 1,099             |       | (224              | )          |
| Balance, end of  period                                                     |       | (29,702           | )          | 13,662            |       |
| ** **                                                                  |       |              |       |              |       |
| **Treasury  stock**                                                         | ** ** | ** **        | ** ** | ** **        | ** ** |
| Balance, beginning  of period                                               |       | (72,948           | )          | (2,291            | )          |
| Balance, end of  period                                                     |       | (72,948           | )          | (2,291            | )          |
| ** **                                                                  |       |              |       |              |       |
| **Total  Stockholders’ Equity**                                        |       | $                 | 869,181    |              | $          | 793,988 |   |

*** ***

***See Notes to Unaudited Consolidated Financial Statements.***

6

----

** **

**InvestorsFinancial Services Corp.Unaudited Consolidated Statements of Cash Flows Six Months Ended June 30, 2006 and 2005 (Dollars in thousands)**
| ** **                                                                         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                         | ** ** | **2006**          | ** ** | **2005**          | ** ** |
| ** **                                                                         | ** ** | ** **        | ** ** | ** **        | ** ** |
| **Cash  Flows From Operating Activities:**                                         |       |              |       |              |       |
| Net income                                                                         |       | $                 | 81,702     |              | $          | 85,075 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |              |       |              |       |
| Equity in undistributed loss of unconsolidated  subsidiary                         |       | 14                |       | 14                |       |
| Depreciation and amortization                                                      |       | 15,542            |       | 15,984            |       |
| Share-based compensation                                                           |       | 2,284             |       | —            |       |
| Amortization of deferred compensation                                              |       | —            |       | 212               |       |
| Amortization of premiums on securities, net of  accretion of discounts             |       | 25,076            |       | 24,440            |       |
| Gain on sale of investments                                                        |       | (2,523            | )          | (9,740            | )          |
| Excess tax benefit related to share-based  compensation                            |       | (5,106            | )          | —            |       |
| Changes in assets and liabilities:                                                 |       |              |       |              |       |
| Accrued interest and fees receivable                                               |       | (14,595           | )          | (14,485           | )          |
| Other assets                                                                       |       | (66,587           | )          | (51,478           | )          |
| Accrued taxes and other expenses                                                   |       | 4,526             |       | 3,662             |       |
| Other liabilities                                                                  |       | 53,818            |       | 61,356            |       |
| Net cash provided by operating activities                                          |       | 94,151            |       | 115,040           |       |
| ** **                                                                         |       |              |       |              |       |
| **Cash  Flows From Investing Activities:**                                         |       |              |       |              |       |
| Proceeds from  maturities and paydowns of securities available for sale            |       | 535,736           |       | 633,126           |       |
| Proceeds from  maturities and paydowns of securities held to maturity              |       | 642,141           |       | 752,969           |       |
| Proceeds from  sale of securities available for sale                               |       | 134,131           |       | 248,441           |       |
| Purchases of  securities available for sale                                        |       | (994,571          | )          | (841,836          | )          |
| Purchases of  securities held to maturity                                          |       | (49,362           | )          | (1,795,148        | )          |
| Net increase in  deposits pledged to secure clearings                              |       | —            |       | (138,850          | )          |
| Net increase in  due to brokers for open trades payable                            |       | 8,021             |       | 43,896            |       |
| Net increase in  Federal Funds sold                                                |       | (520,000          | )          | (11,000           | )          |
| Net increase in  other short-term investments                                      |       | (7,282            | )          | —            |       |
| Net decrease  (increase) in loans                                                  |       | 66,673            |       | (75,290           | )          |
| Purchases of  equipment, software and leasehold improvements                       |       | (32,103           | )          | (13,503           | )          |
| Net cash used for investing activities                                             |       | (216,616          | )          | (1,197,195        | )          |
| ** **                                                                         |       |              |       |              |       |
| **Cash  Flows From Financing Activities:**                                         |       |              |       |              |       |
| Net increase  (decrease) in demand deposits                                        |       | 18,513            |       | (110,501          | )          |
| Net increase  (decrease) in time and savings deposits                              |       | 908,190           |       | (186,350          | )          |
| Net (decrease)  increase in securities sold under repurchase agreements            |       | (165,065          | )          | 596,202           |       |
| Net (decrease)  increase in short-term and other borrowings                        |       | (626,907          | )          | 758,759           |       |
| Proceeds from  exercise of stock options                                           |       | 24,425            |       | 6,210             |       |
| Proceeds from  issuance of common stock                                            |       | 2,296             |       | 1,878             |       |
| Excess tax  benefit related to share-based compensation                            |       | 5,106             |       | —            |       |
| Dividends paid  to stockholders                                                    |       | (2,948            | )          | (2,669            | )          |
| Net cash provided by financing activities                                          |       | 163,610           |       | 1,063,529         |       |
|                                                                               |       |              |       |              |       |
| **Effect  of exchange rates on cash**                                              |       | (353              | )          | 1                 |       |
| ** **                                                                         |       |              |       |              |       |
| **Net  Increase (Decrease) in Cash and Due From Banks**                            |       | 40,792            |       | (18,625           | )          |
| **Cash and Due From Banks, Beginning of Period**                                   |       | 79,637            |       | 49,059            |       |
| **Cash  and Due From Banks, End of Period**                                        |       | $                 | 120,429    |              | $          | 30,434 |   |

* *

*See Notes to UnauditedConsolidated Financial Statements.*

 

7

----

**Investors FinancialServices Corp.sNotes to Unaudited Consolidated Financial Statements**

**1.       Description of Business**

Investors FinancialServices Corp. (‘IFSC’) provides asset administration services for thefinancial services industry through its wholly-owned subsidiary, Investors Bank& Trust Company (‘the Bank’).  Asused herein, the defined term “the Company” shall mean IFSC together with theBank and its domestic and foreign subsidiaries. The Company provides core services and value-added services to a variety of financial asset managers,including mutual fund complexes, investment advisors, family offices, banks andinsurance companies.  Core servicesinclude middle office outsourcing, global custody, multicurrency accounting andfund administration.  Value-addedservices include securities lending, foreign exchange, cash management,performance measurement, institutional transfer agency, investment advisoryservices, lines of credit and brokerage and transition management services.  The Company is subject to regulationby the Federal Deposit Insurance Corporation (‘FDIC’), the Federal ReserveBoard of Governors (‘FRB’), the Office of the Commissioner of Banks of theCommonwealth of Massachusetts (‘Commissioner’), the Securities and ExchangeCommission (‘SEC’), the National Association of Securities Dealers, Inc. (‘NASD’),the State of Vermont Department of Banking, Insurance, Securities & HealthCare Administration (‘BISHCA’), the Office of the Superintendent of FinancialInstitutions in Canada (‘OSFI’), the Irish Financial Services RegulatoryAuthority, the Cayman Islands Monetary Authority (‘CIMA’), the FinancialServices Authority in the United Kingdom (‘FSA’) and the Commission deSurveillance du Secteur Financier in Luxembourg (‘CSSF’).

**2.       Interim Financial Statements**

The unauditedconsolidated interim financial statements of the Company as of June 30, 2006and December 31, 2005, and for the six-month and three-month periods ended June30, 2006 and 2005 have been prepared by the Company pursuant to the rules andregulations of the SEC.  Certaininformation and footnote disclosures normally included in annual financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America (‘GAAP’) have been omitted as permitted by suchrules and regulations.  All adjustments,consisting of normal recurring adjustments, necessary for their fairpresentation in conformity with GAAP are included.  All significant intercompany accounts andtransactions have been eliminated.  TheCompany’s management believes that the disclosures are adequate to presentfairly the financial position, results of operations and cash flows at thedates and for the periods presented.  Thepreparation of the financial statements requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes.  Actual resultsmay differ from those estimates.  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 not necessarily indicative of those tobe expected for the full fiscal year. Certain amounts in prior financialstatements have been reclassified to conform to the current presentation.

***Securities—***TheCompany classifies all equity securities that have readily determinable fairvalues and all investments in debt securities into one of threecategories.  Debt securities that theCompany has the positive intent and ability to hold to maturity are classifiedas held to maturity and carried at amortized cost.  Debt and equity securities that are boughtand held principally for the purpose of selling them in the near term areclassified as trading securities and carried at fair value, with unrealizedgains and losses included in earnings. All other debt and equity securities not classified as either held tomaturity or trading are classified as available for sale and carried at fairvalue, with unrealized gains and losses excluded from earnings and reported inother comprehensive income.

Nonmarketable securitiesconsist of stock of the Federal Home Loan Bank of Boston (‘FHLBB’) and arecarried at cost and redeemable at par value. The Company is required to hold this stock under its borrowing arrangement with the FHLBB.

An investment isconsidered impaired if the fair value of the investment is less than itscost.  The Company recognizes animpairment charge if, based on the facts and circumstances, managementdetermines the impairment to be other than temporary.  For example, the Company will record an otherthan temporary impairment charge on a debt security if it is determined that itis probable that the Company will be unable to recover all amounts due underthe contractual obligations of the security.

Amortizationand accretion of debt securities purchased at a premium or discount areamortized or accreted into income using a method which approximates theconstant effective yield method.  TheCompany applies Statement of Financial Accounting Standards No. 91, *Accounting for Nonrefundable Fees and CostsAssociated with Originating or Acquiring Loans and Initial Direct Costs ofLeases* (‘SFAS 91’) for the amortization of premiums and accretion ofdiscounts.  In calculating the effectiveyield for securities that represent holdings of large numbers of similar loansfor which prepayments are probable and the timing

8

----

andamount of prepayments can be reasonably estimated, prepayments are anticipatedusing the Company’s actual three-month prepayment experience.

Theamount of amortization or accretion to recognize in income is driven by thecalculation of the constant effective yield. When calculating this yield, the Company assumes that prepayments willcontinue from the analysis date to the date of the security’s expected maturityat its most recent three-month prepayment rate. The prepayment rate is updated monthly based on the Company’s previousthree-month actual prepayment experience.

TheCompany utilizes three-month prepayment rates to anticipate prepayments becausesuch rates are based on its own actual prepayment experience and because theCompany believes three-month rates are a better estimate of future experiencethan either one-month or six-month or longer rates.  In the opinion of management, a one-monthrate does not capture enough experience to predict future prepayment behaviorand may create undue volatility in interest income due to one-time fluctuationsin prepayment activity.  Conversely, inthe opinion of management, a six-month or longer rate would not capture enoughvolatility to predict future prepayment behavior.

If a difference arisesbetween the Company’s estimated prepayments and its actual prepayments received,the constant effective yield is recalculated based on the Company’s actualpayments to date and anticipated future payments. This monthly recalculationresults in the carrying value of the security being adjusted to the amount thatwould have existed had the new effective yield been applied since the purchasedate, and a corresponding charge or credit is recognized to interest income.

Forsecurities that do not represent holdings of large numbers of similar loans forwhich prepayments are probable and the timing and amount of prepayments can bereasonably estimated, the associated premiums and discounts are amortized oraccreted over their contractual term using the constant effective yield. Actualprepayment experience for such securities is reviewed monthly and aproportionate amount of premium or discount is recognized in income at thattime such that the effective yield on the remaining portion of the securitiescontinues unchanged.

Asof and for the periods ended June 30, 2006, December 31, 2005 and June 30,2005, the Company anticipated prepayments on its residential mortgage-backedsecurities.  All other securities,including Federal agency securities, state and political subdivisions,corporate debt, U.S. Treasury securities and foreign government securities, donot meet the SFAS 91 criteria for anticipating prepayments.  Accordingly, no prepayments were anticipatedfor these securities.

***IncomeTaxes*—**Income tax expense is based on estimated taxespayable or refundable on a tax return basis for the current year and thechanges in deferred tax assets and liabilities during the year.  Deferredtax assets and liabilities are established for temporary differences betweenthe accounting bases and the tax bases of the Company’s assets and liabilitiesat enacted tax rates expected to be in effect when the amounts related to suchtemporary differences are realized or settled.  If the Company determinesthat it is “more likely than not” that some portion or all of a deferred taxasset will not be realized, the Company records a valuation allowance inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 109, *Accounting for Income Taxes*(‘SFAS109’).

The Company reversedpreviously accrued taxes of approximately $5.3 million in the second quarter of2006, resulting from a tax position that no longer met the probable recognitionthreshold under Statement of Financial Accounting Standards No. 5, *Accounting for Contingencies* (‘SFAS 5’).

The Company recorded aone-time benefit of approximately $7 million in the second quarter of 2005related to the recognition of the indefinite reversal provision of AccountingPrinciples Board Opinion No. 23, *Accountingfor Income Taxes — Special Areas*(‘APB 23’). The indefinite reversalprovision of APB 23 specifies that U.S. income taxes should not be accrued onthe undistributed earnings of a foreign subsidiary if those earnings have beenor will be invested indefinitely in that subsidiary’s operations.  The Company had previously accrued U.S.income taxes on the undistributed earnings of its Irish subsidiaries.  In the second quarter of 2005, the Companyrecognized the indefinite reversal provision of APB 23 due to the projectedcapital needs of its Irish subsidiaries necessary to support continued growth.  As such, the Company no longer records U.S.income taxes on the undistributed earnings of its Irish subsidiaries.

***Share-BasedCompensation*—**On January 1, 2006, the Company adoptedStatement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment*(‘SFAS 123R’).  SFAS 123R requires that compensation costrelating to share-based payment transactions be recognized in the financialstatements, with measurement based upon the fair value of the equity orliability instruments issued.  TheCompany adopted SFAS 123R using the modified prospective applicationmethod.  Under that method, compensationcost for equity awards granted after January 1, 2006 is recognized over theservice period based on the grant date fair value.  In addition, compensationcost for the portion of awards for which the requisite service has not beenrendered that are outstanding as of January 1, 2006 is recognized prospectivelyas the requisite service is rendered.  The

9

----

compensation cost forthat portion of awards is based on the grant date fair value of those awards ascalculated under the pro forma disclosures of Statement of Financial AccountingStandards No. 123, *Accounting for Stock-basedCompensation* (‘SFAS 123’).  Inaccordance with the modified prospective application method, the financialstatements of interim periods prior to the adoption of SFAS 123R have not beenrestated.

The followingtable sets forth share-based compensation cost and the related tax benefitrecognized in the income statement for all of the Company’s share-basedcompensation plans (Dollars in thousands):

|                                | ** ** | **For the Six Months  Ended June 30,** | ** ** | **For the Three Months  Ended June 30,** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                                        | ** ** | **2005**                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Share-based  compensation cost |       | $                                                               | 2,284      |                                                              | $          | 212 |   | $ | 1,234 |   | $ | 105 |   |
| Income tax benefit             |       | $                                                               | 420        |                                                              | $          | — |   | $ | 190 |   | $ | — |   |

 

Certain of the Company’sshare-based awards contain terms that provide for a graded vesting schedulewhereby portions of the award vest in increments over the requisite serviceperiod.  As provided for under SFAS 123R,the Company has elected to recognize compensation cost for awards granted on orafter January 1, 2006 with graded vesting schedules on a straight-line basisover the requisite service period for the entire award.

Prior to adopting SFAS123R, the Company measured compensation cost for share-based compensation plansusing the intrinsic value method under Accounting Principles Board Opinion No.25, *Accounting for Stock Issued to Employees*(‘APB25’),**and made pro forma disclosures of thefair value method under SFAS 123.  Theintrinsic value method measures compensation cost as the amount by which thefair market value of the Company’s common stock exceeds the option exerciseprice on the measurement date, which is typically the date of grant.  Generally, options granted had an exerciseprice equivalent to the fair market value at the measurement date.  Accordingly, no compensation cost wasrecorded.  If share-based compensationcost were recognized using the fair value method, stock options would be valuedat grant date using the Black-Scholes valuation model and the resultingcompensation cost would have decreased net income as indicated below (Dollarsin thousands, except per share data):

 

|                                                                                                                                          | ** ** | **For the Six  Months Ended** | ** ** | **For the Three  Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                                               | ** ** | **June 30, 2005**                  | ** ** | **June 30, 2005**                    | ** ** |
|                                                                                                                                     |       |                                         |       |                                           |       |
| Net income as  reported                                                                                                                  |       | $                                            | 85,075     |                                           | $          | 44,127 |   |
| Deduct: Total  share-based employee compensation cost determined under the fair value method  for all awards, net of related tax effects |       | (1,797                                       | )          | (1,466                                         | )          |
| Pro forma net  income                                                                                                                    |       | $                                            | 83,278     |                                           | $          | 42,661 |   |
|                                                                                                                                     |       |                                         |       |                                           |       |
| Earnings per  share:                                                                                                                     |       |                                         |       |                                           |       |
| Basic-as reported                                                                                                                        |       | $                                            | 1.27       |                                           | $          | 0.66 |   |
| Basic-pro forma                                                                                                                          |       | $                                            | 1.25       |                                           | $          | 0.64 |   |
|                                                                                                                                     |       |                                         |       |                                           |       |
| Diluted-as reported                                                                                                                      |       | $                                            | 1.24       |                                           | $          | 0.64 |   |
| Diluted-pro  forma                                                                                                                       |       | $                                            | 1.22       |                                           | $          | 0.63 |   |

 

The fair value of eachoption grant was estimated on the date of grant using the Black-Scholesvaluation model with the following weighted average assumptions for the sixmonths ended June 30, 2005:  an averageassumed risk-free interest rate of 3.93%, an expected term of four years, anaverage expected volatility of 42.87%, and an average dividend yield of 0.19%.

For the three monthsended June 30, 2005, the following assumptions were used in the Black-Scholesvaluation model:  an average assumedrisk-free interest rate of 3.73%, an expected term of four years, an averageexpected volatility of 41.58%, and an average dividend yield of 0.21%.

For both the six andthree months ended June 30, 2005, the amount of share-based compensation cost(net of tax) included in net income as reported was $0.1 million.

10

----

The following tablerepresents the effect of changing from the intrinsic value method under APB 25to the fair value method under SFAS 123R for the six months and three monthsended June 30, 2006, respectively (Dollars in thousands, except per sharedata):

|                                      | ** ** | **For the Six  Months Ended** | ** ** | **For the Three  Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                           | ** ** | **June 30, 2006**                  | ** ** | **June 30, 2006**                    | ** ** |
|                                 |       |                                         |       |                                           |       |
| Increase/(Decrease)  in:             |       |                                         |       |                                           |       |
|                                 |       |                                         |       |                                           |       |
| Income from  continuing operations   |       | $                                            | (2,113     | )                                              | $          | (1,080 |   |
| Income before  income taxes          |       | (2,113                                       | )          | (1,080                                         |       |
| Net income                           |       | (1,496                                       | )          | (816                                           |       |
| Cash flow from  operations           |       | (5,106                                       | )          | (3,473                                         |       |
| Cash flow from  financing activities |       | 5,106                                        |       | 3,473                                          |       |
|                                 |       |                                         |       |                                           |       |
| Basic EPS                            |       | $                                            | (0.02      | )                                              | $          | (0.01 |   |
| Diluted EPS                          |       | $                                            | (0.02      | )                                              | $          | (0.01 |   |

 

The fair value of eachoption grant under the Director Plan, the Stock Plan, and the 2005 Plan (asdescribed further in Note 8) was estimated on the grant date using theBlack-Scholes valuation model with the following weighted average assumptionsfor the six months ended June 30, 2006: an average assumed risk-free interest rate of 4.77%, an expected term offive years, an average expected volatility of 42.46%, and an average dividendyield of 0.20%.

For the three monthsended June 30, 2006, the following assumptions were used in the Black-Scholesvaluation model:  an average assumedrisk-free interest rate of 4.86%, an expected term of five years, an averageexpected volatility of 42.34%, and an average dividend yield of 0.19%.

The Company bases itsestimate of expected term on the historical exercise and post-vestingemployment termination behavior for similar grants.  The Company’s volatility assumption is basedon the historical volatility of the Company’s stock over a period equating tothe expected term of the employee share option, using weekly price observationsand looking backward from the date of grant.

The fair value of theoption feature of grants under the 1997 Employee Stock Purchase Plan (‘ESPP’)(as described further in Note 8) was estimated on the grant date using theBlack-Scholes valuation model with the following weighted average assumptionsfor the six months ended June 30, 2006: an average assumed risk-free interest rate of 4.40%, an expected term of0.5 years, an average expected volatility of 36.96%, and an average dividendyield of 0.25%.

The expected term for the ESPP is equal to thesix-month payment period.  The Companyestimates expected volatility for the ESPP in the same manner as for employeestock options, except that daily volatility is used instead of weeklyvolatility.  The Company uses dailyvolatility for the ESPP because weekly volatility over six months does notresult in a statistically significant number of data points upon which to basethe volatility calculation.

SFAS 123R also requires that any deferred compensationrelated to share-based awards granted prior to January 1, 2006 must beeliminated against the appropriate equity accounts.  In connection with the Company’s adoption ofSFAS 123R, the presentation in the consolidated statement of stockholders’equity for the six months ended June 30, 2006 was revised to reflect thetransfer of balances previously reported in deferred compensation to surplus.

11

----

***EarningsPer Share—***Basic earnings per share (‘EPS’) were computedby dividing net income by the weighted-average number of common sharesoutstanding during the quarter.  DilutedEPS reflects the potential dilution that could occur if contracts to issuecommon stock were exercised into common stock that then shared in the earningsof the Company.  The reconciliation fromBasic to Diluted EPS is as follows (Dollars in thousands, except per sharedata):
| ** **                                   | ** ** | **For the Six Months** | ** ** | **For the Three Months** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **Ended June 30,**          | ** ** | **Ended June 30,**            | ** ** |
| ** **                                   | ** ** | **2006**                              | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                         |       |                                  |       |                                    |       |   |   |   |   |
| Income available  to common stockholders     |       | $                                     | 81,702     |                                    | $          | 85,075 |   | $ | 44,299 |   | $ | 44,127 |   |
|                                         |       |                                  |       |                                    |       |   |   |   |   |
| Basic  weighted-average shares outstanding   |       | 65,538,888                            |       | 66,761,409                              |       | 65,792,845 |   | 66,803,946 |   |
| Dilutive effect  of stock options            |       | 1,923,309                             |       | 1,682,240                               |       | 1,930,739 |   | 1,443,415 |   |
| Diluted weighted-average  shares outstanding |       | 67,462,197                            |       | 68,443,649                              |       | 67,723,584 |   | 68,247,361 |   |
|                                         |       |                                  |       |                                    |       |   |   |   |   |
| Earnings per  share:                         |       |                                  |       |                                    |       |   |   |   |   |
| Basic                                        |       | $                                     | 1.25       |                                    | $          | 1.27 |   | $ | 0.68 |   | $ | 0.66 |   |
|                                         |       |                                  |       |                                    |       |   |   |   |   |
| Diluted                                      |       | $                                     | 1.21       |                                    | $          | 1.24 |   | $ | 0.65 |   | $ | 0.64 |   |

 

There were 122,069 and13,917 options which were not considered dilutive for purposes of EPScalculations for the six-month periods ended June 30, 2006 and 2005,respectively.  For the three-monthsperiods ended June 30, 2006 and 2005, there were 92,581 and 92,274 options,respectively, which were not considered dilutive for purposes of EPScalculations.

***RecentlyIssued Accounting Pronouncements—***In June 2006, theFinancial Accounting Standards Board (‘FASB’) issued FASB Interpretation No.48, *Accounting for Uncertainty in Income Taxes — an interpretationof FASB Statement No. 109* (‘FIN 48’.)  FIN 48 establishes a recognition thresholdand measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.  Pursuant to FIN 48, the effects of a taxposition are recognized in the financial statements when it is more likely thannot, based on the technical merits, that the position will be sustained uponexamination by the taxing authority. Conversely, previously recognized tax positions are derecognized when itis no longer more likely than not that the tax position would be sustained uponexamination.  FIN 48 also requirescertain disclosures regarding unrecognized tax benefits and the amounts andclassification of the related interest and penalties.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  TheCompany does not anticipate any material impact to its financial condition orresults of operations as a result of the adoption of FIN 48.

12

----

**3.Securities**

Amortized cost amountsand fair values of securities are summarized as follows as of June 30, 2006(Dollars in thousands):

|                                   | ** **                     | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**     | ** ** |
|-----------------------------------|--------------------------------|---------------|------------|----------------|------------|----------------|------------|--------------|------------|
| ** **                        | **Held to Maturity** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **(Losses)** | ** ** | **Value** | ** ** |
|                              |                           |          |       |           |       |           |       |         |       |
| Mortgage-backed  securities       |                           | $             | 4,034,214  |           | $          | 10,177         |       | $            | (39,209    | ) | $ | 4,005,182 |   |
| Federal agency  securities        |                           | 2,005,854     |       | 3,849          |       | (10,592        | )          | 1,999,111    |       |
| State and  political subdivisions |                           | 103,796       |       | 2,975          |       | (139           | )          | 106,632      |       |
|                              |                           |          |       |           |       |           |       |         |       |
| Total                             |                           | $             | 6,143,864  |           | $          | 17,001         |       | $            | (49,940    | ) | $ | 6,110,925 |   |
|                                   |                                |               |            |                |            |                |            |              |            |  |  |  |  |  |  |

 

|                                   | ** **                       | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**     | ** ** |
|-----------------------------------|----------------------------------|---------------|------------|----------------|------------|----------------|------------|--------------|------------|
| ** **                        | **Available for Sale** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **(Losses)** | ** ** | **Value** | ** ** |
|                              |                             |          |       |           |       |           |       |         |       |
| Mortgage-backed  securities       |                             | $             | 4,192,824  |           | $          | 2,443          |       | $            | (72,690    | ) | $ | 4,122,577 |   |
| State and  political subdivisions |                             | 333,840       |       | 88             |       | (8,368         | )          | 325,560      |       |
| Corporate debt                    |                             | 201,419       |       | 482            |       | (1,154         | )          | 200,747      |       |
| Foreign  government securities    |                             | 10,979        |       | —         |       | (81            | )          | 10,898       |       |
|                              |                             |          |       |           |       |           |       |         |       |
| Total                             |                             | $             | 4,739,062  |           | $          | 3,013          |       | $            | (82,293    | ) | $ | 4,659,782 |   |
|                                   |                                  |               |            |                |            |                |            |              |            |  |  |  |  |  |  |

 

Amortized cost amountsand fair values of securities are summarized as follows as of December 31, 2005(Dollars in thousands):

 

|                                   | ** **                     | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **   | ** ** |
|-----------------------------------|--------------------------------|---------------|------------|----------------|------------|----------------|------------|--------------|------------|
| ** **                        | **Held to Maturity** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **(Losses)** | ** ** | **Fair Value** | ** ** |
|                              |                           |          |       |           |       |           |       |         |       |
| Mortgage-backed  securities       |                           | $             | 4,342,254  |           | $          | 11,420         |       | $            | (29,818    | ) | $ | 4,323,856 |   |
| Federal agency  securities        |                           | 2,305,331     |       | 1,560          |       | (23,914        | )          | 2,282,977    |       |
| State and  political subdivisions |                           | 114,345       |       | 4,646          |       | (95            | )          | 118,896      |       |
|                              |                           |          |       |           |       |           |       |         |       |
| Total                             |                           | $             | 6,761,930  |           | $          | 17,626         |       | $            | (53,827    | ) | $ | 6,725,729 |   |
|                                   |                                |               |            |                |            |                |            |              |            |  |  |  |  |  |  |

 

|                                   | ** **                       | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **   | ** ** |
|-----------------------------------|----------------------------------|---------------|------------|----------------|------------|----------------|------------|--------------|------------|
| ** **                        | **Available for Sale** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **(Losses)** | ** ** | **Fair Value** | ** ** |
|                              |                             |          |       |           |       |           |       |         |       |
| Mortgage-backed  securities       |                             | $             | 3,810,797  |           | $          | 3,882          |       | $            | (48,578    | ) | $ | 3,766,101 |   |
| State and  political subdivisions |                             | 388,789       |       | 5,515          |       | (1,913         | )          | 392,391      |       |
| Corporate debt                    |                             | 201,499       |       | 736            |       | (1,543         | )          | 200,692      |       |
| Foreign  government securities    |                             | 10,539        |       | —         |       | (3             | )          | 10,536       |       |
|                              |                             |          |       |           |       |           |       |         |       |
| Total                             |                             | $             | 4,411,624  |           | $          | 10,133         |       | $            | (52,037    | ) | $ | 4,369,720 |   |
|                                   |                                  |               |            |                |            |                |            |              |            |  |  |  |  |  |  |

 

During the three-monthperiod ended June 30, 2006, the Company sold forty-two securities classified asavailable for sale totaling $134.1 million using the specific identificationmethod.  The book value of the securitieswas $131.6 million and resulted in a gross realized gain of $2.5 million forboth the six-month and three-month periods ended June 30, 2006.

The carrying value ofsecurities pledged amounted to approximately $7.6 billion and $7.5 billion atJune 30, 2006 and December 31, 2005, respectively.  Securities are pledged primarily to secureclearings with other depository institutions, to secure repurchase agreementsand to secure outstanding FHLBB borrowings.

On a quarterly basis theCompany reviews its investment portfolio on a security by security basis forany investment that may be other-than-temporarily impaired.  In its evaluation, the Company considers thelength of time the security has been impaired, the severity of the impairment,the financial condition and future prospects of the issuer, and the Company’sability and intent to hold the security to maturity or until it recovers invalue.  At June 30, 2006, no securitieswere considered to be other-than-temporarily impaired.

13

----

**4.             Loans**

Loans consist of demandloans to custody clients of the Company, including individuals, not-for-profitinstitutions and mutual fund clients. The loans to mutual funds and otherpooled product clients include lines of credit and advances pursuant to theterms of the custody agreements between the Company and those clients to facilitatesecurities transactions and redemptions. Almost all of the Company’scommitments to fund loans are at variable rates.  The credit risk associated with these loansis considered low since the loans are, or may be, in the event of default,collateralized with marketable securities held by the Company ascustodian.  There were no impaired loans,nonperforming loans or loans on nonaccrual status at June 30, 2006 or December31, 2005.  In addition, there were noloan charge-offs or recoveries during the six months ended June 30, 2006 or2005.  Loans are summarized as follows(Dollars in thousands):

|                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                            |       |              |       |                  |       |
| Loans to mutual  funds          |       | $                 | 214,115    |                  | $          | 286,144 |   |
| Loans to  individuals           |       | 79,428            |       | 81,392                |       |
| Loans to others                 |       | 42,254            |       | 34,934                |       |
|                            |       | 335,797           |       | 402,470               |       |
| Less allowance  for loan losses |       | (100              | )          | (100                  | )          |
| Total                           |       | $                 | 335,697    |                  | $          | 402,370 |   |

 

**5.       Deposits**

The following is asummary of deposit balances by type (Dollars in thousands):

|                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Interest-bearing deposits:         |       |              |       |                  |       |
| Demand                             |       | $                 | 86,127     |                  | $          | 85,157 |   |
| Savings                            |       | 4,784,602         |       | 4,195,486             |       |
| Time                               |       | 166,297           |       | 55,124                |       |
| Total interest-bearing deposits    |       | 5,037,026         |       | 4,335,767             |       |
|                               |       |              |       |                  |       |
| Noninterest-bearing deposits:      |       |              |       |                  |       |
| Demand                             |       | 469,944           |       | 452,401               |       |
| Savings                            |       | 62,323            |       | 29,422                |       |
| Time                               |       | 350,000           |       | 175,000               |       |
| Total noninterest-bearing deposits |       | 882,267           |       | 656,823               |       |
| Total                              |       | $                 | 5,919,293  |                  | $          | 4,992,590 |   |

 

Time deposits withbalances greater than $100,000 totaled $516.3 million and $230.1 million atJune 30, 2006 and December 31, 2005, respectively.  All time deposits had a maturity of less thanthree months at June 30, 2006 and December 31, 2005. The aggregate amounts ofoverdraft deposits that have been reclassified as loan balances were $117.2 millionand $162.2 million at June 30, 2006 and December 31, 2005, respectively.

**6.       Securities Sold Under RepurchaseAgreements**

The components ofsecurities sold under repurchase agreements are as follows (Dollars inthousands):

|                                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                |       |              |       |                  |       |
| Repurchase  agreements - short term |       | $                 | 4,332,803  |                  | $          | 4,297,868 |   |
| Repurchase  agreements - long term  |       | 300,000           |       | 500,000               |       |
| Total                               |       | $                 | 4,632,803  |                  | $          | 4,797,868 |   |

 

Approximately $4.8billion and $4.9 billion of securities were pledged to collateralize repurchaseagreements as of June 30, 2006 and December 31, 2005, respectively.

14

----

**7.             Short-term and Other Borrowings**

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

|                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                                  |       |              |       |                  |       |
| Federal Funds  purchased                              |       | $                 | 679,706    |                  | $          | 810,511 |   |
| Federal Home  Loan Bank of Boston overnight advances  |       | —            |       | 400,000               |       |
| Federal Home  Loan Bank of Boston short-term advances |       | 50,000            |       | 146,000               |       |
| Treasury, Tax and  Loan account                       |       | 36                |       | 138                   |       |
| Total                                                 |       | $                 | 729,742    |                  | $          | 1,356,649 |   |

 

The Company has borrowingarrangements with the FHLBB and the Federal Reserve Discount Window, which havebeen utilized on an overnight and short-term basis to satisfy fundingrequirements.  Approximately $0.9 billionand $1.0 billion of securities were pledged to collateralize FHLBB advances asof June 30, 2006 and December 31, 2005, respectively, and approximately $1.6billion and $1.4 billion of securities were pledged to collateralize Federal ReserveDiscount Window borrowings as of June 30, 2006 and December 31, 2005,respectively.

**8.       Stockholders’ Equity**

As of June 30, 2006, theCompany’s capital stock consisted of 1,000,000 authorized shares of preferredstock, of which no shares were issued, and 175,000,000 authorized shares ofcommon stock, of which 68,108,995 shares were issued.  All shares have a par value of $0.01 pershare.

The Company has fourequity incentive plans:  the Amended andRestated 1995 Stock Plan (‘Stock Plan’), the Amended and Restated 1995Non-Employee Director Stock Option Plan (‘Director Plan’), the 1997 EmployeeStock Purchase Plan (‘ESPP’) and the 2005 Equity Incentive Plan (the ‘2005 Plan’).  The 2005 Plan supersedes both the Stock Planand the Director Plan, both of which continue in effect only with regard tooptions outstanding under those plans. Options awarded under the Stock Plan, the Director Plan and the 2005Plan generally vest over zero to four years of continuous service and generallyhave ten-year contractual terms.  Theexercise price of these awards is generally equal to the fair market value ofthe Company’s common stock on the date the awards are granted.  There were no amendments to any plans duringthe six months ended June 30, 2006.

Cash received fromoptions exercised under all share-based payment arrangements for the six monthsand three months ended June 30, 2006 was $24.4 million and $10.5 million,respectively.  The actual tax benefitrealized for the tax deductions related to these exercises amounted to $5.2million and $2.6 million for the six months and three months ended June 30,2006, respectively.

In June 2006, the Company announced that its Board ofDirectors authorized a repurchase plan of up to $150.0 million of the Company’scommon stock over the twelve months following the announcement.  The plan expires in June 2007.

*The Stock Plan, Director Plan, and 2005 Plan*

Effective with the start of the 2005 Plan, 45,703shares of the Director Plan and 3,439,197 shares of the Stock Plan were transferredto the 2005 Plan.  On April 14, 2005, theshareholders authorized an additional 2,000,000 shares of common stock forissuance under the 2005 Plan.

 

15

----

A summary of optionactivity under the Director Plan, the Stock Plan and the 2005 Plan for the sixmonths ended June 30, 2006, is as follows:

 
| **Options**                     | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value  ($000)** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------|------------|
| Outstanding at January  1, 2006 |       | 6,919,316                   |       | $                                       | 31         |                                                 |       |                                    |       |   |
| Granted                         |       | 72,063                      |       | 47                                      |       |                                                 |       |                                    |       |
| Exercised                       |       | (891,390                    | )          | 29                                      |       |                                                 |       |                                    |       |
| Forfeited or expired            |       | (21,084                     | )          | 38                                      |       |                                                 |       |                                    |       |
| Outstanding at June 30,  2006   |       | 6,078,905                   |       | 31                                      |       | 5.9 years                                            |       | $                                       | 84,784     |   |
| Exercisable at June 30, 2006    |       | 5,721,153                   |       | $                                       | 31         |                                                 | 5.8 years  |                                    | $          | 81,786 |   |

 

The weighted-average grant-date fair values per optionof options granted during the six months ended June 30, 2006 and 2005 were$20.23 and $17.55, respectively.  Thetotal intrinsic value of options exercised during the six months ended June 30,2006 and 2005 were $15.7 million and $4.3 million, respectively.

As of June 30, 2006, there was $2.3 million of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Stock Plan, the Director Plan and the 2005Plan.  That cost is expected to berecognized over a weighted-average period of 1 year.

A summary of the statusof the Company’s nonvested shares for the six months ended June 30, 2006 is presentedbelow:

| Nonvested Shares         | ** ** | **Number of  Shares** | ** ** | **Weighted-Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------|------------|----------------------------|------------|---------------------------------------------------|------------|
| Nonvested at January 1,  2006 |       | 5,000                      |       | $                                                 | 34         |   |
| Granted                       |       | —                     |       | —                                            |       |
| Vested                        |       | —                     |       | —                                            |       |
| Forfeited                     |       | —                     |       | —                                            |       |
| Nonvested at June 30, 2006    |       | 5,000                      |       | $                                                 | 34         |   |

 

*ESPP*

Under the terms of theESPP, the Company may issue up to 1,620,000 shares of common stock pursuant tothe exercise of nontransferable options granted to participatingemployees.  The ESPP permits eligibleemployees to purchase up to 8,000 shares of common stock per payment period,subject to limitations provided by Section 423(b) of the Internal RevenueCode, through accumulated payroll deductions. The purchases are made twice a year at a price equal to the lesser of(i) 90% of the market value of the Company’s common stock on the firstbusiness day of the payment period or (ii) 90% of the market value of theCompany’s common stock on the last business day of the payment period.  The payment periods consist of two six-monthperiods, January 1 through June 30 and July 1 throughDecember 31.

For the six-month periodended June 30, 2006, the purchase price of the stock was $33.52, or 90% of themarket value of the Company’s common stock on the first business day of thepayment period ending June 30, 2006.

During the year endedDecember 31, 2005, the purchase prices of the stock were $34.25 and $33.25, or90% of the market value of the Company’s common stock on the last business dayof the payment periods ending June 30, 2005 and December 31, 2005, respectively.

16

----

A summary of activityunder the ESPP is as follows:

|                                                             | ** ** | **For the Six** | ** ** | **For the**      | ** ** |
|-------------------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **Months Ended**     | ** ** | **Year Ended**   | ** ** |
| ** **                                                  | ** ** | **June 30,**         | ** ** | **December 31,** | ** ** |
| ** **                                                  | ** ** | **2006**                  | ** ** | **2005**              | ** ** |
|                                                        |       |                      |       |                  |       |
| Total shares available  under the plan, beginning of period |       | 521,563                   |       | 636,267               |       |
| Issued at June  30                                          |       | (68,506                   | )          | (54,862               | )          |
| Issued at  December 31                                      |       | —                    |       | (59,842               | )          |
|                                                        |       |                      |       |                  |       |
| Total shares available under the plan, end of period        |       | 453,057                   |       | 521,563               |       |

 

Prior to the adoption ofSFAS 123R, the ESPP was considered a non-compensatory plan and, therefore, nocompensation cost was recognized. However, pursuant to SFAS 123R, the ESPP is considered a compensatoryplan, effective January 1, 2006. Accordingly, compensation cost is computed as the sum of:  (a) 10% of the fair market value of the Company’scommon stock on the first day of the purchase period and (b) the fair value ofthe option feature, calculated using the Black-Scholes valuation model.  Compensation cost is recognized ratably overthe payment period based on the components of fair value in the precedingsentence and the number of shares that could be purchased at grant date basedon the estimated total withholdings and the discounted market price of thestock on grant date.  The weighted-averagegrant-date fair value of awards granted under the ESPP was $7.86 per share forthe six months ended June 30, 2006.

Compensation cost related to the ESPP was $0.5 millionand $0.3 million for the six months and three months ended June 30, 2006,respectively.  Compensation cost relatedto the ESPP was $0 for both the six months and three months ended June 30,2005.  As of June 30, 2006, there was $0of total unrecognized compensation cost related to the nonvested awards grantedunder the ESPP.

**9.     Employee Benefit Plans**

***PensionPlan—***The Company has a trusteed, noncontributory,qualified defined benefit pension plan (‘Pension Plan’) covering substantiallyall of its employees who were hired before January 1, 1997.  The benefits are based on years of serviceand the employee’s compensation during employment.  Generally, the Company’s funding policy is tocontribute annually the maximum amount that can be deducted for federal incometax purposes.  Contributions are intendedto provide not only for benefits attributed to service to date, but also for benefitsexpected to be earned in the future.  Theplan document was amended in December 2001 and December 2004 to freeze benefitaccruals for certain highly compensated participants.  The Company uses a December 31 measurementdate for this plan. Effective January 1, 2006, no further Pension Plan benefitwill accrue on behalf of any Pension Plan participant, and effective December31, 2005, all Pension Plan participant’s accounts were frozen.

Net periodic pension costfor the Company’s Pension Plan included the following components (Dollars inthousands):

|                                                     | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **June 30,  2006**                          | ** ** | **June 30,  2005**                            | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
|                                                |       |                                             |       |                                               |       |   |   |   |   |
| Service cost-benefits  earned / benefit obligations |       | $                                                | —     |                                               | $          | 372 |   | $ | — |   | $ | 186 |   |
| Interest cost on  projected benefit obligations     |       | 507                                              |       | 572                                                |       | 272 |   | 286 |   |
| Expected return on plan  assets                     |       | (706                                             | )          | (718                                               | )          | (357 | ) | (359 | ) |
| Net amortization and  deferral                      |       | 81                                               |       | 156                                                |       | 63 |   | 78 |   |
| Net periodic pension (benefit) cost                 |       | $                                                | (118       | )                                                  | $          | 382 |   | $ | (22 | ) | $ | 191 |   |

 

The Company does notexpect to contribute to its Pension Plan during 2006, and no contributions weremade during the six-month period ended June 30, 2006.

***SupplementalRetirement Plan***—The Company also has a nonqualified,unfunded, supplemental retirement plan (‘SERP’) which was established in 1994and covers certain employees and pays benefits that supplement any benefitspaid under the Pension Plan.  Benefitsunder the SERP are generally based on compensation not includable in the calculationof benefits to be paid under the Pension Plan. The plan document was amended in April 2000 to eliminate thecompensation cap and include bonuses and commissions of certain employees.  The Company uses a December 31 measurementdate for this plan.

17

----

Net periodic pension costfor the Company’s SERP included the following components (Dollars inthousands):

|                                                     | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **June 30,  2006**                          | ** ** | **June 30,  2005**                            | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
|                                                |       |                                             |       |                                               |       |   |   |   |   |
| Service cost-benefits  earned / benefit obligations |       | $                                                | 923        |                                               | $          | 888 |   | $ | 461 |   | $ | 444 |   |
| Interest cost on  projected benefit obligations     |       | 783                                              |       | 736                                                |       | 387 |   | 368 |   |
| Net amortization and  deferral                      |       | 477                                              |       | 544                                                |       | 238 |   | 272 |   |
| Net periodic pension cost                           |       | $                                                | 2,183      |                                               | $          | 2,168 |   | $ | 1,086 |   | $ | 1,084 |   |

 

At June 30, 2006, theSERP remained an unfunded plan.  TheCompany does not expect to contribute to the SERP, and no contributions weremade during the six-month period ended June 30, 2006.

**10.    Off-Balance Sheet FinancialInstruments**

***Lines of Credit—***At June 30, 2006, theCompany had commitments to mutual funds, individuals and others undercollateralized open lines of credit totaling $1.2 billion, against which$218.6 million in loans were drawn. The credit risk involved in issuing lines of credit is essentially thesame as that involved in extending demand loans.  The Company does not anticipate any loss as aresult of these lines of credit.

***Securities Lending—***On behalf of itsclients, the Company lends securities to creditworthy broker-dealers.  In certain circumstances, the Company mayindemnify its clients for the fair market value of those securities against afailure of the borrower to return such securities.  The Company requires the borrowers to providecollateral in an amount equal to, or in excess of, 102% of the fair marketvalue of U.S. dollar-denominated securities borrowed and 105% of the fairmarket value of non-U.S. dollar-denominated securities borrowed.  The borrowed securities are revalued daily todetermine whether additional collateral is necessary.  As guarantor, the Company is required torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligation undertaken in issuing the guarantee.  The Company measures the fair value of itsindemnification obligation by marking its securities lending portfolio tomarket on a daily basis and comparing the value of the portfolio to thecollateral holdings position.  The fairvalue of the indemnification obligation to be recorded would be the deficiency ofcollateral as compared to the value of the securities out on loan.

With respect to theindemnified securities lending portfolio, the cash and U.S. governmentsecurities held by the Company as collateral at June 30, 2006 totaled $9.0billion, while the fair value of the indemnified securities lending portfoliototaled approximately $8.7 billion. Given that the collateral held was in excess of the value of thesecurities that the Company would be required to replace if the borrowerdefaulted and failed to return such securities, the Company’s indemnificationobligation was zero and no liability was recorded.

All securities loans arecategorized as overnight loans.  Themaximum potential amount of future payments that the Company could be requiredto make would be equal to the market value of the securities borrowed.  Since the securities loans areovercollateralized by 2% (for U.S. dollar-denominated securities) to 5% (fornon-U.S. dollar-denominated securities) of the fair market value of the loanmade, the collateral held by the Company would be used to satisfy theobligation.  In addition, each borrowingagreement includes “set-off” language that allows the Company to use any excesscollateral on other loans to that borrower to cover any collateral shortfall ofthat borrower.  However, there is apotential risk that the collateral would not be sufficient to cover such anobligation if the security on loan increased in value between the time theborrower defaulted and the time the security is “bought-in.”  In those instances, the Company would “buy-in”the security using all available collateral and a loss would result from thedifference between the value of the security “bought-in” and the value of thecollateral held.  The Company has neverexperienced a broker default.

**11.    Derivative Financial Instruments**

***InterestRate Contracts***—Interest rate contracts involve anagreement with a counterparty to exchange cash flows based on an underlyinginterest rate index.  A swap agreementinvolves the exchange of a series of interest payments, either at a fixed orvariable-rate, based upon the notional amount without the exchange of theunderlying principal amount.  The Company’sexposure from these interest rate contracts results from the possibility thatone party may default on its contractual obligation when the contracts are in again position.  The Company hasexperienced no terminations by counterparties of interest rate swaps.  Credit risk is limited to the positive fairvalue of the derivative financial instrument, which is significantly less thanthe notional value.  As of June 30, 2006,the positive fair value related to the Company’s interest rate contracts wasapproximately $31.2 million.

18

----

The Company enters intopay-fixed/receive-floating interest rate swap agreements.  These instruments have been designated ascash flow hedges of variable-rate liabilities and a forecasted series offixed-rate overnight liabilities incurred at different daily fixed rates(thereby resulting in a variable interest expense pattern).  The contractual or notional amounts of theinterest rate swap agreements held by the Company were approximately $1.8billion at June 30, 2006 and $1.9 billion at December 31, 2005.  These contracts had net fair values ofapproximately $31.2 million and $24.2 million at June 30, 2006 and December 31,2005, respectively.  These fair valuesare included in the respective other assets and other liabilities categories onthe Company’s consolidated balance sheets.

For both the six monthsand three months ended June 30, 2006, the Company recognized net pre-tax lossesof $0.1 million, which represented the total ineffectiveness for all cash flowhedges.  For the six months and threemonths ended June 30, 2005, total ineffectiveness related to cash flow hedgesresulted in net pre-tax gains of $3.0 million and $0.6 million, respectively.

As of June 30, 2006, theCompany expects that approximately $12.7 million of deferred net after-taxgains on derivative contracts included in other comprehensive income will be reclassifiedto net interest income within the next twelve months. This expectation is basedon the net discounted cash flows from existing cash flow hedging derivatives,as well as the amortization of gains from the terminated cash flow hedgingderivatives.

***ForeignExchange Contracts***—Foreign exchange contracts involve anagreement to exchange the currency of one country for the currency of anothercountry at an agreed-upon rate and settlement date.  Foreign exchange contracts consist of spot,forward and swap contracts.  Spotcontracts call for the exchange of one currency for another and usually settlein two business days.  Forward contractscall for the exchange of one currency for another at a date beyond spot.  In a currency swap, the holder of a currencytransacts simultaneously both a spot and a forward transaction in that currencyfor an equivalent amount of another currency to get temporary liquidity in thecurrency owned.  The Company’s risk fromforeign exchange contracts results from the possibility that one party maydefault on its contractual obligation or from movements in exchange rates. Creditrisk is limited to the positive market value of the derivative financialinstrument, which is significantly less than the notional value.  The notional value of the Company’s foreignexchange contracts at June 30, 2006 and December 31, 2005 was $9.7 billion and$6.3 billion, respectively.  Unrealizedgains or losses resulting from purchases and sales of foreign exchangecontracts are included within the respective other assets and other liabilitiescategories on the Company’s consolidated balance sheets.  Unrealized gains in other assets were $26.6million and $20.8 million at June 30, 2006 and December 31, 2005,respectively.  Unrealized losses in otherliabilities were $27.5 million and $19.7 million at June 30, 2006 and December31, 2005, respectively.  Foreign exchangecontracts with the same counterparty are netted in the Company’s consolidatedbalance sheets when a master netting agreement exists.  These contracts have not been designated ashedging instruments; therefore, all changes in fair value are included in assetservicing fees.

***Other***—TheCompany also enters into fixed price purchase contracts that are designed tohedge the variability of the consideration to be paid for the purchase ofinvestment securities.  By entering intothese contracts, the Company is fixing the price to be paid at a future datefor certain investment securities.  AtJune 30, 2006, the Company had no fixed price purchase contracts outstanding topurchase investment securities.  AtDecember 31, 2005, the Company had $97.5 million of fixed price purchasecontracts outstanding to purchase investment securities.  Changes in fair value of these cash flowhedges are included as a component of other comprehensive income.

**12.    Commitments and Contingencies**

***Restrictionson Cash Balances***—The Company is required to maintaincertain average cash reserve balances. The average required reserve balance with the FRB for the two-weekperiod including June 30, 2006 was approximately $29.1 million.  In addition, the Company’s consolidatedbalance sheet includes deposits totaling $81.9 million, which were pledged tosecure clearings with depository institutions as of June 30, 2006.

***Contingencies***—Assetsheld by the Company in a fiduciary capacity are not included in theconsolidated balance sheets since these items are not assets of theCompany.  Management conducts regularreviews of its fiduciary responsibilities and considers the results in preparingits consolidated financial statements. In the opinion of management, there were no contingent liabilitiesrelated to its fiduciary capacity at June 30, 2006 that were material to theconsolidated financial position or consolidated results of operations of theCompany.

On June 27, 2003, theCompany and an individual employee of the Company were named in a lawsuitalleging, among other things, that the Company breached an implied covenant ofgood faith and fair dealing in a subadvisory contract with Opus

19

----

Investment Management,Inc. and that the individual employee of the Company engaged in a breach offiduciary duties and tortuous interference with a contract.  The lawsuit was filed in the Superior Courtof Worcester, Massachusetts and sought unspecified damages.  In July 2006, the parties reached settlementin principle.  The settlement is subjectto execution of final settlement agreements and approval by the court.  Included in other liabilities in the Company’sconsolidated balance sheet at June 30, 2006 and in other operating expenses inthe Company’s consolidated statements of income for the six months and threemonths ended June 30, 2006 is approximately $1.8 million for settlementcosts, legal fees and administrative costs related to the settlement.

**13.    Regulatory Matters**

The Company and the Bankare subject to various regulatory capital requirements administered by thefederal banking agencies.  Failure tomeet minimum capital requirements can initiate certain mandatory and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on the Company’s and the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance sheet items as calculated under regulatoryaccounting practices.  The Company’s andthe Bank’s capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings, and otherfactors.

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company andthe Bank to maintain minimum amounts and ratios (set forth in the table below)of Total and Tier 1 capital (as defined in the regulations) to risk-weightedassets (as defined), and of Tier 1 capital (as defined) to average assets (asdefined).  Management believes, as ofJune 30, 2006, that the Company and the Bank meet all capital adequacyrequirements to which they are subject.

Our most recentnotification from the Federal Deposit Insurance Corporation categorized theCompany and the Bank as well-capitalized under the regulatory framework forprompt corrective action.  To becategorized as well-capitalized, the Company and the Bank must maintain minimumTotal risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth inthe table.  There are no conditions orevents since that notification that management believes have changed theCompany’s or the Bank’s category.

20

----

The following tablepresents the capital ratios for the Company and the Bank (Dollars inthousands):
| ** **                                            | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **           | ** ** | ** **                 | ** ** | **To Be Well-Capitalized** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------|------------|----------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **           | ** ** | ** **                 | ** ** | **Under Prompt**                | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital** | ** ** | **Corrective Action** | ** ** |
| ** **                                            | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Provisions**       | ** ** |
| ** **                                            | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**           | ** ** | **Ratio**                  | ** ** | **Amount**                           | ** ** | **Ratio** | ** ** |
| **As of June 30, 2006:**                              | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **           | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Total Capital  (to Risk-Weighted Assets-the Company)  |       | $          | 845,587    |                       | 19.30      | %                    | $          | 350,454                    |       | 8.00                                 | %          | N/A |   | N/A |   |
| Total Capital  (to Risk-Weighted Assets-the Bank)     |       | $          | 809,035    |                       | 18.48      | %                    | $          | 350,197                    |       | 8.00                                 | %          | $ | 437,746 |   | 10.00 | % |
| Tier 1 Capital  (to Risk-Weighted Assets-the Company) |       | $          | 845,487    |                       | 19.30      | %                    | $          | 175,227                    |       | 4.00                                 | %          | N/A |   | N/A |   |
| Tier 1 Capital  (to Risk-Weighted Assets-the Bank)    |       | $          | 808,935    |                       | 18.48      | %                    | $          | 175,098                    |       | 4.00                                 | %          | $ | 262,648 |   | 6.00 | % |
| Tier 1 Capital  (to Average Assets-the Company)       |       | $          | 845,487    |                       | 7.04       | %                    | $          | 480,159                    |       | 4.00                                 | %          | N/A |   | N/A |   |
| Tier 1 Capital  (to Average Assets-the Bank)          |       | $          | 808,935    |                       | 6.74       | %                    | $          | 480,117                    |       | 4.00                                 | %          | $ | 600,146 |   | 5.00 | % |
| **As of December  31, 2005:**                         | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **           | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Total Capital  (to Risk-Weighted Assets-the Company)  |       | $          | 731,833    |                       | 18.50      | %                    | $          | 316,553                    |       | 8.00                                 | %          | N/A |   | N/A |   |
| Total Capital  (to Risk-Weighted Assets-the Bank)     |       | $          | 720,113    |                       | 18.21      | %                    | $          | 316,349                    |       | 8.00                                 | %          | $ | 395,436 |   | 10.00 | % |
| Tier 1 Capital  (to Risk-Weighted Assets-the Company) |       | $          | 731,733    |                       | 18.49      | %                    | $          | 158,276                    |       | 4.00                                 | %          | N/A |   | N/A |   |
| Tier 1 Capital  (to Risk-Weighted Assets-the Bank)    |       | $          | 720,013    |                       | 18.21      | %                    | $          | 158,174                    |       | 4.00                                 | %          | $ | 237,262 |   | 6.00 | % |
| Tier 1 Capital  (to Average Assets-the Company)       |       | $          | 731,733    |                       | 5.95       | %                    | $          | 491,685                    |       | 4.00                                 | %          | N/A |   | N/A |   |
| Tier 1 Capital  (to Average Assets-the Bank)          |       | $          | 720,013    |                       | 5.86       | %                    | $          | 491,549                    |       | 4.00                                 | %          | $ | 614,437 |   | 5.00 | % |
|                                                  |       |       |       |                       |       |                 |       |                       |       |                                 |       |   |   |

 

Under Massachusetts law,trust companies such as the Bank, like national banks, may pay dividends nomore often than quarterly, and only out of net profits and to the extent thatsuch payments will not impair the Bank’s capital stock and surplusaccount.  Moreover, prior Commissionerapproval is required if the total dividends for a calendar year would exceed netprofits for that year combined with retained net profits for the previous twoyears.  These restrictions on the abilityof the Bank to pay dividends to the Company may restrict the ability of theCompany to pay dividends to its stockholders.

The operations of theCompany’s securities broker affiliate, Investors Securities Services, LLC (‘ISS’),are subject to federal and state securities laws, as well as the rules of boththe SEC and the NASD.  Managementbelieves, as of June 30, 2006, that ISS is in material compliance with all ofthe foregoing requirements to which it is subject.

The operations of theCompany’s captive insurance affiliate, Investors Vermont Insurance Company (‘IVIC’),are subject to the laws and regulations of the State of Vermont Department ofBanking, Insurance, Securities and Health Care Administration.  Management believes, as of June 30, 2006,that IVIC is in material compliance with all of the foregoing requirements towhich it is subject.

InJune 2004, the Basel Committee on Banking Supervision (‘Basel Committee’)released the document “International Convergence of Capital Measurement andCapital Standards: A Revised Framework”. The Framework, also referred to as Basel II, is designed to secureinternational convergence on regulations and standards governing the capitaladequacy of internationally active banking organizations.  In September 2005, the FFIEC (U.S. bankingand thrift supervisory agencies) revised guidance on the timing and qualificationprocess for U.S. banks that will become subject to Basel II.  The new rules as applied in the U.S. areexpected to become effective on January 1, 2009, subject to transitionalparallel testing beginning on January 1, 2008.  Although the Company is not required to becompliant with the new rules, the Company has developed an implementationprogram to achieve Basel II compliance. Ultimately, U.S. implementation of Basel II will depend on, and will besubject to, final regulations and related policies promulgated by the FFIECsupervisory agencies.  The Company cannotpredict the final form of the rules, nor their impact on the Company’srisk-based capital.

21

----

**14. GeographicReporting and Service Lines**

The Company does notutilize segment information for internal reporting, as management views theCompany as one segment. The following represents net operating revenue andlong-lived assets (including goodwill) by geographic area (Dollars inthousands):
| ** **                      | ** ** | **Net Operating Revenue** | ** ** | **Net Operating Revenue** | ** ** | **Long-Lived Assets** | ** ** |
|---------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **Six Months Ended**      | ** ** | **Three Months Ended**    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **June 30,**                   | ** ** | **June 30,**                   | ** ** | **June 30,**          | ** ** | **December 31,** | ** ** |
| **Geographic Information** | ** ** | **2006**                            | ** ** | **2005**                            | ** ** | **2006**                   | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States                   |       | $                                   | 373,903    |                                | $          | 317,369                    |       | $ | 193,145 |   | $ | 159,631 |   | $ | 156,145 |   | $ | 141,810 |   |
| Ireland                         |       | 23,315                              |       | 18,423                              |       | 12,904                     |       | 9,782 |   | 7,924 |   | 6,325 |   |
| Canada                          |       | 3,001                               |       | 2,634                               |       | 1,493                      |       | 1,267 |   | 268 |   | 385 |   |
| United Kingdom                  |       | 180                                 |       | —                              |       | 110                        |       | — |   | 1,608 |   | 850 |   |
| Cayman Islands                  |       | 82                                  |       | 85                                  |       | 41                         |       | 42 |   | — |   | — |   |
| Luxembourg                      |       | —                              |       | —                              |       | —                     |       | — |   | — |   | — |   |
|                            |       |                                |       |                                |       |                       |       |   |   |   |   |   |   |
| Total                           |       | $                                   | 400,481    |                                | $          | 338,511                    |       | $ | 207,693 |   | $ | 170,722 |   | $ | 165,945 |   | $ | 149,370 |   |

 

Barclays GlobalInvestors, N.A. (‘BGI’) accounted for approximately 18% of the Company’sconsolidated net operating revenues for the six-month and three-month periodsended June 30, 2006 and 2005, respectively. No client other than BGI accounted for more than 10% of the Company’sconsolidated net operating revenues for the six-month periods ended June 30,2006 and 2005.

The following representsthe Company’s asset servicing fees by service lines (Dollars in thousands):

|                                         | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                              | ** ** | **June 30,**                                | ** ** | **June 30,**                                  | ** ** |
| ** **                              | ** ** | **2006**                                         | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Core service fees:                      |       |                                             |       |                                               |       |   |   |   |   |
| Custody,  accounting and administration |       | $                                                | 220,002    |                                               | $          | 178,703 |   | $ | 112,243 |   | $ | 90,159 |   |
|                                    |       |                                             |       |                                               |       |   |   |   |   |
| Value-added service  fees:              |       |                                             |       |                                               |       |   |   |   |   |
| Foreign exchange                        |       | 48,099                                           |       | 25,504                                             |       | 27,765 |   | 12,255 |   |
| Cash management                         |       | 24,455                                           |       | 16,537                                             |       | 13,143 |   | 9,173 |   |
| Securities  lending                     |       | 16,654                                           |       | 11,850                                             |       | 10,492 |   | 8,170 |   |
| Investment  advisory                    |       | 3,761                                            |       | 3,704                                              |       | 1,825 |   | 1,989 |   |
| Other service  fees                     |       | 1,467                                            |       | 1,403                                              |       | 667 |   | 752 |   |
| Total value-added  service fees         |       | 94,436                                           |       | 58,998                                             |       | 53,892 |   | 32,339 |   |
|                                    |       |                                             |       |                                               |       |   |   |   |   |
| Total asset servicing fees              |       | $                                                | 314,438    |                                               | $          | 237,701 |   | $ | 166,135 |   | $ | 122,498 |   |

 

22

----

**15.    Net Interest Income**

The components ofinterest income and interest expense are as follows (Dollars in thousands):

|                                                                | ** ** | **For the Six Months  Ended** | ** ** | **For the Three Months  Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                     | ** ** | **June 30,**                            | ** ** | **June 30,**                              | ** ** |
| ** **                                                     | ** ** | **2006**                                     | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest income:                                               |       |                                         |       |                                           |       |   |   |   |   |
| Federal Funds  sold and other short-term investments           |       | $                                            | 1,865      |                                           | $          | 753 |   | $ | 1,387 |   | $ | 390 |   |
| Investment  securities held to maturity and available for sale |       | 261,150                                      |       | 201,594                                        |       | 131,400 |   | 105,461 |   |
| Loans                                                          |       | 9,343                                        |       | 3,811                                          |       | 5,134 |   | 2,252 |   |
| Total interest  income                                         |       | 272,358                                      |       | 206,158                                        |       | 137,921 |   | 108,103 |   |
| Interest expense:                                              |       |                                         |       |                                           |       |   |   |   |   |
| Deposits                                                       |       | 74,200                                       |       | 31,363                                         |       | 40,513 |   | 16,118 |   |
| Securities sold  under repurchase agreements                   |       | 80,301                                       |       | 60,551                                         |       | 39,347 |   | 34,197 |   |
| Short-term and  other borrowings                               |       | 34,761                                       |       | 23,375                                         |       | 18,891 |   | 15,137 |   |
| Junior  subordinated debentures                                |       | 1,210                                        |       | 1,210                                          |       | 605 |   | 605 |   |
| Total interest  expense                                        |       | 190,472                                      |       | 116,499                                        |       | 99,356 |   | 66,057 |   |
|                                                           |       |                                         |       |                                           |       |   |   |   |   |
| Net interest income                                            |       | $                                            | 81,886     |                                           | $          | 89,659 |   | $ | 38,565 |   | $ | 42,046 |   |

 

23

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Stockholdersof Investors Financial Services Corp.

We have reviewed theaccompanying consolidated balance sheet of Investors Financial Services Corp.and subsidiaries (the “Company”) as of June 30, 2006, and the relatedconsolidated statements of income and comprehensive income for the six-monthand three-month periods ended June 30, 2006 and 2005, and stockholders’ equityand cash flows for the six-month period ended June 30, 2006 and 2005. These interim financial statements are the responsibility of the Company’smanagement.

We conducted our reviewsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  A review of interim financial information consistsprincipally of applying analytical procedures and making inquiries of personsresponsible for financial and accounting matters.  It is substantiallyless in scope than an audit conducted in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the objective of which isthe expression of an opinion regarding the financial statements taken as awhole.  Accordingly, we do not express such an opinion.

Based on our reviews, weare not aware of any material modifications that should be made to suchconsolidated interim financial statements for them to be in conformity withaccounting principles generally accepted in the United States of America.

We have previouslyaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheet of the Companyand subsidiaries as of December 31, 2005, and the related consolidatedstatements of income and comprehensive income, stockholders’ equity, and cashflows for the year then ended (not presented herein); and in our report datedMarch 2, 2006, we expressed an unqualified opinion on those consolidatedfinancial statements.  In our opinion, the information set forth in theaccompanying consolidated balance sheet as of December 31, 2005 is fairlystated, in all material respects, in relation to the consolidated balance sheetfrom which it has been derived.

DELOITTE &TOUCHE LLP

/s/Deloitte & ToucheLLPBoston, MassachusettsAugust 8, 2006

24

----

**Item 2.**           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

*Youshould read the following discussion together with our Unaudited ConsolidatedFinancial Statements and related Notes to Unaudited Consolidated FinancialStatements, which are included elsewhere in this Report.  The following discussion containsforward-looking statements that reflect plans, estimates and beliefs.  Our actual results could differ materiallyfrom those discussed in the forward-looking statements.  See “Certain Factors That May Affect FutureResults.”*

*Unless otherwise indicated orunless the context requires otherwise, all references in this Report to “InvestorsFinancial,” “we,” “us,” “our,” or similar references mean Investors FinancialServices Corp., together with our subsidiaries. “Investors Bank” or the “Bank”means our subsidiary, Investors Bank & Trust Company, alone.*

**Overview**

We provide asset administrationservices for the financial services industry through our wholly-ownedsubsidiary, Investors Bank & Trust Company. We provide core services and value-added services to a variety offinancial asset managers, including mutual fund complexes, investment advisors,family offices, banks and insurance companies. Core services include middle office outsourcing, global custody,multicurrency accounting and fund administration.  Value-added services include securitieslending, foreign exchange, cash management, performance measurement,institutional transfer agency, investment advisory services, lines of creditand brokerage and transition management services.  We have offices located in the United States,Ireland, Canada, the Cayman Islands, the United Kingdom and Luxembourg with avast global subcustodian network established to accommodate the internationalneeds of our clients.  At June 30, 2006,we provided services for approximately $2.0 trillion in net assets, includingapproximately $0.4 trillion in foreign net assets.

We grow our business by selling our services to newclients and by further penetrating our existing clients.  We believe thatwe service approximately 10% of the assets managed by our existing clients, andwe have traditionally achieved significant success in growing clientrelationships.  Our ability to service new clients and expand ourrelationships with existing clients depends on our provision of superior clientservice.  Our growth is also affected by conditions in the globalsecurities markets, the interest rate environment, the regulatory environmentfor us and our clients and the success of our clients in marketing theirproducts.

We derive our asset servicing revenue from providingcore and value-added services.  We derive our net interest income byinvesting the cash balances our clients leave on deposit with us.  Since weprice our service offerings on a bundled basis, our share of earnings fromthese investments is viewed as part of the total compensation that our clientspay us for servicing their assets.  In establishing a fee structure for aspecific client, we analyze all expected revenue and expenses.  We believenet operating revenue (net interest income plus noninterest income) and netincome are the most meaningful measures of our financial results.

As an asset administration services company, theamount of net operating revenue that we generate is impacted by overall marketconditions, client activity and the prevailing interest rate environment. A significant portion of our core services revenue is based upon the amount ofassets we process.  As market values of underlying assets fluctuate, sowill our revenue.  We have managed this volatility by offering a tieredpricing structure for our asset-based fees.  As asset values increase, thebasis point fee is reduced for the incremental assets.  When asset valuesdecrease, revenue is only impacted at the then marginal rate.  Many of ourvalue-added services are transactional based, and we receive a fee for eachtransaction processed.  We have continued to experience net interestmargin pressure during the first half of 2006 due to a very flat yield curve,lower reinvestment spreads and the liability sensitive nature of our balancesheet.  Because we are a liability sensitive institution, as overnightinterest rates rise, most of our liabilities reprice but our assets take longerto reprice due to the nature of their reset provisions (i.e., monthly,quarterly and annually).  The lower interest rate spreads were also due tothe narrowing of market spreads on reinvestment and purchase opportunities forfixed and floating-rate investment assets. During the remainder of 2006, we expect short-term rates to continue torise at least 25 basis points and the yield curve to remain very flat, withouta sustained inversion.

We remain focused on our sales efforts, enhancing ourglobal technology platform and building out office space to accommodategrowth.  Due to this need to invest forboth current and future growth, our operating margins are expected to decreasein the short term from their prior historical levels.

**Results of LitigationSettlement**

As we previously reported in our Annual Report on Form10-K for the year ended December 31, 2005, we and an individual employeeof ours were named in a lawsuit filed by Opus Investment Management, Inc. inthe Superior Court of Worcester, Massachusetts on June 27, 2003.Subsequent to our second quarter 2006 earnings announcement on July 13,2006, the parties in the litigation reached settlement in principle. While thesettlement is subject to execution of final settlement agreements and approvalby the court, we accrued approximately $1.8 million for settlement costs,legal fees and administrative costs in accordance with Statement of FinancialAccounting Standards No. 5, *Accounting forContingencies*. This adjustment decreased our previously announcedsecond quarter 2006 net income by approximately $1.2 million to$44.3 million and decreased our diluted earnings per share by $0.02 to$0.65.

25

----

 

**Certain Factors That May Affect Future Results**

From time to time, information provided by us, statementsmade by our employees, or information included in our filings with theSecurities Exchange Commission (‘SEC’) (including this Form 10-Q) may containstatements which are not historical facts, so-called “forward-lookingstatements,” which are made under Section 21E of the Securities Exchange Act of1934 and which involve risks and uncertainties. These statements relate to futureevents or our future financial performance and are identified by words such as “may,”“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,capital resources, growth rate, annual dividend payments, interest rateconditions, the shape of the yield curve, interest rate sensitivity, compliancewith capital adequacy guidelines, loss exposure on lines of credit, foreignexchange revenue, cash management revenue, securities lending revenue, netinterest income, operating margin, operating expenses, including occupancyexpenses and needs, transaction processing services expense, professional feeexpense, compensation expense, travel and sales expense, investments in technology,pension plan and supplemental pension expense, depreciation expense,investments in Federal Home Loan Bank of Boston (‘FHLBB’) capital stock, theeffect on earnings of changes in equity values or fixed income values, theeffects of increased prepayments and reduced investment opportunities for ournet interest income, the effect of any anticipated activity under our stockrepurchase plan, contributing to our supplemental retirement plan, the effectof new accounting pronouncements and the effect of certain legal claims againstus.  Our actual future results may differsignificantly from those stated in any forward-looking statements.  Factors that may cause such differences include,but are not limited to, the factors discussed in Item 1A of this Form 10-Q andour Form 10-K filed on March 2, 2006.

**Statements of Income**

***Comparison of Operating Results for the Six andThree Months Ended June 30, 2006 and 2005***

Net income for thesix-months ended June 30, 2006 decreased 4% to $81.7 million from the same periodin 2005.  The decrease primarily resultedfrom continued pressure on our net interest margin, as well as increasedoperating expenses.  This decrease wassubstantially offset by increased asset servicing fees, which reflect ourability to sell to new and existing clients combined with market appreciationand strong client fund flows.  Net incomefor the three-months ended June 30, 2006 increased 1% to $44.3 million for thesame period in 2005, which was primarily due to an increase in pre-taxearnings.

*Fees and Other Revenue*

The components offees and other revenue are as follows (Dollars in thousands):

 
| ** **                    | ** ** | **For the Six Months Ended  June 30,** | ** ** | **For the Three Months Ended  June 30,** | ** ** |
|-------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                        | ** ** | **2005**                                                          | ** ** | **Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **Change** | ** ** |
|                          |       |                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |
| Total asset  servicing fees   |       | $                                                               | 314,438    |                                                              | $          | 237,701 |   | 32 | % | $ | 166,135 |   | $ | 122,498 |   | 36 | % |
| Other operating  income       |       | 1,634                                                           |       | 1,411                                                             |       | 16 | % | 470 |   | 626 |   | (25 | %) |
| Gain on sale of  investments  |       | 2,523                                                           |       | 9,740                                                             |       | (74 | %) | 2,523 |   | 5,552 |   | (55 | %) |
|                          |       |                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |
| Total fees and other  revenue |       | $                                                               | 318,595    |                                                              | $          | 248,852 |   | 28 | % | $ | 169,128 |   | $ | 128,676 |   | 31 | % |

 

The largest components of asset servicing fees arecustody, accounting and administration fees, which increased 23% to $220.0million and 24% to $112.2 million for the six-month and three-month periodsended June 30, 2006, respectively, from the same periods in 2005.  Custody, multicurrency accounting and fundadministration fees are based in part on the value of assets processed.  Assets processed is the total dollar value offinancial assets on the reported date for which we provide one or more of the following services: middleoffice outsourcing, global custody, multicurrency accounting, fundadministration, securities lending, foreign exchange, cash management,performance measurement, institutional transfer agency, investment advisoryservices, lines of credit and brokerage and transition management services.

26

----

 

The change in net assetsprocessed includes the following components(Dollars in billions):

 

|                                            | ** ** | **For the Six Months  Ended  June 30, 2006** | ** ** | **For the Three Months  Ended  June 30, 2006** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                       |       |                                                                  |       |                                                                    |       |
| Net assets  processed, beginning of period |       | $                                                                     | 1,793      |                                                                    | $          | 1,930 |   |
| Change in net assets  processed:           |       |                                                                  |       |                                                                    |       |
| Sales to new  clients                      |       | 1                                                                     |       | —                                                                  |       |
| Further  penetration of existing clients   |       | 18                                                                    |       | 16                                                                      |       |
| Lost clients                               |       | —                                                                |       | —                                                                  |       |
| Fund flows and  market gain                |       | 140                                                                   |       | 6                                                                       |       |
| Total change in  net assets processed      |       | 159                                                                   |       | 22                                                                      |       |
| Net assets processed,  end of period       |       | $                                                                     | 1,952      |                                                                    | $          | 1,952 |   |

 

The majority of the increase in assets processed forthe six months ended June 30, 2006 was due to client fund flows and marketmovements.  The increase in assetsprocessed for the three months ended June 30, 2006 was due to sales to existingclients.  As indicated in the ‘Overview’section, our core services fees are primarily generated by charging a fee basedupon the value of assets processed.  Asmarket values or clients’ asset levels fluctuate, so will our revenue.  Our tiered pricing structure, coupled withminimum and flat fees, allow us to manage this volatility to a certainextent.  As asset values increase, thebasis point fee typically lowers.  Whenasset values decrease, revenue is only impacted by the asset decline at thethen marginal rate.

If the value of equity or fixed income assets held byour clients were to increase or decrease by 10% for a sustained period of time,we estimate currently that this market movement, by itself, would cause acorresponding change of less than 5% in our earnings per share.  Earnings per share do not track precisely tothe value of the equity and fixed-income markets because conditions present ina market increase or decrease may generate offsetting increases or decreases inother revenue and expense items that are influenced by the value of the assetswe administer.  For example, increasedmarket volatility often results in higher transaction fee revenue.  Also, market value declines may result inincreased interest income and sweep fee income as clients move larger amountsof assets into the cash management vehicles that we offer.  In addition, our tiered pricing structurereduces the impact of volatility in asset values to a certain extent.  However, there can be no assurance that anyof these offsetting revenue and expense movements will occur during any futureupturn or downturn in the equity or fixed-income markets, or that our tieredpricing structure will reduce the impact on us of a sustained change in assetvalues.

Transaction-driven income includes our value-addedservices, such as foreign exchange, cash management, securities lending andinvestment advisory services.

·                  Foreign exchange fees were $48.1 million for thesix-month period ended June 30, 2006, up 89% from the same period in 2005, andwere $27.8 million for the three-month period ended June 30, 2006, up 127% fromthe same period in 2005. The increase in foreign exchange fees is attributableto new business, increased volume of client activity and volatility in currencymarkets.  Future foreign exchange incomeis dependent on the volume of new and existing client activity and overallvolatility in the currencies traded.  Weexpect foreign exchange fees for the second half of 2006 to be less than thefirst half of 2006, but to continue to meet or exceed prior year levels.

·                  Cash management fees, which consist of sweep fees,were $24.5 million for the six-month period ended June 30, 2006, up 48% fromthe same period in 2005, and were $13.1 million for the three-month periodended June 30, 2006, up 43% from the same period in 2005.  The increase is primarily due to higherbalances placed by our clients in the cash management products we offer.  Cash management fees will continue to dependon the level of client balances maintained in the cash management products weoffer.  If our clients’ investmentproducts continue to maintain higher cash balances than they did in comparableperiods, we expect our cash management revenue to be positively impacted.

·                  Securities lending fees were $16.7 million for thesix-month period ended June 30, 2006, up 41% from the same period in 2005, and$10.5 million for the three-month period ended June 30, 2006, up 28% from thesame period in 2005, primarily due to new business, higher volumes and improvedmarket conditions.  Securities lendingtransaction volume is positively affected by the market value of securities onloan, merger and acquisition activity, increased IPO activity, the seasonalityof international dividend arbitrage and a steeper short end of the yieldcurve.  If the capital markets experienceany of the aforementioned activity, it is likely that our securities lendingrevenue will be positively impacted.  Ifwe experience any of the following: 1) a reduction in our securities lendingportfolio, 2) lower market values or 3) compression of the spreads earned onsecurities lending activity, our securities lending revenue will likely benegatively impacted.

·                  Investment advisory fees were $3.8 million for thesix-month period ended June 30, 2006, up 2% from the same period in 2005.  The increase in investment advisory fees isattributable to higher asset levels in our proprietary Merrimac money 

27

----

 

market funds as well asdiscontinuing advisory fee waivers during the second quarter of 2005.  Investment advisory fees were $1.8 millionfor the three-month period ended June 30, 2006, down 8% from the same period in2005.  The decrease was primarily due tocommission fees.  Future investmentadvisory fee income is dependent upon asset levels within the Merrimac moneymarket funds, which are driven by overall market conditions, client activityand transaction volumes.

·                  Other service fees were $1.5 million for thesix-month period ended June 30, 2006, up 5% from the same period in 2005.  Other service fees include income earned oncompliance advisory, brokerage and transition management services.  The increase in other service fees for thesix-month period is primarily due to an increase in transition managementservice fees.  Other service fees were$0.7 million for the three-month period ended June 30, 2006, down 11% from thesame period in 2005.  The decrease forthe three-month period is primarily due to a reduction in brokerage commissionfees.

·                  Other operating income for the six-month periodended June 30, 2006 was $1.6 million, up 16% from the same period in 2005.  The increase is primarily due to an increasein interest earned on clearing agency deposits. Other operating income for the three-month period ended June 30, 2006was $0.5 million, down 25% from the same period in 2005.  The decrease was due to a decrease in FHLBBstock dividend income.

During the second quarter of 2006, we sold municipalsecurities held in our available for sale portfolio, resulting in therecognition of $2.5 million in gains for both the six-month and three-monthperiods ended June 30, 2006.  During thefirst half of 2005, we sold municipal securities held in our available for saleportfolio, resulting in the recognition of $9.7 million and $5.6 million ingains for the six-month and three-month periods ended June 30, 2005,respectively.  These security sales in2005 and 2006 were the result of our strategy to improve the after-tax yield ofour municipal securities portfolio by replacing certain municipal securitiessold with those that offer a more attractive after-tax yield, as well as tocapitalize on strong market conditions.

*Net Interest Income*

The following table presents the components of netinterest income (Dollars in thousands):
| ** **          | ** ** | **For the Six Months Ended June 30,** | ** ** | **For the Three Months Ended June 30,** | ** ** |
|---------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                                            | ** ** | **2005**                                                              | ** ** | **Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **Change** | ** ** |
|                |       |                                                                |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Interest income     |       | $                                                                   | 272,358    |                                                                  | $          | 206,158 |   | 32 | % | $ | 137,921 |   | $ | 108,103 |   | 28 | % |
| Interest expense    |       | 190,472                                                             |       | 116,499                                                               |       | 63 | % | 99,356 |   | 66,057 |   | 50 | % |
| Net interest income |       | $                                                                   | 81,886     |                                                                  | $          | 89,659 |   | (9 | %) | $ | 38,565 |   | $ | 42,046 |   | (8 | %) |

 

Net interest income is affectedby the volume and mix of assets and liabilities and the movement and level ofinterest rates.  The decrease in our net interest income for both thesix-month and three-month periods ended June 30, 2006 was primarily driven bylower interest rate spreads, which were partially offset by growth in ourinvestment portfolio.  Lower interestrate spreads were due to the continued increasing short-term interest rateswithout a concurrent increase in longer-term rates, which resulted in a veryflat yield curve.  Consequently, ourinterest-bearing liabilities, of which the majority is priced based onovernight floating rates, have repriced at higher rates faster than ourinterest-earning assets have repriced, resulting in a lower net interest marginas compared to the same period in 2005. In addition, reinvestment and purchase spreads on fixed andfloating-rate assets were lower than expected due to higher market demand,especially for shorter-term and floating-rate fixed income investments.  Average investment security balances were upapproximately $0.1 billion and down approximately $0.2 billion for thesix-month and three-month periods ended June 30, 2006, compared to the sameperiods in 2005.

The table below presents the changes in net interestincome resulting from changes in the volume of interest-earning assets orinterest-bearing liabilities and changes in interest rates for the six monthsand three months ended June 30, 2006 compared to the same periods in 2005.  Changes attributed to both volume and ratehave been allocated based on the proportion of change in each category (Dollarsin thousands):

28

----

 
| ** **                                    | ** ** | **For the Six Months Ended June 30, 2006** | ** ** | **For the Three Months Ended June 30, 2006** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Change**                                                                    | ** ** | **Change**                                                                      | ** ** | ** ** | ** ** | **Change** | ** ** | **Change** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Due to**                                                               | ** ** | **Due to**                                                                 | ** ** | ** ** | ** ** | **Due to** | ** ** | **Due to** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Volume**                                                                    | ** ** | **Rate**                                                                        | ** ** | **Net** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net** | ** ** |
| Interest-earning  assets:                     |       |                                                                          |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Federal Funds sold and short-term investments |       | $                                                                             | 466        |                                                                            | $          | 646 |   | $ | 1,112 |   | $ | 626 |   | $ | 371 |   | $ | 997 |   |
| Investment securities                         |       | 2,106                                                                         |       | 57,450                                                                          |       | 59,556 |   | (2,134 | ) | 28,073 |   | 25,939 |   |
| Loans                                         |       | 2,871                                                                         |       | 2,661                                                                           |       | 5,532 |   | 910 |   | 1,972 |   | 2,882 |   |
|                                          |       |                                                                          |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Total interest-earning assets                 |       | 5,443                                                                         |       | 60,757                                                                          |       | 66,200 |   | (598 | ) | 30,416 |   | 29,818 |   |
|                                          |       |                                                                          |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                |       |                                                                          |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Deposits                                      |       | 10,044                                                                        |       | 32,792                                                                          |       | 42,836 |   | 8,150 |   | 16,245 |   | 24,395 |   |
| Borrowings                                    |       | (10,972                                                                       | )          | 42,109                                                                          |       | 31,137 |   | (11,730 | ) | 20,634 |   | 8,904 |   |
|                                          |       |                                                                          |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities            |       | (928                                                                          | )          | 74,901                                                                          |       | 73,973 |   | (3,580 | ) | 36,879 |   | 33,299 |   |
|                                          |       |                                                                          |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Change in net interest  income                |       | $                                                                             | 6,371      |                                                                            | $          | (14,144 | ) | $ | (7,773 | ) | $ | 2,982 |   | $ | (6,463 | ) | $ | (3,481 | ) |

 

In addition to investing in bothvariable and fixed-rate securities, we use derivative instruments to manage ourexposure to interest rate risk.  See the ‘MarketRisk’ section for more detailed information.

29

----

 

The following tables present average balances,interest income and expense, and yields earned or paid on the major categoriesof assets and liabilities for the periods indicated (Dollars in thousands):

 
| ** **                                                        | ** ** | **Six Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                        | ** ** | **Average**                                             | ** ** | ** **                                              | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                        | ** ** | **Balance**                                             | ** ** | **Interest**                                            | ** ** | **Yield/Cost** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Cost** | ** ** |
| **Interest-earning  assets:**                                     |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Federal Funds sold and other short-term investments               |       | $                                                       | 83,026     |                                                    | $          | 1,865 |   | 4.49% |   | $ | 55,967 |   | $ | 753 |   | 2.69% |   |
| Investment securities(1)                                          |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Mortgage-backed securities                                        |       | 8,172,916                                               |       | 195,849                                                 |       | 4.79% |   | 7,867,841 |   | 145,277 |   | 3.69% |   |
| Federal agency securities                                         |       | 2,138,064                                               |       | 48,825                                                  |       | 4.57% |   | 2,318,705 |   | 40,860 |   | 3.52% |   |
| State and political subdivisions                                  |       | 490,820                                                 |       | 10,619                                                  |       | 4.33% |   | 470,210 |   | 10,885 |   | 4.63% |   |
| Other securities                                                  |       | 212,257                                                 |       | 5,857                                                   |       | 5.52% |   | 259,273 |   | 4,572 |   | 3.53% |   |
| Total investment securities                                       |       | 11,014,057                                              |       | 261,150                                                 |       | 4.74% |   | 10,916,029 |   | 201,594 |   | 3.69% |   |
| Loans                                                             |       | 306,367                                                 |       | 9,343                                                   |       | 6.10% |   | 192,997 |   | 3,811 |   | 3.95% |   |
| Total interest-earning assets                                     |       | 11,403,450                                              |       | 272,358                                                 |       | 4.78% |   | 11,164,993 |   | 206,158 |   | 3.69% |   |
| Allowance for loan losses                                         |       | (100                                                    | )          |                                                    |       |   |   | (100 | ) |   |   |   |   |
| Noninterest-earning assets                                        |       | 650,917                                                 |       |                                                    |       |   |   | 637,264 |   |   |   |   |   |
| Total assets                                                      |       | $                                                       | 12,054,267 |                                                    |       |   |   |   | $ | 11,802,157 |   |   |   |   |   |
| **Interest-bearing  liabilities:**                                |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Deposits:                                                         |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Demand                                                            |       | $                                                       | 91,610     |                                                    | $          | 1,862 |   | 4.07% |   | $ | — |   | $ | — |   | — |   |
| Savings                                                           |       | 4,148,070                                               |       | 69,788                                                  |       | 3.36% |   | 3,252,860 |   | 29,753 |   | 1.83% |   |
| Time                                                              |       | 106,281                                                 |       | 2,550                                                   |       | 4.80% |   | 118,270 |   | 1,610 |   | 2.72% |   |
| Securities sold under repurchase agreements                       |       | 4,584,001                                               |       | 80,301                                                  |       | 3.50% |   | 5,210,157 |   | 60,551 |   | 2.32% |   |
| Junior subordinated debentures                                    |       | 24,774                                                  |       | 1,210                                                   |       | 9.77% |   | 24,774 |   | 1,210 |   | 9.77% |   |
| Other borrowings                                                  |       | 1,456,419                                               |       | 34,761                                                  |       | 4.77% |   | 1,647,953 |   | 23,375 |   | 2.84% |   |
| Total interest-bearing liabilities                                |       | 10,411,155                                              |       | 190,472                                                 |       | 3.66% |   | 10,254,014 |   | 116,499 |   | 2.27% |   |
| Noninterest-bearing liabilities:                                  |       |                                                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Demand deposits                                                   |       | 350,397                                                 |       |                                                    |       |   |   | 304,401 |   |   |   |   |   |
| Savings                                                           |       | 69,852                                                  |       |                                                    |       |   |   | 57,415 |   |   |   |   |   |
| Noninterest-bearing time deposits                                 |       | 206,630                                                 |       |                                                    |       |   |   | 203,425 |   |   |   |   |   |
| Other liabilities                                                 |       | 198,329                                                 |       |                                                    |       |   |   | 231,710 |   |   |   |   |   |
| Total liabilities                                                 |       | 11,236,363                                              |       |                                                    |       |   |   | 11,050,965 |   |   |   |   |   |
| Equity                                                            |       | 817,904                                                 |       |                                                    |       |   |   | 751,192 |   |   |   |   |   |
| Total liabilities and equity                                      |       | $                                                       | 12,054,267 |                                                    |       |   |   |   | $ | 11,802,157 |   |   |   |   |   |
| Net interest income                                               |       |                                                    |       | $                                                       | 81,886     |   |   |   |   |   | $ | 89,659 |   |   |   |
| Net interest margin (2)                                           |       |                                                    |       |                                                    |       | 1.44% |   |   |   |   |   | 1.61% |   |
| Average interest rate spread (3)                                  |       |                                                    |       |                                                    |       | 1.12% |   |   |   |   |   | 1.42% |   |
| Ratio of  interest-earning assets to interest-bearing liabilities |       |                                                    |       |                                                    |       | 109.53% |   |   |   |   |   | 108.88% |   |

----

(1)           Average yield/cost on available for sale securities isbased on amortized cost.

(2)           Annualized net interest income divided by totalinterest-earning assets.

(3)           Yield on interest-earning assets less rate paid oninterest-bearing liabilities.

30

----

 

*Operating Expenses*

Total operating expenses were $284.6 million for thesix months ended June 30, 2006, up 31% from the same period in 2005.  Total operating expenses were $148.9 millionfor the three months ended June 30, 2006, up 32% from the same period in2005.  The increases in total operatingexpenses for both the six-month and three-month periods ended June 30, 2006were primarily due to increased compensation and benefits, technology andtelecommunications, transaction processing services, occupancy and otheroperating expenses, as detailed below.  We expect that incremental expensefor the remainder of 2006 will primarily be driven by continued investments inpersonnel, office space and in our integrated global technology platform.  The components of operating expenses were asfollows (Dollars in thousands):
| ** **                         | ** ** | **For the Six Months  Ended June 30,** | ** ** | **For the Three Months  Ended June 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                                        | ** ** | **2005**                                                          | ** ** | **Change** | ** ** | **2006** | ** ** | **2005** | ** ** | **Change** | ** ** |
|                               |       |                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |
| Compensation and  benefits         |       | $                                                               | 164,207    |                                                              | $          | 120,351 |   | 36 | % | $ | 87,209 |   | $ | 63,432 |   | 37 | % |
| Technology and  telecommunications |       | 35,125                                                          |       | 25,913                                                            |       | 36 | % | 17,787 |   | 13,077 |   | 36 | % |
| Transaction  processing services   |       | 29,469                                                          |       | 22,776                                                            |       | 29 | % | 15,797 |   | 11,656 |   | 36 | % |
| Occupancy                          |       | 15,563                                                          |       | 12,840                                                            |       | 21 | % | 8,012 |   | 6,227 |   | 29 | % |
| Depreciation and  amortization     |       | 15,542                                                          |       | 15,984                                                            |       | (3 | %) | 7,736 |   | 8,093 |   | (4 | %) |
| Professional  fees                 |       | 5,404                                                           |       | 6,379                                                             |       | (15 | %) | 1,943 |   | 3,406 |   | (43 | %) |
| Travel and sales  promotion        |       | 4,077                                                           |       | 3,174                                                             |       | 28 | % | 2,146 |   | 1,825 |   | 18 | % |
| Insurance                          |       | 1,967                                                           |       | 2,275                                                             |       | (14 | %) | 994 |   | 1,146 |   | (13 | %) |
| Other operating  expenses          |       | 13,255                                                          |       | 8,337                                                             |       | 59 | % | 7,301 |   | 4,375 |   | 67 | % |
|                               |       |                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |
| Total operating  expenses          |       | $                                                               | 284,609    |                                                              | $          | 218,029 |   | 31 | % | $ | 148,925 |   | $ | 113,237 |   | 32 | % |

 

Compensation and benefits expense was $164.2 millionfor the six months ended June 30, 2006 and was $87.2 million for the threemonths ended June 30, 2006, up 36% and 37%, respectively, from the same periodslast year due to higher headcount in our Boston and European offices.  Annual salary increases, bonus accruals andoption expense also contributed to the growth in the compensation and benefitsexpense.  Further increases incompensation expense in the second half of 2006 will be primarily dependentupon sales to new and existing clients.

Technology and telecommunications expense was $35.1million for the six months ended June 30, 2006 and was $17.8 million for thethree months ended June 30, 2006, both up 36% from the same periods lastyear.  The increases are primarily due toour investment in enhancing our global integrated technology platform.  Generally, we expect technology reinvestmentto equal approximately 18-20% of net operating revenue each year, includingrelated compensation costs.

Transaction processing services expense was $29.5million for the six months ended June 30, 2006 and was $15.8 million for thethree months ended June 30, 2006, up 29% and 36%, respectively, from the sameperiods last year due to increases in transaction volumes with oursubcustodians and higher market values. Future transaction processing services expense will be dependent uponasset levels and the volume of client transaction activity.

Occupancy expense was $15.6 million for the six monthsended June 30, 2006 and was $8.0 million for the three months ended June 30,2006, up 21% and 29%, respectively, from the same periods last year.  These increases are due to our new officespace in Boston, London and Luxembourg. Occupancy expense is expected to increase throughout 2006 due to theaddition of new space needed to accommodate growth.

Professional fees expense was $5.4 million for the sixmonths ended June 30, 2006 and was $1.9 million for the three months ended June30, 2006, down 15% and 43%, respectively, from the same periods last year.  The decreases are primarily attributed tolower consulting services related to office space design and requirements andlegal fees related to outstanding claims reaching their retention limits underour directors and officers liability insurance policy.

Travel and sales promotion expense was $4.1 millionfor the six months ended June 30, 2006 and was $2.1 million for the threemonths ended June 30, 2006, up 28% and 18%, respectively, from the same periodslast year.  Travel and sales promotionexpense consists of expenses incurred by the sales force, client managementstaff and other employees in connection with sales calls on potential clients,as well as traveling to existing client sites and our foreign offices.  The increases resulted from a higher level ofsales calls to potential clients, a higher level of travel to client sites andforeign offices and attendance at industry conferences.

Other operating expense was $13.3 million for the sixmonths ended June 30, 2006 and $7.3 million for the three months ended June 30,2006, up 59% and 67%, respectively, from the same periods last year as a resultof higher recruiting and staffing expenses, as well as our settlement inprinciple of pending litigation.  Otheroperating expenses are expected to continue to increase in the second half of2006 due to higher staffing and recruiting costs as a result of the growth ofour business.

31

----

 

*Income Taxes*

Income taxes were $34.2 million for the six-monthperiod ended June 30, 2006, down 3% from the same period in 2005.  This decrease in income taxes is primarilyrelated to a decrease in pretax earnings, as well as a 1% decrease in the 2006effective tax rate resulting from a change in the recognition threshold of atax position.  The decrease in incometaxes and the effective tax rate was partially offset by the decrease inone-time tax benefits.  During the secondquarter of 2005, the Company adopted the indefinite reversal provisions ofAccounting Principles Board Opinion No. 23, *Accounting for IncomeTaxes — Special Areas* (‘APB 23’), which specifies that U.S. incometaxes should not be recorded on the undistributed earnings of a foreignsubsidiary if those undistributed earnings have been or will be investedindefinitely in that subsidiary.  Wedetermined that the undistributed earnings of our Irish subsidiaries will bepermanently invested in our Irish operations to support continued growth.  During the second quarter of 2006, theCompany reversed previously accrued taxes resulting from a tax position that nolonger met the probable recognition threshold under Statement of FinancialAccounting Standards No. 5, *Accounting forContingencies* (‘SFAS 5’).

Income taxes were $14.5 million for the three-monthperiod ended June 30, 2006, up 8% from the same period in 2005.  This increase in income taxes is primarilyrelated to an increase in pretax earnings, as well as a decrease in theone-time tax benefits, as discussed above. The increase in income taxes was partially offset by the decrease in the2006 effective tax rate resulting from a change in the recognition threshold ofa tax position, as discussed above.

32

----

 

**Financial Condition**

At June 30, 2006, our total assets were $12.4 billion,up 2% from $12.1 billion at December 31, 2005, primarily due to an increase inFederal Funds sold.  Averageinterest-earning assets increased $0.2 billion, or 2%, for the six-month periodended June 30, 2006 as compared to the same period in 2005.  Our asset growth during the six-month endedJune 30, 2006 was primarily funded by increases in average client balances ofapproximately $1.1 billion.  Averageinterest-earning assets decreased $0.1 billion, or 1%, for the three-monthperiod ended June 30, 2006 as compared to the same period in 2005.  Our asset growth decline was driven by poormarket performance during the second quarter of 2006.

*Investment Portfolio*

The income we derive from our investment portfolio isgenerated primarily by investing client cash balances and is a component of ourasset processing business.  In addition,we use the investment portfolio to secure open positions at securities clearinginstitutions in connection with our custody services.  The following table summarizes our investmentportfolio as of the dates indicated (Dollars in thousands):
| ** **                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **Securities held to maturity**     | ** ** | ** **        | ** ** | ** **            | ** ** |
| Mortgage-backed  securities         |       | $                 | 4,034,214  |                  | $          | 4,342,254 |   |
| Federal agency  securities          |       | 2,005,854         |       | 2,305,331             |       |
| State and political  subdivisions   |       | 103,796           |       | 114,345               |       |
| Total securities  held to maturity  |       | $                 | 6,143,864  |                  | $          | 6,761,930 |   |
| ** **                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Securities available for sale**   | ** ** | ** **        | ** ** | ** **            | ** ** |
| Mortgage-backed  securities         |       | $                 | 4,122,577  |                  | $          | 3,766,101 |   |
| State and political  subdivisions   |       | 325,560           |       | 392,391               |       |
| Corporate debt                      |       | 200,747           |       | 200,692               |       |
| Foreign government  securities      |       | 10,898            |       | 10,536                |       |
| Total securities available for sale |       | $                 | 4,659,782  |                  | $          | 4,369,720 |   |

 

Our held to maturity securities portfolio decreased$0.6 billion, or 9%, from December 31, 2005 to June 30, 2006.  The decrease is primarily due topaydowns.  Our held to maturity portfoliosecurities are purchased with the intent and ability to hold them to maturity.

Our available for sale securities portfolio increased$0.3 billion, or 7%, from December 31, 2005 to June 30, 2006.  The increase was mainly due to purchases ofnew investment securities, offset by maturities and prepayments.  Our investment security purchases includedmortgage-backed securities and municipal securities.  We believe that purchasing these securitiesallows us to take advantage of attractive yields and limited extension riskwhich aligns with our asset and liability strategy.  Refer to the gap analysis under the ‘MarketRisk’ section for additional details regarding the matching of ourinterest-earning assets and interest-bearing liabilities.

The average balance of our investment securities forthe six-month period ended June 30, 2006 was $11.0 billion, with an averageyield of 4.74%, compared to an average balance of $10.9 billion with an averageyield of 3.69% during the same period in 2005. The increase in yield is primarily due to our variable-rate securitiesrepricing at higher interest rates.  Iflong-term interest rates rise, we would expect slower prepayments and ouroverall yield to increase as our variable-rate securities reprice.  Conversely, if long-term interest ratesdecline, we would expect that prepayments would accelerate, with the cash flowsfrom these prepayments being reinvested in lower-yielding assets of equalquality and similar risk.

Prepayment cash flow levels on our Federal agencysecurities increased slightly in the first six months of 2006, which we believewere attributable to the expiration of borrower prepayment penalties,refinancing and loan payoff activity. Mortgaged-backed security prepayment cash flow levels decreased for thefirst half of 2006, primarily attributable to decreased refinancingopportunities.

We invest in mortgage-backed securities and Federalagency securities to increase the total return of the investmentportfolio.  Mortgage-backed securitiesand Federal agency securities generally have a higher yield than U.S. Treasurysecurities due to credit and prepayment risk.  Credit risk results fromthe possibility that a loss may occur if a counterparty, such as the Federalagency issuing the securities, is unable to meet the terms of thecontract.  Credit risk related to mortgage-backed securities and Federal agencysecurities is substantially reduced by payment guarantees and creditenhancements.  Prepayment risk results from the possibility that changesin interest rates and other economic factors will result in investmentsecurities being paid off earlier than the scheduled maturity date.  Referto the ‘Market Risk’ section for additional details regarding our net interestincome simulation model, which includes the impact of changes in interestrates, and therefore prepayment risk, on our net interest income.

33

----

 

We invest in AAA rated, insured municipal securitiesto generate stable, tax advantaged income.  Municipal securities generallyhave lower stated yields than Federal agency and U.S. Treasury securities, buttheir after-tax yields are comparable.  Municipal securities are subjectto call risk.  Call risk is similar to prepayment risk and results fromthe possibility that fluctuating interest rates and other factors may result inthe exercise of the call option by the issuing municipality prior to thematurity date of the security.

*Loan Portfolio*

The balance in our loan portfolio was $335.7 million,down 17% from December 31, 2005.  Thedecrease was primarily due to repayments of lines of credit, partially offsetby new loan originations.

We make loans to individually managed accountcustomers and to mutual funds and other pooled product clients.  We offeroverdraft protection and lines of credit to our clients for the purpose offunding redemptions, covering overnight cash shortfalls, leveraging portfoliosand meeting other client borrowing needs.  The majority of loans toindividually managed account customers are written on a demand basis, bearvariable interest rates tied to the Prime rate or the Federal Funds rate andare fully secured by liquid collateral, primarily freely tradable securitiesheld in custody by us for the borrower.  We monitor the value ofcollateral daily to ensure the amount of collateral held by us exceeds the loanbalance by a certain threshold.  Loans to mutual funds and other pooledproduct clients include unsecured lines of credit that may, in the event ofdefault, be collateralized at our option by securities held in custody by usfor those clients.  Loans to individually managed account customers,mutual funds and other pooled product clients also include advances that wemake to certain clients pursuant to the terms of our custody agreements withthose clients to facilitate securities transactions and redemptions.

At June 30, 2006, our only lending concentrations thatexceeded 10% of total loan balances were the lines of credit to mutual fundclients discussed above.  These loanswere made in the ordinary course of business on the same terms and conditionsprevailing at the time for comparable transactions.

Our loan portfolio credit performance has beenexcellent.  There have been no loancharge-offs in the history of our Company. It is our policy to place a loan on nonaccrual status when eitherprincipal or interest becomes 90 days past due and the loan’s collateralis not sufficient to cover both principal and accrued interest.  As of June 30, 2006, there were no loans onnonaccrual status and no troubled debt restructurings.  Although virtually all of our loans are fullycollateralized with freely tradable securities, management recognizes somecredit risk inherent in the loan portfolio, and therefore has recorded anallowance for loan losses of $0.1 million at June 30, 2006, a level whichhas remained consistent for the past five years.  This amount is not allocated to anyparticular loan, but is intended to absorb any risk of loss inherent in theloan portfolio.  Management activelymonitors the loan portfolio and the underlying collateral and regularlyassesses the adequacy of the allowance for loan losses.

*Deposits*

Total deposits were $5.9 billion at June 30, 2006, up19% from December 31, 2005.  The increasein our deposit balances is a result of possessing higher amounts of assets forour clients.

Time deposits with balances greater than $100,000totaled $516.3 million and $230.1 million at June 30, 2006 and December 31,2005, respectively.  All time depositshad a maturity of less than three months at June 30, 2006 and December 31,2005.

*Repurchase Agreements andShort-Term and Other Borrowings*

Repurchase agreements decreased $0.2 billion, or 3%,from December 31, 2005 to June 30, 2006. The majority of our repurchase agreements are with clients who prefer amore collateralized form of deposit. Repurchase agreements provide for the sale of securities for cashcoupled with the obligation to repurchase those securities on a set date or ondemand.  We use repurchase agreements,including client repurchase agreements, because they provide a lower costsource of funding than other short-term borrowings and allow our clients theextra benefit of collateralization of their deposits.  The average balance of securities sold underrepurchase agreements for the six months ended June 30, 2006 was $4.6 billionwith an average cost of approximately 3.50%, compared to an average balance of$5.2 billion and an average cost of approximately 2.32% for the same period in2005.  The increase in the average costof repurchase agreements was due to higher short-term interest rates in thefirst half of 2006 compared to the same period in 2005.

Short-term and other borrowings decreased $0.6billion, or 46%, from December 31, 2005 to June 30, 2006.  We use short-term and other borrowings tooffset the variability of deposit flow. The average balance of short-term and other borrowings for the sixmonths ended June 30, 2006 was $1.5 billion with an average cost ofapproximately 4.77%, compared to an average balance of $1.6 billion and anaverage cost of approximately 2.84% for the same period in 2005.

34

----

 

**Market Risk**

Our clients, in the course of their financial asset management,maintain cash balances, which they can deposit with us on a short-term basis ininterest-bearing accounts or client repurchase agreements.  We either directly invest these cash balancesto earn interest income, or place these deposits in third-party vehicles andremit a portion of the earnings on these investments to our clients afterdeducting a fee as our compensation for investing clients’ funds in theseinvestment vehicles.  In the conduct ofthese activities, we are subject to market risk.

Market risk is the risk of an adverse financial impactfrom changes in market prices and interest rates.  The level of risk we assume is a function ofour overall strategic objectives and liquidity needs, client requirements andmarket volatility.  The active managementof market risk is integral to our operations. The objective of interest rate sensitivity management is to providesustainable net interest income under various economic conditions.

Our balance sheet is primarily subject to interestrate risk, which is the risk of loss due to movements in interest rates.  Prepayment risk, which is the risk thatchanges in interest rates and other economic factors will result in investmentsecurities being paid off earlier than the scheduled maturity date, is inherentin our investment securities, mainly our mortgage-backed securities andvariable-rate Federal agency securities. Prepayment levels for mortgage-backed securities are primarily driven bychanges in interest rates.  Prepaymentlevels for Federal agency securities are driven by a number of factors,including expiration of prepayment penalty provisions, the economic conditionof the borrower, borrower refinancing alternatives, and interest rates.

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, wehave established a policy limit stating that projected net interest income overthe next twelve months will not be impacted by more than 10% given a change ininterest rates of up to 200 basis points (+ or -) over twelve months.  Each quarter, our Board of Directors reviewsour asset and liability positions, including simulations of the effect ofvarious interest rate scenarios on our capital.

The day-to-day responsibility for oversight of theAsset and Liability Management function has been delegated by our Board ofDirectors to our Asset and Liability Committee (‘ALCO’).  ALCO is a senior management committeeconsisting of the Chief Executive Officer, the President, the Chief FinancialOfficer, the Chief Risk Officer and members of the Treasury function.  ALCO meets twice monthly.  Our primary tool in managing interest ratesensitivity is an income simulation model. Key assumptions in the simulation model include the timing of cashflows, which include forecasted prepayment speeds that are based on market andindustry data, maturities and repricing of financial instruments, changes inmarket conditions, capital planning and deposit sensitivity.  The model assumes that the composition of ourinterest-sensitive assets and liabilities will change over the period beingmeasured.  The model also assumes thatthe change in interest rates is a parallel shift of the yield curve across allmaturities.  These assumptions areinherently uncertain, and as a result, the model cannot precisely predict theeffect of changes in interest rates on our net interest income.  Actual results may differ from simulatedresults due to the timing, magnitude and frequency of interest rate changes, andchanges in market conditions and management strategies.

The results of the income simulation model as of June30, 2006 and 2005 indicated that an upward shift of interest rates by 200 basispoints over a twelve-month period would result in a reduction in projected netinterest income of 6.8% and 6.5%, respectively, which is within our 10% policylimit.  We also simulate a 200 basispoint rate reduction over a twelve-month period.  This simulation would result in an increasein projected net interest income of 3.5% and 0.2% as of June 30, 2006 and 2005,respectively, both within our 10% policy limit.

We also use gap analysis as a secondary tool to manageour interest rate sensitivity.  Gapanalysis involves measurement of the difference in asset and liabilityrepricing on a cumulative basis within a specified time frame.  A positive gap indicates that moreinterest-earning assets than interest-bearing liabilities mature in a timeframe, and a negative gap indicates the opposite.  By seeking to minimize the net amount ofassets and liabilities that could reprice in the same time frame, we attempt toreduce the risk of significant adverse effects on net interest income caused byinterest rate changes.  As shown in thecumulative gap position in the table presented on the following page, at June30, 2006, interest-bearing liabilities repriced faster than interest-earningassets in the short term.  Generallyspeaking, during a period of falling interest rates, net interest income wouldbe higher than it would have been until interest rates stabilize.  During a period of rising interest rates, netinterest income would be lower than it would have been until interest ratesstabilize.  Other important determinantsof net interest income are the shape of the yield curve, general rate levels,reinvestment spreads, balance sheet growth and mix, and interest rate spreads.  Wecontinue to run a closely matched balance sheet by investing the majority ofour assets in short duration, variable-rate securities and adding interest rateswaps against client liabilities, including client repurchase agreements.

35

----

 

We manage the structure of interest-earning assets andinterest-bearing liabilities by adjusting their mix, yield, maturity and/orrepricing characteristics based on market conditions.  Client deposits and repurchase agreements,which are predominantly short term, are our primary sources of funds.  We also use term borrowings and interest rateswap agreements to augment our management of interest rate exposure.  The effect of the swap agreements is tolengthen both a forecasted series of fixed-rate overnight liabilities incurredat different daily fixed rates and short-term variable-rate liabilities intolonger-term fixed-rate liabilities.  Theweighted-average fixed-payment rates were 3.74% and 3.25% at June 30, 2006 and2005, respectively.  Variable-interestpayments received are currently indexed to the overnight Federal Fundsrate.  At June 30, 2006 and 2005, theweighted-average rates of variable market-indexed interest payment obligationsto the Company were 4.89% and 3.19%, respectively.  The remaining terms of swaps at June 30, 2006range from 1 to 28 months.  Thesecontracts had net fair values of approximately $31.2 million and $10.5 millionat June 30, 2006 and 2005, respectively.

The following table presents the repricing schedule ofour interest-earning assets and interest-bearing liabilities at June 30, 2006(Dollars in thousands):
| ** **                                                                         | ** ** | **Within Three** | ** ** | **Three to Six** | ** ** | **Six to Twelve** | ** ** | **One Year to** | ** ** | **Over Five** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|-----------------------------|------------|---------------------------|------------|--------------------|------------|------------|------------|
| ** **                                                                         | ** ** | **Months**            | ** ** | **Months**                 | ** ** | **Months**                  | ** ** | **Five Years**       | ** ** | **Years**          | ** ** | **Total**  | ** ** |
| Interest-earning  assets: (1)                                                      |       |                  |       |                       |       |                        |       |                      |       |               |       |       |       |
| Investment securities (2, 3)                                                       |       | $                     | 6,200,023  |                       | $          | 590,266                     |       | $                         | 858,090    |               | $          | 2,468,652  |       | $ | 736,582 |   | $ | 10,853,613 |   |
| Federal funds sold and other short-term investments                                |       | 540,951               |       | —                     |       | —                      |       | —                    |       | —             |       | 540,951    |       |
| Loans—variable rate                                                           |       | 332,485               |       | 3,300                      |       | —                      |       | —                    |       | —             |       | 335,785    |       |
| Loans—fixed rate                                                              |       | —                |       | —                     |       | —                      |       | 12                        |       | —             |       | 12         |       |
| Total interest-earning assets                                                      |       | $                     | 7,073,459  |                       | $          | 593,566                     |       | $                         | 858,090    |               | $          | 2,468,664  |       | $ | 736,582 |   | $ | 11,730,361 |   |
| Interest-bearing  liabilities:                                                     |       |                  |       |                       |       |                        |       |                      |       |               |       |       |       |
| Demand deposits                                                                    |       | $                     | 86,127     |                       | $          | —                      |       | $                         | —     |               | $          | —     |       | $ | — |   | $ | 86,127 |   |
| Savings accounts                                                                   |       | 4,761,932             |       | —                     |       | —                      |       | 22,670                    |       | —             |       | 4,784,602  |       |
| Time deposits                                                                      |       | 166,297               |       | —                     |       | —                      |       | —                    |       | —             |       | 166,297    |       |
| Interest rate contracts                                                            |       | (1,670,000            | )          | 120,000                    |       | 480,000                     |       | 1,070,000                 |       | —             |       | —     |       |
| Securities sold  under                                                             |       |                  |       |                       |       |                        |       |                      |       |               |       |       |       |
| repurchase agreements                                                              |       | 3,982,803             |       | 100,000                    |       | 250,000                     |       | 300,000                   |       | —             |       | 4,632,803  |       |
| Short-term and  other                                                              |       |                  |       |                       |       |                        |       |                      |       |               |       |       |       |
| borrowings                                                                         |       | 729,742               |       | —                     |       | —                      |       | —                    |       | —             |       | 729,742    |       |
| Junior subordinated debentures                                                |       | —                |       | —                     |       | 24,774                      |       | —                    |       | —             |       | 24,774     |       |
| Total  interest-bearing liabilities                                                |       | $                     | 8,056,901  |                       | $          | 220,000                     |       | $                         | 754,774    |               | $          | 1,392,670  |       | $ | — |   | $ | 10,424,345 |   |
| Net  interest-sensitivity gap                                                      |       |                  |       |                       |       |                        |       |                      |       |               |       |       |       |
| during the  period                                                                 |       | $                     | (983,442   | )                          | $          | 373,566                     |       | $                         | 103,316    |               | $          | 1,075,994  |       | $ | 736,582 |   | $ | 1,306,016 |   |
| Cumulative gap                                                                     |       | $                     | (983,442   | )                          | $          | (609,876                    | )          | $                         | (506,560   | )                  | $          | 569,434    |       | $ | 1,306,016 |   |   |   |
| Interest-earning  assets as a percent of interest-bearing liabilities (cumulative) |       | 87.79                 | %          | 92.63                      | %          | 94.39                       | %          | 105.46                    | %          | 112.53             | %          |       |       |
| Interest-earning  assets as a percent of total assets (cumulative)                 |       | 57.19                 | %          | 61.99                      | %          | 68.93                       | %          | 88.89                     | %          | 94.85              | %          |       |       |
| Net  interest-sensitivity gap as a percent of total assets                         |       | (7.95                 | %)         | 3.02                       | %          | 0.84                        | %          | 8.70                      | %          | 5.96               | %          |       |       |
| Cumulative gap as a  percent of total assets                                       |       | (7.95                 | %)         | (4.93                      | %)         | (4.10                       | %)         | 4.60                      | %          | 10.56              | %          |       |       |

----

(1)             Adjustablerate assets are included in the period in which interest rates are nextscheduled to adjust rather than in the period in which they are due.  Fixed-rate loans are included in the periodin which they are scheduled to be repaid.

(2)             Mortgage-backedsecurities are included in the pricing category that corresponds with theearlier of their first repricing date or principal paydown schedule generatedfrom industry sourced prepayment projections.

(3)             Excludes$29.3 million of unsettled securities purchases and $79.3 million of netunrealized losses as of June 30, 2006.

36

----

 

**Liquidity**

Liquidity represents the ability of an institution tomeet present and future financial obligations through either runoff due toprepayments, asset sales, maturity of existing assets or the acquisition ofadditional funds through liability management. For a financial institution such as ours, these obligations arise fromthe withdrawals of deposits, the payment of operating expenses, and theinclusion of capital expenditures for fixed assets and leasehold improvements.

Our primary sources of liquidity include cash and cashequivalents, Federal Funds sold, new deposits, short-term borrowings, interestand principal payments on securities held to maturity and available for sale,fees collected from asset administration clients, FHLBB borrowings and FederalReserve Discount Window.  As a result ofour management of liquid assets and our ability to generate liquidity throughliability funds, management believes that we maintain overall liquidity sufficientto meet our depositors’ needs, to satisfy our operating requirements and tofund the payment of an anticipated annual cash dividend of $0.09 per share for2006 (approximately $5.9 million based upon 65,984,326 shares outstandingas of June 30, 2006).

Our ability to pay dividends on common stock maydepend on the receipt of dividends from the Bank.  Any dividend payments by the Bank are subjectto certain restrictions imposed by the Massachusetts Commissioner of Banks.  During all periods presented in this report,the Company did not require dividends from the Bank in order to fund theCompany’s own dividends.  In addition, wemay not pay dividends on our common stock if we are in default under certainagreements entered into in connection with the sale of our Capital Securities.  The Capital Securities were issued in 1997 byInvestors Capital Trust I, a Delaware statutory business trust sponsored by us,and qualify as Tier 1 capital under the capital guidelines of the FederalReserve Board of Governors (‘FRB’).

In July 2005, we announced that our Board of Directorsauthorized us to repurchase up to $150.0 million of our common stock in theopen market over the twelve months following the announcement.  The purchase of our common stock wasprimarily funded by a dividend from the Bank to the Company.  We did not repurchase any shares during thethree months ended June 30, 2006.  As ofJune 30, 2006, we repurchased $70.7 million of our common stock under thisplan.

In June 2006, we announced that our Board ofDirectors had authorized a new repurchase plan of up to $150.0 million of ourcommon stock over the next twelve months. We do not expect our stock repurchase program to have a material impacton our capital resources, such as maintaining risk-based capital ratios inexcess of capital adequacy guidelines and our ability to pay dividends on ourcommon stock.  As of June 30, 2006, wehave not repurchased any shares under this plan.

We have informal borrowing arrangements with variouscounterparties.  Each counterparty hasagreed to make funds available to us at the Federal Funds overnight rate.  Each counterparty may terminate itsarrangement at any time and is under no contractual obligation to provide uswith requested funding.  Our borrowingsunder these arrangements are typically on a short-term basis.  We cannot be certain, however, that suchfunding will be available.  Lack ofavailability of liquid funds could have a material adverse impact on ouroperations.

We also have Master Repurchase Agreements in placewith various counterparties.  Eachcounterparty has agreed on an uncommitted basis to make funds available to usat various rates in exchange for collateral consisting of marketablesecurities.

The Bank’s capital stock investment in the FHLBBtotaled $50.0 million as of June 30, 2006.  The $50.0 million capitalstock investment includes both a $25.0 million membership component and a $25.0million activity-based component.  FHLBBcapital stock investments require a five-year advance notice ofwithdrawal.  The Bank’s $50.0 million capital stock investment in theFHLBB provides an overnight borrowing capacity of up to $833.0 million.  The amount outstanding under this arrangementat June 30, 2006 was $50.0 million.  Additional borrowing is available tothe Bank based on prescribed collateral levels and increased investment inFHLBB capital stock.  The Bank currently has no plans to increase itsinvestment in FHLBB capital stock.

**Capital Resources**

Historically, we have financed our operationsprincipally through internally generated cash flows.  We incur capital expenditures for furniture,fixtures, capitalized software and miscellaneous equipment needs.  We lease office space and computing equipmentthrough operating leases.  Capitalexpenditures have been incurred and leases entered into on an as-requiredbasis, primarily to meet our growing operating needs.  As a result, our capital expenditures were$32.1 million and $13.5 million for the six months ended June 30, 2006 and2005, respectively.  For the six monthsended June 30, 2006, capital expenditures were comprised of approximately $13.1million in capitalized software and projects in process, $9.7 million inleasehold improvements, and $9.3 million in fixed assets.  For the six months ended June 30, 2005,capital expenditures were comprised of approximately $10.8 million incapitalized software and projects in process, $2.6 million in fixed assets and$0.1 million in leasehold improvements.

37

----

 

Stockholders’ equity at June 30, 2006 was $869.2million, up 12% from December 31, 2005, primarily due to net income earned andthe exercise of stock options in the first half of 2006.  The ratio of average stockholders’ equity toaverage assets was approximately 7% for June 30, 2006, compared to 6% forDecember 31, 2005.

The Federal Reserve Board of Governors (‘FRB’) hasadopted capital adequacy guidelines applicable to United States bankingorganizations.  The FRB’s capital adequacy guidelines generally requirebank holding companies (‘BHCs’) to maintain total capital equal to 8% of totalrisk-adjusted assets and off-balance sheet items (the ‘Total Risk-Based CapitalRatio’), with at least 50% of that amount consisting of Tier 1, or corecapital, and the remaining amount consisting of Tier 2, or supplementarycapital.  Tier 1 capital for BHCs generally consists of the sum of commonstockholders’ equity and perpetual preferred stock (subject to certainlimitations), less goodwill and other nonqualifying intangible assets. Tier 2 capital generally consists of hybrid capital instruments, perpetual debtand mandatory convertible debt securities; perpetual preferred stock, notincluded as Tier 1 capital; term subordinated debt and intermediate-termpreferred stock; and, subject to limitations, general allowances for loan andlease losses.  Assets are adjusted under the risk-based guidelines to takeinto account different risk characteristics.

In addition to the risk-based capital requirements,the FRB requires BHCs to maintain a minimum leverage capital ratio of Tier 1capital to its average total consolidated assets (the ‘Leverage Ratio’) of3%.  Total average consolidated assets for this purpose does not includegoodwill and any other intangible assets and investments that the FRBdetermines should be deducted from Tier 1 capital.  The FRB has announcedthat the 3% Leverage Ratio requirement is the minimum for the top-ratedBHCs.  All other BHCs are required to maintain a minimum Leverage Ratio of4%.  BHCs with supervisory, financial, operational or managerialweaknesses, as well as BHCs that are anticipating or experiencing significantgrowth, are expected to maintain capital ratios well above the minimumlevels.  Because we anticipate significant future growth, we will berequired to maintain a Leverage Ratio of 4% or higher.

We are currently in compliance with both the TotalRisk-Based Capital Ratio and the Leverage Ratio requirements, and managementexpects these ratios to remain in compliance with the FRB’s capital adequacyguidelines.  At June 30, 2006, our TotalRisk-Based Capital Ratio and Leverage Ratio were 19.30% and 7.04%,respectively.

38

----

 

**Item 3.**                       Quantitativeand Qualitative Disclosures about Market Risk

The information required by this item is contained inthe ‘Market Risk’ section in the ‘Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,’ as part of this Report.

**Item 4.**                       Controls and Procedures

**Evaluation ofDisclosure Controls and Procedures**

As required by Rule 13a-15 under the SecuritiesExchange Act of 1934, as of June 30, 2006, the end of the quarter covered bythis report, the Company carried out an evaluation under the supervision andwith the participation of the Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of the Company’s disclosure controls andprocedures.  In designing and evaluatingthe Company’s disclosure controls and procedures, the Company and itsmanagement recognize that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and the Company’s management necessarily wasrequired to apply its judgment in evaluating and implementing possible controlsand procedures.  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures were effective at thereasonable assurance level to ensure that information required to be disclosedby the Company in the reports it files or submits under the Exchange Act isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure, and is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  There wasno change in the Company’s internal control over financial reporting thatoccurred during the quarter ended June 30, 2006 that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.  The Companyreviews, on an ongoing basis, its disclosure controls and procedures, which mayinclude its internal controls over financial reporting, and may from time totime make changes aimed at enhancing their effectiveness and to ensure that theCompany’s systems evolve with its business.

39

----

 

**PART II.  OTHER INFORMATION**

**Item1.  Legal Proceedings**

On June 27, 2003,we and an individual employee of ours were named in a lawsuit alleging, amongother things, that we breached an implied covenant of good faith and fairdealing in a subadvisory contract with Opus Investment Management, Inc. andthat our individual employee engaged in a breach of fiduciary duties andtortuous interference with a contract. The lawsuit was filed in the Superior Court of Worcester, Massachusettsand sought unspecified damages.  In July2006, the parties reached settlement in principle.  The settlement is subject to execution offinal settlement agreements and approval by the court. Included in otherliabilities in our consolidated balance sheet at June 30, 2006 and in otheroperating expenses in our consolidated statements of income for the six monthsand three months ended June 30, 2006 is approximately $1.8 million forsettlement costs, legal fees and administrative costs related to thesettlement.

We and certain ofour officers were named as defendants in three purported class actioncomplaints that were filed on or about August 4, 2005, August 15, 2005, andSeptember 30, 2005 in the United States District Court for the District ofMassachusetts, Boston, Massachusetts.  On November 2, 2005, theMassachusetts District Court consolidated the complaints filed on August 4 andAugust 15, 2005, and appointed a lead plaintiff.  On December 22, 2005,the defendants filed an assented-to motion to consolidate the complaint filedon September 30, 2005 with the previously consolidated actions.  OnFebruary 3, 2006, the lead plaintiff filed a consolidated complaint against usand seven of our current and former officers.  Among other things, theconsolidated complaint asserts that the defendants violated Sections 10(b) and20(a) of the Securities Exchange Act of 1934 during the period April 10, 2001until July 15, 2005.  The allegations in the consolidated complaintpredominantly relate to: (1) our October 2004 restatement of its financialresults, and (2) our July 2005 revision of public guidance regarding our futurefinancial performance.  The consolidated complaint seeks unspecifieddamages, interest, fees, and costs.  We strongly believe that the lawsuitlacks merit and we intend to defend against the claims vigorously. However, we cannot predict the outcome of the lawsuit at this time, and we cangive no assurance that it will not materially adversely affect our financialcondition or results of operations.  On May 14, 2006, we filed a motion todismiss all claims asserted in the consolidated complaint.  That motion is currently pending before theCourt.

We and nine of ourofficers and directors are named as defendants in two shareholder derivativecomplaints that were filed on or about September 22, 2005 and October 17, 2005in the United States District Court for the District of Massachusetts, Boston,Massachusetts.  Among other things, the complaints assert that thedefendants are liable for breach of fiduciary duty, unjust enrichment, abuse ofcontrol, mismanagement, misappropriation of information, insider trading, andviolation of Section 14(a) of the Securities Exchange Act of 1934.  Thecomplaint filed on September 22, 2005 also seeks reimbursement under theSarbanes-Oxley Act of 2002.  The allegations in the complaintspredominantly relate to: (1) our October 2004 restatement of our financialresults, and (2) our July 2005 revision of public guidance regarding our futurefinancial performance.  The complaints seek unspecified damages, attorneys’fees, accountant and expert fees, and costs.  We strongly believe that thelawsuits lack merit and we intend to defend against the claimsvigorously.  However, we cannot predict the outcome of the lawsuits atthis time, and we can give no assurance that they will not materially adverselyaffect our financial condition or results of operations.

**Item 1A.Risk Factors**

*Our operating results are subjectto fluctuations in interest rates and the securities markets.*

A significant portion of our fees is based on themarket value of the assets we process. Accordingly, our operating results are subject to fluctuations ininterest rates and securities markets as these fluctuations affect the marketvalue of assets processed.  Our netinterest income is earned by investing depositors’ funds in our investmentportfolio and, in small part, by making loans. A rising short-term interest rate environment, such as we are nowexperiencing, generally causes downward pressure on net interest income.  Changes in the relationship betweenshort-term and long-term interest rates, referred to as the yield curve, couldalso adversely affect the market value of, or the earnings produced by, ourinvestment and loan portfolios, and thus could adversely affect our operatingresults.  The current very flat yieldcurve, where short-term rates have increased while long-term rates have failedto increase, has resulted in a decrease in our net interest margin that willcontinue to have a material impact on our net interest income.

Volatility in the equity markets can have a materialeffect on our asset-based fees.  Whilereductions in asset servicing fees may be offset by increases in other sourcesof revenue, a sustained downward movement of the broad equity markets willlikely have an adverse impact on our earnings.

Our growth depends inpart on the ability of our clients to generate fund flows by selling theirinvestment products to new and existing investors.  Fluctuations in interest rates or thesecurities markets can lead to investors seeking alternatives to the investmentofferings of our clients, which could result in a lesser amount of assetsprocessed and correspondingly lower fees. For example, if the value of equityor fixed income assets held by our clients were to increase or decrease by 10%for a sustained period of time, we estimate currently that this marketmovement, by itself, would cause a corresponding change of less than 5% in ourearnings per share.

40

----

 

In addition, we are experiencing narrower investmentportfolio reinvestment spreads, which reduces our net interest income.  If reinvestments spreads on the securitytypes we purchase remain narrow, or become narrower, our net interest incomewill continue to be impacted negatively.

*A material portion of our revenueis derived from our relationship with Barclays Global Investors, N.A. (‘BGI’) andrelated entities.*

As a result of our ongoing relationship with BGI’s iShares and MasterInvestment Portfolios, our assumption of the operations of the U.S. assetadministration unit of BGI in 2001 and our servicing assets for Barclays GlobalInvestors Canada, Ltd., BGI accounted for approximately 18% and 17% of our netoperating revenue for the six months ended June 30, 2006 and 2005,respectively.  We recently renewed ourU.S. asset administration outsourcing agreement and our iShares and MasterInvestment Portfolio custody and fund accounting agreements with BGI and weexpect that BGI will continue to account for a significant portion of our netoperating revenue.  We provide servicesto BGI under long-term contracts that may be terminated before the expirationof the contracts under certain circumstances. Further information regarding the terms of certain BGI contracts,including early termination provisions, was disclosed in Item 8.01 on our Form8-K filed on January 25, 2006.

*We may incur losses due tooperational errors.*

The services that we providerequire complex processes and interaction with numerous third parties.  While we maintain sophisticated computersystems and a comprehensive system of internal controls, and our operationalhistory has been excellent, from time to time we may make operational errorsfor which we are responsible to our clients. In addition, even though we maintain appropriate errors and omissionsand other insurance policies, an operational error could result in a significantliability to us and may have a material adverse effect on our results ofoperations.

*We face significant competitionfrom other financial services companies, which could negatively affect ouroperating results.*

We are part of an extremelycompetitive asset servicing industry. Many of our current and potential competitors have longer operatinghistories, greater name recognition and substantially greater financial,marketing and other resources than we do. These greater resources could, for example, allow our competitors todevelop technology superior to our own. In addition, we face the risk that large mutual fund complexes may buildin-house asset servicing capabilities and no longer outsource these services tous.  As a result, we may not be able tocompete effectively with current or future competitors, which could result in aloss of existing clients or difficulty in gaining new clients.

*We may incur significant costsdefending legal claims.*

We have been named in lawsuitsin U.S. District Court in Massachusetts alleging, among other things,violations of securities laws.  While webelieve these claims are without merit, we cannot be sure that we will prevailin the defense of these claims.  We arealso party to other litigation and we may become subject to other legal claimsin the future.  Litigation is costly andcould divert the attention of management. For a more detailed discussion of our ongoing lawsuits, please see Item1, Legal Proceedings, in Part II of this report and Item 3, Legal Proceedings,in Part 1 of our Annual Report on Form 10-K for the year ended December 31,2005.

*Our future results depend, inpart, on successful integration of prior and possible future outsourcingtransactions.*

Integration of outsourcingtransactions is complicated and frequently presents unforeseen difficulties andexpenses which can affect whether and when a particular outsourcing transactionwill be accretive to our earnings per share. Any future outsourcing transactions will present similarchallenges.  These outsourcingtransactions can also consume a significant amount of management’s time.

*The failure to properly manageour growth could adversely affect the quality of our services and result in theloss of clients.*

We have experienced a period ofrapid growth that has required the dedication of significant management andother resources.  Continued growth couldplace a strain on our management and other resources.  To manage future growth effectively, we mustcontinue to invest in our operational, financial and other internal systems,and our human resources, which could affect our profitability.

41

----

* *

*We must hire and retain skilledpersonnel in order to succeed.*

Qualified personnel, in particular managers and othersenior personnel, are in great demand throughout the financial servicesindustry.  As a result, we could find itincreasingly difficult to continue to attract and retain sufficient numbers ofthese highly skilled employees, which could affect our ability to attract andretain clients.

*We may not be able toprotect our proprietary technology.*

Our proprietary technology is important to our business.  We rely on trade secret, copyright andtrademark laws and confidentiality agreements with employees and third partiesto protect our proprietary technology, all of which offer only limitedprotection.  These intellectual propertyrights may be invalidated or our competitors may develop similar technologyindependently.  Legal proceedings toenforce our intellectual property rights may be unsuccessful, and could also beexpensive and divert management’s attention.

*Our quarterly and annualoperating results may fluctuate.*

Our quarterly and annual operating results aredifficult to predict and may fluctuate from quarter to quarter and annually forseveral reasons, including:

·                  The timing of commencement or termination ofclient engagements;

·                  Changes in interest rates, the relationshipbetween different interest rates or equity values;

·                  The rate of net inflows and outflows of investorfunds in the investment vehicles offered by our clients; and

·                  The timing and magnitude of share repurchasesunder our share repurchase plan.

Most of our expenses, such as employee compensationand rent, are relatively fixed and are expected to increase in 2006 to supportexpected growth.  As a result, anyshortfall in revenue relative to our expectations could significantly affectour operating results.

*We are subject to extensivefederal and state regulations that impose complex restraints on our business.*

Federal and state laws and regulations applicable tofinancial institutions and their parent companies apply to us.  Our primary regulators are the FederalReserve Board of Governors (‘FRB’), the Federal Deposit Insurance Corporation (‘FDIC’),the office of the Commissioner of Banks of the Commonwealth of Massachusetts,the National Association of Securities Dealers, Inc. (‘NASD’), the State ofVermont Department of Banking, Insurance, Securities & Health CareAdministration (‘BISHCA’), the Office of the Superintendent of FinancialInstitutions in Canada (‘OSFI’), the Irish Financial Services RegulatoryAuthority, the Cayman Islands Monetary Authority (‘CIMA’), the FinancialServices Authority in the United Kingdom (‘FSA’) and the Commission deSurveillance du Secteur Financier in Luxembourg (‘CSSF’).  Virtually all aspects of our operations aresubject to specific requirements or restrictions and general regulatoryoversight including the following:

·                  The FRB and the FDIC maintain capitalrequirements that we must meet.  Failureto meet those requirements could lead to severe regulatory action or evenreceivership.  We are currentlyconsidered to be “well-capitalized”;

·                  Under Massachusetts law, the Bank may berestricted in its ability to pay dividends to Investors Financial ServicesCorp., which may in turn restrict our ability to pay dividends to ourstockholders;

·                  The FRB and the FDIC are empowered to assessmonetary penalties against, and to order termination of activities by,companies or individuals who violate the law;

·                  The NASD maintains certain regulatoryrequirements that our securities broker affiliate, Investors SecuritiesServices, LLC, must meet.  Failure tomeet those requirements could lead to severe regulatory action;

·                  BISHCA maintains certain regulatory requirementsthat our insurance captive affiliate, Investors Vermont Insurance Company, mustmeet.  Failure to meet those requirementscould lead to regulatory action; and

·                  Our international operations are subject toregulatory oversight by regulators in the jurisdictions in which we operate,including the OSFI, the Irish Financial Services Regulatory Authority, theCIMA, the FSA and the CSSF.  Failure to comply with applicableinternational regulatory requirements could result in regulatory action andimpact our ability to provide services in those jurisdictions.

42

----

 

Banking law restricts our ability to own the stock ofcertain companies and also makes it more difficult for us to be acquired.  Also, we have not elected financial holdingcompany status under the federal Gramm-Leach-Bliley Act of 1999.  This may place us at a competitivedisadvantage with respect to other organizations.

43

----

 

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

(a)          Our annual meeting ofstockholders was held on Tuesday, April 18, 2006.

(b)         The following matterswere voted upon at the meeting:

·                  Electthree (3) Class II directors;

·                  Approvethe Company’s Senior Executive Bonus Plan;

·                  Ratifythe selection of Deloitte & Touche LLP as the Company’s independentregistered public accounting firm for the fiscal year ending December 31, 2006.

All proposals were approved.  The voting results were as follows:
| ** ** | ** ** | ** **                                               | ** ** | **Votes**  | ** ** | **Votes**   | ** ** | **Votes**    | ** ** | ** **    | ** ** |
|------------|------------|----------------------------------------------------------|------------|------------|------------|-------------|------------|--------------|------------|---------------|------------|
|       | ** ** | ** **                                               | ** ** | **For**    | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Abstained** | ** ** |
|       |       |                                                     |       |       |       |        |       |         |       |          |       |
| (1)        |       | Election of Richard P.  Boyatzi as Class II Director     |       | 60,644,506 |       | N/A         |       | 211,925      |       | N/A           |       |
|       |       | Election of Frank B.  Condon, Jr as Class II Director    |       | 58,709,280 |       | N/A         |       | 2,147,151    |       | N/A           |       |
|       |       | Election of John I  Snow, III as Class II Director       |       | 60,034,606 |       | N/A         |       | 821,825      |       | N/A           |       |
| (2)        |       | Approve the Company’s  Senior  Executive Bonus Plan |       | 58,354,549 |       | 1,983,357   |       | N/A          |       | 518,524       |       |
| (3)        |       | Ratify the selection of  Deloitte & Touche LLP       |       | 60,703,281 |       | 134,050     |       | N/A          |       | 19,100        |       |

 

 

44

----

**Item 6.**                          Exhibits

(a)            Exhibits
|        | Exhibit No. | ** ** | **Description**                                                                                                                                                                                                               |
|--------|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 15          |       | Letter of awareness  from Deloitte & Touche LLP.                                                                                                                                                                          |
|   | 31.1        |       | Certification of Kevin  J. Sheehan, Chief Executive Officer, pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as amended                                                                        |
|   | 31.2        |       | Certification of John  N. Spinney, Jr., Chief Financial Officer, pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as amended                                                                    |
|   | 32.1        |       | Certification of Kevin  J. Sheehan, Chief Executive Officer, and John N. Spinney, Jr., Chief  Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted, pursuant  to Section 906  of the Sarbanes-Oxley Act of 2002. |

** **

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                      |   |   | ** ** | **INVESTORS FINANCIAL SERVICES CORP.**                                                         |
|----------------------|--------|--------|------------|------------------------------------------------------------------------------------------------|
|                 |   |   | ** ** | ** **                                                                                     |
|                 |   |   | ** ** | ** **                                                                                     |
| Date: August 8, 2006 |   | By:    |       | /s/ Kevin J. Sheehan                                                                           |
|                 |   |   |       | Kevin J. Sheehan                                                                               |
|                 |   |   |       | Chairman and Chief Executive Officer                                                           |
|                 |   |   |       |                                                                                           |
|                 |   |   |       |                                                                                           |
|                 |   |   |       |                                                                                           |
|                 |   |   |       |                                                                                           |
|                 |   | By:    |       | /s/ John N. Spinney, Jr.                                                                       |
|                 |   |   |       | John N. Spinney, Jr.                                                                           |
|                 |   |   |       | Senior Vice President and Chief Financial Office  (Principal Financial and Accounting Officer) |

 

45

----