SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-Q/AAmendment No. 1

|(Mark One)                                    |                                                                                         
|--------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly period ended March 31, 2004
|or                                           
|o                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the Transition period from            to 

0-26996(Commission File Number)

---

INVESTORS FINANCIAL SERVICES CORP.(Exact name of registrant as specified in its charter)

---

|Delaware(State or other jurisdiction of
incorporation or organization)                  |  | 04-3279817(IRS Employer Identification No.)
|--------------------------------------------------------------------------------------- |  | -------------------------------------------
|200 Clarendon Street,
P.O. Box 9130, Boston, MA(Address of principal executive offices) |  | 02117-9130(Zip Code)                       
|(617) 937-6700(Registrant's telephone number, including area code)                     

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes ý    No o

As of November 11, 2004 there were 66,462,871 shares of Common Stock outstanding.



---





INVESTORS FINANCIAL SERVICES CORP.

INDEX

|           |  |                                                                                                                           |  | Page
|---------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  | EXPLANATORY NOTE                                                                                                          |  | 3   
|PART I.    |  | FINANCIAL INFORMATION                                                                                                     |  |     
|Item 1.    |  | Unaudited Condensed Consolidated Financial Statements                                                                     |  | 5   
|           |  | Unaudited Condensed Consolidated Balance Sheets
March 31, 2004 and December 31, 2003                                      |  | 5   
|           |  | Unaudited Condensed Consolidated Statements of Income and Comprehensive Income
Three months ended March 31, 2004 and 2003 |  | 6   
|           |  | Unaudited Condensed Consolidated Statements of Stockholders' Equity
Three months ended March 31, 2004 and 2003            |  | 7   
|           |  | Unaudited Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2004 and 2003                      |  | 8   
|           |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                            |  | 9   
|           |  | Report of Independent Registered Public Accounting Firm                                                                   |  | 24  
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 25  
|Item 4.    |  | Controls and Procedures                                                                                                   |  | 44  
|PART II.   |  | OTHER INFORMATION                                                                                                         |  |     
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                          |  | 45  
|SIGNATURES |  | 46                                                                                                                       

2

---



INVESTORS FINANCIAL SERVICES CORP.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

EXPLANATORY NOTE

This Amendment to Investors Financial Services Corp.'s Quarterly Report on Form 10-Q for the period ended March 31, 2004, includes
restated financial statements as of March 31, 2004 and December 31, 2003, and for the three-month periods ended March 31, 2004 and 2003. The restatement relates to our application
of Statement of Financial Accounting Standard No. 91,Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases("FAS 91"). See Note 15 to our Notes to Unaudited Condensed Consolidated Financial Statements in this report.

The
principal application of FAS 91 to our financial statements is in determining the accounting treatment of premiums paid and discounts realized on our purchase of securities backed by
mortgages and other loans. Historically, we had applied the prospective method to determine the amortization of premiums and the accretion of discounts for the securities in our investment portfolio.
Our management and Audit Committee have determined that the retrospective method is the appropriate method under FAS 91 to determine the amortization of premiums and the accretion of discounts for
certain of our securities.

This
application of FAS 91 results in the following changes in reported income before income taxes for the periods presented in this Report:



This
application of FAS 91 also results in changes to other comprehensive income, net of tax, as well as other changes in our disclosures regarding our investment portfolio. Other
comprehensive income, net of tax, increased on a cumulative basis by approximately $3.4 million and $4.9 million, as of March 31, 2004 and December 31, 2003, respectively.

The
following tables summarize the effect of the restatement on our consolidated financial statements at, or for, the periods reflected (Dollars in thousands, except per share data,
results are unaudited).

|                           |  | For the Three Months Ended
March 31, 2004 |         | For the Three Months Ended
March 31, 2003
|-------------------------- |  | ----------------------------------------- | ------- | -----------------------------------------
|
|Statement of Income        |  |                                           |         |                                          
|Interest income            |  | $                                         | 71,176  |                                          
|Net interest income        |  |                                           | 45,961  |                                          
|Net operating revenue      |  |                                           | 152,731 |                                          
|Income Before Income Taxes |  |                                           | 52,597  |                                          
|Provision for income taxes |  |                                           | 17,622  |                                          
|Net Income                 |  |                                           | 34,975  |                                          
|Basic Earnings Per Share   |  | $                                         | 0.53    |                                          
|Diluted Earnings Per Share |  | $                                         | 0.52    |                                          

3

---



|                            |                                | For the Three Months Ended
March 31, 2004 |        | For the Three Months Ended
March 31, 2003
|--------------------------- | ------------------------------ | ----------------------------------------- | ------ | -----------------------------------------
|
|Comprehensive Income        |                                |                                           |        |                                          
|Net income                  |                                | $                                         | 34,975 |                                          
|Other comprehensive income: |                                |                                           |        |                                          
|                            | Net unrealized investment gain |                                           |        | 23,356                                   
|                            | Other comprehensive income     |                                           |        | 22,111                                   
|Comprehensive income        |                                |                                           | 57,086 |                                          

|                                                                                 |                                                                        | For the Three Months Ended
March 31, 2004 |        | For the Three Months Ended
March 31, 2003
|-------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------------------------- | ------ | -----------------------------------------
|
|Statement of Cash Flows                                                          |                                                                        |                                           |        |                                          
|Net income                                                                       |                                                                        | $                                         | 34,975 |                                          
|Adjustments to reconcile net ncome to net cash provided by operating activities: |                                                                        |                                           |        |                                          
|                                                                                 | Amortization of premiums on securities, net of accretions of discounts |                                           |        | 9,465                                    
|                                                                                 | Other liabilities                                                      |                                           |        | 22,021                                   
|                                                                                 |                                                                        | Net cash provided by operating activities |        |                                          

|                                            |  | At March 31, 2004 |            | At December 31, 2003
|------------------------------------------- |  | ----------------- | ---------- | --------------------
|
|Balance Sheet                               |  |                   |            |                     
|Securities held to maturity                 |  | $                 | 4,906,905  |                     
|Total Assets                                |  |                   | 10,099,743 |                     
|Other liabilities                           |  |                   | 126,616    |                     
|Total liabilities                           |  |                   | 9,488,933  |                     
|Retained earnings                           |  |                   | 319,961    |                     
|Accumulated other comprehensive income, net |  |                   | 35,117     |                     
|Total stockholders' equity                  |  |                   | 610,810    |                     
|Total Liabilities and Stockholders' Equity  |  | $                 | 10,099,743 |                     

This
Report, as amended, covers the quarterly period ended March 31, 2004 and was originally filed on May 7, 2004. This Report has been amended to restate certain financial
statements and related financial results only and does not reflect events after the filing of the original report and does not modify or update disclosures as originally filed, except as required to
reflect the effect of the restatement. Contemporaneously with the filing of this Report, we have also filed:



Our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 should be referenced for our current disclosures.

4

---





PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

INVESTORS FINANCIAL SERVICES CORP.        UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETSMarch 31, 2004 and December 31, 2003 (Dollars in thousands, except share
data)

|                                                                                                                                                                                                                |         | March 31,
2004
(As Restated) |            | December 31,
2003
(As Restated) |          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | ---------------------------- | ---------- | ------------------------------- | ---------
|Assets                                                                                                                                                                                                          |         |                              |            |                                 |          
|Cash and due from banks                                                                                                                                                                                         |         | $                            | 45,429     |                                 | $        
|Federal Funds sold                                                                                                                                                                                              |         |                              | 185,000    |                                 |          
|Securities held to maturity (approximate fair value of $4,928,619 and $4,308,578 at March 31, 2004 and December 31, 2003, respectively)                                                                         |         |                              | 4,905,722  |                                 |          
|Securities available for sale                                                                                                                                                                                   |         |                              | 4,387,142  |                                 |          
|Nonmarketable equity securities                                                                                                                                                                                 |         |                              | 50,000     |                                 |          
|Loans, less allowance for loan losses of $100 at March 31, 2004 and December 31, 2003                                                                                                                           |         |                              | 153,104    |                                 |          
|Accrued interest and fees receivable                                                                                                                                                                            |         |                              | 76,451     |                                 |          
|Equipment and leasehold improvements, less accumulated depreciation of $54,730 and $47,683 at March 31, 2004 and December 31, 2003, respectively                                                                |         |                              | 73,943     |                                 |          
|Goodwill, net                                                                                                                                                                                                   |         |                              | 79,969     |                                 |          
|Other assets                                                                                                                                                                                                    |         |                              | 141,800    |                                 |          
|                                                                                                                                                                                                                |         |                              |            |                                 |          
|Total Assets                                                                                                                                                                                                    |         | $                            | 10,098,560 |                                 | $        
|                                                                                                                                                                                                                |         |                              |            |                                 |          
|Liabilities and Stockholders' Equity                                                                                                                                                                            |         |                              |            |                                 |          
|Liabilities:                                                                                                                                                                                                    |         |                              |            |                                 |          
|Deposits:                                                                                                                                                                                                       |         |                              |            |                                 |          
|                                                                                                                                                                                                                | Demand  |                              | $          | 855,696                         |          
|                                                                                                                                                                                                                | Savings |                              |            | 3,959,080                       |          
|                                                                                                                                                                                                                | Time    |                              |            | 160,512                         |          
|                                                                                                                                                                                                                |         |                              |            |                                 |          
|                                                                                                                                                                                                                |         | Total deposits               |            |                                 | 4,975,288
|Securities sold under repurchase agreements                                                                                                                                                                     |         |                              | 3,479,681  |                                 |          
|Short-term and other borrowings                                                                                                                                                                                 |         |                              | 849,704    |                                 |          
|Due to brokers for open trades payable                                                                                                                                                                          |         |                              | 32,870     |                                 |          
|Junior subordinated deferrable interest debentures                                                                                                                                                              |         |                              | 24,774     |                                 |          
|Other liabilities                                                                                                                                                                                               |         |                              | 125,876    |                                 |          
|                                                                                                                                                                                                                |         |                              |            |                                 |          
|                                                                                                                                                                                                                |         | Total liabilities            |            |                                 | 9,488,193
|                                                                                                                                                                                                                |         |                              |            |                                 |          
|Commitments and contingencies                                                                                                                                                                                   |         |                              |           |                                 |          
|Stockholders' Equity:                                                                                                                                                                                           |         |                              |            |                                 |          
|Preferred stock, par value $0.01 (shares authorized: 1,000,000; issued and outstanding: none at March 31, 2004 and December 31, 2003)                                                                           |         |                              |           |                                 |          
|Common stock, par value $0.01 (shares authorized: 100,000,000 at March 31, 2004 and December 31, 2003; issued and outstanding: 66,027,734 and 65,436,788 at March 31, 2004 and December 31, 2003,
respectively) |         |                              | 661        |                                 |          
|Surplus                                                                                                                                                                                                         |         |                              | 256,583    |                                 |          
|Deferred compensation                                                                                                                                                                                           |         |                              | (962       | )                               |          
|Retained earnings                                                                                                                                                                                               |         |                              | 316,102    |                                 |          
|Accumulated other comprehensive income, net                                                                                                                                                                     |         |                              | 38,533     |                                 |          
|Treasury stock, at cost (26,508 shares at March 31, 2004 and December 31, 2003)                                                                                                                                 |         |                              | (550       | )                               |          
|                                                                                                                                                                                                                |         |                              |            |                                 |          
|                                                                                                                                                                                                                |         | Total stockholders' equity   |            |                                 | 610,367  
|                                                                                                                                                                                                                |         |                              |            |                                 |          
|Total Liabilities and Stockholders' Equity                                                                                                                                                                      |         | $                            | 10,098,560 |                                 | $        
|                                                                                                                                                                                                                |         |                              |            |                                 |          

See Notes to Unaudited Condensed Consolidated Financial Statements.

5

---





INVESTORS FINANCIAL SERVICES CORP.        UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF  INCOME AND COMPREHENSIVE INCOMEThree Months Ended March 31, 2004
and 2003 (Dollars in thousands, except per share data)

|                                  |                                                  | March 31, 2004
(As Restated) |                              | March 31, 2003
(As Restated) |        
|--------------------------------- | ------------------------------------------------ | ---------------------------- | ---------------------------- | ---------------------------- | -------
|Fees and Other Revenue:           |                                                  |                              |                              |                              |        
|Asset servicing fees:             |                                                  |                              |                              |                              |        
|                                  | Core service fees                                |                              | $                            | 76,094                       |        
|                                  | Ancillary service fees                           |                              |                              | 30,093                       |        
|                                  |                                                  |                              |                              |                              |        
|                                  |                                                  | Total asset servicing fees   |                              |                              | 106,187
|                                  |                                                  |                              |                              |                              |        
|Other operating income            |                                                  |                              | 349                          |                              |        
|Gain on sale of investment        |                                                  |                              | 234                          |                              |        
|                                  |                                                  |                              |                              |                              |        
|                                  |                                                  |                              | Total fees and other revenue |                              |        
|                                  |                                                  |                              |                              |                              |        
|Interest income                   |                                                  |                              | 73,636                       |                              |        
|Interest expense                  |                                                  |                              | 25,215                       |                              |        
|                                  |                                                  |                              |                              |                              |        
|                                  |                                                  | Net interest income          |                              |                              | 48,421 
|                                  |                                                  |                              |                              |                              |        
|                                  |                                                  |                              | Net operating revenue        |                              |        
|                                  |                                                  |                              |                              |                              |        
|Operating Expenses:               |                                                  |                              |                              |                              |        
|Compensation and benefits         |                                                  |                              | 55,323                       |                              |        
|Transaction processing services   |                                                  |                              | 10,940                       |                              |        
|Technology and telecommunications |                                                  |                              | 10,266                       |                              |        
|Depreciation and amortization     |                                                  |                              | 7,954                        |                              |        
|Occupancy                         |                                                  |                              | 7,391                        |                              |        
|Professional fees                 |                                                  |                              | 3,238                        |                              |        
|Travel and sales promotion        |                                                  |                              | 1,082                        |                              |        
|Other operating expenses          |                                                  |                              | 3,940                        |                              |        
|                                  |                                                  |                              |                              |                              |        
|                                  |                                                  |                              | Total operating expenses     |                              |        
|                                  |                                                  |                              |                              |                              |        
|Income Before Income Taxes        |                                                  |                              | 55,057                       |                              |        
|Provision for income taxes        |                                                  |                              | 18,504                       |                              |        
|                                  |                                                  |                              |                              |                              |        
|Net Income                        |                                                  | $                            | 36,553                       |                              | $      
|                                  |                                                  |                              |                              |                              |        
|Basic Earnings Per Share          |                                                  | $                            | 0.56                         |                              | $      
|                                  |                                                  |                              |                              |                              |        
|Diluted Earnings Per Share        |                                                  | $                            | 0.54                         |                              | $      
|                                  |                                                  |                              |                              |                              |        
|Comprehensive Income:             |                                                  |                              |                              |                              |        
|Net income                        |                                                  | $                            | 36,553                       |                              | $      
|Other comprehensive income:       |                                                  |                              |                              |                              |        
|                                  | Net unrealized investment gain                   |                              |                              | 21,913                       |        
|                                  | Net unrealized derivative instrument (loss) gain |                              |                              | (1,162                       | )      
|                                  | Cumulative translation adjustment                |                              |                              | (83                          | )      
|                                  |                                                  |                              |                              |                              |        
|                                  |                                                  |                              | Other comprehensive income   |                              |        
|                                  |                                                  |                              |                              |                              |        
|Comprehensive income              |                                                  | $                            | 57,221                       |                              | $      
|                                  |                                                  |                              |                              |                              |        

See Notes to Unaudited Condensed Consolidated Financial Statements.

6

---





INVESTORS FINANCIAL SERVICES CORP.        UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYThree Months Ended March 31, 2004 and 2003
(Dollars in thousands, except share data)

|                                                                                                         |  | March 31,
2004
(As Restated) |            | March 31,
2003
(As Restated) |  
|-------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | ---------------------------- | -
|Common shares                                                                                            |  |                              |            |                              |  
|Balance, beginning of period                                                                             |  |                              | 65,436,788 |                              |  
|Exercise of stock options                                                                                |  |                              | 590,946    |                              |  
|                                                                                                         |  |                              |            |                              |  
|Balance, end of period                                                                                   |  |                              | 66,027,734 |                              |  
|                                                                                                         |  |                              |            |                              |  
|Treasury shares                                                                                          |  |                              |            |                              |  
|Balance, beginning of period                                                                             |  |                              | 26,508     |                              |  
|                                                                                                         |  |                              |            |                              |  
|Balance, end of period                                                                                   |  |                              | 26,508     |                              |  
|                                                                                                         |  |                              |            |                              |  
|Common stock                                                                                             |  |                              |            |                              |  
|Balance, beginning of period                                                                             |  | $                            | 655        |                              | $
|Exercise of stock options                                                                                |  |                              | 6          |                              |  
|                                                                                                         |  |                              |            |                              |  
|Balance, end of period                                                                                   |  |                              | 661        |                              |  
|                                                                                                         |  |                              |            |                              |  
|Surplus                                                                                                  |  |                              |            |                              |  
|Balance, beginning of period                                                                             |  |                              | 242,662    |                              |  
|Exercise of stock options                                                                                |  |                              | 8,578      |                              |  
|Tax benefit from exercise of stock options                                                               |  |                              | 5,343      |                              |  
|                                                                                                         |  |                              |            |                              |  
|Balance, end of period                                                                                   |  |                              | 256,583    |                              |  
|                                                                                                         |  |                              |            |                              |  
|Deferred compensation                                                                                    |  |                              |            |                              |  
|Balance, beginning of period                                                                             |  |                              | (1,076     | )                            |  
|Amortization of deferred compensation                                                                    |  |                              | 114        |                              |  
|                                                                                                         |  |                              |            |                              |  
|Balance, end of period                                                                                   |  |                              | (962       | )                            |  
|                                                                                                         |  |                              |            |                              |  
|Retained earnings                                                                                        |  |                              |            |                              |  
|Balance, beginning of period                                                                             |  |                              | 280,701    |                              |  
|Net income                                                                                               |  |                              | 36,553     |                              |  
|Cash dividend, $0.0175 and $0.0150 per share in the periods ending March 31, 2004 and 2003, respectively |  |                              | (1,152     | )                            |  
|                                                                                                         |  |                              |            |                              |  
|Balance, end of period                                                                                   |  |                              | 316,102    |                              |  
|                                                                                                         |  |                              |            |                              |  
|Accumulated other comprehensive income, net                                                              |  |                              |            |                              |  
|Balance, beginning of period                                                                             |  |                              | 17,865     |                              |  
|Net unrealized investment gain                                                                           |  |                              | 21,913     |                              |  
|Net unrealized derivative instrument (loss) gain                                                         |  |                              | (1,162     | )                            |  
|Amortization of transition-related adjustment                                                            |  |                              |           |                              |  
|Effect of foreign currency translation                                                                   |  |                              | (83        | )                            |  
|                                                                                                         |  |                              |            |                              |  
|Balance, end of period                                                                                   |  |                              | 38,533     |                              |  
|                                                                                                         |  |                              |            |                              |  
|Treasury stock                                                                                           |  |                              |            |                              |  
|Balance, beginning of period                                                                             |  |                              | (550       | )                            |  
|                                                                                                         |  |                              |            |                              |  
|Balance, end of period                                                                                   |  |                              | (550       | )                            |  
|                                                                                                         |  |                              |            |                              |  
|Total Stockholders' Equity                                                                               |  | $                            | 610,367    |                              | $
|                                                                                                         |  |                              |            |                              |  

See Notes to Unaudited Condensed Consolidated Financial Statements.

7

---





INVESTORS FINANCIAL SERVICES CORP.        UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSThree Months Ended March 31, 2004 and 2003 (Dollars in
thousands)

|                                                                                  |                                                                       | March 31,
2004
(As Restated)              |                                           | March 31,
2003
(As Restated) |        
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ---------------------------- | -------
|Cash Flows From Operating Activities:                                             |                                                                       |                                           |                                           |                              |        
|Net income                                                                        |                                                                       | $                                         | 36,553                                    |                              | $      
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                                       |                                           |                                           |                              |        
|                                                                                  | Equity in undistributed loss of unconsolidated subsidiary             |                                           |                                           | 7                            |        
|                                                                                  | Depreciation and amortization                                         |                                           |                                           | 7,954                        |        
|                                                                                  | Amortization of deferred compensation                                 |                                           |                                           | 114                          |        
|                                                                                  | Amortization of premiums on securities, net of accretion of discounts |                                           |                                           | 7,005                        |        
|                                                                                  | Gain on sale of investment                                            |                                           |                                           | (234                         | )      
|                                                                                  | Changes in assets and liabilities:                                    |                                           |                                           |                              |        
|                                                                                  |                                                                       | Accrued interest and fees receivable      |                                           |                              | (3,635 
|                                                                                  |                                                                       | Other assets                              |                                           |                              | (39,906
|                                                                                  |                                                                       | Other liabilities                         |                                           |                              | 22,903 
|                                                                                  |                                                                       |                                           |                                           |                              |        
|                                                                                  |                                                                       | Net cash provided by operating activities |                                           |                              | 30,761 
|                                                                                  |                                                                       |                                           |                                           |                              |        
|Cash Flows From Investing Activities:                                             |                                                                       |                                           |                                           |                              |        
|Proceeds from maturities and paydowns of securities available for sale            |                                                                       |                                           | 291,797                                   |                              |        
|Proceeds from maturities and paydowns of securities held to maturity              |                                                                       |                                           | 281,471                                   |                              |        
|Proceeds from sale of securities available for sale                               |                                                                       |                                           | 25,041                                    |                              |        
|Purchases of securities available for sale                                        |                                                                       |                                           | (373,214                                  | )                            |        
|Purchases of securities held to maturity                                          |                                                                       |                                           | (887,838                                  | )                            |        
|Net increase (decrease) in due to brokers for open trades payable                 |                                                                       |                                           | 32,870                                    |                              |        
|Net increase in Federal Funds sold                                                |                                                                       |                                           | (185,000                                  | )                            |        
|Net decrease in loans                                                             |                                                                       |                                           | 46,426                                    |                              |        
|Purchases of fixed assets, capitalized software and leasehold improvements        |                                                                       |                                           | (5,470                                    | )                            |        
|                                                                                  |                                                                       |                                           |                                           |                              |        
|                                                                                  |                                                                       |                                           | Net cash used for investing activities    |                              |        
|                                                                                  |                                                                       |                                           |                                           |                              |        
|Cash Flows From Financing Activities:                                             |                                                                       |                                           |                                           |                              |        
|Net increase in demand deposits                                                   |                                                                       |                                           | 520,873                                   |                              |        
|Net increase (decrease) in time and savings deposits                              |                                                                       |                                           | 247,297                                   |                              |        
|Net increase in securities sold under repurchase agreements                       |                                                                       |                                           | 221,680                                   |                              |        
|Net (decrease) increase in short-term and other borrowings                        |                                                                       |                                           | (248,383                                  | )                            |        
|Proceeds from exercise of stock options                                           |                                                                       |                                           | 8,584                                     |                              |        
|Cash dividends to shareholders                                                    |                                                                       |                                           | (1,152                                    | )                            |        
|                                                                                  |                                                                       |                                           |                                           |                              |        
|                                                                                  |                                                                       |                                           | Net cash provided by financing activities |                              |        
|                                                                                  |                                                                       |                                           |                                           |                              |        
|Effect of exchange rates on cash                                                  |                                                                       |                                           | (3                                        | )                            |        
|Net Increase In Cash And Due From Banks                                           |                                                                       |                                           | 5,740                                     |                              |        
|                                                                                  |                                                                       |                                           |                                           |                              |        
|Cash and Due From Banks, Beginning of Period                                      |                                                                       |                                           | 39,689                                    |                              |        
|                                                                                  |                                                                       |                                           |                                           |                              |        
|Cash and Due From Banks, End of Period                                            |                                                                       | $                                         | 45,429                                    |                              | $      
|                                                                                  |                                                                       |                                           |                                           |                              |        

See Notes to Unaudited Condensed Consolidated Financial Statements.

8

---





INVESTORS FINANCIAL SERVICES CORP.        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Information is as of and for the three months ended
March 31, 2004 and 2003)

1. Description of Business

Investors Financial Services Corp. ("IFSC") provides asset administration services for the financial services industry through its wholly-owned subsidiary,
Investors Bank & Trust Company (the "Bank"). As used herein, the defined term "the Company" shall mean IFSC together with the Bank 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 and insurance companies. Core
services include global custody, multicurrency accounting and mutual fund administration. Value-added services include securities lending, foreign exchange, cash management, performance measurement,
institutional transfer agency, investment advisory services, lines of credit, middle office outsourcing and brokerage and transition management services. The Company is subject to regulation by the
Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors, the Office of the Commissioner of Banks of the Commonwealth of Massachusetts, the Securities and Exchange Commission, the
National Association of Securities Dealers, Inc., the Office of the Superintendent of Financial Institutions in Canada, the Irish Financial Services Regulatory Authority, and the State of
Vermont Department of Banking, Insurance, Securities & Health Care Administration.

2. Interim Financial Statements

The unaudited condensed consolidated interim financial statements of the Company and subsidiaries as of March 31, 2004 and December 31, 2003, and
for the three-month periods ended March 31, 2004 and 2003 have been prepared by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United
States of America ("GAAP") have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, necessary for their fair presentation
in conformity with GAAP are included. As described in the Explanatory Note at the beginning of this Quarterly Report on Form 10-Q/A, included in this Report are restated financial
statements for the three months ended March 31, 2004 and 2003 and as of December 31, 2003. The Company's management believes that the disclosures are adequate to present fairly the
financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual report on Form 10-K/A. Results for interim periods are not necessarily indicative of those to be expected
for the full fiscal year. Certain amounts in prior financial statements have been reclassified to conform to the current presentation.

Employee Stock-Based CompensationThe Company measures compensation cost for stock-based compensation
plans using the intrinsic value method. The intrinsic value method measures compensation cost as the difference of the option exercise price and the fair market value of the common stock on the
measurement date, which is typically the date of grant. Generally, options granted have an exercise price equivalent to the fair market value at the measurement date. Accordingly, no compensation cost
has been recorded. If stock-based compensation were recognized using the fair value method, stock options would be valued at grant date using the Black-Scholes

9

---



valuation
model and compensation costs would have decreased net income as indicated below (Dollars in thousands, except per share data):

For the Three Months Ended
March 31,2004

2003Net income as reported

$
36,553

$
5,867Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(1,485
)

(2,080
)Pro forma net income

$
35,068

$
3,787Earnings per share:Basicas reported

$
0.56

$
0.09Basicpro forma

$
0.53

$
0.06Dilutedas reported

$
0.54

$
0.09Dilutedpro forma

$
0.52

$
0.06


The
fair value of each option grant was estimated on the date of grant using the Black-Scholes valuation model with the following assumptions for the three months ended March 31,
2004 and 2003, respectively: an average assumed risk-free interest rate of 2.38% and 2.30%, an expected life of four years, an average expected volatility of 53.95% and 56.18%, and an
average dividend yield of 0.17% and 0.25%.

Earnings Per ShareBasic earnings per share ("EPS") were computed by dividing net income by the
weighted-average number of common shares outstanding during the year. Diluted EPS reflects the potential dilution that could occur if contracts to issue common stock were exercised into common stock
that then shared in the earnings of the Company. The reconciliation from Basic to Diluted EPS is as follows (Dollars in thousands, except share data):

For the Three Months Ended
March 31,2004

2003Income available to common stockholders

$
36,553

$
5,867Basic weighted-average shares outstanding


65,837,110


64,885,852Dilutive effect of stock options


1,875,842


1,433,396Diluted weighted-average shares outstanding


67,712,952


66,319,248Earnings per share:Basic


$0.56


$0.09Diluted


$0.54


$0.09


10

---



There
were 722 and 3,620,549 option shares which were not considered dilutive for purposes of earnings per share calculations for the three-month periods ended March 31, 2004 and
2003, respectively.

3. Securities

Amortized cost amounts and fair values of securities are summarized as follows as of March 31, 2004 (Dollars in thousands):

|Held to Maturity                 |  | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |  | Fair
Value
|-------------------------------- |  | -------------- | --------- | ---------------- | - | ------------------- |  | ----------
|Mortgage-backed securities       |  | $              | 2,806,600 |                  | $ | 20,781              |  | $         
|Federal agency securities        |  |                | 1,974,131 |                  |   | 3,716               |  |           
|State and political subdivisions |  |                | 124,991   |                  |   | 7,068               |  |           
|                                 |  |                |           |                  |   |                     |  |           
|Total                            |  | $              | 4,905,722 |                  | $ | 31,565              |  | $         
|                                 |  |                |           |                  |   |                     |  |           

|Available for Sale               |  | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |  | Fair
Value
|-------------------------------- |  | -------------- | --------- | ---------------- | - | ------------------- |  | ----------
|Mortgage-backed securities       |  | $              | 3,680,436 |                  | $ | 48,761              |  | $         
|State and political subdivisions |  |                | 333,658   |                  |   | 23,976              |  |           
|Corporate debt                   |  |                | 177,851   |                  |   | 111                 |  |           
|U.S. Treasury securities         |  |                | 111,180   |                  |   | 6,935               |  |           
|Foreign government securities    |  |                | 9,532     |                  |   | 251                 |  |           
|                                 |  |                |           |                  |   |                     |  |           
|Total                            |  | $              | 4,312,657 |                  | $ | 80,034              |  | $         
|                                 |  |                |           |                  |   |                     |  |           

Amortized
cost amounts and fair values of securities are summarized as follows as of December 31, 2003 (Dollars in thousands):

|Held to Maturity                 |  | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |  | Fair
Value
|-------------------------------- |  | -------------- | --------- | ---------------- | - | ------------------- |  | ----------
|Mortgage-backed securities       |  | $              | 2,272,030 |                  | $ | 23,089              |  | $         
|Federal agency securities        |  |                | 1,906,554 |                  |   | 1,657               |  |           
|State and political subdivisions |  |                | 127,632   |                  |   | 6,890               |  |           
|                                 |  |                |           |                  |   |                     |  |           
|Total                            |  | $              | 4,306,216 |                  | $ | 31,636              |  | $         
|                                 |  |                |           |                  |   |                     |  |           

11

---



|Available for Sale               |  | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |  | Fair
Value
|-------------------------------- |  | -------------- | --------- | ---------------- | - | ------------------- |  | ----------
|Mortgage-backed securities       |  | $              | 3,593,470 |                  | $ | 28,740              |  | $         
|State and political subdivisions |  |                | 333,777   |                  |   | 22,119              |  |           
|Corporate debt                   |  |                | 178,394   |                  |   | 314                 |  |           
|U.S. Treasury securities         |  |                | 111,305   |                  |   | 2,396               |  |           
|Federal agency securities        |  |                | 29,600    |                  |   | 9                   |  |           
|Foreign government securities    |  |                | 9,644     |                  |   | 59                  |  |           
|                                 |  |                |           |                  |   |                     |  |           
|Total                            |  | $              | 4,256,190 |                  | $ | 53,637              |  | $         
|                                 |  |                |           |                  |   |                     |  |           

The
carrying value of securities pledged amounted to approximately $5.6 billion at March 31, 2004 and December 31, 2003. Securities are pledged primarily to secure
clearings with other depository institutions, to secure repurchase agreements and to secure outstanding Federal Home Loan Bank of Boston ("FHLBB") borrowings.

The
Company regularly reviews its held to maturity and available for sale securities portfolios for possible impairment. At March 31, 2004, no securities were
other-than-temporarily impaired.

4. Loans

Loans consist of demand loans to custody clients of the Company, including individuals, not-for-profit institutions and mutual fund
clients. The loans to mutual funds and other pooled product clients include lines of credit and advances pursuant to the terms of the custody agreements between the Company and those clients to
facilitate securities transactions and redemptions. Generally, the loans are, or may be, in the event of default, collateralized with marketable securities held by the Company as custodian. There were
no impaired or nonperforming loans at March 31, 2004 and December 31, 2003. In addition, there were no loan charge-offs or recoveries during the three months ended
March 31, 2004 and the year ended December 31, 2003. Loans are summarized as follows (Dollars in thousands):

March 31,
2004

December 31,
2003Loans to individuals

$
73,747

$
67,641Loans to mutual funds


47,759


104,954Loans to others


31,698


27,035Gross loans


153,204


199,630Less allowance for loan losses


(100
)

(100
)Total

$
153,104

$
199,530


12

---



5. Securities Sold Under Repurchase Agreements

The components of securities sold under repurchase agreements are as follows (Dollars in thousands):

March 31,
2004

December 31,
2003Repurchase agreements-short term

$
2,929,681

$
2,858,001Repurchase agreements-long term


550,000


400,000Total

$
3,479,681

$
3,258,001


Approximately
$3.5 billion and $3.4 billion of securities were pledged to collateralize repurchase agreements as of March 31, 2004 and December 31, 2003,
respectively.

6. Short-term and Other Borrowings

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

March 31,
2004

December 31,
2003Federal Home Loan Bank of Boston long-term advances

$
100,000

$
150,000Federal Home Loan Bank of Boston overnight advances


400,000


250,000Federal funds purchased


349,615


697,855Treasury, Tax and Loan account


89


232Total

$
849,704

$
1,098,087


The
Company has borrowing arrangements with the FHLBB and the Federal Reserve Discount Window, which have been utilized on an overnight and long-term basis to satisfy funding
requirements. Approximately $1.8 billion and $1.9 billion of securities were pledged to collateralize these advances as of March 31, 2004 and December 31, 2003,
respectively.

7. Stockholders' Equity

The Company has three stock option plans: the Amended and Restated 1995 Stock Plan ("Stock Plan"), the Amended and Restated 1995 Non-Employee Director
Stock Option Plan ("Director Plan"), and the 1997 Employee Stock Purchase Plan ("ESPP"). There were no amendments to these plans during the three months ended March 31, 2004.

13

---



During
the three months ended March 31, 2004, the following activity occurred under the Director Plan and the Stock Plan:

March 31, 2004Shares

Weighted-
Average
Exercise
PriceOutstanding at December 31, 2003

6,547,086

$
24Granted

14,129


38Exercised

(618,293
)

16Canceled

(15,056
)

33Outstanding at March 31, 2004

5,927,866

$
25Outstanding and exercisable March 31, 2004

4,195,765


A
summary of activity under the ESPP is as follows:

For the Three
Months Ended
March 31,
2004

For the
Year Ended
December 31,
2003Total shares available under the Plan, beginning of period

227,504

356,875Issued at June 30



(70,606
)Issued at December 31



(58,765
)Total shares available under the Plan, end of period

227,504

227,504


For
the three months ended March 31, 2004, there was no stock issuance or purchase activity under the ESPP.

8. Employee Benefit Plans

Pension PlanThe Company has a trusteed, noncontributory, qualified defined benefit pension plan
covering substantially all of its employees who were hired before January 1, 1997. The benefits are based on years of service and the employee's compensation during employment. Generally, the
Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to
service to date, but also for benefits expected to be earned in the future. The plan document was amended in December 2001 to freeze benefit accruals for certain highly compensated participants
as of December 31, 2001, as well as to change the maximum allowable compensation projected for future years. Such highly compensated participants will receive their future full benefit accrual
under the Company's nonqualified supplemental retirement plan, as described below. The Company uses a December 31 measurement date for this plan.

14

---



Supplemental Retirement PlanThe Company also has a nonqualified, unfunded, supplemental retirement
plan ("SERP") which was established in 1994 and covers certain employees and pays benefits that supplement any benefits paid under the qualified plan. Benefits under the supplemental plan are
generally based on compensation not includable in the calculation of benefits to be paid under the qualified plan. The Company uses a December 31 measurement date for this plan.

Net
periodic pension cost for the Company's qualified defined benefit pension plan and supplemental retirement plan included the following components (Dollars in thousands):

|                                                 |  | March 31, 2004 |      | March 31, 2003
|------------------------------------------------ |  | -------------- | ---- | --------------
|
|Service cost-benefits earned/benefit obligations |  | $              | 286  |               
|Interest cost on projected benefit obligations   |  |                | 351  |               
|Expected return on plan assets                   |  |                | (367 | )             
|Net amortization and deferral                    |  |                | 62   |               
|                                                 |  |                |      |               
|Net periodic pension cost                        |  | $              | 332  |               
|                                                 |  |                |      |               

The
Company expects to contribute approximately $2 to $4 million to its pension plan during 2004. During the three months ended March 31, 2004, the Company did not make any
contribution to the plan.

At
March 31, 2004, the SERP plan remained an unfunded plan. Consistent with the Company's expectations at December 31, 2003, no contributions to the SERP plan are
anticipated during 2004.

9. Off-Balance Sheet Financial Instruments

Lines of CreditAt March 31, 2004, the Company had commitments to individuals and mutual funds
under collateralized open lines of credit totaling $1.0 billion, against which $83.0 million in loans were drawn. The credit risk involved in issuing lines of credit is essentially the
same as that involved in extending demand loans. The Company does not anticipate any loss as a result of these lines of credit.

Securities LendingOn behalf of its clients, the Company lends securities to creditworthy
broker-dealers. In certain circumstances, the Company may indemnify its clients for the fair market value of those securities against a failure of the borrower to return such securities. The Company
requires the borrowers to provide collateral in an amount equal to, or in excess of, 102% of the fair market value of U.S. dollar-denominated securities borrowed and 105% of the fair market value of
non-U.S. dollar-denominated securities borrowed. The borrowed securities are revalued daily to determine whether additional collateral is necessary. As guarantor, the Company is required
to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company measures the fair value of its indemnification
obligation by marking its securities lending portfolio to market on a daily basis and comparing the value of the portfolio to the collateral holdings position. The fair value of the indemnification
obligation to be recorded would be the deficiency of collateral as compared to the value of the securities out on loan.

With
respect to the indemnified securities lending portfolio, the cash and U.S. government securities held by the Company as collateral at March 31, 2004 totaled
$4.9 billion while the fair value

15

---



of
the portfolio totaled approximately $4.7 billion. Given that the collateral held was in excess of the value of the securities that the Company would be required to replace if the borrower
defaulted and failed to return such securities, the Company's indemnification obligation was zero and no liability was recorded.

All
securities loans are categorized as overnight loans. The maximum potential amount of future payments that the Company could be required to make would be equal to the market value of
the securities borrowed. Since the securities loans are overcollateralized by 2% (for U.S. dollar-denominated securities) to 5% (for non-U.S. dollar-denominated securities) of the fair
market value of the loan made, the collateral held by the Company would be used to satisfy the obligation. In addition, each borrowing agreement includes "set-off" language that allows the
Company to use any excess collateral on other loans to that borrower to cover any collateral shortfall of that borrower. However, there is a potential risk that the collateral would not be sufficient
to cover such an obligation if the security on loan increased in value between the time the borrower defaulted and the time the security is "bought-in." In such instances, the Company
would "buy-in" the security using all available collateral and a loss would result from the difference between the value of the security "bought-in" and the value of the
collateral held. The Company has never experienced a broker default.

16

---



10. Derivative Financial Instruments

Interest Rate ContractsInterest rate contracts involve an agreement with a counterparty to exchange
cash flows based on an underlying interest rate index. A swap agreement involves the exchange of a series of interest payments, either at a fixed or variable rate, based upon the notional amount
without the exchange of the underlying principal amount. The Company's exposure from these interest rate contracts results from the possibility that one party may default on its contractual obligation
when the contracts are in a gain position. The Company has experienced no terminations by counterparties of interest rate swaps. Credit risk is limited to the positive fair value of the derivative
financial instrument, which is significantly less than the notional value. During the periods presented, the Company had agreements to assume fixed-rate interest payments in exchange for
receiving variable market-indexed interest payments. The contractual or notional amounts of the interest rate swap agreements held by the Company were approximately $1.2 billion at
March 31, 2004 and December 31, 2003. The effect of these agreements was to lengthen short-term variable-rate liabilities into longer-term
fixed-rate liabilities. These contracts had net fair values of approximately $(16.8) million and $(14.9) million at March 31, 2004 and December 31, 2003, respectively. These
fair values are included in the respective other assets and other liabilities categories on the Company's consolidated balance sheet. These instruments have been designated as cash flow hedges.
Changes in fair value of effective portions are included as a component of other comprehensive income. Changes in fair value of ineffective portions are included in net interest income.

Foreign Exchange ContractsForeign exchange contracts involve an agreement to exchange the currency of
one country for the currency of another country at an agreed-upon rate and settlement date. Foreign exchange contracts consist of spot, forward and swap contracts. Spot contracts call for
the exchange of one currency for another and usually settle in two business days. Forward contracts call for the exchange of one currency for another at a date beyond spot. In a currency swap, the
holder of a currency transacts simultaneously both a spot and a forward transaction in that currency for an equivalent amount of another currency to get temporary liquidity in the currency owned. The
Company's risk from foreign exchange contracts results from the possibility that one party may default on its contractual obligation or from movements in exchange rates. Credit risk is limited to the
positive market value of the derivative financial instrument, which is significantly less than the notional value. The notional values of the Company's foreign exchange contracts as of
March 31, 2004 and December 31, 2003 were $2.7 billion and $1.6 billion, respectively. Unrealized gains or losses resulting from purchases and sales of foreign exchange
contracts are included within the respective other assets and other liabilities categories on the Company's consolidated balance sheet. Unrealized gains in other assets were $16.8 million and
$16.1 million as of March 31, 2004 and December 31, 2003, respectively. Unrealized losses in other liabilities were $15.8 million and $15.9 million
as of March 31, 2004 and December 31, 2003, respectively. Foreign exchange contracts have been reduced by offsetting balances with the same counterparty where a master netting agreement
exists. These contracts have not been designated as hedging instruments; therefore, all changes in fair value are included in asset servicing fees.

OtherThe Company also enters into fixed price purchase contracts that are designed to hedge the
variability of the consideration to be paid for the purchase of investment securities. By entering into these contracts, the Company is fixing the price to be paid at a future date for certain
investment securities. At March 31, 2004 and December 31, 2003, the Company had $742.7 million and $792.1 million, respectively, of fixed price purchase contracts
outstanding to purchase investment securities. Changes in fair value of these cash flow hedges are included as a component of other comprehensive income.

17

---



11. Commitments and Contingencies

Restrictions on Cash BalancesThe Company is required to maintain certain average cash reserve
balances. The average required reserve balance with the Federal Reserve Bank ("FRB") for the two-week period including March 31, 2004 was approximately $32.8 million. In
addition, the Company's other assets category includes deposits totaling approximately $67.4 million, which were pledged to secure clearings with depository institutions.

ContingenciesAssets processed held by the Company in a fiduciary capacity are not included in the
consolidated balance sheets since such items are not assets of the Company. Management conducts regular reviews of its fiduciary responsibilities and considers the results in preparing its
consolidated financial statements. In the opinion of management, there are no contingent liabilities at March 31, 2004 that are material to the consolidated financial position or results of
operations of the Company.

12. Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company's and the Bank's consolidated financial position and results
of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative
measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of
Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of
March 31, 2004, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As
of March 31, 2004, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company and the Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Company and the Bank must maintain minimum Total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Company's or
the Bank's category.

18

---



The
following table presents the capital ratios for the Bank and the Company (Dollars in thousands):

|                         |                                       | Actual |   | For Capital
Adequacy Purposes |  | To Be Well Capitalized
Under Prompt
Corrective Action
Provisions |  
|------------------------ | ------------------------------------- | ------ | - | ----------------------------- |  | ---------------------------------------------------------------- | -
|
|As of March 31, 2004:    |                                       |        |   |                               |  |                                                                  |  
|Total Capital            |                                       |        |   |                               |  |                                                                  |  
|                         | (to Risk-Weighted Assets-the Company) |        | $ | 517,008                       |  | 17.99                                                            | %
|Total Capital            |                                       |        |   |                               |  |                                                                  |  
|                         | (to Risk-Weighted Assets-the Bank)    |        | $ | 504,556                       |  | 17.56                                                            | %
|Tier 1 Capital           |                                       |        |   |                               |  |                                                                  |  
|                         | (to Risk-Weighted Assets-the Company) |        | $ | 516,908                       |  | 17.99                                                            | %
|Tier 1 Capital           |                                       |        |   |                               |  |                                                                  |  
|                         | (to Risk-Weighted Assets-the Bank)    |        | $ | 504,456                       |  | 17.56                                                            | %
|Tier 1 Capital           |                                       |        |   |                               |  |                                                                  |  
|                         | (to Average Assets-the Company)       |        | $ | 516,908                       |  | 5.46                                                             | %
|Tier 1 Capital           |                                       |        |   |                               |  |                                                                  |  
|                         | (to Average Assets-the Bank)          |        | $ | 504,456                       |  | 5.33                                                             | %
|As of December 31, 2003: |                                       |        |   |                               |  |                                                                  |  
|Total Capital            |                                       |        |   |                               |  |                                                                  |  
|                         | (to Risk-Weighted Assets-the Company) |        | $ | 467,651                       |  | 17.62                                                            | %
|Total Capital            |                                       |        |   |                               |  |                                                                  |  
|                         | (to Risk-Weighted Assets-the Bank)    |        | $ | 462,073                       |  | 17.42                                                            | %
|Tier 1 Capital           |                                       |        |   |                               |  |                                                                  |  
|                         | (to Risk-Weighted Assets-the Company) |        | $ | 467,551                       |  | 17.61                                                            | %
|Tier 1 Capital           |                                       |        |   |                               |  |                                                                  |  
|                         | (to Risk-Weighted Assets-the Bank)    |        | $ | 461,973                       |  | 17.42                                                            | %
|Tier 1 Capital           |                                       |        |   |                               |  |                                                                  |  
|                         | (to Average Assets-the Company)       |        | $ | 467,551                       |  | 5.36                                                             | %
|Tier 1 Capital           |                                       |        |   |                               |  |                                                                  |  
|                         | (to Average Assets-the Bank)          |        | $ | 461,973                       |  | 5.29                                                             | %

Under Massachusetts law, trust companies such as the Bank, like national banks, may pay dividends no more often than quarterly, and only out of
net profits and to the extent that such payments will not impair the Bank's capital stock and surplus account. Moreover, prior Commissioner approval is required if the total dividends for a calendar
year would exceed net profits for that year combined with retained net profits for the previous two years. These restrictions on the ability of the Bank to pay dividends to the Company may restrict
the ability of the Company to pay dividends to its stockholders.

The
operations of the Company's securities broker affiliate, Investors Securities Services, Inc., are subject to federal and state securities laws, as well as the rules of both
the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Management believes, as of March 31, 2004, that Investors Securities Services, Inc.
is in material compliance with all of the foregoing requirements to which it is subject.

19

---



13. Geographic Reporting and Service Lines

The Company does not utilize segment information for internal reporting as management views the Company as one segment. The following represents net operating
revenue and long-lived assets (including goodwill) by geographic area (Dollars in thousands):

|               |  | Net Operating Revenue |         |  |   |        
|-------------- |  | --------------------- | ------- |  | - | -------
|
|
|
|United States  |  | $                     | 148,043 |  | $ | 110,205
|Ireland        |  |                       | 6,098   |  |   | 3,759  
|Canada         |  |                       | 1,006   |  |   | 427    
|Cayman Islands |  |                       | 44      |  |   | 17     
|               |  |                       |         |  |   |        
|Total          |  | $                     | 155,191 |  | $ | 114,408
|               |  |                       |         |  |   |        

Barclays
Global Investors, N.A. ("BGI") accounted for approximately 17% and 15% of the Company's consolidated net operating revenues for the three-month periods ended March 31,
2004 and 2003, respectively. No client other than BGI accounted for more than 10% of the Company's consolidated net operating revenues for the three-month periods ending March 31, 2004 and
2003.

The
following represents the Company's asset servicing fees by service lines (Dollars in thousands):

For the Three Months EndedAsset servicing fees by service lines:

March 31,
2004

March 31,
2003Core service fees:Custody, accounting and administration

$
76,094

$
56,761Ancillary service fees:Foreign exchange


18,495


6,733Cash management


5,600


5,035Investment advisory


3,470


3,215Securities lending


2,143


2,188Other service fees


385


214Total ancillary service fees


30,093


17,385Total asset servicing fees

$
106,187

$
74,146


20

---



14. Net Interest Income

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

For the Three Months EndedMarch 31,
2004

March 31,
2003Interest income:Federal Funds sold

$
162

$
16Investment securities held to maturity and available for sale


72,350


60,194Loans


1,124


848Total interest income


73,636


61,058Interest expense:Deposits


11,369


9,117Short-term and other borrowings


13,846


12,449Total interest expense


25,215


21,566Net interest income

$
48,421

$
39,492


15. Restatement

The Company has approximately $9.3 billion of investment securities on its balance sheet as of March 31, 2004. Certain types of investments held by
the Company were purchased with discounts or premiums to par value.

The
principal application of Statement of Financial Accounting Standard No. 91,Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases("FAS 91") to the Company's financial statements is in determining the accounting treatment of premiums paid and
discounts realized on its purchase of securities backed by mortgages and other loans. Historically, the Company had applied the prospective method to determine the amortization of premiums and the
accretion of discounts for the securities in its investment portfolio. The Company's management and Audit Committee have determined that the retrospective method is the appropriate method under FAS 91
to determine the amortization of premiums and the accretion of discounts for certain of the Company's securities.

This
application of FAS 91 results in the following changes in reported income before income taxes for the periods presented in this Report:



This
application of FAS 91 also results in changes to other comprehensive income, net of tax, as well as other changes in the Company's disclosures regarding its portfolio. Other
comprehensive income, net of tax, increased on a cumulative basis by approximately $3.4 million and $4.9 million, as of March 31, 2004 and December 31, 2003, respectively.

21

---



The
following tables summarize the effect of the restatement on the Company's consolidated financial statements at, or for, the periods reflected (Dollars in thousands, except per share
data, results are unaudited):

|                           |  | For the Three Months Ended
March 31, 2004 |         | For the Three Months Ended
March 31, 2003
|-------------------------- |  | ----------------------------------------- | ------- | -----------------------------------------
|
|Statement of Income        |  |                                           |         |                                          
|Interest income            |  | $                                         | 71,176  |                                          
|Net interest income        |  |                                           | 45,961  |                                          
|Net operating revenue      |  |                                           | 152,731 |                                          
|Income Before Income Taxes |  |                                           | 52,597  |                                          
|Provision for income taxes |  |                                           | 17,622  |                                          
|Net Income                 |  |                                           | 34,975  |                                          
|Basic Earnings Per Share   |  | $                                         | 0.53    |                                          
|Diluted Earnings Per Share |  | $                                         | 0.52    |                                          

|                            |                                | For the Three Months Ended
March 31, 2004 |        | For the Three Months Ended
March 31, 2003
|--------------------------- | ------------------------------ | ----------------------------------------- | ------ | -----------------------------------------
|
|Comprehensive Income        |                                |                                           |        |                                          
|Net income                  |                                | $                                         | 34,975 |                                          
|Other comprehensive income: |                                |                                           |        |                                          
|                            | Net unrealized investment gain |                                           |        | 23,356                                   
|                            | Other comprehensive income     |                                           |        | 22,111                                   
|Comprehensive income        |                                |                                           | 57,086 |                                          

|                                                                                  |                                                                        | For the Three Months Ended
March 31, 2004 |        | For the Three Months Ended
March 31, 2003
|--------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------------------------- | ------ | -----------------------------------------
|
|Statement of Cash Flows                                                           |                                                                        |                                           |        |                                          
|Net income                                                                        |                                                                        | $                                         | 34,975 |                                          
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                                        |                                           |        |                                          
|                                                                                  | Amortization of premiums on securities, net of accretions of discounts |                                           |        | 9,465                                    
|                                                                                  | Other liabilities                                                      |                                           |        | 22,021                                   
|                                                                                  |                                                                        | Net cash provided by operating activities |        |                                          

22

---



|                                            |  | At March 31, 2004 |            | At December 31, 2003
|------------------------------------------- |  | ----------------- | ---------- | --------------------
|
|Balance Sheet                               |  |                   |            |                     
|Securities held to maturity                 |  | $                 | 4,906,905  |                     
|Total Assets                                |  |                   | 10,099,743 |                     
|Other liabilities                           |  |                   | 126,616    |                     
|Total liabilities                           |  |                   | 9,488,933  |                     
|Retained earnings                           |  |                   | 319,961    |                     
|Accumulated other comprehensive income, net |  |                   | 35,117     |                     
|Total stockholders' equity                  |  |                   | 610,810    |                     
|Total Liabilities and Stockholders' Equity  |  | $                 | 10,099,743 |                     

23

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Shareholders of
Investors Financial Services Corp.
Boston, Massachusetts

We
have reviewed the accompanying condensed consolidated balance sheet of Investors Financial Services Corp. and subsidiaries (the "Company") as of March 31, 2004, and the related
condensed consolidated statements of income and comprehensive income, condensed consolidated statements of stockholders' equity and cash flows for the three-month periods ended March 31, 2004
and 2003. These interim financial statements are the responsibility of the Company's management.

We
conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.

Based
on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.

As
discussed in Note 15, the March 31, 2004 and 2003 condensed consolidated financial statements have been restated.

We
have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Investors Financial Services
Corp. and
subsidiaries as of December 31, 2003, and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for the fiscal year then ended (not
presented herein) included in Investors Financial Services Corp. Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003; and, in our report dated
February 20, 2004 (November 12, 2004 as to the effects of the restatement discussed in Note 23) (which report contains an explanatory paragraph relating to the Company's adoption,
effective January 1, 2001, of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective January 1, 2002, and
Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and effective October 1, 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities, an interpretation of Accounting Research Bulletin No. 51"), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which
it has been derived.

DELOITTE & TOUCHE LLP

Boston,
Massachusetts
May 7, 2004, November 12, 2004, as to the effects
of the restatement discussed in Note 15

24

---





Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with our Unaudited Consolidated Financial Statements and related Notes to Unaudited
Consolidated Financial Statements, which are included elsewhere in this Report. The following discussion contains forward-looking statements that reflect plans, estimates and beliefs. Our actual
results could differ materially from those discussed in the forward-looking statements.

Recent Developments

On October 21, 2004, our Audit Committee, in consultation with management, determined to amend our Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 and the subsequent Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004 to restate the
financial statements (the "relevant financial statements") and related information contained therein. Our restatement arises from the application of Statement of Financial Accounting Standards
No. 91Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases("FAS 91").

The
principal application of FAS 91 to our financial statements is in determining the accounting treatment of premiums paid and discounts realized on our purchase of securities backed by
mortgages and other loans. Historically, we had applied the prospective method to determine the amortization of premiums and the accretion of discounts for the securities in our investment portfolio.
Our management and Audit Committee have determined that the retrospective method is the appropriate method under FAS 91 to determine the amortization of premiums and the accretion of discounts for
certain of our securities.

This
application of FAS 91 results in the following changes in reported income before income taxes for the periods presented in this Report:



This
application of FAS 91 also results in changes to other comprehensive income, net of tax, as well as other changes in our disclosures regarding our portfolio, including net interest
margin during the periods listed above.

Overview

We provide asset administration services for the financial services industry through our wholly-owned subsidiary, Investors Bank & Trust Company. We
provide core services and value-added services to a variety of financial asset managers, including mutual fund complexes, investment advisors, family offices, banks and insurance companies. Core
services include global custody, multicurrency accounting and mutual fund administration. Value-added services include securities lending, foreign exchange, cash management, performance measurement,
institutional transfer agency, investment advisory services, lines of credit, middle office outsourcing and brokerage and transition management services. We have offices located in the United States,
Ireland, Canada and the Cayman Islands, as well as a network of global subcustodians in more than 90 countries. At March 31, 2004, we provided services for approximately $1.1 trillion in net
assets, including approximately $183 billion in foreign net assets.

We
grow our business by selling our services to new clients and by further penetrating our existing clients. We believe that we currently service less than 10% of the assets managed by
our existing clients, and we have traditionally achieved significant success in growing client relationships. Our ability

25

---



to
service new clients and expand our relationships with existing clients depends on our provision of superior client service. Our growth is also affected by overall market conditions, the regulatory
environment for us and our clients and the success of our clients at marketing their products.

We
derive our asset servicing revenue from providing these core and value-added services. We derive our net interest income by investing the cash balances our clients leave on deposit
with us. Our share of earnings from these investments is viewed as part of the total compensation that our clients pay us for servicing their assets. Our service offerings are priced on a bundled
basis. In establishing a fee structure for a specific client, we analyze all expected revenue and expenses. We believe net operating
revenue (net interest income plus noninterest income) and net income are the most meaningful measures of our financial results.

As
a provider of asset administration services, the amount of net operating revenue that we generate is impacted by overall market conditions, client activity, and the prevailing
interest rate environment. Over the course of the past year, we have benefited from the appreciation of the market values of the assets we service for our clients. A significant portion of our core
services revenue is based upon the amount of assets under administration. As market values of underlying assets fluctuate, so will our revenue. We have managed this volatility by offering a tiered
pricing structure for our asset-based fees. As asset values increase, the basis point fee is reduced for the incremental assets. Many of our value-added services are transactional based, and we
receive a fee for each transaction processed. We have also continued to experience net interest margin compression in this low interest rate environment because we have little room to reduce further
the rates we pay on our interest-bearing liabilities, yet high volumes of prepayments in our investment portfolio have caused us to reinvest these cash flows in lower-yielding assets. We expect the
Federal Open Market Committee ("FOMC") to begin to raise the Federal Funds rate in the second half of 2004. As such, we have structured our balance sheet in anticipation of this rise in rates.

We
continue to remain focused on our sales efforts, prudent expense management and increasing operational efficiency. These goals are complicated by our need to build infrastructure to
support our rapid growth, maintain and enhance our technology and retain and motivate our workforce.

In
our 2003 earnings releases, in addition to reporting GAAP results, we also reported operating income and operating earnings per share information that excluded the effect of the
previously disclosed $13.9 million, or $0.21 per diluted share, one-time tax accrual that we recorded in the first quarter of 2003. The accrual resulted from a retroactive tax law
change by the Commonwealth of Massachusetts disallowing a dividends received deduction taken by Investors Bank & Trust Company on dividends received since 1999 from a wholly-owned real estate
investment trust. In the second quarter of 2003, we settled this tax matter pursuant to an agreement to pay 50% of the liability. We believe that pro forma operating income and operating earnings per
share provide a more meaningful presentation of our results of operations because they do not include the one-time tax charge which was unrelated to our ongoing operations.

The
following table presents a reconciliation between net income and earnings per share presented on the face of our Unaudited Condensed Consolidated Statements of Income and the
non-GAAP

26

---



measure
of net operating income and operating earnings per share referenced in our earnings releases (Dollars in thousands, except per share data):

GAAP Earnings (unaudited)

For the Three Months
Ended March 31,2004

2003Income before taxes

$
55,057

$
28,689Provision for income taxes


18,504


22,822Net income

$
36,553

$
5,867Earnings per share:Basic

$
0.56

$
0.09Diluted

$
0.54

$
0.09


Non-GAAP Operating Earnings (unaudited)

For the Three Months
Ended March 31,2004

2003Income before taxes

$
55,057

$
28,689Provision for income taxes


18,504


8,922(1
)Net operating income

$
36,553

$
19,767Operating earnings per share:Basic

$
0.56

$
0.30Diluted

$
0.54

$
0.30


---

Certain Factors That May Affect Future Results

From time to time, information provided by us, statements made by our employees, or information included in our filings with the Securities and Exchange
Commission ("SEC") (including this Form 10-Q/A) may contain statements which are not historical facts, so-called "forward-looking statements," and which involve risks
and uncertainties. These statements relate to future events or our future financial performance and are identified by words such as "may," "will," "could," "should," "expect," "plan," "intend,"
"seek," "anticipate," "believe," "estimate," "potential," or "continue" or other comparable terms or the negative of those terms. Forward-looking statements in this Form 10-Q/A
include certain statements regarding future changes in operating expenses (including compensation and benefits, transaction processing services, technology and telecommunications, depreciation and
amortization, and other operating expenses), net interest income, client funding, the effective tax rate for 2004, hedge ineffectiveness, liquidity, annual dividend payments, interest rate conditions,
interest rate sensitivity, loss exposure on lines of credit, future pension costs and funding levels, the timing and

27

---



effect
on earnings of derivative gains and losses, the effect on earnings of changes in equity values and the effect of certain legal claims against us. Our actual future results may differ
significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. Each of these factors, and
others, are discussed from time to time in our filings with the SEC.

Our operating results are subject to fluctuations in interest rates and the securities markets.

A significant portion of our fees are based on the market value of the assets we process. Accordingly, our operating results are subject to fluctuations in
interest rates and securities markets as these fluctuations affect the market value of assets processed. Current market conditions, including the recent volatility in the equity markets, can have a
material effect on our asset-based fees. While reductions in asset servicing fees may be offset by increases in other sources of revenue, a sustained downward movement of the broad equity markets will
likely have an adverse impact on our earnings. Fluctuations in interest rates or the securities markets can also lead to investors seeking alternatives to the investment offerings of our clients,
which could result in a lesser amount of assets processed and correspondingly lower fees. Also, our net interest income is earned by investing depositors' funds and making loans. Rapid, sustained
changes in interest rates and/or the relationship between short-term and long-term interest rates could adversely affect the market value of, or the earnings produced by, our
investment and loan portfolios, and thus could adversely affect our operating results.

A material portion of our revenues is derived from our relationship with Barclays Global Investors, N.A. ("BGI") and related entities.

As a result of our selection in 2003 to service assets for Barclays Global Investors Canada, Ltd., our assumption of the operations of the U.S. asset
administration unit of BGI in 2001 and our ongoing relationship with BGI's iShares and Master Investment Portfolios, BGI accounted for approximately 17% and 15% of our net operating revenue during the
three months ended March 31, 2004 and 2003, respectively. We expect that BGI will continue to account for a significant portion of our net operating revenue. While we provide services to BGI
under long-term contracts, those contracts may be terminated for certain regulatory and fiduciary reasons. The loss of BGI's business would cause our net operating revenue to decline and
would likely have an adverse effect on our quarterly and annual results.

We may incur losses due to operational errors.

The services that we provide require complex processes and interaction with numerous third parties. While we maintain sophisticated computer systems and a
comprehensive system of controls, and our operational history has been excellent, from time to time we may make operational errors for which we are responsible to our clients. In addition, even though
we maintain appropriate errors and omissions and other insurance policies, an operational error could result in significant liability to us and may have a material adverse effect on our financial
condition and results of operations.

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

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

28

---



We may incur significant costs defending legal claims.

We have been named in a lawsuit in Massachusetts state court alleging, among other things, violations of a covenant of good faith and fair dealing in a contract.
While we believe this claim is without merit, we cannot be sure that we will prevail in the defense of this claim. Litigation is costly and could divert the attention of management. We may become
subject to other legal claims in the future.

Our future results depend, in part, on successful integration of possible future acquisitions and outsourcing transactions.

Integration of acquisitions and outsourcing transactions is complicated and frequently presents unforeseen difficulties and expenses which can affect whether and
when a particular acquisition or outsourcing transaction will be accretive to our earnings per share. Any future acquisitions or outsourcing transactions will present these or similar challenges.
These acquisitions and outsourcing transactions can also consume a significant amount of management's time.

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

We have been experiencing a period of rapid growth that has required the dedication of significant management and other resources. Continued rapid growth could
place a strain on our management and other resources. To manage future growth effectively, we must continue to invest in our operational, financial and other internal systems, and in our human
resources.

We must hire and retain skilled personnel in order to succeed.

Qualified personnel, in particular managers and other senior personnel, are in great demand throughout the financial services industry, especially as the economy
begins to recover. We could find it increasingly difficult to continue to attract and retain sufficient numbers of these highly skilled employees, which could affect our ability to attract and retain
clients.

We may not be able to protect our proprietary technology.

Our proprietary technology is important to our business. We rely on trade secret, copyright and trademark laws and confidentiality agreements with employees and
third parties to protect our proprietary technology, all of which offer only limited protection. These intellectual property rights may be invalidated or our competitors may develop similar technology
independently. Legal proceedings to enforce our intellectual property rights may be unsuccessful, and could also be expensive and divert management's attention.

Our quarterly and annual operating results may fluctuate.

Our quarterly and annual operating results are difficult to predict and may fluctuate from quarter to quarter and annually for several reasons, including:



Most
of our expenses, like employee compensation and rent, are relatively fixed. As a result, any shortfall in revenue relative to our expectations could significantly affect our
operating results.

29

---



We are subject to extensive federal and state regulations that impose complex restraints on our business.

Federal and state laws and regulations applicable to financial institutions and their parent companies apply to us. Our primary regulators are the Federal Reserve
Board ("FRB"), the Federal Deposit Insurance Corporation ("FDIC"), the Massachusetts Commissioner of Banks and the National Association of Securities Dealers, Inc. ("NASD"). Virtually all
aspects of our operations are subject to specific requirements or restrictions and general regulatory oversight including the following:



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

Statements of Operations

Comparison of Operating Results for the Three Months Ended March 31, 2004 and 2003

Net income for the three months ended March 31, 2004 was $36.6 million, up 523% from $5.9 million for the same period in 2003. As previously
disclosed, we recorded a $13.9 million tax accrual during the first quarter of 2003 relating to a specific tax assessment. Refer toIncome Taxeswithin this section for further discussion regarding our settlement of this tax assessment. Absent this charge, net income for the three months ended March 31, 2004 increased 85% from net
operating income for the same period in 2003. Overall the increase in net income can be attributed to growth in operating revenue and net interest income due to new business, strong equity markets and
a favorable interest rate environment coupled with the continued leverage in our business model, as net operating revenue grew 36% with only a 17% increase in operating expenses.

Fees and Other Revenue

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

For the Three Months
Ended March 31,2004

2003

ChangeTotal asset servicing fees

$
106,187

$
74,146

43
%Other operating income


349


770

(55
)%Gain on sale of investment


234




100
%Total fees and other revenue

$
106,770

$
74,916

43
%


Asset
servicing fees for the three months ended March 31, 2004 increased 43% to $106.2 million from the same period in 2003. The largest components of asset servicing fees
are custody, accounting

30

---



and
administration, which increased 34% to $76.1 million. Custody, accounting and administration fees are based in part on the value of assets processed. Assets processed is the total dollar
value of financial assets on the reported date for which we provide global custody or multicurrency accounting. The change in net assets processed includes the following components (Dollars in
billions):

For the Three Months
Ended March 31, 2004

For the Three Months
Ended March 31, 2003Net assets processed, beginning of period

$
1,057

$
785Sales to new clients


1


Further penetration of existing clients


7


4Lost clients


(1
)

Fund flows and market gain (loss)


67


(5
)Net assets processed, end of period

$
1,131

$
784


The
majority of the increase in assets processed resulted from solid equity market performance, the ability of our clients to develop and sell product, which generates fund flows that
have a direct, positive impact on our business, and strong international fund flows. Our core services fees are generated by charging a fee based upon the value of assets processed. As market values
or clients' asset levels fluctuate, so will our revenue. Our tiered pricing structure, coupled with minimum and flat fees, allow us to manage this volatility. As asset values increase, the basis point
fee typically declines, while when asset values decrease, revenue is only impacted by the asset decline at the then marginal rate.

If
the value of equity assets held by our clients was to increase or decrease by 10%, we estimate that this, by itself, would currently cause a corresponding change of approximately 3%
in our earnings per share. If the value of fixed-income assets held by our clients was to increase or decrease by 10%, we estimate that this, by itself, would currently cause a corresponding change of
approximately 2% in our earnings per share. In practice, earnings per share do not track precisely to the value of the equity markets because conditions present in a market increase or decrease may
generate offsetting increases or decreases in other revenue items. For example, market volatility often results in increased transaction fee revenue. Also, market declines may result in increased net
interest income and sweep fee income as clients move larger amounts of assets into the cash management vehicles that we offer. However, there can be no assurance that these offsetting revenue
increases will occur during any future downturn in the equity markets.

Transaction-driven
income includes our ancillary services, such as foreign exchange, cash management, securities lending and investment advisory services. Foreign exchange fees were
$18.5 million for the three months ended March 31, 2004, up 175% from the same period in 2003. The increase in foreign exchange fees is attributable to new clients, further penetration
of existing clients, higher transaction volumes and increased volatility of the currencies traded by our clients. Future foreign exchange income is dependent on the volume of client activity and the
overall volatility in the currencies traded. Cash management fees, which consist of sweep fees, were $5.6 million for the three months ended March 31, 2004, up 11% from the same period
in 2003. The increase is primarily due to increased client balances. Cash management revenue will continue to depend on the level of client balances maintained in the cash management products we
offer. If our clients' investment products continue to maintain increasing cash balances, our cash management revenue will be positively impacted. Investment advisory fees were $3.5 million for
the three months ended March 31, 2004, up 8% from the same period in 2003. The increase in investment advisory fees is attributable to growth in the asset size of the Merrimac Master Portfolio,
an investment company for which we act as advisor.

31

---



Future
investment advisory fee income is dependent upon asset levels within the Merrimac Master Portfolio which are driven by overall market conditions, client activity and transaction volumes.
Securities lending fees were $2.1 million for the three months ended March 31, 2004, down 2% from the same period in 2003, primarily due to narrower spreads. Securities lending
transaction volume is positively affected by the market value of the securities on loan, merger and acquisition activity, increased IPO activity and a steeper short-end of the yield curve.
If the capital markets experience any of the aforementioned activity, it is likely that our securities lending revenue will be positively impacted. If we experience a reduction in our securities
lending portfolio, lower market values and continued compression of the spreads earned on securities lending activity, our securities lending revenue will likely be negatively impacted.

Other
operating income consists of dividends received relating to the Federal Home Loan Bank of Boston ("FHLBB") stock investment and miscellaneous fees for systems consulting services.
For the three months ended March 31, 2004, other operating income decreased 55% compared to the same period last year due to a lower yield paid on the FHLBB stock investment and client systems
development projects completed in 2003. Operating income for the three months ended March 31, 2004 also included a $0.2 million gain on the sale of a mortgage-backed security from our
available for sale portfolio. No securities gains were recorded for the same period in 2003.

Net Interest Income

For the Three Months
Ended March 31,2004

2003

ChangeInterest income

$
73,636

$
61,058

21
%Interest expense


25,215


21,566

17
%Total net interest income

$
48,421

$
39,492

23
%


Net
interest income was $48.4 million for the three months ended March 31, 2004, up 23% from the same period in 2003. Net interest income is affected by the volume and mix
of assets and liabilities, and the movement and level of interest rates. The improvement in our net interest income was the result of balance sheet growth driven by strong client funding and a steep
yield curve. During 2004, we continued to experience high volumes of prepayments from our investment portfolio. The cash flows
from these prepayments were reinvested in lower yielding interest-earning assets. We continue to run a closely matched balance sheet by investing in low duration, variable-rate securities
and adding interest rate swaps against client liabilities, including client repurchase agreements.

During
2004, the Company continued to employ a strategy of prepaying long-term FHLBB borrowings and replacing them with lower cost funding in order to preserve net interest
margin. Although the average funding balance increased $2.3 billion from $6.6 billion for the three months ended March 31, 2003 to $8.9 billion for the same period in 2004,
the average rates paid on interest-bearing liabilities declined. Our average rate paid on interest-bearing liabilities was 1.20% for the three months ended March 31, 2004, a 20 basis point
decline from 1.40% for the same period in 2003. The decrease was primarily the result of a lower Federal Funds rate from which the majority of our funding sources are priced.

The
table below presents the changes in net interest income resulting from changes in the volume of interest-earning assets or interest-bearing liabilities and changes in interest rates
for the three months ended March 31, 2004 compared to the same period in 2003. Changes attributed to both

32

---



volume
and rate have been allocated based on the proportion of change in each category (Dollars in thousands):

For the Three Months
Ended March 31, 2004Change
Due to
Volume

Change
Due to
Rate

NetInterest-earning assets:Federal Funds sold

$
151

$
(5
)
$
146Investment securities


18,881


(6,725
)

12,156Loans


506


(230
)

276Total interest-earning assets

$
19,538

$
(6,960
)
$
12,578Interest-bearing liabilities:Deposits

$
5,619

$
(3,367
)
$
2,252Borrowings


591


806


1,397Total interest-bearing liabilities

$
6,210

$
(2,561
)
$
3,649Change in net interest income

$
13,328

$
(4,399
)
$
8,929


In
addition to investing in both variable and fixed-rate securities, we use derivative instruments to manage exposure to interest rate risks. We routinely enter into interest
rate swap agreements in which we pay a fixed interest rate and receive a floating interest rate. These transactions are designed to hedge a portion of our client liabilities, including client
repurchase agreements. By entering into a pay fixed/receive floating interest rate swap, a portion of our liabilities is effectively converted to a fixed-rate liability for the term of the
interest rate swap agreement. Our derivatives are designated as highly effective cash flow hedges. To the extent there is hedge ineffectiveness it is included as a component of the net interest
margin. Hedge ineffectiveness had an insignificant impact on earnings for the three months ended March 31, 2004 and 2003. We expect that hedge ineffectiveness will continue to have an
insignificant effect on net interest margin in 2004.

We
regularly run interest rate simulation models to understand the effect of various interest rate scenarios on our capital and net income. The results of the income simulation model as
of March 31, 2004 indicated that an upward shift of interest rates by 200 basis points over a twelve-month period would result in a reduction in projected net interest income of 6.17%. We also
simulate a 200 basis point rate reduction over a twelve-month period, however, in the simulation we do not reduce rates below 0%. This modified simulation results in a decrease in projected net
interest income of 10.38% over the same twelve-month period. We expect the FOMC to begin increasing interest rates in the second half of 2004. While our simulation model projects a decrease in net
interest income in a rising rate environment, we generally expect the absolute amount of net interest income to increase, driven by higher levels of client funding and capital. Refer to the "Market
Risk" section of this document for more detailed information regarding our income simulation methodology and policies.

33

---



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

|                                                                 |                                             | Three Months Ended
March 31, 2004 |           | Three Months Ended
March 31, 2003 |          
|---------------------------------------------------------------- | ------------------------------------------- | --------------------------------- | --------- | --------------------------------- | ---------
|
|Interest-earning assets:                                         |                                             |                                   |           |                                   |          
|                                                                 | Federal Funds sold                          |                                   | $         | 67,560                            |          
|                                                                 | Investment securities(1)                    |                                   |           | 8,851,155                         |          
|                                                                 | Loans                                       |                                   |           | 198,970                           |          
|                                                                 |                                             |                                   |           |                                   |          
|                                                                 |                                             | Total interest-earning assets     |           |                                   | 9,117,685
|                                                                 |                                             |                                   |           |                                   |          
|                                                                 | Allowance for loan losses                   |                                   |           | (100                              | )        
|                                                                 | Noninterest-earning assets                  |                                   |           | 487,392                           |          
|                                                                 |                                             |                                   |           |                                   |          
|                                                                 |                                             | Total assets                      |           | $                                 | 9,604,977
|                                                                 |                                             |                                   |           |                                   |          
|Interest-bearing liabilities:                                    |                                             |                                   |           |                                   |          
|                                                                 | Deposits:                                   |                                   |           |                                   |          
|                                                                 |                                             | Savings                           |           | $                                 | 3,924,863
|                                                                 |                                             | Time                              |           |                                   | 129      
|                                                                 | Securities sold under repurchase agreements |                                   |           | 3,691,117                         |          
|                                                                 | Trust preferred stock(2)                    |                                   |           | 24,774                            |          
|                                                                 | Other borrowings(3)                         |                                   |           | 732,527                           |          
|                                                                 |                                             |                                   |           |                                   |          
|                                                                 | Total interest-bearing liabilities          |                                   |           | 8,373,410                         |          
|                                                                 |                                             |                                   |           |                                   |          
|                                                                 | Noninterest-bearing liabilities:            |                                   |           |                                   |          
|                                                                 |                                             | Demand deposits                   |           |                                   | 308,916  
|                                                                 |                                             | Savings                           |           |                                   | 80,953   
|                                                                 |                                             | Noninterest-bearing time deposits |           |                                   | 164,121  
|                                                                 |                                             | Other liabilities                 |           |                                   | 105,964  
|                                                                 |                                             |                                   |           |                                   |          
|Total liabilities                                                |                                             |                                   | 9,033,364 |                                   |          
|Equity                                                           |                                             |                                   | 571,613   |                                   |          
|                                                                 |                                             |                                   |           |                                   |          
|Total liabilities and equity                                     |                                             | $                                 | 9,604,977 |                                   |          
|                                                                 |                                             |                                   |           |                                   |          
|Net interest income                                              |                                             |                                   |           |                                   | $        
|                                                                 |                                             |                                   |           |                                   |          
|Net interest margin(4)                                           |                                             |                                   |           |                                   |          
|                                                                 |                                             |                                   |           |                                   |          
|Average interest rate spread(5)                                  |                                             |                                   |           |                                   |          
|                                                                 |                                             |                                   |           |                                   |          
|Ratio of interest-earning assets to interest-bearing liabilities |                                             |                                   |           |                                   |          
|                                                                 |                                             |                                   |           |                                   |          

---

34

---





Operating Expenses

Total operating expenses were $100.1 million for the three months ended March 31, 2004, up 17% from the same period in 2003. The majority of the
increase in operating expenses is in compensation and benefits expense and transaction processing services. It is expected that only incremental expense associated with new business as well as
commitments related to depreciation and technology and telecommunications will be added during the remainder of 2004. The components of operating expenses were as follows (Dollars in thousands):

For the Three Months
Ended March 31,2004

2003

ChangeCompensation and benefits

$
55,323

$
49,771

11
%Transaction processing services


10,940


6,808

61
%Technology and telecommunications


10,266


9,291

10
%Depreciation and amortization


7,954


6,079

31
%Occupancy


7,391


7,325

1
%Professional fees


3,238


2,951

10
%Travel and sales promotion


1,082


985

10
%Other operating expenses


3,940


2,509

57
%Total operating expenses

$
100,134

$
85,719

17
%


Compensation
and benefits expense was $55.3 million for the three months ended March 31, 2004, up 11% from the same period in 2003, due to higher employment taxes, annual
merit raises, new hires needed to support new business and higher bonuses that are directly tied to earnings per share outperformance during the first quarter of 2004. Further increases in
compensation expense in 2004 will be dependent upon new business wins.

Transaction
processing services expense was $10.9 million for the three months ended March 31, 2004, up 61% from the same period in 2003, relating to subcustodian fees
resulting from higher assets processed and increased transaction volumes. Future transaction processing services expense will be dependent upon asset levels and the volume of client transaction
activity.

Technology
and telecommunications expense was $10.3 million for the three months ended March 31, 2004, up 10% from the same period in 2003 due to increased software license
and maintenance fees, as well as higher contract programming costs. Future technology and telecommunications expense will be dependent on the level of new business, ongoing improvement to our
infrastructure and client integrations. Technology reinvestment is targeted at approximately 18-20% of net operating revenue.

Depreciation
and amortization expense was $8.0 million for the three months ended March 31, 2004, up 31% from the same period in 2003. This increase resulted from the
completion of capitalized software projects in late 2003 and their placement into service. Depreciation expense is expected to continue to accrue at this rate for the remainder of 2004.

Other
operating expense was $3.9 million for the three months ended March 31, 2004, up 57% from the same period in 2003, largely due to increased insurance premiums
relating to the increasingly expensive market for property and casualty, director and officer and professional liability insurance coverages.

Income Taxes

Income taxes were $18.5 million for the three months ended March 31, 2004, down 19% from the same period in 2003 due to a one-time tax
accrual recorded in the first quarter of 2003 for a tax

35

---



assessment
by the Commonwealth of Massachusetts Department of Revenue, offset by increased pretax earnings and an increase in our effective tax rate in 2004 to 33.6%.

In
March 2003, a retroactive change in the Commonwealth of Massachusetts tax law disallowed a dividends received deduction taken by the Bank on dividends it received since 1999
from a wholly-owned real estate investment trust. In the second quarter of 2003, we settled this disputed tax matter with the Massachusetts Department of Revenue, pursuant to an agreement to pay 50%
of the liability.

Financial Condition

At March 31, 2004, our total assets were $10.1 billion, up 9% from $9.2 billion at December 31, 2003, driven by strong client funding.
Average interest-earning assets increased $2.4 billion, or 36%, for the three months ended March 31, 2004 compared to the same period in 2003. Funding for our asset growth was provided
by an increase in average client balances of approximately $2.9 billion offset by a decrease in average external borrowings of approximately $0.6 billion for the three months ended
March 31, 2004.

Investment Portfolio

Our investment portfolio is used to invest depositors' funds and is a component of our asset processing business. In addition, we use the investment portfolio to
secure open positions at securities clearing institutions in connection with our custody services. The following table summarizes our investment portfolio as of the dates indicated (Dollars in
thousands):

March 31,
2004

December 31,
2003Securities held to maturityMortgage-backed securities

$
2,806,600

$
2,272,030Federal agency securities


1,974,131


1,906,554State and political subdivisions


124,991


127,632Total securities held to maturity

$
4,905,722

$
4,306,216Securities available for saleMortgage-backed securities

$
3,725,312

$
3,611,980State and political subdivisions


357,588


355,828Corporate debt


176,344


175,816U.S. Treasury securities


118,115


113,701Federal agency securities





29,609Foreign government securities


9,783


9,703Total securities available for sale

$
4,387,142

$
4,296,637


The
overall increases in our held to maturity and available for sale portfolios are attributable to investing client deposits, including client repurchase agreements, and borrowed funds
to effectively
utilize the Bank's capital and to accommodate client fund flows. Our held to maturity portfolio increased $599.5 million, or 14%, to $4.9 billion at March 31, 2004 from
$4.3 billion at December 31, 2003. Since net interest income is an integral part of our compensation for asset processing services, we purchase investment securities that will protect
our net interest margin, while maintaining both an acceptable credit and interest rate risk profile.

The
increase in the held to maturity portfolio stems primarily from purchases of floating-rate mortgage-backed securities, which offer an attractive effective yield and will
reprice when interest rates increase.

36

---



Our
available for sale portfolio remained relatively flat at $4.4 billion at March 31, 2004 compared to $4.3 billion at December 31, 2003. We continue to
invest in floating-rate and adjustable-rate mortgage-backed securities in an effort to maintain our net interest margin, diversify our portfolio with assets that reprice more
frequently, and take advantage of an attractive effective yield and limited extension risk, which aligns with our overall asset-liability strategy. Refer to the gap analysis under the "Market Risk"
section for additional details regarding the matching of our interest-earning assets and interest-bearing liabilities.

During
the three months ended March 31, 2004, we sold a security issued by the Government National Mortgage Association ("GNMA" or "Ginnie Mae") resulting in the recognition of a
$0.2 million gain in noninterest income.

The
average balance of our combined investment portfolios for the three months ended March 31, 2004 was $8.9 billion, with an average yield of 3.27%, compared to an average
balance of $6.6 billion with an average yield of 3.65% during the same period in 2003. The decline in yield is primarily due to the overall low interest rate environment. Securities that
matured and paid down in the first quarter of 2004 were originally purchased in a higher interest rate environment, the proceeds of which are now being reinvested at lower interest rates. In addition,
prepayments have caused us to recognize a greater amount of premium amortization associated with the larger population of affected securities purchased through March 31, 2004. We recognized net
amortization of $7.0 million for the three months ended March 31, 2004 compared to $6.4 million of net amortization in the same period of 2003. The effect of this additional
amortization was a lower effective yield on the investment portfolio. A significant portion of our investment portfolio is variable rate in nature. If interest rates were to rise during 2004, we would
expect slower prepayments and our overall yield to increase as our variable-rate securities reprice. Conversely, if interest rates were to decline in 2004, we would expect that prepayments
would accelerate, with the cash flows from these prepayments being reinvested in lower-yielding assets of equal quality and risk.

We
invest in mortgage-backed securities, Federal agency bonds and corporate debt to increase the total return of the investment portfolio. Mortgage-backed securities generally have a
higher yield than U.S. Treasury securities due to credit and prepayment risk. Credit risk results from the possibility that a loss may occur if a counterparty is unable to meet the terms of the
contract. Prepayment risk results from the possibility that changes in interest rates may cause mortgage-backed securities to be paid off prior to their maturity dates. Federal agency bonds generally
have a higher yield than U.S. Treasury securities due to credit and call risk. Credit risk results from the possibility that the Federal agency issuing the bonds may be unable to meet the terms of the
bond. Call risk is similar to prepayment risk and results from the possibility that fluctuating interest rates and other factors may result in the exercise of the call option by the Federal agency
prior to the maturity date of the bond. Credit risk related to mortgage-backed securities and Federal agency bonds is substantially reduced by payment guarantees and credit enhancements.

We
invest in municipal securities to generate stable, tax advantaged income. Municipal securities generally have lower stated yields than Federal agency and U.S. Treasury securities, but
their after-tax yields are comparable. Municipal securities are subject to credit risk. However, all municipal securities that we invest in are insured and AAA rated.

Loan Portfolio

Our loan portfolio decreased $46.4 million, or 23%, to $153.1 million at March 31, 2004 from $199.5 million at December 31,
2003. The majority of the decrease relates to repayments of advances on clients' lines of credit, partially offset by an increase in client overdrafts. At March 31, 2004, client overdrafts were
$66.9 million compared to $54.3 million at December 31, 2003.

37

---



We
make loans to individually managed account customers and to mutual funds and other pooled product clients. We offer overdraft protection and lines of credit to our clients for the
purpose of funding redemptions, covering overnight cash shortfalls, leveraging portfolios and meeting other client borrowing needs. Virtually all loans to individually managed account customers are
written on a demand basis, bear variable interest rates tied to the Prime rate or the Federal Funds rate and are fully secured by liquid collateral, primarily freely tradable securities held in
custody by us for the borrower. Loans to mutual funds and other pooled product clients include unsecured lines of credit that may, in the event of default, be collateralized at our option by
securities held in custody by us for those clients. Loans to individually managed account customers, mutual funds and other pooled product clients also include advances that we make to certain clients
pursuant to the terms of our custody agreements with those clients to facilitate securities transactions and redemptions.

At
March 31, 2004, our only lending concentrations that exceeded 10% of total loan balances were the lines of credit to mutual fund clients discussed above. These loans were made
in the ordinary course of business on the same terms and conditions prevailing at the time for comparable transactions.

Our
credit loss experience has been excellent. There have been no loan charge-offs in the last five years, or in the history of our Company. It is our policy to place a loan
on nonaccrual status when either principal or interest becomes 60 days past due and the loan's collateral is not sufficient to cover both principal and accrued interest. As of March 31,
2004, there were no loans on nonaccrual status, no loans greater than 90 days past due, and no troubled debt restructurings. Although virtually all of our loans are fully collateralized with
freely tradable securities, management recognizes some credit risk inherent in the loan portfolio, and has an allowance for loan losses of $0.1 million at March 31, 2004, a level which
has remained consistent for the past five years. This amount is not allocated to any particular loan, but is intended to absorb any risk of loss inherent in the loan portfolio. Management actively
monitors the loan portfolio and the underlying collateral and regularly assesses the adequacy of the allowance for loan losses.

Repurchase Agreements and Short-Term and Other Borrowings

Asset growth was funded in part by increased securities sold under repurchase agreements. Repurchase agreements increased $221.7 million, or 7%, to
$3.5 billion at March 31, 2004 from $3.3 billion at December 31, 2003. Repurchase agreements provide for the sale of securities for cash coupled with the obligation to
repurchase those securities on a set date or on demand. The majority of our repurchase agreements are with clients. We use repurchase agreements, including client repurchase agreements, because they
provide a lower cost source of funding than other short-term borrowings and allow our clients the extra benefit of collateralization of their deposits. The average balance of securities
sold under repurchase agreements for the three months ended March 31, 2004 was $3.7 billion with an average cost of approximately 0.83%, compared to an average balance of
$3.1 billion and an average cost of approximately 0.95% for the same period in 2003. The decline in the average rate paid on repurchase agreements relates to the decline in the Federal Funds
rate to which the repurchase agreements are linked.

Short-term
and other borrowings decreased $248.4 million, or 23%, to $849.7 million at March 31, 2004 from $1.1 billion at December 31,
2003. We use short-term and other borrowings to offset variability of deposit flow. The average balance of short-term and other borrowings for the three months ended
March 31, 2004 was $732.5 million with an average cost of approximately 3.05%, compared to an average balance of $855.3 million and an average cost of approximately 2.12% for the
same period last year. The average cost of borrowing for the three months ended March 31, 2004 included prepayment fees of $2.6 million. These fees were incurred to employ an
asset-liability strategy in which we replaced a high cost borrowing with a new borrowing at a lower rate and purchased assets with a similar maturity to lock in a spread.

38

---



Market Risk

We engage in investment activities to accommodate clients' cash management needs and to contribute to overall corporate earnings. Our clients, in the course of
their financial asset management, maintain cash balances, which they can deposit with us on a short-term basis in interest-bearing accounts or client repurchase agreements. We either
directly invest these cash balances to earn interest income, or place these deposits in third-party vehicles and remit a portion of the earnings on these investments to our clients after deducting a
fee as our compensation for the investment. In the conduct of these activities, we are subject to market risk. Market risk is the risk of an adverse financial impact resulting from changes in market
prices and interest rates. The level of risk we assume is a function of our overall strategic objectives and liquidity needs, client requirements and market volatility.

The
active management of market risk is integral to our operations. The objective of interest rate sensitivity management is to provide sustainable net interest revenue under various
economic conditions. We manage the structure of interest-earning assets and interest-bearing liabilities by adjusting their mix, yield, maturity and/or repricing characteristics based on market
conditions. Since client deposits and repurchase agreements, our primary sources of funds, are predominantly short term, we maintain a generally short-term interest rate repricing
structure for our interest-earning assets. We also use term borrowings and interest rate swap agreements to augment our management of interest rate exposure. The effect of the interest rate swap
agreements is to lengthen short-term variable-rate liabilities into longer-term fixed-rate liabilities.

Our
Board of Directors has set asset and liability management policies that define the overall framework for managing interest rate sensitivity, including accountabilities and controls
over investment activities. These policies delineate investment limits and strategies that are appropriate, given our liquidity and regulatory requirements. For example, we have established a policy
limit stating that projected net interest income over the next twelve months will not be reduced by more than 10% given a change in interest rates of up to 200 basis points (+ or -) over twelve
months. Each quarter, our Board of Directors reviews our asset and liability positions, including simulations of the effect of various interest rate scenarios on our capital. Due to current interest
rate levels, the Company's Board of Directors has approved a temporary exception to the 10% limit for decreases in interest rates. The Board of Directors approved the policy exception because, with
the Federal Funds target rate currently at 1.00%, a 200 basis point further reduction would move rates into a negative position and is therefore not likely to occur.

Our
Board of Directors has delegated day-to-day responsibility for oversight of the Asset and Liability Management function to our Asset and Liability Committee
("ALCO"). ALCO is a senior management committee consisting of the Chief Executive Officer, the President, the Chief Financial Officer, the Chief Risk Officer and members of the Treasury function. ALCO
meets twice monthly. Our primary tool in managing interest rate sensitivity is an income simulation model. Key assumptions in the simulation model include the timing of cash flows, maturities and
repricing of financial instruments, changes in market conditions, capital planning and deposit
sensitivity. The model assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period will change periodically over the period being measured. The
model also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities.
These assumptions are inherently uncertain, and as a result, the model cannot precisely predict the effect of changes in interest rates on our net interest income. Actual results may differ from
simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies.

The
results of the income simulation model as of March 31, 2004 and 2003 indicated that an upward shift of interest rates by 200 basis points over a twelve-month period would
result in a reduction in projected net interest income of 6.17% and 5.97%, respectively. We also simulate a 200

39

---



basis
point rate reduction over a twelve-month period, however, in the simulation we do not reduce rates below 0%. This modified simulation results in a decrease in projected net interest income of
10.38% and 13.64% at March 31, 2004 and 2003, respectively.

We
also use gap analysis as a secondary tool to manage our interest rate sensitivity. Gap analysis involves measurement of the difference in asset and liability repricing on a cumulative
basis within a specified time frame. A positive gap indicates that more interest-earning assets than interest-bearing liabilities mature in a time frame, and a negative gap indicates the opposite. By
seeking to minimize the net amount of assets and liabilities that could reprice in the same time frame, we attempt to reduce the risk of significant adverse effects on net interest income caused by
interest rate changes. As shown in the cumulative gap position in the table presented below, at March 31, 2004, interest-bearing liabilities repriced faster than interest-earning assets in the
short term, as has been typical for us. Generally speaking, during a period of falling interest rates, net interest income would be higher than it would have been until interest rates stabilize.
During a period of rising interest rates, net interest income would be lower than it would have been until interest rates stabilize. However, at the current absolute level of interest rates, lower
interest rates may also lead to lower net interest income due to a diminished ability to lower the rates paid on interest-bearing liabilities, including certain client funds, as rates approach zero.
Other important determinants of net interest income are general interest rate levels, balance sheet growth and mix, and interest rate spreads.

40

---



The
following table presents the repricing schedule of our interest-earning assets and interest-bearing liabilities at March 31, 2004 (Dollars in thousands):

|                                                                                      |                                             | Within Three
Months                            |        | Three to Six
Months |            | Six to Twelve
Months |         | One Year to
Five Years |       | Over Five
Years |          | Total 
|------------------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------------------- | ------ | ------------------- | ---------- | -------------------- | ------- | ---------------------- | ----- | --------------- | -------- | ------
|Interest-earning assets(1)                                                            |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      | Federal Funds sold                          |                                                | $      | 185,000             |            | $                    |        |                        | $     |                |          | $     
|                                                                                      | Investment securities(2, 3)                 |                                                |        | 4,664,748           |            |                      | 570,912 |                        |       | 865,775         |          |       
|                                                                                      | Loansvariable rate                         |                                                |        | 153,192             |            |                      |        |                        |       |                |          |       
|                                                                                      | Loansfixed rate                            |                                                |        |                    |            |                      |        |                        |       |                |          |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Total interest-earning assets                  |        | $                   | 5,002,940  |                      | $       | 570,912                |       | $               | 865,775  |       
|Interest-bearing liabilities:                                                         |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      | Savings accounts                            |                                                | $      | 3,852,195           |            | $                    |        |                        | $     |                |          | $     
|                                                                                      | Time deposits                               |                                                |        | 512                 |            |                      |        |                        |       |                |          |       
|                                                                                      | Interest rate contracts                     |                                                |        | (1,160,000          | )          |                      | 90,000  |                        |       | 180,000         |          |       
|                                                                                      | Securities sold under repurchase agreements |                                                |        | 2,929,681           |            |                      |        |                        |       |                |          |       
|                                                                                      | Short-term and other borrowings             |                                                |        | 749,704             |            |                      |        |                        |       |                |          |       
|                                                                                      | Trust preferred stock                       |                                                |        |                    |            |                      |        |                        |       |                |          |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Total interest-bearing liabilities             |        | $                   | 6,372,092  |                      | $       | 90,000                 |       | $               | 180,000  |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Net interest-sensitivity gap during the period |        | $                   | (1,369,152 | )                    | $       | 480,912                |       | $               | 685,775  |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Cumulative gap                                 |        | $                   | (1,369,152 | )                    | $       | (888,240               | )     | $               | (202,465 | )     
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Interest-sensitive assets as a percent of interest sensitive liabilities (cumulative) |                                             |                                                | 78.51  | %                   |            | 86.25                | %       |                        | 96.95 | %               |          | 111.28
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Interest-sensitive assets as a percent of total assets (cumulative)                   |                                             |                                                | 49.54  | %                   |            | 55.19                | %       |                        | 63.77 | %               |          | 90.87 
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Net interest-sensitivity gap as a percent of total assets                             |                                             |                                                | (13.56 | %)                  |            | 4.76                 | %       |                        | 6.79  | %               |          | 11.22 
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Cumulative gap as a percent of total assets                                           |                                             |                                                | (13.56 | %)                  |            | (8.80                | %)      |                        | (2.00 | %)              |          | 9.21  
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       

---

41

---



Liquidity

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

Our
primary sources of liquidity include cash and cash equivalents, Federal Funds sold, Federal Reserve Discount Window, client deposits, short-term borrowings, interest and
principal payments on securities held to maturity and available for sale, and fees collected from asset administration clients. As a result of our management of liquid assets and the ability to
generate liquidity through deposits and repurchase agreements, management believes that we maintain overall liquidity sufficient to meet our depositors' needs, to satisfy our operating requirements
and to fund the payment of an anticipated annual cash dividend of $0.07 per share for 2004 (approximately $4.6 million based upon 66,027,734 shares outstanding as of March 31, 2004).

Our
ability to pay dividends on Common Stock may depend on the receipt of dividends from the Bank. Any dividend payments by the Bank are subject to 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 the Company's own dividends. In addition, we may
not pay dividends on our Common Stock if we are in default under certain agreements entered into in connection with the sale of our Capital Securities. The Capital Securities were issued by Investors
Capital Trust I, a Delaware statutory business trust sponsored by us, and qualify as Tier 1 capital under the capital guidelines of the Federal Reserve.

We
have informal borrowing arrangements with various counterparties. Each counterparty has agreed to make funds available to us at the Federal Funds overnight rate. The aggregate amount
of these borrowing arrangements as of March 31, 2004 was $2.5 billion. Each bank may terminate its arrangement at any time and is under no contractual obligation to provide us with
requested funding. Our borrowings under these arrangements are typically on an overnight basis. We cannot be certain, however, that such funding will be available. Lack of availability of liquid funds
could have a material adverse impact on our operations.

We
also have Master Repurchase Agreements in place with various counterparties. Each broker has agreed to make funds available to us at various rates in exchange for collateral
consisting of marketable securities. The aggregate amount of available borrowings under these arrangements at March 31, 2004 was $4.1 billion.

We
also have a borrowing arrangement with the FHLBB. We may borrow amounts determined by prescribed collateral levels and the amount of FHLBB stock we hold. We are required to hold FHLBB
stock equal to no less than (i) 1% of our outstanding residential mortgage loan principal (including mortgage pool securities) or (ii) total advances from the FHLBB, divided by a
leverage factor of 20. The aggregate amount of borrowing available to us under this arrangement at March 31, 2004 was $3.3 billion. The amount outstanding under this arrangement at
March 31, 2004 was $0.5 billion.

On
April 19, 2004, the FHLBB implemented a new capital structure mandated for all Federal Home Loan Banks by the Gramm-Leach-Bliley Act of 1999 and regulations that were
subsequently promulgated in 2001 by the FHLBB's regulator, the Federal Housing Finance Board. The Bank's capital stock investment in the FHLBB will remain at its current level of $50 million
under the new capital plan. The $50 million capital stock investment includes both a $25 million membership component and a $25 million activity-based component. Under the new
capital plan, the FHLBB capital stock investments require a five-year advance notice of withdrawal. The Bank's $50 million capital stock investment in the FHLBB will provide a
borrowing capacity of approximately $555 million.

42

---



Capital Resources

Historically, we have financed our operations principally through internally generated cash flows. We incur capital expenditures for furniture, fixtures,
capitalized software and miscellaneous equipment needs. Capital expenditures have been incurred and operating leases entered into on an as-required basis, primarily to meet our growing
operating needs. As a result, our capital expenditures were $5.5 million and $8.8 million for the three months ended March 31, 2004 and 2003, respectively. For the three months
ended March 31, 2004, capital expenditures were comprised of approximately $3.0 million in capitalized software and projects in process and $2.5 million in fixed assets. For the
three months ended March 31, 2003, capital expenditures were comprised of approximately $3.5 million in capitalized software and projects in process, $1.2 million in fixed assets
and $4.1 million in leasehold improvements. Leasehold improvement expenditures for the three months ended March 31, 2003 were related to increased space in our Dublin office, which was
needed to support new business.

Stockholders'
equity at March 31, 2004 was $610.4 million, up 13% from December 31, 2003, primarily due to net income growth and increased other comprehensive income
due to the appreciation of our available for sale securities portfolio. The ratio of average stockholders' equity to average assets remained constant at approximately 6% for March 31, 2004 and
December 31, 2003.

The
FRB has adopted a system using internationally consistent risk-based capital adequacy guidelines to evaluate the capital adequacy of banks and bank holding companies.
Under the risk-based capital guidelines, different categories of assets are assigned different risk weights, based generally upon the perceived credit risk of the asset. These risk weights
are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. Certain off-balance sheet items are added to the risk-weighted asset base
by converting them to a balance sheet equivalent and assigning them the appropriate risk weight.

FRB
and FDIC guidelines require that banking organizations have a minimum ratio of total capital to risk-adjusted assets and off-balance sheet items of 8.0%.
Total capital is defined as the sum of "Tier 1" and "Tier 2" capital elements, with at least half of the total capital required to be Tier 1. Tier 1 capital includes, with certain restrictions, the
sum of common stockholders' equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and minority interests in consolidated subsidiaries, less certain
intangible assets. Tier 2 capital includes, with certain limitations, subordinated debt meeting certain requirements, intermediate-term preferred stock, certain hybrid capital instruments,
certain forms of perpetual preferred stock, as well as maturing capital instruments and general allowances for loan losses. Our Total and Tier 1 capital ratios at March 31, 2004 were each
17.99%, which are in excess of minimum requirements. The Bank's Total and Tier 1 capital ratios at March 31, 2004 were each 17.56%, which are in excess of minimum requirements.

In
addition to the risk-based capital guidelines, the FRB and the FDIC use a "Leverage Ratio" as an additional tool to evaluate capital adequacy. The Leverage Ratio is
defined to be a company's Tier 1 capital divided by its adjusted average total assets. The Leverage Ratio adopted by the federal banking agencies requires a ratio of 3.0% Tier 1 capital to adjusted
average total assets for top-rated banking institutions. All other banking institutions are expected to maintain a Leverage Ratio of 4.0% to 5.0%. The computation of the
risk-based capital ratios and the Leverage Ratio requires that the capital of Investors Financial and that of Investors Bank be reduced by most intangible assets. Our Leverage Ratio at
March 31, 2004 was 5.46%, which is in excess of regulatory minimums. Investors Bank's Leverage Ratio at March 31, 2004 was 5.33%, which is also in excess of regulatory minimums.

43

---



Item 4. Controls and Procedures



As of March 31, 2004, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and
procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file or
submit to the Securities and Exchange Commission. Kevin J. Sheehan, our Chairman and Chief Executive Officer, and John N. Spinney, Jr., our Senior Vice President and Chief Financial Officer, reviewed
and participated in this evaluation. Based on this evaluation, Messrs. Sheehan and Spinney concluded that, as of March 31, 2004, our disclosure controls were effective.



During the fourth quarter of 2004, the Company's management determined that they should have applied the retrospective method of accounting for premiums and
discounts on certain investment securities under Statement of Financial Accounting Standard No. 91,Accounting for Non-Refundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases. As a result, the Consolidated Balance Sheets as of December 31, 2003 and 2002 and the related
Consolidated Statements of Income, Comprehensive Income, Stockholders' Equity and Cash Flows for each of the years in the three year period ended December 31, 2003 have been restated. In
addition, the Condensed Consolidated Balance Sheet as of March 31, 2004 and the related Condensed Consolidated Statements of Income and Comprehensive Income, Stockholders' Equity and Cash Flows
for the three months ended March 31, 2004 and 2003 have been restated.

As
a result of the evaluation completed by us, and which Messrs. Sheehan and Spinney participated, we have concluded that no changes occurred during our fiscal quarter ended
March 31, 2004 in our internal controls over financial reporting, which changes have materially affected, or are reasonably likely to materially affect, our internal controls over financial
reporting.

44

---





PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.



Exhibit No.

Description15

Letter of awareness from Deloitte & Touche LLP, dated November 15, 2004, concerning unaudited interim financial statements.31.1

Certification of Kevin J. Sheehan, Chief Executive Officer31.2

Certification of John N. Spinney, Jr., Chief Financial Officer32.1

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.




45

---







SIGNATURES

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

|                        |  |     |  | INVESTORS FINANCIAL SERVICES CORP.                                                                                                        
|----------------------- |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|Date: November 15, 2004 |  | By: |  | /s/KEVIN J. SHEEHANKevin J. Sheehan
Chairman and Chief Executive Officer                                                                  
|                        |  | By: |  | /s/JOHN N. SPINNEY, JR.John N. Spinney, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

46

---



QuickLinks