SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q/A
Amendment No. 1

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

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

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|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.



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INVESTORS FINANCIAL SERVICES CORP.

INDEX

|           |  |                                                                                                                          |  | Page
|---------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ----
|           |  | EXPLANATORY NOTE                                                                                                         |  | 3   
|PART I.    |  | FINANCIAL INFORMATION                                                                                                    |  |     
|Item 1.    |  | Unaudited Condensed Consolidated Financial Statements                                                                    |  |     
|           |  | Unaudited Condensed Consolidated Balance Sheets June 30, 2004 and December 31, 2003                                      |  | 6   
|           |  | Unaudited Condensed Consolidated Statements of Income and Comprehensive Income Six months ended June 30, 2004 and 2003   |  | 7   
|           |  | Unaudited Condensed Consolidated Statements of Income and Comprehensive Income Three months ended June 30, 2004 and 2003 |  | 8   
|           |  | Unaudited Condensed Consolidated Statements of Stockholders' Equity Six months ended June 30, 2004 and 2003              |  | 9   
|           |  | Unaudited Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2004 and 2003                        |  | 10  
|           |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                           |  | 11  
|           |  | Report of Independent Registered Public Accounting Firm                                                                  |  | 28  
|Item 2.    |  | Management's Discussion and Analysis of Financial Conditionand Results of Operations                                     |  | 29  
|Item 4.    |  | Controls and Procedures                                                                                                  |  | 49  
|PART II.   |  | OTHER INFORMATION                                                                                                        |  |     
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                         |  | 51  
|SIGNATURES |  | 52                                                                                                                      

2

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INVESTORS FINANCIAL SERVICES CORP.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

EXPLANATORY NOTE

This Amendment to Investors Financial Services Corp.'s Quarterly Report on Form 10-Q for the period ended June 30, 2004, includes
restated financial statements as of June 30, 2004 and December 31, 2003, and for the six-month and three-month periods ended June 30, 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 16 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 portfolio. Other comprehensive
income, net of tax, increased on a cumulative basis by $4.9 million as of both June 30, 2004 and December 31, 2003.

The
following is a summary of 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 Six Months Ended
June 30, 2004 |         | For the Six Months Ended
June 30, 2003
|-------------------------- |  | -------------------------------------- | ------- | --------------------------------------
|
|Statement of Income        |  |                                        |         |                                       
|Interest income            |  | $                                      | 142,533 |                                       
|Net interest income        |  |                                        | 90,253  |                                       
|Net operating revenue      |  |                                        | 306,764 |                                       
|Income Before Income Taxes |  |                                        | 105,930 |                                       
|Provision for income taxes |  |                                        | 35,537  |                                       
|Net Income                 |  |                                        | 70,393  |                                       
|Basic Earnings Per Share   |  | $                                      | 1.07    |                                       
|Diluted Earnings Per Share |  | $                                      | 1.04    |                                       

3

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|                            |                                        | For the Six Months Ended
June 30, 2004 |        | For the Six Months Ended
June 30, 2003
|--------------------------- | -------------------------------------- | -------------------------------------- | ------ | --------------------------------------
|
|Comprehensive Income        |                                        |                                        |        |                                       
|Net income                  |                                        | $                                      | 70,393 |                                       
|Other comprehensive income: |                                        |                                        |        |                                       
|                            | Net unrealized investment (loss) gain: |                                        |        | (37,157                               
|                            | Other comprehensive (loss) income      |                                        |        | (25,703                               
|Comprehensive income        |                                        |                                        | 44,690 |                                       

|                                                                                  |                                                                       | For the Six Months Ended
June 30, 2004    |        | For the Six Months Ended
June 30, 2003
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ------ | --------------------------------------
|
|Statement of Cash Flows                                                           |                                                                       |                                           |        |                                       
|Net income                                                                        |                                                                       | $                                         | 70,393 |                                       
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                                       |                                           |        |                                       
|                                                                                  | Amortization of premiums on securities, net of accretion of discounts |                                           |        | 22,166                                
|                                                                                  | Other liabilities                                                     |                                           |        | 22,150                                
|                                                                                  |                                                                       | Net cash provided by operating activities |        |                                       

|                           |  | For the Three Months Ended
June 30, 2004 |         | For the Three Months Ended
June 30, 2003
|-------------------------- |  | ---------------------------------------- | ------- | ----------------------------------------
|
|Statement of Income        |  |                                          |         |                                         
|Interest income            |  | $                                        | 71,357  |                                         
|Net interest income        |  |                                          | 44,292  |                                         
|Net operating revenue      |  |                                          | 154,033 |                                         
|Income Before Income Taxes |  |                                          | 53,333  |                                         
|Provision for income taxes |  |                                          | 17,915  |                                         
|Net Income                 |  |                                          | 35,418  |                                         
|Basic Earnings Per Share   |  | $                                        | 0.54    |                                         
|Diluted Earnings Per Share |  | $                                        | 0.52    |                                         

4

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|                                   |                                        | For the Three Months Ended
June 30, 2004 |         | For the Three Months Ended
June 30, 2003
|---------------------------------- | -------------------------------------- | ---------------------------------------- | ------- | ----------------------------------------
|
|Comprehensive Income               |                                        |                                          |         |                                         
|Net income                         |                                        | $                                        | 35,418  |                                         
|Other comprehensive (loss) income: |                                        |                                          |         |                                         
|                                   | Net unrealized investment (loss) gain: |                                          |         | (60,513                                 
|                                   | Other comprehensive (loss) income      |                                          |         | (47,814                                 
|Comprehensive (loss) income        |                                        |                                          | (12,396 | )                                       

|                                            |  | At June 30, 2004 |            | At December 31, 2003
|------------------------------------------- |  | ---------------- | ---------- | --------------------
|
|Balance Sheet                               |  |                  |            |                     
|Securities held to maturity                 |  | $                | 5,096,930  |                     
|Total Assets                                |  |                  | 10,921,423 |                     
|Other liabilities                           |  |                  | 79,273     |                     
|Total liabilities                           |  |                  | 10,319,880 |                     
|Retained earnings                           |  |                  | 354,222    |                     
|Accumulated other comprehensive income, net |  |                  | (12,697    | )                   
|Total stockholders' equity                  |  |                  | 601,543    |                     
|Total Liabilities and Stockholders' Equity  |  | $                | 10,921,423 |                     

This
Report, as amended, covers the quarterly period ended June 30, 2004 and was originally filed on August 6, 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 disclosure.

5

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PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

INVESTORS FINANCIAL SERVICES CORP.  UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETSJune 30, 2004 and December 31, 2003 (Dollars in thousands, except share data)

|                                                                                                                                                                                                                             |                   | June 30,
2004
(As Restated) |            | December 31,
2003
(As Restated) |          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | --------------------------- | ---------- | ------------------------------- | ---------
|Assets                                                                                                                                                                                                                       |                   |                             |            |                                 |          
|Cash and due from banks                                                                                                                                                                                                      |                   | $                           | 42,779     |                                 | $        
|Federal Funds sold                                                                                                                                                                                                           |                   |                             | 425,000    |                                 |          
|Securities held to maturity (approximate fair value of $5,095,999 and $4,308,578 at June 30, 2004 and December 31, 2003, respectively)                                                                                       |                   |                             | 5,095,905  |                                 |          
|Securities available for sale                                                                                                                                                                                                |                   |                             | 4,605,279  |                                 |          
|Nonmarketable equity securities                                                                                                                                                                                              |                   |                             | 50,000     |                                 |          
|Loans, less allowance for loan losses of $100 at June 30, 2004 and December 31, 2003                                                                                                                                         |                   |                             | 192,183    |                                 |          
|Accrued interest and fees receivable                                                                                                                                                                                         |                   |                             | 83,704     |                                 |          
|Equipment and leasehold improvements, less accumulated depreciation of $52,289 and $47,683 at June 30, 2004 and December 31, 2003, respectively                                                                              |                   |                             | 71,493     |                                 |          
|Goodwill, net                                                                                                                                                                                                                |                   |                             | 79,969     |                                 |          
|Deposits pledged to secure clearings                                                                                                                                                                                         |                   |                             | 188,226    |                                 |          
|Other assets                                                                                                                                                                                                                 |                   |                             | 85,860     |                                 |          
|                                                                                                                                                                                                                             |                   |                             |            |                                 |          
|Total Assets                                                                                                                                                                                                                 |                   | $                           | 10,920,398 |                                 | $        
|                                                                                                                                                                                                                             |                   |                             |            |                                 |          
|Liabilities and Stockholders' Equity                                                                                                                                                                                         |                   |                             |            |                                 |          
|Liabilities:                                                                                                                                                                                                                 |                   |                             |            |                                 |          
|Deposits:                                                                                                                                                                                                                    |                   |                             |            |                                 |          
|                                                                                                                                                                                                                             | Demand            |                             | $          | 1,052,848                       |          
|                                                                                                                                                                                                                             | Savings           |                             |            | 3,585,156                       |          
|                                                                                                                                                                                                                             | Time              |                             |            | 365,169                         |          
|                                                                                                                                                                                                                             |                   |                             |            |                                 |          
|                                                                                                                                                                                                                             |                   | Total deposits              |            |                                 | 5,003,173
|Securities sold under repurchase agreements                                                                                                                                                                                  |                   |                             | 4,287,675  |                                 |          
|Short-term and other borrowings                                                                                                                                                                                              |                   |                             | 789,119    |                                 |          
|Due to brokers for open trades payable                                                                                                                                                                                       |                   |                             | 135,866    |                                 |          
|Junior subordinated deferrable interest debentures                                                                                                                                                                           |                   |                             | 24,774     |                                 |          
|Other liabilities                                                                                                                                                                                                            |                   |                             | 78,589     |                                 |          
|                                                                                                                                                                                                                             |                   |                             |            |                                 |          
|                                                                                                                                                                                                                             | Total liabilities |                             |            | 10,319,196                      |          
|                                                                                                                                                                                                                             |                   |                             |            |                                 |          
|Commitments and contingencies                                                                                                                                                                                                |                   |                             |           |                                 |          
|Stockholders' Equity:                                                                                                                                                                                                        |                   |                             |            |                                 |          
|Preferred stock, par value $0.01 (shares authorized: 1,000,000; issued and outstanding: none at June 30, 2004 and December 31, 2003)                                                                                         |                   |                             |           |                                 |          
|Common stock, par value $0.01 (shares authorized: 175,000,000 at June 30, 2004 and 100,000,000 at December 31, 2003; issued and outstanding: 66,224,998 and 65,436,788 at June 30, 2004 and December 31, 2003, respectively) |                   |                             | 662        |                                 |          
|Surplus                                                                                                                                                                                                                      |                   |                             | 260,686    |                                 |          
|Deferred compensation                                                                                                                                                                                                        |                   |                             | (780       | )                               |          
|Retained earnings                                                                                                                                                                                                            |                   |                             | 348,941    |                                 |          
|Accumulated other comprehensive income, net                                                                                                                                                                                  |                   |                             | (7,757     | )                               |          
|Treasury stock, at cost (26,508 shares at June 30, 2004 and December 31, 2003)                                                                                                                                               |                   |                             | (550       | )                               |          
|                                                                                                                                                                                                                             |                   |                             |            |                                 |          
|                                                                                                                                                                                                                             |                   | Total stockholders' equity  |            |                                 | 601,202  
|                                                                                                                                                                                                                             |                   |                             |            |                                 |          
|Total Liabilities and Stockholders' Equity                                                                                                                                                                                   |                   | $                           | 10,920,398 |                                 | $        
|                                                                                                                                                                                                                             |                   |                             |            |                                 |          

See Notes to Unaudited Condensed Consolidated Financial Statements.

6

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INVESTORS FINANCIAL SERVICES CORP.  UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMESix Months Ended June 30, 2004 and 2003 (Dollars in thousands,
except per share data)

|                                  |                                           | June 30,
2004
(As Restated) |                              | June 30,
2003
(As Restated)      
|--------------------------------- | ----------------------------------------- | --------------------------- | ---------------------------- | ---------------------------------
|Fees and Other Revenue:           |                                           |                             |                              |                                  
|Asset servicing fees:             |                                           |                             |                              |                                  
|                                  | Core service fees                         |                             | $                            | 154,849                          
|                                  | Ancillary service fees                    |                             |                              | 60,331                           
|                                  |                                           |                             |                              |                                  
|                                  |                                           | Total asset servicing fees  |                              |                                  
|                                  |                                           |                             |                              |                                  
|Other operating income            |                                           |                             | 1,097                        |                                  
|Gain on sale of investment        |                                           |                             | 234                          |                                  
|                                  |                                           |                             |                              |                                  
|                                  |                                           |                             | Total fees and other revenue |                                  
|                                  |                                           |                             |                              |                                  
|Interest income                   |                                           |                             | 142,776                      |                                  
|Interest expense                  |                                           |                             | 52,280                       |                                  
|                                  |                                           |                             |                              |                                  
|                                  |                                           |                             | Net interest income          |                                  
|                                  |                                           |                             |                              |                                  
|                                  |                                           |                             |                              | Net operating revenue            
|                                  |                                           |                             |                              |                                  
|Operating Expenses:               |                                           |                             |                              |                                  
|Compensation and benefits         |                                           |                             | 109,094                      |                                  
|Transaction processing services   |                                           |                             | 21,138                       |                                  
|Technology and telecommunications |                                           |                             | 20,722                       |                                  
|Depreciation and amortization     |                                           |                             | 16,721                       |                                  
|Occupancy                         |                                           |                             | 14,260                       |                                  
|Professional fees                 |                                           |                             | 7,256                        |                                  
|Travel and sales promotion        |                                           |                             | 2,579                        |                                  
|Insurance                         |                                           |                             | 2,360                        |                                  
|Other operating expenses          |                                           |                             | 6,704                        |                                  
|                                  |                                           |                             |                              |                                  
|                                  |                                           |                             |                              | Total operating expenses         
|                                  |                                           |                             |                              |                                  
|Income Before Income Taxes        |                                           |                             | 106,173                      |                                  
|Provision for income taxes        |                                           |                             | 35,624                       |                                  
|                                  |                                           |                             |                              |                                  
|Net Income                        |                                           | $                           | 70,549                       |                                  
|                                  |                                           |                             |                              |                                  
|Basic Earnings Per Share          |                                           | $                           | 1.07                         |                                  
|                                  |                                           |                             |                              |                                  
|Diluted Earnings Per Share        |                                           | $                           | 1.04                         |                                  
|                                  |                                           |                             |                              |                                  
|Comprehensive Income:             |                                           |                             |                              |                                  
|Net income                        |                                           | $                           | 70,549                       |                                  
|Other comprehensive income:       |                                           |                             |                              |                                  
|                                  | Net unrealized investment (loss) gain     |                             |                              | (37,076                          
|                                  | Net unrealized derivative instrument gain |                             |                              | 11,854                           
|                                  | Cumulative translation adjustment         |                             |                              | (400                             
|                                  |                                           |                             |                              |                                  
|                                  |                                           |                             |                              | Other comprehensive (loss) income
|                                  |                                           |                             |                              |                                  
|Comprehensive income              |                                           | $                           | 44,927                       |                                  
|                                  |                                           |                             |                              |                                  

See Notes to Unaudited Condensed Consolidated Financial Statements.

7

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INVESTORS FINANCIAL SERVICES CORP.  UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMEThree Months Ended June 30, 2004 and 2003 (Dollars in thousands,
except per share data)

|                                  |                                           | June 30,
2004
(As Restated) |                                   | June 30,
2003
(As Restated)
|--------------------------------- | ----------------------------------------- | --------------------------- | --------------------------------- | ---------------------------
|Fees and Other Revenue:           |                                           |                             |                                   |                            
|Asset servicing fees:             |                                           |                             |                                   |                            
|                                  | Core service fees                         |                             | $                                 | 78,755                     
|                                  | Ancillary service fees                    |                             |                                   | 30,238                     
|                                  |                                           |                             |                                   |                            
|                                  |                                           | Total asset servicing fees  |                                   |                            
|                                  |                                           |                             |                                   |                            
|Other operating income            |                                           |                             | 748                               |                            
|                                  |                                           |                             |                                   |                            
|                                  |                                           |                             | Total fees and other revenue      |                            
|                                  |                                           |                             |                                   |                            
|Interest income                   |                                           |                             | 69,140                            |                            
|Interest expense                  |                                           |                             | 27,065                            |                            
|                                  |                                           |                             |                                   |                            
|                                  |                                           | Net interest income         |                                   |                            
|                                  |                                           |                             |                                   |                            
|                                  |                                           |                             | Net operating revenue             |                            
|                                  |                                           |                             |                                   |                            
|Operating Expenses:               |                                           |                             |                                   |                            
|Compensation and benefits         |                                           |                             | 53,771                            |                            
|Technology and telecommunications |                                           |                             | 10,456                            |                            
|Transaction processing services   |                                           |                             | 10,198                            |                            
|Depreciation and amortization     |                                           |                             | 8,767                             |                            
|Occupancy                         |                                           |                             | 6,869                             |                            
|Professional fees                 |                                           |                             | 4,018                             |                            
|Travel and sales promotion        |                                           |                             | 1,497                             |                            
|Insurance                         |                                           |                             | 1,164                             |                            
|Other operating expenses          |                                           |                             | 3,960                             |                            
|                                  |                                           |                             |                                   |                            
|                                  |                                           |                             | Total operating expenses          |                            
|                                  |                                           |                             |                                   |                            
|Income Before Income Taxes        |                                           |                             | 51,116                            |                            
|Provision for income taxes        |                                           |                             | 17,120                            |                            
|                                  |                                           |                             |                                   |                            
|Net Income                        |                                           | $                           | 33,996                            |                            
|                                  |                                           |                             |                                   |                            
|Basic Earnings Per Share          |                                           | $                           | 0.51                              |                            
|                                  |                                           |                             |                                   |                            
|Diluted Earnings Per Share        |                                           | $                           | 0.50                              |                            
|                                  |                                           |                             |                                   |                            
|Comprehensive Income:             |                                           |                             |                                   |                            
|Net income                        |                                           | $                           | 33,996                            |                            
|Other comprehensive income:       |                                           |                             |                                   |                            
|                                  | Net unrealized investment (loss) gain     |                             |                                   | (58,989                    
|                                  | Net unrealized derivative instrument gain |                             |                                   | 13,016                     
|                                  | Cumulative translation adjustment         |                             |                                   | (317                       
|                                  |                                           |                             |                                   |                            
|                                  |                                           |                             | Other comprehensive (loss) income |                            
|                                  |                                           |                             |                                   |                            
|Comprehensive (loss) income       |                                           | $                           | (12,294                           | )                          
|                                  |                                           |                             |                                   |                            

See Notes to Unaudited Condensed Consolidated Financial Statements.

8

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INVESTORS FINANCIAL SERVICES CORP.  UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYSix Months Ended June 30, 2004 and 2003 (Dollars in thousands, except share
data)

|                                                                 |  | June 30,
2004
(As Restated) |            | June 30,
2003
(As Restated) |  
|---------------------------------------------------------------- |  | --------------------------- | ---------- | --------------------------- | -
|Common shares                                                    |  |                             |            |                             |  
|Balance, beginning of period                                     |  |                             | 65,436,788 |                             |  
|Exercise of stock options                                        |  |                             | 740,529    |                             |  
|Common stock issuance                                            |  |                             | 47,681     |                             |  
|                                                                 |  |                             |            |                             |  
|Balance, end of period                                           |  |                             | 66,224,998 |                             |  
|                                                                 |  |                             |            |                             |  
|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                                        |  |                             | 7          |                             |  
|                                                                 |  |                             |            |                             |  
|Balance, end of period                                           |  |                             | 662        |                             |  
|                                                                 |  |                             |            |                             |  
|Surplus                                                          |  |                             |            |                             |  
|Balance, beginning of period                                     |  |                             | 242,662    |                             |  
|Exercise of stock options                                        |  |                             | 10,005     |                             |  
|Tax benefit from exercise of stock options                       |  |                             | 6,539      |                             |  
|Common stock issuance                                            |  |                             | 1,668      |                             |  
|Stock option forfeiture                                          |  |                             | (188       | )                           |  
|                                                                 |  |                             |            |                             |  
|Balance, end of period                                           |  |                             | 260,686    |                             |  
|                                                                 |  |                             |            |                             |  
|Deferred compensation                                            |  |                             |            |                             |  
|Balance, beginning of period                                     |  |                             | (1,076     | )                           |  
|Stock option forfeiture                                          |  |                             | 188        |                             |  
|Amortization of deferred compensation                            |  |                             | 108        |                             |  
|                                                                 |  |                             |            |                             |  
|Balance, end of period                                           |  |                             | (780       | )                           |  
|                                                                 |  |                             |            |                             |  
|Retained earnings                                                |  |                             |            |                             |  
|Balance, beginning of period                                     |  |                             | 280,701    |                             |  
|Net income                                                       |  |                             | 70,549     |                             |  
|Cash dividend, $0.035 and $0.030 per share in the periods ending |  |                             |            |                             |  
|June 30, 2004 and 2003, respectively                             |  |                             | (2,309     | )                           |  
|                                                                 |  |                             |            |                             |  
|Balance, end of period                                           |  |                             | 348,941    |                             |  
|                                                                 |  |                             |            |                             |  
|Accumulated other comprehensive income, net                      |  |                             |            |                             |  
|Balance, beginning of period                                     |  |                             | 17,865     |                             |  
|Net unrealized investment (loss) gain                            |  |                             | (37,076    | )                           |  
|Net unrealized derivative instrument gain                        |  |                             | 11,844     |                             |  
|Amortization of transition-related adjustment                    |  |                             |           |                             |  
|Amortization of terminated interest rate swap agreements         |  |                             | 10         |                             |  
|Effect of foreign currency translation                           |  |                             | (400       | )                           |  
|                                                                 |  |                             |            |                             |  
|Balance, end of period                                           |  |                             | (7,757     | )                           |  
|                                                                 |  |                             |            |                             |  
|Treasury stock                                                   |  |                             |            |                             |  
|Balance, beginning of period                                     |  |                             | (550       | )                           |  
|                                                                 |  |                             |            |                             |  
|Balance, end of period                                           |  |                             | (550       | )                           |  
|                                                                 |  |                             |            |                             |  
|Total Stockholders' Equity                                       |  | $                           | 601,202    |                             | $
|                                                                 |  |                             |            |                             |  

See Notes to Unaudited Condensed Consolidated Financial Statements.

9

---





INVESTORS FINANCIAL SERVICES CORP.  UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSix Months Ended June 30, 2004 and 2003 (Dollars in thousands)

|                                                                                    |                                                                       | June 30,
2004
(As Restated)               |            | June 30,
2003
(As Restated) |           
|----------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ---------- | --------------------------- | ----------
|Cash Flows From Operating Activities:                                               |                                                                       |                                           |            |                             |           
|Net income                                                                          |                                                                       | $                                         | 70,549     |                             | $         
|Adjustments to reconcile net income to net cash provided by operating activities:   |                                                                       |                                           |            |                             |           
|                                                                                    | Equity in undistributed loss of unconsolidated subsidiary             |                                           |            | 14                          |           
|                                                                                    | Depreciation and amortization                                         |                                           |            | 16,721                      |           
|                                                                                    | Amortization of deferred compensation                                 |                                           |            | 108                         |           
|                                                                                    | Amortization of premiums on securities, net of accretion of discounts |                                           |            | 21,923                      |           
|                                                                                    | Gain on sale of investment                                            |                                           |            | (234                        | )         
|                                                                                    | Changes in assets and liabilities:                                    |                                           |            |                             |           
|                                                                                    |                                                                       | Accrued interest and fees receivable      |            |                             | (10,888   
|                                                                                    |                                                                       | Other assets                              |            |                             | (13,552   
|                                                                                    |                                                                       | Other liabilities                         |            |                             | 22,237    
|                                                                                    |                                                                       |                                           |            |                             |           
|                                                                                    |                                                                       | Net cash provided by operating activities |            |                             | 106,878   
|                                                                                    |                                                                       |                                           |            |                             |           
|Cash Flows From Investing Activities:                                               |                                                                       |                                           |            |                             |           
|Proceeds from maturities and paydowns of securities available for sale              |                                                                       |                                           | 717,922    |                             |           
|Proceeds from maturities and paydowns of securities held to maturity                |                                                                       |                                           | 758,965    |                             |           
|Proceeds from sale of securities available for sale                                 |                                                                       |                                           | 25,041     |                             |           
|Purchases of securities available for sale                                          |                                                                       |                                           | (1,115,949 | )                           |           
|Purchases of securities held to maturity                                            |                                                                       |                                           | (1,563,748 | )                           |           
|Net increase in deposits pledged to secure clearings                                |                                                                       |                                           | (158,580   | )                           |           
|Net increase (decrease) in due to brokers for open trades payable                   |                                                                       |                                           | 135,866    |                             |           
|Net increase in Federal Funds sold and securities purchased under resale agreements |                                                                       |                                           | (425,000   | )                           |           
|Net decrease in loans                                                               |                                                                       |                                           | 7,347      |                             |           
|Purchases of fixed assets, capitalized software and leasehold improvements          |                                                                       |                                           | (11,779    | )                           |           
|                                                                                    |                                                                       |                                           |            |                             |           
|                                                                                    |                                                                       | Net cash used for investing activities    |            |                             | (1,629,915
|                                                                                    |                                                                       |                                           |            |                             |           
|Cash Flows From Financing Activities:                                               |                                                                       |                                           |            |                             |           
|Net increase in demand deposits                                                     |                                                                       |                                           | 718,025    |                             |           
|Net increase in time and savings deposits                                           |                                                                       |                                           | 78,030     |                             |           
|Net increase in securities sold under repurchase agreements                         |                                                                       |                                           | 1,029,674  |                             |           
|Net (decrease) increase in short-term and other borrowings                          |                                                                       |                                           | (308,968   | )                           |           
|Proceeds from exercise of stock options                                             |                                                                       |                                           | 10,012     |                             |           
|Proceeds from issuance of common stock                                              |                                                                       |                                           | 1,668      |                             |           
|Cash dividends to shareholders                                                      |                                                                       |                                           | (2,309     | )                           |           
|                                                                                    |                                                                       |                                           |            |                             |           
|                                                                                    |                                                                       | Net cash provided by financing activities |            |                             | 1,526,132 
|                                                                                    |                                                                       |                                           |            |                             |           
|Effect of exchange rates on cash                                                    |                                                                       |                                           | (5         | )                           |           
|Net Increase (Decrease) in Cash and Due From Banks                                  |                                                                       |                                           | 3,090      |                             |           
|                                                                                    |                                                                       |                                           |            |                             |           
|Cash and Due From Banks, Beginning of Period                                        |                                                                       |                                           | 39,689     |                             |           
|                                                                                    |                                                                       |                                           |            |                             |           
|Cash and Due From Banks, End of Period                                              |                                                                       | $                                         | 42,779     |                             | $         
|                                                                                    |                                                                       |                                           |            |                             |           

See Notes to Unaudited Condensed Consolidated Financial Statements.

10

---





INVESTORS FINANCIAL SERVICES CORP.        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Information is as of and for the six months and the
three months ended June 30, 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
("SEC"), 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 June 30, 2004 and December 31, 2003, and for
the six-month and the three-month periods ended June 30, 2004 and 2003 have been prepared by the Company pursuant to the rules and
regulations of the SEC. 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 noted 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 six months and three months ended June 30, 2004 and 2003 and as of December 31, 2003 that reflect the application of the retrospective method under FAS 91. 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

11

---



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

|                                                                                                                                            |                     | For the Six Months
Ended June 30, |        | For the Three Months
Ended June 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | --------------------------------- | ------ | ----------------------------------- | -
|
|Net income as reported                                                                                                                      |                     | $                                 | 70,549 |                                     | $
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |                     |                                   | (5,176 | )                                   |  
|                                                                                                                                            |                     |                                   |        |                                     |  
|Pro forma net income                                                                                                                        |                     | $                                 | 65,373 |                                     | $
|                                                                                                                                            |                     |                                   |        |                                     |  
|Earnings per share:                                                                                                                         |                     |                                   |        |                                     |  
|                                                                                                                                            | Basic-as reported   |                                   | $      | 1.07                                |  
|                                                                                                                                            |                     |                                   |        |                                     |  
|                                                                                                                                            | Basic-pro forma     |                                   | $      | 0.99                                |  
|                                                                                                                                            |                     |                                   |        |                                     |  
|                                                                                                                                            | Diluted-as reported |                                   | $      | 1.04                                |  
|                                                                                                                                            |                     |                                   |        |                                     |  
|                                                                                                                                            | Diluted-pro forma   |                                   | $      | 0.97                                |  
|                                                                                                                                            |                     |                                   |        |                                     |  

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 six months ended June 30,
2004 and 2003, respectively: an average assumed risk-free interest rate of 2.89% and 2.17%, an expected life of four years, an average expected volatility of 52.84% and 56.26%, and an
average dividend yield of 0.17% and 0.23%.

For
the three months ended June 30, 2004 and 2003, respectively, the following assumptions were used in the Black-Scholes valuation model: an assumed risk-free
interest rate of 3.40% and 2.04%, an expected life of four years, an expected volatility of 51.73% and 56.34%, and a dividend yield of 0.16% and 0.21%.

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

12

---



Stock
that then shared in the earnings of the Company. The reconciliation from Basic to Diluted EPS is as follows (Dollars in thousands, except per share data):

|                                            |         | For the Six Months Ended
June 30, |            | For the Three Months Ended
June 30,
|------------------------------------------- | ------- | --------------------------------- | ---------- | -----------------------------------
|
|Income available to common stockholders     |         | $                                 | 70,549     |                                    
|                                            |         |                                   |            |                                    
|Basic weighted-average shares outstanding   |         |                                   | 65,976,331 |                                    
|Dilutive effect of stock options            |         |                                   | 1,731,942  |                                    
|                                            |         |                                   |            |                                    
|Diluted weighted-average shares outstanding |         |                                   | 67,708,273 |                                    
|                                            |         |                                   |            |                                    
|Earnings per share:                         |         |                                   |            |                                    
|                                            | Basic   |                                   | $          | 1.07                               
|                                            |         |                                   |            |                                    
|                                            | Diluted |                                   | $          | 1.04                               
|                                            |         |                                   |            |                                    

There
were 42,109 and 3,587,429 option shares which were not considered dilutive for purposes of EPS calculations for the six-month periods ended June 30, 2004 and
2003, respectively. For the three-month periods ended June 30, 2004 and 2003 there were 193,514 and 3,591,643 option shares, respectively, which were not considered dilutive for purposes of EPS
calculations.

New Accounting PrinciplesIn March 2004, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments.EITF Issue 03-1 is effective for all annual or interim financial statements for periods beginning after June 15,
2004. EITF Issue 03-1 addresses the identification of other-than-temporarily impaired investments, and requires that an impairment charge be recognized for
other-than-temporarily impaired investments for which there is neither the ability nor intent to hold either until maturity or until the market value of the investment
recovers. The Company does not anticipate any material impact to its financial condition or results of operations.

13

---



3. Securities

Amortized cost amounts and fair values of securities are summarized as follows as of June 30, 2004 (Dollars in thousands):

|Held to Maturity                 |  | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |  | Fair
Value
|-------------------------------- |  | -------------- | --------- | ---------------- | - | ------------------- |  | ----------
|Mortgage-backed securities       |  | $              | 2,874,627 |                  | $ | 13,632              |  | $         
|Federal agency securities        |  |                | 2,091,935 |                  |   | 3,625               |  |           
|State and political subdivisions |  |                | 129,343   |                  |   | 3,823               |  |           
|                                 |  |                |           |                  |   |                     |  |           
|Total                            |  | $              | 5,095,905 |                  | $ | 21,080              |  | $         
|                                 |  |                |           |                  |   |                     |  |           

|Available for Sale               |  | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |  | Fair
Value
|-------------------------------- |  | -------------- | --------- | ---------------- | - | ------------------- |  | ----------
|Mortgage-backed securities       |  | $              | 3,940,389 |                  | $ | 10,709              |  | $         
|State and political subdivisions |  |                | 382,550   |                  |   | 12,007              |  |           
|Corporate debt                   |  |                | 177,767   |                  |   | 842                 |  |           
|U.S. Treasury securities         |  |                | 112,614   |                  |   | 1,851               |  |           
|Foreign government securities    |  |                | 9,259     |                  |   | 15                  |  |           
|                                 |  |                |           |                  |   |                     |  |           
|Total                            |  | $              | 4,622,579 |                  | $ | 25,424              |  | $         
|                                 |  |                |           |                  |   |                     |  |           

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              |  | $         
|                                 |  |                |           |                  |   |                     |  |           

|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 $5.9 billion and $5.6 billion at June 30, 2004 and December 31, 2003. Securities are
pledged primarily to secure clearings with other

14

---



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 June 30, 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 June 30, 2004 and December 31, 2003. In addition, there were no loan charge-offs or recoveries during the six months ended June 30, 2004 and the year ended
December 31, 2003. Loans are summarized as follows (Dollars in thousands):

June 30,
2004

December 31,
2003Loans to individuals

$
91,292

$
67,641Loans to mutual funds


66,437


104,954Loans to others


34,554


27,035Gross loans


192,283


199,630Less allowance for loan losses


(100
)

(100
)Total

$
192,183

$
199,530


15

---



5. Deposits

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

June 30,
2004

December 31,
2003Interest-bearing deposits:Savings

$
3,575,512

$
3,632,913Time


130,169


Total interest-bearing deposits


3,705,681


3,632,913Noninterest-bearing deposits:Demand


1,052,848


334,823Savings


9,644


49,382Time


235,000


190,000Total noninterest-bearing deposits


1,297,492


574,205Total

$
5,003,173

$
4,207,118


6. Securities Sold Under Repurchase Agreements

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

June 30,
2004

December 31,
2003Repurchase agreementsshort term

$
3,587,675

$
2,858,001Repurchase agreementslong term


700,000


400,000Total

$
4,287,675

$
3,258,001


Approximately
$4.3 billion and $3.4 billion of securities were pledged to collateralize repurchase agreements as of June 30, 2004 and December 31, 2003,
respectively.

7. Short-term and Other Borrowings

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

June 30,
2004

December 31,
2003Federal Funds purchased

$
739,038

$
697,855Federal Home Loan Bank of Boston long-term advances


50,000


150,000Federal Home Loan Bank of Boston overnight advances





250,000Treasury, Tax and Loan account


81


232Total

$
789,119

$
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.

16

---



Approximately
$1.4 billion and $1.9 billion of securities were pledged to collateralize these advances as of June 30, 2004 and December 31, 2003, respectively.

8. Stockholders' Equity

As of June 30, 2004, the Company's authorized capital stock consisted of 1,000,000 shares of Preferred Stock and 175,000,000 shares of Common Stock, all
with a par value of $0.01 per share.

At
the Annual Meeting of Stockholders of the Company held on April 13, 2004, stockholders approved an increase in the number of authorized shares of Common Stock from 100,000,000
to 175,000,000. On May 5, 2004, the Company amended its Certificate of Incorporation to increase the number of authorized shares of Common Stock to 175,000,000. These shares are available for
issuance for general corporate purposes as determined by the Company's Board of Directors.

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").

At
the Annual Meeting of Stockholders of the Company held on April 13, 2004, stockholders approved an amendment to the Company's ESPP to increase the number of shares of Common
Stock that may be issued thereunder from 1,120,000 to 1,620,000.

During
the six months ended June 30, 2004, the following activity occurred under the Director Plan and the Stock Plan:

June 30, 2004Shares

Weighted-Average
Exercise PriceOutstanding at December 31, 2003

6,547,086

$
24Granted

261,274


41Exercised

(963,175
)

20Canceled

(78,306
)

31Outstanding at June 30, 2004

5,766,879

$
26Outstanding and Exercisable at June 30, 2004

4,141,844


A
summary of activity under the ESPP is as follows:

For the
Six Months Ended
June 30, 2004

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

227,504

356,875Approved increase in shares available

500,000

Issued at June 30

(47,681
)
(70,606
)Issued at December 31



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

679,823

227,504


17

---



For
the six-month period ended June 30, 2004, the purchase price of the stock was $35.00, or 90% of the market value of the Common Stock on the first business day of
the payment period ending June 30, 2004.

During
the year ended December 31, 2003, the purchase prices of the stock were $25.50 and $27.00, or 90% of the market value of the Common Stock on the first business day of the
payment periods ending June 30, 2003 and December 31, 2003, respectively.

9. 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.

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):

June 30, 2004

June 30, 2003Pension Plan

SERP

Pension Plan

SERPService cost

$
463

$
476

$
417

$
439Interest cost on projected benefit obligations


555


484


513


449Expected return on plan assets


(725
)




(543
)

Net amortization and deferral


120


296


124


325Net periodic pension cost

$
413

$
1,256

$
511

$
1,213


The
Company expects to contribute approximately $2 to $4 million to its pension plan during 2004. During the period ended June 30, 2004, the Company did not make any
contributions to the plan.

At
June 30, 2004, the SERP remained an unfunded plan. Consistent with the Company's expectations at December 31, 2003, no contributions to the SERP are anticipated during
2004.

18

---





10. Off-Balance Sheet Financial Instruments

Lines of CreditAt June 30, 2004, the Company had commitments to individuals and mutual funds
under collateralized open lines of credit totaling $1.0 billion, against which $88.0 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 June 30, 2004 totaled
$4.8 billion while the fair value of the portfolio totaled approximately $4.6 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 those 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.

11. 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

19

---



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 $1.3 billion and $1.2 billion at June 30, 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
$3.6 million and $(14.9) million at June 30, 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 and were $0.9 million for both the six months and three months ended June 30,
2004.

In
May 2004, the Company terminated $280.0 million of its interest rate swap agreements discussed above. As a result, an after-tax net loss of
$0.4 million was included in other comprehensive income and will be amortized over the life of the underlying contracts through 2006. The Company estimates that net derivative gains and losses
reclassified into earnings within the next twelve months will be immaterial. These terminated interest rate swap agreements were replaced with new interest rate swap agreements and term borrowings in
order to more favorably manage exposure to changes in interest rates.

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 and 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 June 30,
2004 and December 31, 2003 were $2.1 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 $4.7 million and
$16.1 million as of June 30, 2004 and December 31, 2003, respectively. Unrealized losses in other liabilities were $4.5 million and $15.9 million as of
June 30, 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

20

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into
these contracts, the Company is fixing the price to be paid at a future date for certain investment securities. At June 30, 2004 and December 31, 2003, the Company had
$639.4 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.

12. 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 June 30, 2004 was approximately $33.0 million. In
addition, the Company's balance sheet includes deposits totaling approximately $188.2 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 these 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 were no contingent liabilities at June 30, 2004 that were material to the consolidated financial position or results of
operations of the Company.

13. 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
June 30, 2004, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

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.

21

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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 June 30, 2004:                                 |  |        |         |                               |       |                                                                  |  
|Total Capital
(to Risk-Weighted Assets-the Company)  |  | $      | 553,818 |                               | 17.87 | %                                                                | $
|Total Capital
(to Risk-Weighted Assets-the Bank)     |  | $      | 540,134 |                               | 17.45 | %                                                                | $
|Tier 1 Capital
(to Risk-Weighted Assets-the Company) |  | $      | 553,718 |                               | 17.87 | %                                                                | $
|Tier 1 Capital
(to Risk-Weighted Assets-the Bank)    |  | $      | 540,034 |                               | 17.44 | %                                                                | $
|Tier 1 Capital
(to Average Assets-the Company)       |  | $      | 553,718 |                               | 5.54  | %                                                                | $
|Tier 1 Capital
(to Average Assets-the Bank)          |  | $      | 540,034 |                               | 5.40  | %                                                                | $
|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.

22

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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 June 30, 2004, that Investors Securities Services, Inc.
is in material compliance with all of the foregoing requirements to which it is subject.

14. 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  |  | $                     | 291,240 |  | $ | 226,996
|Ireland        |  |                       | 13,440  |  |   | 8,391  
|Canada         |  |                       | 2,237   |  |   | 807    
|Cayman Islands |  |                       | 90      |  |   | 38     
|               |  |                       |         |  |   |        
|Total          |  | $                     | 307,007 |  | $ | 236,232
|               |  |                       |         |  |   |        

Barclays
Global Investors, N.A. ("BGI") accounted for approximately 17% of the Company's consolidated net operating revenues for the six- and three-month periods ended
June 30, 2004, and 16% of the Company's consolidated net operating revenues for the six- and three-month periods ended June 30, 2003. No client other than BGI accounted for
more than 10% of the Company's consolidated net operating revenues for the six- and three-month periods ended June 30, 2004 and 2003.

23

---



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

For the Six Months Ended
June 30,

For the Three Months Ended
June 30,2004

2003

2004

2003Core service fees:Custody, accounting and administration

$
154,849

$
118,838

$
78,755

$
62,078Ancillary service fees:Foreign exchange


33,008


16,823


14,513


10,090Cash management


12,338


10,667


6,738


5,632Investment advisory


8,033


6,092


4,563


2,877Securities lending


5,724


4,842


3,581


2,654Other service fees


1,228


619


843


404Total ancillary service fees


60,331


39,043


30,238


21,657Total asset servicing fees

$
215,180

$
157,881

$
108,993

$
83,735


15. Net Interest Income

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

For the Six Months Ended
June 30,

For the Three Months Ended
June 30,2004

2003

2004

2003Interest income:Federal Funds sold and securities sold under repurchase agreements

$
314

$
182

$
152

$
166Investment securities held to maturity and available for sale


140,310


120,152


67,961


59,958Loans


2,152


1,778


1,027


930Total interest income


142,776


122,112


69,140


61,054Interest expense:Deposits


22,274


18,231


10,904


9,114Short-term and other borrowings


30,006


26,958


16,161


14,509Total interest expense


52,280


45,189


27,065


23,623Net interest income

$
90,496

$
76,923

$
42,075

$
37,431


16. Restatement

The Company has approximately $9.7 billion of investment securities on its balance sheet as of June 30, 2004. Certain types of investments held by
the Company were purchased with discounts or premiums to par value.

24

---



The
principal application of Statement of Financial Accounting Standards 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 was adjusted on a cumulative basis by $4.9 million as of both June 30, 2004 and December 31, 2003.

The
following tables summarize of 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 Six Months Ended
June 30, 2004 |         | For the Six Months Ended
June 30, 2003
|-------------------------- |  | -------------------------------------- | ------- | --------------------------------------
|
|Statement of Income        |  |                                        |         |                                       
|Interest income            |  | $                                      | 142,533 |                                       
|Net interest income        |  |                                        | 90,253  |                                       
|Net operating revenue      |  |                                        | 306,764 |                                       
|Income Before Income Taxes |  |                                        | 105,930 |                                       
|Provision for income taxes |  |                                        | 35,537  |                                       
|Net Income                 |  |                                        | 70,393  |                                       
|Basic Earnings Per Share   |  | $                                      | 1.07    |                                       
|Diluted Earnings Per Share |  | $                                      | 1.04    |                                       

25

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|                            |                                        | For the Six Months Ended
June 30, 2004 |        | For the Six Months Ended
June 30, 2003
|--------------------------- | -------------------------------------- | -------------------------------------- | ------ | --------------------------------------
|
|Comprehensive Income        |                                        |                                        |        |                                       
|Net income                  |                                        | $                                      | 70,393 |                                       
|Other comprehensive income: |                                        |                                        |        |                                       
|                            | Net unrealized investment (loss) gain: |                                        |        | (37,157                               
|                            | Other comprehensive (loss) income      |                                        |        | (25,703                               
|Comprehensive income        |                                        |                                        | 44,690 |                                       

|                                                                                  |                                                                       | For the Six Months Ended
June 30, 2004    |        | For the Six Months Ended
June 30, 2003
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ------ | --------------------------------------
|
|Statement of Cash Flows                                                           |                                                                       |                                           |        |                                       
|Net income                                                                        |                                                                       | $                                         | 70,393 |                                       
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                                       |                                           |        |                                       
|                                                                                  | Amortization of premiums on securities, net of accretion of Discounts |                                           |        | 22,166                                
|                                                                                  | Other liabilities                                                     |                                           |        | 22,150                                
|                                                                                  |                                                                       | Net cash provided by operating activities |        |                                       

|                           |  | For the Three Months Ended
June 30, 2004 |         | For the Three Months Ended
June 30, 2003
|-------------------------- |  | ---------------------------------------- | ------- | ----------------------------------------
|
|Statement of Income        |  |                                          |         |                                         
|Interest income            |  | $                                        | 71,357  |                                         
|Net interest income        |  |                                          | 44,292  |                                         
|Net operating revenue      |  |                                          | 154,033 |                                         
|Income Before Income Taxes |  |                                          | 53,333  |                                         
|Provision for income taxes |  |                                          | 17,915  |                                         
|Net Income                 |  |                                          | 35,418  |                                         
|Basic Earnings Per Share   |  | $                                        | 0.54    |                                         
|Diluted Earnings Per Share |  | $                                        | 0.52    |                                         

26

---



|                                   |                                        | For the Three Months Ended
June 30, 2004 |         | For the Three Months Ended
June 30, 2003
|---------------------------------- | -------------------------------------- | ---------------------------------------- | ------- | ----------------------------------------
|
|Comprehensive Income               |                                        |                                          |         |                                         
|Net income                         |                                        | $                                        | 35,418  |                                         
|Other comprehensive (loss) income: |                                        |                                          |         |                                         
|                                   | Net unrealized investment (loss) gain: |                                          |         | (60,513                                 
|                                   | Other comprehensive (loss) income      |                                          |         | (47,814                                 
|Comprehensive (loss) income        |                                        |                                          | (12,396 | )                                       

|                                            |  | At June 30, 2004 |            | At December 31, 2003
|------------------------------------------- |  | ---------------- | ---------- | --------------------
|
|Balance Sheet                               |  |                  |            |                     
|Securities held to maturity                 |  | $                | 5,096,930  |                     
|Total Assets                                |  |                  | 10,921,423 |                     
|Other liabilities                           |  |                  | 79,273     |                     
|Total liabilities                           |  |                  | 10,319,880 |                     
|Retained earnings                           |  |                  | 354,222    |                     
|Accumulated other comprehensive income, net |  |                  | (12,697    | )                   
|Total stockholders' equity                  |  |                  | 601,543    |                     
|Total Liabilities and                       |  |                  |            |                     
|Stockholders' Equity                        |  | $                | 10,921,423 |                     

27

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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 June 30, 2004, and the related
condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2004 and 2003, and condensed consolidated statements of
stockholders' equity and cash flows for the six-month periods ended June 30, 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 16, the June 30, 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
August 6, 2004, November 12, 2004, as to the
effects of the restatement
discussed in Note 16

28

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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. 91,Accounting 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 ("IBT").
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 June 30, 2004, we provided services for approximately $1.2 trillion in net
assets, including approximately $222 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

29

---



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. We have structured our balance sheet to accommodate an expected increase in rates by the Federal Open Market Committee ("FOMC") over the next
eighteen months. We expect to experience some net interest margin pressure, however, we believe net interest income will continue to grow during this period.

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.

Effective
July 1, 2004, we entered into a seven-year contract with International Business Machines Corporation ("IBM"), to outsource certain technical infrastructure
services. As these services are currently performed by IBT or other service providers, this contract is not expected to have a material impact on our financial condition or results of operations. All
development and maintenance of proprietary software and systems will continue to be performed by IBT.

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 and its later partial reversal of approximately
$6.7 million, or $0.10 per share, net of federal income taxes, in the second quarter of 2003. The accrual resulted from a retroactive tax law change by the Commonwealth of Massachusetts
disallowing a dividends received deduction taken by IBT 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 non-GAAP 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

30

---



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 Six Months Ended
June 30, |         | For the Three Months Ended
June 30,
|-------------------------- | ------- | --------------------------------- | ------- | -----------------------------------
|
|Income before taxes        |         | $                                 | 106,173 |                                    
|Provision for income taxes |         |                                   | 35,624  |                                    
|                           |         |                                   |         |                                    
|Net income                 |         | $                                 | 70,549  |                                    
|                           |         |                                   |         |                                    
|Earnings per share:        |         |                                   |         |                                    
|                           | Basic   |                                   | $       | 1.07                               
|                           |         |                                   |         |                                    
|                           | Diluted |                                   | $       | 1.04                               
|                           |         |                                   |         |                                    

Non-GAAP Operating Earnings (unaudited)

|                              |         | For the Six Months Ended
June 30, |         | For the Three Months Ended
June 30, |  
|----------------------------- | ------- | --------------------------------- | ------- | ----------------------------------- | -
|
|Income before taxes           |         | $                                 | 106,173 |                                     | $
|Provision for income taxes    |         |                                   | 35,624  |                                     |  
|                              |         |                                   |         |                                     |  
|Net operating income          |         | $                                 | 70,549  |                                     | $
|                              |         |                                   |         |                                     |  
|Operating earnings per share: |         |                                   |         |                                     |  
|                              | Basic   |                                   | $       | 1.07                                |  
|                              |         |                                   |         |                                     |  
|                              | Diluted |                                   | $       | 1.04                                |  
|                              |         |                                   |         |                                     |  

---

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

31

---



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, insurance expense, 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 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. 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. While we expect interest rates to continue to rise over the next eighteen months, 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% of our net operating revenue during the six
months and three months ended June 30, 2004. 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

32

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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.

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:



33

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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.

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.

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Statements of Operations

Comparison of Operating Results for the Six and Three Months Ended June 30, 2004 and 2003

Net income for the six months ended June 30, 2004 was $70.5 million, up 109% from $33.8 million for the same period in 2003. Net income for
the three months ended June 30, 2004 was $34.0 million, up 22% from $27.9 million for the same period in 2003. Our income statements for the six- and three-month
periods ended June 30, 2003 each reflect the net effect of the first quarter 2003 tax accrual and its later partial reversal resulting from our settlement with the Massachusetts Department of
Revenue. Refer toIncome Taxeswithin this section for further discussion regarding our settlement of this tax assessment. Absent the effects of this
tax matter, net income for the six months and three months ended June 30, 2004 increased 72% and 60%, respectively, from net operating income for the same periods in 2003. Overall the increases
in net income can be attributed to our ability to sell to new and existing clients, strong client fund flows and a favorable interest rate environment. Net operating revenue for the six months and
three months ended June 30, 2004 grew 30% and 25%, respectively, with only a 14% and 11% increase, respectively, in operating expenses.

Fees and Other Revenue

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

|                             |  | For the Six Months Ended June 30, |         | For the Three Months Ended June 30, |  
|---------------------------- |  | --------------------------------- | ------- | ----------------------------------- | -
|
|Total asset servicing fees   |  | $                                 | 215,180 |                                     | $
|Other operating income       |  |                                   | 1,097   |                                     |  
|Gain on sale of investment   |  |                                   | 234     |                                     |  
|                             |  |                                   |         |                                     |  
|Total fees and other revenue |  | $                                 | 216,511 |                                     | $
|                             |  |                                   |         |                                     |  

Asset
servicing fees for the six months and three months ended June 30, 2004 increased 36% and 30%, respectively, from the same periods in 2003. The largest components of asset
servicing fees are custody, accounting and administration, which increased 30% to $154.8 million for the six months ended June 30, 2004 and increased 27% to $78.8 million for the
three months ended June 30, 2004 from the same periods in 2003. 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 Six Months Ended
June 30, 2004

For the Three Months Ended
June 30, 2004Net assets processed, beginning of period

$
1,057

$
1,131Change in net assets processed:Sales to new clients


3


2Further penetration of existing clients


16


9Lost clients


(1
)

Fund flows and market gain


128


61Total change in net assets processed


146


72Net assets processed, end of period

$
1,203

$
1,203


The
majority of the increase in assets processed resulted from client fund flows, and to a lesser extent market appreciation. In addition, we signed several new advisory clients and
family offices and won business from numerous existing clients. Our core services fees are generated by charging a fee

35

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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, allows 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
$33.0 million for the six months ended June 30, 2004, up 96% from the same period in 2003, and were $14.5 million for the three months ended June 30, 2004, up 44% from the
same period in 2003. The increase in foreign exchange fees for both periods is attributable to new clients, higher transaction volumes and increased volatility in currency markets. 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 $12.3 million for the
six months ended June 30, 2004, up 16% from the same period in 2003, and were $6.7 million for the three months ended June 30, 2004, up 20% from the same period in 2003. The
increases for both periods are primarily due to higher domestic and foreign balances held by our clients. 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 $8.0 million for the six months ended June 30, 2004, up 32% from the same period in 2003, and were $4.6 million for the three months
ended June 30, 2004, up 59% from the same period in 2003. The increases in investment advisory fees are attributable to higher balances in our proprietary Merrimac money market funds. Future
investment advisory fee income is dependent upon asset levels within the Merrimac money market funds which are driven by overall market conditions, client activity and transaction volumes. Securities
lending fees were $5.7 million for the six months ended June 30, 2004, up 18% from the same period in 2003, and were $3.6 million for the three months ended June 30, 2004,
up 35% from the same period in 2003, due to higher volumes in both periods. 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 service fees for the six months ended June 30, 2004 were $1.2 million, up 98% from
the same period last year, and were $0.8 million for the three months ended June 30, 2004, up 109% from the same period last year. Other service fees are earned on brokerage and
transition management services, which were provided in greater volume for both periods in 2004 compared to 2003.

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 six

36

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months
ended June 30, 2004, other operating income decreased 23% compared to the same period last year, due to a lower yield paid on our FHLBB stock investment and to the high volume of client
systems development projects performed in 2003. Other operating income increased 14% for the three months ended June 30, 2004 compared to the same period last year. Although still impacted by a
lower yield paid on our FHLBB investment, this decrease was offset by a one-time fee for consulting services provided to clients. Operating revenue for the six months ended June 30,
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 during 2003.

Net Interest Income

The following table presents the components of net interest income (Dollars in thousands):

|                          |  | For the Six Months Ended June 30, |         | For the Three Months Ended June 30, |  
|------------------------- |  | --------------------------------- | ------- | ----------------------------------- | -
|
|Interest income           |  | $                                 | 142,776 |                                     | $
|Interest expense          |  |                                   | 52,280  |                                     |  
|                          |  |                                   |         |                                     |  
|Total net interest income |  | $                                 | 90,496  |                                     | $
|                          |  |                                   |         |                                     |  

Net
interest income was $90.5 million for the six months ended June 30, 2004, up 18% from the same period in 2003, and was $42.1 million for the three months ended
June 30, 2004, up 12% 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 for both periods was the result of balance sheet growth driven by strong client funding and a steep yield curve. We expect net interest income to grow in line with our
balance sheet growth, despite an expected 275 basis point increase in rates by the FOMC over the next eighteen months. 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, we continued to employ a strategy of prepaying high-rate borrowings and replacing them with lower cost term funding in order to maintain our net interest margin.
We do not expect to incur any further prepayment costs in 2004. Although the average funding balance increased for both the six months and three months ended June 30, 2004 compared to the same
periods in 2003, the average rates paid on interest-bearing liabilities declined. Our average rate paid on interest-bearing liabilities was 1.22% for the six months ended June 30, 2004, a 17
basis point decline from 1.39% for the same period in 2003. Our average rate paid on interest-bearing liabilities was 1.23% for the three months ended June 30, 2004, a 16 basis point decline
from 1.39% for the same period in 2003. These decreases were 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 six months and the three months ended June 30, 2004 compared to the same periods in 2003. Changes attributed

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

|                              |                       | For the Six Months Ended June 30, 2004 |        | For the Three Months Ended June 30, 2004 |       
|----------------------------- | --------------------- | -------------------------------------- | ------ | ---------------------------------------- | ------
|
|Interest-earning assets:      |                       |                                        |        |                                          |       
|                              | Federal Funds sold    |                                        | $      | 168                                      |       
|                              | Investment securities |                                        |        | 35,159                                   |       
|                              | Loans                 |                                        |        | 794                                      |       
|                              |                       |                                        |        |                                          |       
|                              |                       | Total interest-earning assets          |        | $                                        | 36,121
|                              |                       |                                        |        |                                          |       
|Interest-bearing liabilities: |                       |                                        |        |                                          |       
|                              | Deposits              |                                        | $      | 10,769                                   |       
|                              | Borrowings            |                                        |        | 1,063                                    |       
|                              |                       |                                        |        |                                          |       
|                              |                       | Total interest-bearing liabilities     |        | $                                        | 11,832
|                              |                       |                                        |        |                                          |       
|Change in net interest income |                       | $                                      | 24,289 |                                          | $     
|                              |                       |                                        |        |                                          |       

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 did not have a material impact on earnings for the six months and the three months ended June 30, 2004 and 2003. We expect that hedge ineffectiveness will continue
to have an insignificant effect on our net interest margin in 2004.

In
May 2004, we terminated $280.0 million of our interest rate swap agreements discussed above. As a result, an after-tax net loss of $0.4 million was
included in other comprehensive income and will be amortized over the life of the underlying contracts through 2006. The Company estimates that net derivative gains and losses reclassified into
earnings within the next twelve months will be immaterial. These terminated interest rate swap agreements were replaced with new interest rate swap agreements and term borrowings in order to more
favorably manage exposure changes in interest rates.

We
regularly run interest rate simulation models to understand the effect of various interest rate scenarios on our capital and net income, with a policy limit of a 10% change in net
interest income. The results of the income simulation model as of June 30, 2004 indicated that an upward shift of interest rates by 200 basis points over a twelve-month period would result in a
change in projected net interest income within this 10% range. 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 would change projected net interest income by more than the 10% policy limit, however, our Board of Directors approved this exception because of the low likelihood that rates
will decrease to 0%. More relevant to our earnings is that we expect additional increases in interest rates by the FOMC during the next eighteen months. While our simulation model projects a slight
decrease in our net interest margin percentage in a rising rate environment, we generally expect the absolute dollar amount of net interest income to increase over the next eighteen months, 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.

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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):

|                              |                                                                     | Six Months Ended June 30, 2004    |         | Six Months Ended June 30, 2003 |          
|----------------------------- | ------------------------------------------------------------------- | --------------------------------- | ------- | ------------------------------ | ---------
|
|Interest-earning assets:      |                                                                     |                                   |         |                                |          
|                              | Federal Funds sold and securities purchased under resale agreements |                                   | $       | 64,110                         |          
|                              | Investment securities(1)                                            |                                   |         | 9,085,199                      |          
|                              | Loans                                                               |                                   |         | 180,998                        |          
|                              |                                                                     |                                   |         |                                |          
|                              |                                                                     | Total interest-earning assets     |         |                                | 9,330,307
|                              |                                                                     |                                   |         |                                |          
|Allowance for loan losses     |                                                                     |                                   | (100    | )                              |          
|Noninterest-earning assets    |                                                                     |                                   | 527,817 |                                |          
|                              |                                                                     |                                   |         |                                |          
|                              |                                                                     | Total assets                      |         | $                              | 9,858,024
|                              |                                                                     |                                   |         |                                |          
|Interest-bearing liabilities: |                                                                     |                                   |         |                                |          
|                              | Deposits:                                                           |                                   |         |                                |          
|                              |                                                                     | Savings                           |         | $                              | 4,050,597
|                              |                                                                     | Time                              |         |                                | 15,151   
|                              | Securities sold under repurchase agreements(2)                      |                                   |         | 3,726,235                      |          
|                              | Trust preferred stock(3)                                            |                                   |         | 24,774                         |          
|                              | Other borrowings(4)                                                 |                                   |         | 783,422                        |          
|                              |                                                                     |                                   |         |                                |          
|                              | Total interest-bearing liabilities                                  |                                   |         | 8,600,179                      |          
|                              |                                                                     |                                   |         |                                |          
|                              | Noninterest-bearing liabilities:                                    |                                   |         |                                |          
|                              |                                                                     | Demand deposits                   |         |                                | 289,415  
|                              |                                                                     | Savings                           |         |                                | 77,897   
|                              |                                                                     | Noninterest-bearing time deposits |         |                                | 165,852  
|                              |                                                                     | Other liabilities                 |         |                                | 136,181  
|                              |                                                                     |                                   |         |                                |          
|                              | Total liabilities                                                   |                                   |         | 9,269,524                      |          
|                              |                                                                     |                                   |         |                                |          
|                              | Equity                                                              |                                   |         | 588,500                        |          
|                              |                                                                     |                                   |         |                                |          
|                              | Total liabilities and equity                                        |                                   | $       | 9,858,024                      |          
|                              |                                                                     |                                   |         |                                |          
|                              | Net interest income                                                 |                                   |         |                                |          
|                              |                                                                     |                                   |         |                                |          
|                              | Net interest margin(5)                                              |                                   |         |                                |          
|                              |                                                                     |                                   |         |                                |          
|                              | Average interest rate spread(6)                                     |                                   |         |                                |          
|                              |                                                                     |                                   |         |                                |          
|                              | Ratio of interest-earning assets to interest-bearing liabilities    |                                   |         |                                |          
|                              |                                                                     |                                   |         |                                |          

---

39

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Operating Expenses

Total operating expenses were $200.8 million for the six months ended June 30, 2004 and were $100.7 million for the three months ended
June 30, 2004, up 14% and 11%, respectively, from the same periods in 2003. It is expected that incremental expense for the remainder of 2004 will primarily be associated with new business as
well as commitments related to depreciation and technology and telecommunications. The components of operating expenses were as follows (Dollars in thousands):

|                                  |  | For the Six Months Ended June 30, |         | For the Three Months Ended June 30, |  
|--------------------------------- |  | --------------------------------- | ------- | ----------------------------------- | -
|
|Compensation and benefits         |  | $                                 | 109,094 |                                     | $
|Transaction processing services   |  |                                   | 21,138  |                                     |  
|Technology and telecommunications |  |                                   | 20,722  |                                     |  
|Depreciation and amortization     |  |                                   | 16,721  |                                     |  
|Occupancy                         |  |                                   | 14,260  |                                     |  
|Professional fees                 |  |                                   | 7,256   |                                     |  
|Travel and sales promotion        |  |                                   | 2,579   |                                     |  
|Insurance                         |  |                                   | 2,360   |                                     |  
|Other operating expenses          |  |                                   | 6,704   |                                     |  
|                                  |  |                                   |         |                                     |  
|Total operating expenses          |  | $                                 | 200,834 |                                     | $
|                                  |  |                                   |         |                                     |  

Compensation
and benefits expense was $109.1 million for the six months ended June 30, 2004 and was $53.8 million for the three months ended June 30, 2004, up
8% and 6%, respectively, from the same periods last year due to higher headcount, payroll taxes and incentive accruals. Further increases in compensation expense in 2004 will be primarily dependent
upon new business wins.

Transaction
processing services expense was $21.1 million for the six months ended June 30, 2004 and was $10.2 million for the three months ended June 30,
2004, up 29% and 7%, respectively, from the same periods last year as a result of higher subcustodian fees driven by increased asset values and 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 $20.7 million for the six months ended June 30, 2004 and was $10.5 million for the three months ended June 30,
2004, up 10% and 9%, respectively, from the same periods last year. These increases resulted from increased hardware and telecommunications expenditures, increased software license and maintenance
fees, as well as higher contract programming costs in both periods in 2004. Future technology and telecommunications expense will be dependent on the amount of new business we win, ongoing improvement
to our infrastructure and client integrations. Generally, we expect technology reinvestment to equal approximately 18-20% of net operating revenue.

Depreciation
and amortization expense was $16.7 million for the six months ended June 30, 2004 and was $8.8 million for the three months ended June 30, 2004,
up 32% and 33%, respectively, from the same periods last year. These increases resulted from the completion of capitalized software projects in late 2003 and early 2004 and their placement into
service. We expect that depreciation expense will decrease for the remainder of 2004 due to the full depreciation of assets purchased from BGI in 2001.

Professional
fees expense was $7.3 million for the six months ended June 30, 2004 and was $4.0 million for the three months ended June 30, 2004, up 16% and
22%, respectively, from the same periods last year. These increases are attributed primarily to increased fees associated with the

40

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Merrimac
Master Portfolios. The Merrimac fees are asset-based and the increase results from growth in the size of the portfolios.

Travel
and sales promotion expense was $2.6 million for the six months ended June 30, 2004 and was $1.5 million for the three months ended June 30, 2004, up
25% and 38%, respectively, compared to the same periods last year. Travel and sales promotion expense consists of expenses incurred by the sales force, client management staff and other employees in
connection with sales calls on potential clients, traveling to existing client sites, to our offices in New York and California, and to our foreign subsidiaries.

Insurance
expense was $2.4 million for the six months ended June 30, 2004 and was $1.2 million for the three months ended June 30, 2004, up 196% and 103%,
respectively, from the same periods last year. In May 2003, our favorable five-year fixed-rate insurance policy expired, resulting in the increased premiums for the 2004
periods discussed above. Our insurance policies are renewed annually and we expect insurance expense for the remainder of the year to continue at approximately the same run rate as in the second
quarter of 2004.

Other
operating expense was $6.7 million for the six months ended June 30, 2004 and was $4.0 million for the three months ended June 30, 2004, up 52% and 86%,
respectively, compared to the same periods last year as a result of higher FDIC insurance premiums due to higher deposit liabilities, higher recruiting expense, increased advertising expense and
higher miscellaneous office expenses in both periods. We expect that incremental expense for the remainder of 2004 will be primarily associated with new business.

Income Taxes

Income taxes were $35.6 million and $17.1 million for the six months and three months ended June 30, 2004, respectively, up 38% and 481%,
respectively, from the same periods in 2003. These increases are attributable to increased pretax earnings and an increase in the effective tax rate in 2004 to approximately 33.5%, offset by the net
effect of the first quarter 2003 tax accrual and its later partial reversal resulting from our settlement with the Commonwealth of Massachusetts.

In
March 2003, a retroactive tax 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 June 30, 2004, our total assets were $10.9 billion, up 18% from $9.2 billion at December 31, 2003, primarily as a result of strong
client funding and additional capital generated from net income. Average interest-earning assets increased $2.3 billion, or 33%, for the six months ended June 30, 2004 compared to the
same period in 2003. Average interest-earning assets increased $2.2 billion, or 30% for the three months ended June 30, 2004. Funding for our asset growth was provided by an increase in
average client balances of approximately $2.7 billion and $2.5 billion for the six months and three months ended June 30, 2004 and 2003, respectively. These increases were
partially offset by decreases in average external borrowings of approximately $0.5 billion for both of the above-mentioned periods compared to the same periods in 2003.

Investment Portfolio

Our investment portfolio is used to invest depositors' funds and the net interest income generated from our investment portfolio is a component of our
compensation for our asset processing business. In addition, we use the investment portfolio to secure open positions at securities clearing institutions in

41

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connection
with our custody services. The following table summarizes our investment portfolio as of the dates indicated (Dollars in thousands):

|                                 |                                     | June 30,
2004 |           | December 31,
2003
|-------------------------------- | ----------------------------------- | ------------- | --------- | -----------------
|Securities held to maturity      |                                     |               |           |                  
|Mortgage-backed securities       |                                     | $             | 2,874,627 |                  
|Federal agency securities        |                                     |               | 2,091,935 |                  
|State and political subdivisions |                                     |               | 129,343   |                  
|                                 |                                     |               |           |                  
|                                 | Total securities held to maturity   |               | $         | 5,095,905        
|                                 |                                     |               |           |                  
|Securities available for sale    |                                     |               |           |                  
|Mortgage-backed securities       |                                     | $             | 3,910,599 |                  
|State and political subdivisions |                                     |               | 393,767   |                  
|Corporate debt                   |                                     |               | 177,174   |                  
|U.S. Treasury securities         |                                     |               | 114,465   |                  
|Federal agency securities        |                                     |               |          |                  
|Foreign government securities    |                                     |               | 9,274     |                  
|                                 |                                     |               |           |                  
|                                 | Total securities available for sale |               | $         | 4,605,279        
|                                 |                                     |               |           |                  

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 IBT's capital and to accommodate client fund flows. 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.

Our
held to maturity portfolio increased $789.7 million, or 18%, to $5.1 billion at June 30, 2004 from $4.3 billion at December 31, 2003. This increase
stems primarily from purchases of floating-rate mortgage-backed and Small Business Administration securities, which offer an attractive effective yield and reprice as interest rates
increase.

Our
available for sale portfolio remained relatively flat at $4.6 billion at June 30, 2004 and $4.3 billion at December 31, 2003. We reinvested cash flow in
adjustable-rate mortgage-backed securities and insured, AAA-rated municipal bonds. These investments allow us to maintain our net interest margin, diversify our portfolio with
assets that reprice more frequently, and take advantage of attractive 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.

The
average balance of our combined investment portfolios for the six months ended June 30, 2004 was $9.1 billion, with an average yield of 3.09%, compared to an average
balance of $6.9 billion with an average yield of 3.49% during the same period in 2003. For the three months ended June 30, 2004, the average balance of our combined investment portfolios
was $9.3 billion, with an average yield of 2.92%, compared to an average balance of $7.2 billion with an average yield of 3.35% during the same period in 2003. The declines in yields are
primarily due to the overall low interest rate environment coupled with the proceeds of securities that matured or paid down that were originally purchased in a higher interest rate environment, 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 June 30, 2004. We recognized net amortization of $21.9 million for the six months ended June 30, 2004 compared to $16.7 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

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is
variable rate in nature. If interest rates were to rise during the balance of 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 during the second half of 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 an issuer is unable to meet the terms of the security.
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 more favorable. 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 $7.3 million, or 4%, to $192.2 million at June 30, 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 June 30, 2004, client overdrafts were
$101.0 million compared to $54.3 million at December 31, 2003.

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
June 30, 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 June 30,
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 June 30, 2004, a

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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 $1.0 billion, or 32%, to
$4.3 billion at June 30, 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 six months ended June 30, 2004 was $3.7 billion with an average cost of approximately 1.02%, compared to an average balance of
$3.3 billion and an average cost of approximately 0.95% for the same period in 2003. The average balance of securities sold under repurchase agreements for the three months ended
June 30, 2004 was $3.8 billion with an average cost of approximately 1.22%, compared to an average balance of $3.4 billion and an average cost of approximately 0.94% for the same
period in 2003. The average cost of repurchase agreements for the six months and three months ended June 30, 2004 included prepayment fees of $2.9 million. These fees were incurred to
employ an asset-liability strategy in which we replaced high rate borrowings with lower cost term funding.

Short-term
and other borrowings decreased $309.0 million, or 28%, to $789.1 million at June 30, 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 six months ended
June 30, 2004 was $783.4 million with an average cost of approximately 2.48%, compared to an average balance of $887.1 million and an average cost of approximately 2.34% for the
same period last year. The average balance of short-term and other borrowings for the three months ended June 30, 2004 was $834.3 million with an average cost of
approximately 1.97%, compared to an average balance of $918.5 million and an average cost of approximately 2.55% for the same period last year. The average cost of borrowing for the six months
ended June 30, 2004 included prepayment fees of $3.9 million. The average cost of borrowing for the three months ended June 30, 2004 and 2003 included prepayment fees of
$1.3 million and $1.1 million, respectively. Again, these fees were incurred to employ an asset-liability strategy in which we replaced high rate borrowings with lower cost term funding.

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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 change 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 1.25%, 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 June 30, 2004 and 2003 indicated that an upward shift of interest rates by 200 basis points over a twelve-month period would
result in a change in projected net interest income within our 10% policy limit. We also simulate a 200 basis point rate

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reduction
over a twelve-month period, however, in the simulation we do not reduce rates below 0%. This modified simulation results in a change in projected net interest income which exceeds the policy
limit of 10%, however, our Board of Directors approved this exception because of the low likelihood that rates will decrease to 0%.

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 June 30, 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.

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The
following table presents the repricing schedule of our interest-earning assets and interest-bearing liabilities at June 30, 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                          |                                                | $      | 425,000             |            | $                    |        |                        | $     |                |          | $     
|                                                                                      | Investment securities(2,3)                  |                                                |        | 4,745,511           |            |                      | 590,058 |                        |       | 898,176         |          |       
|                                                                                      | Loansvariable rate                         |                                                |        | 192,271             |            |                      |        |                        |       |                |          |       
|                                                                                      | Loansfixed rate                            |                                                |        |                    |            |                      |        |                        |       |                |          |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Total interest-earning assets                  |        | $                   | 5,362,782  |                      | $       | 590,058                |       | $               | 898,176  |       
|Interest-bearing liabilities:                                                         |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      | Savings accounts                            |                                                | $      | 3,540,163           |            | $                    |        |                        | $     |                |          | $     
|                                                                                      | Time deposits                               |                                                |        | 130,169             |            |                      |        |                        |       |                |          |       
|                                                                                      | Interest rate contracts                     |                                                |        | (1,240,000          | )          |                      | 90,000  |                        |       | 180,000         |          |       
|                                                                                      | Securities sold under repurchase agreements |                                                |        | 3,587,675           |            |                      |        |                        |       |                |          |       
|                                                                                      | Short-term and other borrowings             |                                                |        | 739,119             |            |                      |        |                        |       |                |          |       
|                                                                                      | Trust preferred stock                       |                                                |        |                    |            |                      |        |                        |       |                |          |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Total interest-bearing liabilities             |        | $                   | 6,757,126  |                      | $       | 90,000                 |       | $               | 180,000  |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Net interest-sensitivity gap during the period |        | $                   | (1,394,344 | )                    | $       | 500,058                |       | $               | 718,176  |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Cumulative gap                                 |        | $                   | (1,394,344 | )                    | $       | (894,286               | )     | $               | (176,110 | )     
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Interest-sensitive assets as a percent of interest-sensitive liabilities (cumulative) |                                             |                                                | 79.36  | %                   |            | 86.94                | %       |                        | 97.49 | %               |          | 110.21
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Interest-sensitive assets as a percent of total assets (cumulative)                   |                                             |                                                | 49.11  | %                   |            | 54.51                | %       |                        | 62.74 | %               |          | 88.88 
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Net interest-sensitivity gap as a percent of total assets                             |                                             |                                                | (12.77 | %)                  |            | 4.58                 | %       |                        | 6.58  | %               |          | 9.85  
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Cumulative gap as a percent of total assets                                           |                                             |                                                | (12.77 | %)                  |            | (8.19                | %)      |                        | (1.61 | %)              |          | 8.23  
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       

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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

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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 66,224,998 shares outstanding as of June 30, 2004).

Our
ability to pay dividends on Common Stock may depend on the receipt of dividends from IBT. Any dividend payments by IBT 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 IBT 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 June 30, 2004 was $2.9 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 June 30, 2004 was $4.3 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. IBT's capital stock investment in the FHLBB totaled $50 million as of June 30, 2004. The
$50 million capital stock
investment includes both a $25 million membership component and a $25 million activity-based component. The Bank's $50 million capital stock investment in the FHLBB provides a
borrowing capacity of approximately $555 million. Under the new capital plan, FHLBB capital stock investments require a five-year advance notice of withdrawal. The amount
outstanding under this arrangement at June 30, 2004 was $50 million. Additional borrowing is available to IBT based on prescribed collateral levels and increased investment in FHLBB
capital stock.

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 $11.8 million and $17.0 million for the six months ended June 30, 2004 and 2003, respectively. For the six months ended
June 30, 2004, capital expenditures were comprised of approximately $3.8 million in capitalized software and projects in process, $7.9 million in fixed assets and
$0.1 million in leasehold improvements. For the six months ended June 30, 2003, capital expenditures were comprised of approximately $7.8 million in capitalized software and
projects in process, $4.3 million in fixed assets and $4.9 million in leasehold improvements. Leasehold improvement expenditures for the six months

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ended
June 30, 2003 were related to increased space in our Dublin office, which was needed to support new business.

Stockholders'
equity at June 30, 2004 was $601.2 million, up 11% from December 31, 2003, primarily due to net income growth. The ratio of average stockholders'
equity to average assets remained constant at approximately 6% for June 30, 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 June 30, 2004 were each 17.87%, which are in excess of minimum requirements. IBT's Total and Tier 1 capital ratios at June 30, 2004 were
17.45% and 17.44%, respectively, 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 our capital and that of IBT be reduced by most intangible assets. Our Leverage Ratio at June 30, 2004 was 5.54%, which
is in excess of regulatory minimums. IBT's Leverage Ratio at June 30, 2004 was 5.40%, which is also in excess of regulatory minimums.

Item 4. Controls and Procedures



As of June 30, 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 June 30, 2004, our disclosure controls were effective.

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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 June 30, 2004 and the related Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended
June 30, 2004 and 2003 and the related Statements of Stockholders' Equity and Cash Flows for the six months ended June 30, 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
June 30, 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.

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PART II. OTHER INFORMATION

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



|Exhibit No. |  | Description                                                                                                                                                                                                              
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1**       |  | Certificate of Amendment to the Certificate of Incorporation of Investors Financial Services Corp., filed with the Delaware Secretary of State on May 5, 2004.                                                           
|10.1**      |  | Amendment to Investors Financial Services Corp. 1997 Employee Stock Purchase Plan approved April 13, 2004 by the stockholders of Investors Financial Services Corp.                                                      
|10.2**      |  | Information Technology Services Agreement dated July 1, 2004 between the Company and International Business Machines Corporation. *                                                                                      
|15          |  | Letter of awareness from Deloitte & Touche LLP, dated November 15, 2004, concerning unaudited interim financial information.                                                                                             
|31.1        |  | Certification of Kevin J. Sheehan, Chief Executive Officer.                                                                                                                                                              
|31.2        |  | Certification of John N. Spinney, Jr., Chief Financial Officer.                                                                                                                                                          
|32.1        |  | Certification of Kevin J. Sheehan, Chief Executive Officer, and John N. Spinney, Jr., Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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:                               
|                        |  | By:                               

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