<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 --------------
                                    FORM 10-Q
                                 --------------

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                  FOR THE TRANSITION PERIOD FROM _____ TO _____

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

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

           DELAWARE                                     04-3279817
(State or other jurisdiction of               (IRS Employer Identification No.)
incorporation or organization)

                       200 CLARENDON STREET,
                      P.O. BOX 9130, BOSTON, MA                   02117-9130
               (Address of principal executive offices)           (Zip Code)

                                 (617) 937-6700
              (Registrant's telephone number, including area code)

         Indicate by check mark whether the registrant (1) 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 |X| No |_|

         As of April 30, 2001 there were 31,738,645 shares of Common Stock
outstanding.

================================================================================

<PAGE>

                       INVESTORS FINANCIAL SERVICES CORP.

                                      INDEX
<TABLE>
<CAPTION>
                                                                                                            PAGE
<S>              <C>                                                                                        <C>
PART I.          FINANCIAL INFORMATION

Item 1.          Condensed Consolidated Financial Statements

                 Condensed Consolidated Balance Sheets (unaudited)
                   March 31, 2001 and December 31, 2000 ...................................................   3

                 Condensed Consolidated Statements of Income and Comprehensive Income (unaudited)
                   Three months ended March 31, 2001 and 2000..............................................   4

                 Condensed Consolidated Statements of Stockholder's Equity (unaudited)
                   Three months ended March 31, 2001 and 2000..............................................   5

                 Condensed Consolidated Statements of Cash Flows (unaudited)
                   Three months ended March 31, 2001 and 2000..............................................   6

                 Notes to Condensed Consolidated Financial Statements......................................   7

Item 2.          Management's Discussion and Analysis of Financial Condition
                   and Results of Operations...............................................................   17

Item 3.          Quantitative and Qualitative Disclosure about Market Risk.................................   30

PART II.         OTHER INFORMATION

Item 6.          Exhibits and Reports on Form 8-K..........................................................   31

SIGNATURES.................................................................................................   31
</TABLE>

                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                       INVESTORS FINANCIAL SERVICES CORP.
                CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                      MARCH 31, 2001 AND DECEMBER 31, 2000
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                        MARCH 31,     DECEMBER 31,
                                                                                          2001            2000
                                                                                      --------------  --------------
<S>                                                                                    <C>               <C>
                                      ASSETS
Cash and due from banks............................................................       $  25,160        $ 30,489
Federal funds sold.................................................................          17,000         450,000
Securities available for sale......................................................       1,363,545         772,333
Securities held to maturity (approximate fair value of $2,729,240 and $2,287,602
   at March 31, 2001 and December 31, 2000, respectively)..........................       2,723,318       2,299,294
Non-marketable equity securities...................................................          23,000          15,000
Loans, less allowance for loan losses of $100 at March 31, 2001 and December 31,
   2000............................................................................         110,706         129,269
Accrued interest and fees receivable...............................................          61,178          48,003
Equipment and leasehold improvements, less accumulated depreciation of $11,493 and
   $10,563 at March 31, 2001 and December 31, 2000, respectively...................          16,779          15,086
Goodwill, net......................................................................          66,452          34,094
Other assets.......................................................................          23,020          17,547
                                                                                      --------------  --------------
TOTAL ASSETS.......................................................................     $ 4,430,158      $3,811,115
                                                                                      ==============  ==============
                       LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
     Demand........................................................................       $ 272,282        $362,946
     Savings.......................................................................       1,736,504       1,903,938
     Time..........................................................................          65,000          65,000
                                                                                      --------------  --------------
         Total deposits............................................................       2,073,786       2,331,884

Securities sold under repurchase agreements........................................       1,238,724       1,251,725
Short-term and other borrowings....................................................         735,081             246
Other liabilities..................................................................          54,979          24,206
                                                                                      --------------  --------------
         Total liabilities.........................................................       4,102,570       3,608,061
                                                                                      --------------  --------------
Commitments and contingencies

Company-obligated, mandatorily redeemable, preferred securities of subsidiary
   trust holding solely junior subordinated deferrable interest debentures
   of the Company..................................................................          24,253          24,246
                                                                                      --------------  --------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 (shares authorized: 1,000,000; issued and
   outstanding: 0 at March 31, 2001 and December 31, 2000).........................               -               -
Common stock, par value $0.01 (shares authorized:  40,000,000 at March 31, 2001
   and December 31, 2000; issued and outstanding: 31,713,176 at March 31, 2001 and
   29,912,711 at December 31, 2000)                                                             317             299
Surplus............................................................................         213,321          95,007
Deferred compensation..............................................................            (546)           (247)
Retained earnings..................................................................          94,937          85,188
Accumulated other comprehensive loss, net..........................................          (4,694)         (1,439)
Treasury stock, par value $0.01 (10,814 shares at March 31, 2001 and December 31,
2000)..............................................................................               -               -
                                                                                      --------------  --------------
           Total stockholders' equity..............................................         303,335         178,808
                                                                                      --------------  --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.........................................     $ 4,430,158     $ 3,811,115
                                                                                      ==============  ==============
</TABLE>

            SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       3
<PAGE>

                       INVESTORS FINANCIAL SERVICES CORP.
      CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                                   (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 2001 AND 2000
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                   MARCH 31,          MARCH 31,
                                                                                     2001               2000
                                                                             --------------------  ----------------
<S>                                                                              <C>                <C>
OPERATING REVENUE:
Interest income:
   Federal funds sold and securities purchased under resale agreements....             $   929           $   898
   Investment securities held to maturity and available for sale..........              57,021            35,480
   Loans..................................................................               1,367             1,416
                                                                             ------------------  ----------------
       Total interest income..............................................              59,317            37,794
                                                                             ------------------  ----------------
Interest expense:
   Deposits...............................................................              19,430            12,510
   Short-term and other borrowings........................................              18,418            12,327
                                                                             ------------------  ----------------
       Total interest expense.............................................              37,848            24,837
                                                                             ------------------  ----------------
       Net interest income................................................              21,469            12,957

Non-interest income:
   Asset servicing fees...................................................              48,432            39,716
   Other operating income.................................................                 781               396
                                                                             ------------------  ----------------
       Net operating revenue..............................................              70,682            53,069

OPERATING EXPENSES:
 Compensation and benefits................................................              33,914            26,527
 Technology and telecommunications........................................               8,042             4,595
 Occupancy................................................................               3,536             2,072
 Transaction processing services..........................................               2,574             2,519
 Depreciation and amortization............................................               1,362             1,043
 Travel and sales promotion...............................................                 998               669
 Professional fees........................................................                 745             1,074
 Amortization of goodwill.................................................                 650               421
 Other operating expenses.................................................               3,032             2,854
                                                                             ------------------  ----------------
       Total operating expenses...........................................              54,853            41,774
                                                                             ------------------  ----------------

INCOME BEFORE INCOME TAXES AND MINORITY INTEREST..........................              15,829            11,295

Provision for income taxes................................................               5,084             3,632
Minority interest expense, net of income taxes............................                 397               397
                                                                             ------------------  ----------------
NET INCOME................................................................              10,348             7,266
                                                                             ------------------  ----------------
Other comprehensive income/(loss) net of tax of ($1,998) and $423, respectively:
   Cumulative effect of a change in accounting principle..................              (3,934)                -
   Net unrealized investment gain.........................................               2,344               898
   Net unrealized derivative instrument loss..............................              (1,665)                -
                                                                             ------------------  ----------------
       Other comprehensive income/(loss)..................................              (3,255)              898
                                                                             ------------------  ----------------
COMPREHENSIVE INCOME......................................................           $   7,093          $  8,164
                                                                             ==================  ================
BASIC EARNINGS PER SHARE..................................................            $   0.33          $   0.25
                                                                             ==================  ================
DILUTED EARNINGS PER SHARE................................................            $   0.32          $   0.24
                                                                             ==================  ================
</TABLE>

            SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       4
<PAGE>

                       INVESTORS FINANCIAL SERVICES CORP.
      CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 2001 AND 2000
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                          MARCH 31,       MARCH 31,
                                                                                            2001            2000
                                                                                       ------------    -------------
         <S>                                                                           <C>               <C>
         COMMON SHARES
         Balance, beginning of period ..........................................        29,912,711          14,610,154
         Exercise of stock options .............................................           176,320             175,609
         Common stock issuance .................................................         1,624,145                --
                                                                                      ------------        ------------
         Balance, end of period ................................................        31,713,176          14,785,763
                                                                                      ============        ============
         TREASURY SHARES
         Balance, beginning of period ..........................................            10,814              10,814
                                                                                      ------------        ------------
         Balance, end of period ................................................            10,814              10,814
                                                                                      ============        ============
         COMMON STOCK
         Balance, beginning of period ..........................................      $        299        $        146
         Exercise of stock options .............................................                 2                   2
         Common stock issuance .................................................                16                  --
                                                                                      ------------        ------------
         Balance, end of period ................................................               317                 148
                                                                                      ------------        ------------
         SURPLUS
         Balance, beginning of period ..........................................            95,007              87,320
         Exercise of stock options .............................................               438                 300
         Tax benefit from exercise of stock options ............................             1,712               1,529
         Common stock issuance .................................................           116,164                  --
                                                                                      ------------        ------------
         Balance, end of period ................................................           213,321              89,149
                                                                                      ------------        ------------
         DEFERRED COMPENSATION
         Balance, beginning of the period ......................................              (247)               (689)
         Common stock issuance..................................................              (335)                  -
         Amortization of deferred compensation .................................                36                 128
                                                                                      ------------        ------------
         Balance, end of period ................................................              (546)               (561)
                                                                                      ------------        ------------
         RETAINED EARNINGS
         Balance, beginning of period ..........................................            85,188              53,542
         Net income ............................................................            10,348               7,266
         Cash dividend, $0.02 and $0.015 per share in the periods ending
         March 31, 2001 and 2000, respectively .................................              (599)               (443)
                                                                                      ------------        ------------
         Balance, end of period ................................................            94,937              60,365
                                                                                      ------------        ------------
         ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS), NET
         Balance, beginning of period ..........................................            (1,439)             (3,481)
         Cumulative effect of a change in accounting principle .................            (3,934)                 --
         Net unrealized investment gain ........................................             2,344                 898
         Net unrealized  derivative instrument loss ............................            (1,665)                 --
                                                                                      ------------        ------------
         Balance, end of period ................................................            (4,694)             (2,583)
                                                                                      ------------        ------------
         TREASURY STOCK
         Balance, beginning of period ..........................................                --                  --
                                                                                      ------------        ------------
         Balance, end of period ................................................                --                  --
                                                                                      ------------        ------------
         TOTAL STOCKHOLDERS' EQUITY ............................................      $    303,335        $    146,518
                                                                                      ============        ============
</TABLE>

            SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       5
<PAGE>

                       INVESTORS FINANCIAL SERVICES CORP.
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                   THREE MONTHS ENDED MARCH 31, 2001 AND 2000
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                 MARCH 31,          MARCH 31,
                                                                                   2001               2000
                                                                             ------------------  ----------------
<S>                                                                            <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................         $    10,348        $    7,266
                                                                             ------------------  ----------------
Adjustments to reconcile net income to net cash provided by operating
   activities:
   Depreciation and amortization..........................................               2,012             1,464
   Amortization of deferred compensation..................................                  36               128
   Amortization of premiums on securities, net of accretion of discounts..                (313)              911
   Changes in assets and liabilities:
       Accrued interest and fees receivable...............................             (13,176)           (1,725)
       Other assets.......................................................              (1,762)           (1,378)
       Other liabilities..................................................              18,495            19,678
                                                                             ------------------  ----------------
           Total adjustments..............................................               5,292            19,078
                                                                             ------------------  ----------------
       Net cash provided by operating activities..........................              15,640            26,344
                                                                             ------------------  ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale.................              87,812            12,844
Proceeds from maturities of securities held to maturity...................             120,324            45,642
Purchases of securities available for sale................................            (269,526)          (61,392)
Purchases of securities held to maturity..................................            (946,508)         (204,880)
Purchases of non-marketable equity securities.............................              (8,000)                -
Net decrease in federal funds sold........................................             433,000           100,000
Net increase in loans.....................................................              18,563            10,766
Purchase of business......................................................             (33,008)                -
Purchases of equipment and leasehold improvements.........................              (3,048)           (1,154)
                                                                             ------------------  ----------------
       Net cash used for investing activities.............................            (600,391)          (98,174)
                                                                             ------------------  ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits...........................................             (90,665)          (43,579)
Net decrease in time and savings deposits.................................            (167,433)         (131,261)
Net increase in short-term and other borrowings...........................             721,834           231,822
Proceeds from exercise of stock options...................................                 440               302
Proceeds from issuance of common stock....................................             115,845                 -
Cash dividends to shareholders............................................                (599)             (443)
                                                                             ------------------  ----------------
       Net cash provided by financing activities..........................             579,422            56,841
                                                                             ------------------  ----------------
NET DECREASE IN CASH AND DUE FROM BANKS...................................              (5,329)          (14,989)
                                                                             ------------------  ----------------
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD..............................              30,489            37,624
                                                                             ------------------  ----------------
CASH AND DUE FROM BANKS, END OF PERIOD....................................        $     25,160       $    22,635
                                                                             ==================  ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid for interest.................................................        $     37,626       $    23,332
                                                                             ==================  ================
   Cash paid for income taxes.............................................         $     1,737       $     2,585
                                                                             ==================  ================
</TABLE>

            SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

                                       6
<PAGE>

                       INVESTORS FINANCIAL SERVICES CORP.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
       (INFORMATION AS OF AND FOR THE THREE MONTHS MARCH 31, 2001 AND 2000
                                  IS UNAUDITED)

1.    DESCRIPTION OF BUSINESS

      Investors Financial Services Corp. (`IFSC') provides asset servicing for
      the financial services industry through its wholly owned subsidiaries,
      Investors Bank & Trust Company (the `Bank') and Investors Capital
      Services, Inc. The Company provides global custody, multicurrency
      accounting, mutual fund administration, securities lending, foreign
      exchange, cash management, performance measurement, institutional transfer
      agency and investment advisory services to a variety of financial asset
      managers, including mutual fund complexes, investment advisors, banks and
      insurance companies. IFSC and the Bank are subject to regulation by the
      Federal Reserve Board of Governors, the Office of the Commissioner of
      Banks of the Commonwealth of Massachusetts and the Federal Deposit
      Insurance Corporation.

      As used herein, the defined term `the Company' shall mean IFSC together
      with the Bank and its domestic and foreign subsidiaries.

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

2.     INTERIM FINANCIAL STATEMENTS

       The condensed consolidated interim financial statements of the Company
       and subsidiaries as of March 31, 2001 and 2000 and for the three-month
       periods ended March 31, 2001 and 2000 have been prepared by the Company,
       without audit, pursuant to the rules and regulations of the Securities
       and Exchange Commission. Certain information and footnote disclosures
       normally included in annual financial statements prepared in accordance
       with generally accepted accounting principles 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 accounting principles generally accepted
       in the United States of America are included. 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. Results for
       interim periods are not necessarily indicative of those to be expected
       for the full fiscal year. Certain amounts in the prior periods' financial
       statements have been reclassified to conform to the current periods'
       presentation.

       Effective January 1, 2001, the Company adopted SFAS 133, as amended and
       interpreted, which established accounting and reporting standards for
       derivative instruments, including certain derivative instruments embedded
       in other contracts and for hedging activities. All derivatives, whether
       designated in hedging relationships or not, are required to be recorded
       on the balance sheet at fair value. If the derivative is designated as a
       fair value hedge, the change in the fair value of the derivative and the
       item being hedged will be recognized in earnings. If the derivative is
       designated as a cash flow hedge, the effective portions of changes in the
       fair value of the derivative are recorded in other comprehensive income
       (`OCI'). Ineffective portions of changes, as determined in accordance
       with SFAS 133, in the fair value of the cash flow hedges are recognized
       in earnings. For derivatives that do not qualify as hedges, changes in
       their fair value are recognized in earnings.

       The adoption of SFAS 133 on January 1, 2001, resulted in no cumulative
       effect-type adjustment to net income. However, the Company recorded a
       reduction to OCI of $3.9 million, net of tax, and a corresponding
       liability for the fair value of the interest rate swaps. The reduction to
       OCI and the recognition of the liability are primarily attributable to
       net unrealized losses on cash flow hedges as of initial adoption.

                                       7
<PAGE>

2.        INTERIM FINANCIAL STATEMENTS (CONTINUED)

       The Company uses derivative instruments to manage exposures to interest
       rate risks. The Company routinely enters into interest rate swap
       agreements in which the Company pays a fixed interest rate and receives a
       floating interest rate. These transactions are designed to hedge a
       portion of the Company's liabilities in connection with securities sold
       under repurchase agreements. By entering into a pay-fixed/receive-
       floating interest rate swap, a portion of the liabilities is effectively
       converted to a fixed rate liability for the term of the interest rate
       swap agreement. Most of these derivatives have been designated as highly
       effective cash flow hedges. An insignificant portion of the derivatives
       used to manage exposures to interest rate risks were not considered
       highly effective and therefore, did not qualify for hedge accounting.

       Hedge ineffectiveness, determined in accordance with SFAS 133, had an
       insignificant impact on earnings for the three months ended March 31,
       2001. No cash flow hedges were dedesignated or discontinued for the three
       months ended March 31, 2001.

       For the three months ended March 31, 2001, net interest income included a
       net loss of $0.7 million, net of tax, on interest rate swaps relating to
       SFAS 133. The net loss consisted of a $0.3 million loss, net of tax, on
       changes in the fair value of derivative instruments not designated as
       hedging instruments and $0.4 million of derivative losses, net of tax,
       that resulted primarily from the reclassification of transition
       adjustment-related derivative losses from OCI to net interest income in
       accordance with SFAS 133. The Company estimates that $2.3 million, net of
       tax, of the remaining transition adjustment of net derivative losses
       included in OCI will be reclassified into earnings within the next twelve
       months. The recognition in net interest income of the transition
       adjustment derivative losses from OCI will be offset by derivative gains
       from changes in the fair value liability of the interest rate swaps as
       they reach maturity.

3.     LOANS

       Loans consist of demand loans to custody clients of the Company,
       including individuals, and not-for-profit institutions located in the
       greater Boston, Massachusetts metropolitan area and loans to mutual fund
       clients. The loans to mutual funds include lines of credit and advances
       pursuant to the terms of the custody agreements between the Company and
       those mutual fund 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 non-performing loans at December 31,
       2000 and March 31, 2001. In addition, there were no loan charge-offs or
       recoveries during the three months ended March 31, 2001 and the year
       ended December 31, 2000. Loans are summarized as follows (Dollars in
       thousands):

<TABLE>
<CAPTION>
                                                MARCH 31,       DECEMBER 31,
                                                  2001              2000
                                              --------------    -------------
<S>                                           <C>              <C>
Loans to mutual funds......................   $      32,791    $    86,316
Loans to individuals.......................          77,978         43,016
Loans to others............................              37             37
                                              --------------   ------------
                                                    110,806        129,369
Less allowance for loan losses.............             100            100
                                              --------------   ------------
Total......................................   $     110,706    $   129,269
                                              ==============   ============
</TABLE>

       The Company had commitments to lend of approximately $296.2 million and
       $222.4 million at March 31, 2001 and December 31, 2000, respectively. The
       terms of these commitments are similar to the terms of outstanding loans.

                                       8
<PAGE>

4.     ACQUISITIONS

       Goodwill related to the Company's acquisitions is summarized as follows
(Dollars in thousands):

<TABLE>
<CAPTION>
                                             FOR THE THREE          FOR THE
                                             MONTHS ENDED         YEAR ENDED
                                            MARCH 31, 2001     DECEMBER 31, 2000
                                           ----------------    ------------------
<S>                                        <C>                   <C>
Goodwill, beginning of period............  $     34,094          $     39,776

Plus purchase of business................        33,008                     -
Plus contingent payment..................             -                   255
Less termination fees....................             -                (4,362)
Less amortization........................          (650)               (1,575)
                                           -------------        -------------
Goodwill, end of period..................  $     66,452          $     34,094
                                           =============        =============
</TABLE>

      On October 1, 1998, the Bank acquired the domestic institutional trust and
      custody business (`the Business') of BankBoston, N.A. Under the terms of
      the purchase agreement, the Bank paid approximately $48 million to
      BankBoston as of the closing and subsequently paid an additional $4.9
      million based upon client retention. The Business provides master trust
      and custody services to endowments, pension funds, municipalities, mutual
      funds and other financial institutions, primarily in New England. The
      acquisition was accounted for using the purchase method of accounting. In
      connection with the acquisition, the Bank also entered into an outsourcing
      agreement with BankBoston under which the Bank would provide custodial and
      certain other services for BankBoston's private banking and institutional
      asset management businesses. In 2000, the outsourcing agreement and a
      custody agreement with BankBoston-sponsored 1784 Funds were terminated. As
      a result of the early termination of the outsourcing agreement and the
      1784 Funds custody agreement, the Bank received a total of $11.4 million
      in termination fees. The Bank has not experienced and does not anticipate
      a material impact on net income due to the termination of either
      agreement. The Bank was informed by BankBoston that its decision to
      terminate both of the agreements was not related in any way to the quality
      of service, but was made as part of the integration process undertaken in
      connection with the merger of BankBoston with Fleet.

      On February 1, 2001, the Bank purchased the advisor custody unit of The
      Chase Manhattan Bank. This unit provided institutional custody services to
      accounts holding approximately $27 billion in assets as of February 1,
      2001. These accounts consist of individual accounts, trusts, endowments
      and corporate accounts whose assets are managed by third-party investment
      advisors. Pursuant to the terms of the asset purchase agreement, the Bank
      paid to Chase as of closing approximately $31.5 million of the total
      purchase price, plus another $39.8 million in exchange for the book value
      of loans to clients. The Bank is obligated to pay up to an additional
      $10.5 million contingent upon client retention. The Bank expects the
      client accounts to be converted to its custody system in mid-2001. The
      transaction will be accounted for as a purchase.

5.     DEPOSITS

       Time deposits at March 31, 2001 and December 31, 2000 each included
       non-interest bearing amounts of approximately $65 million.

       All time deposits had a minimum balance of $100,000 and a maturity of
       less than three months at March 31, 2001 and December 31, 2000.

                                       9
<PAGE>

6.     SHORT-TERM AND OTHER BORROWINGS

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

<TABLE>
<CAPTION>
                                                              MARCH 31,        DECEMBER 31,
                                                                2001              2000
                                                            --------------    --------------
<S>                                                         <C>               <C>
                                                                              $        -
Federal Home Loan Bank of Boston term advances...........       $ 400,000              -
Federal funds purchased..................................         275,000              -
Federal Home Loan Bank of Boston overnight advances......          60,000              -
Treasury, tax and loan account...........................              81            246
                                                            --------------    -----------
Total....................................................   $     735,081     $      246
                                                            ==============    ===========
</TABLE>

       The Company has a borrowing arrangement with the Federal Home Loan Bank
       of Boston (`FHLBB'), which is utilized on an overnight and on a term
       basis to satisfy temporary funding requirements. The Company has utilized
       both short-term and long-term features of the term advances. As of March
       31, 2001, there were $400 million of term advances comprised of $100
       million of short-term advances outstanding with an interest rate of
       4.93%, and $300 million of long-term advances outstanding with interest
       rates ranging from 4.64% to 5.17% and maturities ranging from September
       2002 to February 2005. There were no outstanding term advances under this
       agreement at December 31, 2000.

       There were $60 million of outstanding overnight advances at March 31,
       2001. There were no outstanding overnight advances under this agreement
       at December 31, 2000.

       The rate on the outstanding balance of federal funds purchased from other
       banks at March 31, 2001 was 5.50%. There were no outstanding balances of
       federal funds purchased from other banks at December 31, 2000.

       The Company receives federal tax deposits from clients as agent for the
       Federal Reserve Bank and accumulates these deposits in the Treasury, tax
       and loan account. The Federal Reserve Bank charges the Company interest
       at the Federal funds rate on such deposits. The interest rate on the
       outstanding balance was 4.78% at March 31, 2001 and 6.29% at December 31,
       2000.

7.     STOCKHOLDERS' EQUITY

      On February 16, 1999, the Company's Board of Directors approved a
      two-for-one stock split in the form of a 100% stock dividend to
      shareholders of record on March 1, 1999. The dividend was paid on March
      17, 1999. A total of 13,595,946 shares of common stock were issued in
      connection with the stock split. The par value of these additional shares
      was capitalized by a transfer from retained earnings to common stock. The
      stock split did not cause any change in the $0.01 par value per share of
      the common stock or in total stockholders' equity.

      At the Annual Meeting of Shareholders of the Company held on April 18,
      2000, shareholders approved an increase in the number of authorized shares
      of Common Stock from 20,000,000 to 40,000,000. On May 2, 2000, the Company
      filed an amendment to its Certificate of Incorporation increasing the
      number of authorized shares of Common Stock to 40,000,000. Such shares are
      available for general corporate purposes as determined by the Company's
      Board of Directors.

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

                                       10
<PAGE>

7.     STOCKHOLDERS' EQUITY (CONTINUED)

      As of March 31, 2001, the Company had authorized 1,000,000 shares of
      Preferred Stock and 40,000,000 shares of Common Stock, all with a par
      value of $0.01 per share.

      At the Annual Meeting of Shareholders of the Company held on April 17,
      2001, shareholders approved an increase in the number of authorized shares
      of Common Stock from 40,000,000 to 100,000,000. On April 25, 2001, the
      Company filed an amendment to its Certificate of Incorporation increasing
      the number of authorized shares of Common Stock to 100,000,000. Such
      shares are available 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, the Amended and Restated 1995 Non-Employee Director Stock
      Option Plan, and the 1997 Employee Stock Purchase Plan.

      At the Annual Meeting of Shareholders of the Company held on April 17,
      2001, shareholders approved the amendment and restatement of the Company's
      Amended and Restated 1995 Stock Plan to increase the number of shares
      available for grant pursuant to the plan from 4,640,000 to 6,140,000. The
      Company may grant options to purchase up to a maximum of 6,140,000 shares
      of Common Stock to certain employees, consultants, directors and officers.
      The options may be awarded as incentive stock options (employees only),
      non-qualified stock options, stock awards or opportunities to make direct
      purchases of stock. No options were granted to consultants during the
      three months ended March 31, 2001. Of the 4,640,000 shares of Common Stock
      authorized for issuance under the plan at March 31, 2001, 265,727 were
      available for grant as of that date.

      The terms of the Amended and Restated 1995 Non-Employee Director Stock
      Option Plan provide for the grant of options to non-employee directors to
      purchase up to a maximum of 400,000 shares of Common Stock. Pursuant to
      the terms of the Plan, options to purchase 10,000 shares of Common Stock
      were awarded on November 8, 1995 to each director. Any director elected or
      appointed after such date will receive an automatic initial grant of
      options to purchase 2,500 shares upon becoming a director. Thereafter,
      each director will receive an automatic grant of options to purchase 2,500
      shares effective upon each one-year anniversary of the date of such
      director's original grant. Additionally, non-employee directors may elect
      to receive options to acquire shares of the Company's Common Stock in lieu
      of such director's cash retainer. Any election is subject to certain
      restrictions under the Amended and Restated 1995 Non-Employee Director
      Stock Option Plan. The number of shares of stock underlying the option is
      equal to the quotient obtained by dividing the cash retainer by the value
      of an option on the date of grant as determined using the Black-Scholes
      model. Of the 400,000 shares of Common Stock authorized for issuance under
      the plan, 82,082 were available for grant at March 31, 2001.

      The exercise price of options under the Amended and Restated 1995
      Non-Employee Director Stock Option Plan and the qualified incentive
      options under the Amended and Restated 1995 Stock Plan may not be less
      than the fair market value at the date of the grant. The exercise price of
      the non-qualified options under the Amended and Restated 1995 Stock Plan
      is determined by the compensation committee of the Board of Directors. All
      options become exercisable as specified by the compensation committee at
      the date of the grant.

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

      On May 29, 1998, the Company granted 40,000 shares of Common Stock to an
      officer of Investors Capital Services, Inc. This grant is subject to the
      Company's right to repurchase the shares if the officer's employment with
      the Company terminates. The Company's right to repurchase the shares
      lapses in five equal annual installments beginning one year from the date
      of grant.

                                       11
<PAGE>

7.    STOCKHOLDERS' EQUITY (CONTINUED)

      On February 13, 2001, the Company granted 4,000 shares of Common Stock to
      former employees of the Chase advisor custody unit in connection with the
      acquisition of the unit. This grant is subject to the Company's right to
      repurchase the shares if the employees' employment with the Company
      terminates. The Company's right to repurchase the shares lapses in five
      equal annual installments beginning one year from the date of grant.

      The Company has recorded deferred compensation of $0.5 million and $0.3
      million at March 31, 2001 and December 31, 2000 respectively, related to
      the grants described in the above paragraphs.

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

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

<TABLE>
<CAPTION>
                                                         NUMBER OF   WEIGHTED-AVERAGE
                                                           SHARES     EXERCISE PRICE
                                                         ----------- -----------------
<S>                                                      <C>          <C>
Outstanding at December 31, 2000......................    2,896,662        $27
Granted...............................................       41,375         75
Exercised.............................................     (193,550)         9
Canceled..............................................       (1,800)        70
                                                         -----------
Outstanding at March 31, 2001.........................    2,742,687        $29
                                                         ===========
Outstanding and exercisable at March 31, 2001.........    1,319,257
                                                         ===========

                                                         NUMBER OF   WEIGHTED-AVERAGE
                                                           SHARES     EXERCISE PRICE
                                                         ----------- -----------------

Outstanding at December 31, 1999......................    2,960,334        $13
Granted...............................................      202,784         21
Exercised.............................................     (536,482)        22
Canceled..............................................      (32,500)        15
                                                         -----------
Outstanding at March 31, 2000.........................    2,594,136        $14
                                                         ===========
Outstanding and exercisable at March 31, 2000.........    1,094,588
                                                         ===========
</TABLE>

                                       12
<PAGE>

7.     STOCKHOLDERS' EQUITY (CONTINUED)

       A summary of activity under the 1997 Employee Stock Purchase Plan is as
follows (Number of shares):

<TABLE>
<CAPTION>
                                                                                  FOR THE THREE        FOR THE
                                                                                  MONTHS ENDED        YEAR ENDED
                                                                                    MARCH 31,        DECEMBER 31,
                                                                                      2001               2000
                                                                                 ----------------   -------------
       <S>                                                                       <C>                <C>
       Total shares available under the Plan, beginning of period..............          299,034         357,354
          Issued at June 30....................................................                -         (34,466)
          Issued at December 31................................................                -         (23,854)
                                                                                 ----------------   -------------
       Total shares available under the Plan, end of period....................          299,034         299,034
                                                                                 ================   =============
</TABLE>

       During the year ended December 31, 2000, the purchase price of the stock
       was $21.00 and $36.25, or 90% of the average market value of the Common
       Stock on the first business day of the payment period ending June 30,
       2000 and December 31, 2000, respectively.

       EARNINGS PER SHARE--Under SFAS No. 128, the Company is required to
       disclose a reconciliation of Basic EPS and Diluted EPS for the periods
       ended March 31, 2001 and 2000 as follows (Dollars in thousands, except
       share data):

<TABLE>
<CAPTION>
                                                          FOR THE THREE MONTHS ENDED
                                                                   MARCH 31,
                                                        --------------------------------
                                                            2001              2000
                                                        --------------    --------------
       <S>                                               <C>                <C>
       Income available to common stockholders......          $10,348            $7,266
                                                        --------------    --------------
       Basic average shares.........................       31,011,674        29,485,392

          Dilutive effect of stock options..........        1,335,352           991,062
                                                        --------------    --------------
       Diluted average shares.......................       32,347,026        30,476,454
                                                        --------------    --------------
       Earnings per share
          Basic.....................................            $0.33             $0.25
                                                        ==============    ==============
          Diluted...................................            $0.32             $0.24
                                                        ==============    ==============
</TABLE>

8.     OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

       LINES OF CREDIT--At March 31, 2001, the Company had commitments to
       individuals and mutual funds under collateralized open lines of credit
       totaling $357 million, against which $61 million in loans were drawn. The
       credit risk involved in issuing lines of credit is essentially the same
       as that involved in extending loan facilities. The Company does not
       anticipate any loss as a result of these lines of credit.

                                       13
<PAGE>

9.     COMMITMENTS AND CONTINGENCIES

       RESTRICTIONS ON CASH BALANCES--The Company is required to maintain
       certain average cash reserve balances. The reserve balance requirement
       with the FRB as of March 31, 2001 was $9.4 million. In addition, another
       cash balance in the amount of $3.4 million was pledged to secure
       clearings with a depository institution, Depository Trust Company, as of
       March 31, 2001.

       LEASE COMMITMENTS-- Minimum future commitments on non-cancelable
       operating leases at March 31, 2001 were as follows (Dollars in
       thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDING         PREMISES      EQUIPMENT
------------------         --------      ---------
<C>                         <C>        <C>
2001...............         $10,462    $   3,067
2002...............          14,841        2,957
2003...............          14,834        1,276
2004...............          14,834           29
2005 and beyond....          63,401           --
</TABLE>

      Total rent expense was $4.8 million and $2.9 million for the three months
      ended March 31, 2001 and 2000, respectively.

      Effective January 1, 2000, the Company renewed its five-year service
      agreement with Electronic Data Systems (`EDS') to expire on December 31,
      2005. Under the terms of the agreement, the Company agreed to pay certain
      monthly service fees based on usage. Service expense under this contract
      was $1.1 million for the three months ended March 31, 2001 and $0.7
      million for the three months ended March 31, 2000.

      CONTINGENCIES--The Company provides global custody, multicurrency
      accounting, institutional transfer agency, performance measurement,
      foreign exchange, securities lending, mutual fund administration and
      investment advisory services to a variety of financial asset managers,
      including mutual fund complexes, investment advisors, banks and insurance
      companies. Assets under custody and management, held by the Company in a
      fiduciary capacity, are not included in the consolidated balance sheets
      since such items are not assets of the Company. Management conducts
      regular reviews of its fiduciary responsibilities and considers the
      results in preparing its consolidated financial statements. In the opinion
      of management, there are no contingent liabilities at March 31, 2001 that
      are material to the consolidated financial position or results of
      operations of the Company.

      On January 16, 2001, a complaint naming the Company and numerous other
      parties, including Barclays Global Investors, State Street Bank and
      Merrill Lynch, as defendants in a patent infringement action was filed in
      the United States District Court for the Northern District of Illinois
      Eastern Division. In a letter dated January 18, 2001, the plaintiff,
      Mopex, Inc., indicated its desire to license the patent in issue "at a
      favorable royalty rate prior to substantial involvement with the Court."
      The complaint alleges that the patent covers the creation and trading of
      certain securities, including the Barclays iShares exchange traded funds.
      The complaint seeks injunctive relief, recovery of reasonable attorney
      fees, unspecified damages, including interest and costs, and requests that
      those damages be trebled. The Company, whose defense costs are indemnified
      by Barclays Global Investors, believes the claim is without merit.

                                       14
<PAGE>

10.    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 results of operations and financial condition. 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 table below) of total and Tier I capital (as
       defined in the regulations) to risk-weighted assets (as defined), and of
       Tier I capital (as defined) to average assets (as defined). Management
       believes, as of March 31, 2001, that the Company and the Bank meet all
       capital adequacy requirements to which they are subject.


                                       15


<PAGE>


10.    REGULATORY MATTERS (CONTINUED)

       As of March 31, 2001, the most recent notification from the FDIC
       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 I risk-based, and Tier I 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. The following table presents the capital ratios for the
       Company and the Bank as of March 31, 2001 and December 31, 2000 (Dollars
       in thousands):

<TABLE>
<CAPTION>
                                                                                                   TO BE WELL
                                                                                                  CAPITALIZED
                                                                                                  UNDER PROMPT
                                                                           FOR CAPITAL         CORRECTIVE ACTION
                                                       ACTUAL           ADEQUACY PURPOSES:         PROVISIONS
                                                ---------------------  ---------------------  ---------------------
                                                 AMOUNT      RATIO      AMOUNT      RATIO       AMOUNT     RATIO
                                                ----------  ---------  ----------  ---------  ----------- ---------
<S>                                             <C>          <C>        <C>         <C>        <C>          <C>
AS OF MARCH 31, 2001:
Total Capital
   (to Risk Weighted Assets--the Company).....   $265,930       15.81%  $ 134,581       8.00%         N/A       N/A
Total Capital
   (to Risk Weighted Assets--the Bank)........   $263,329       15.68%  $ 134,323       8.00%  $  167,903     10.00%
Tier I Capital
   (to Risk Weighted Assets--the Company).....   $265,830       15.80%  $  67,290       4.00%         N/A       N/A
Tier I Capital
   (to Risk Weighted Assets--the Bank)........   $263,229       15.67%  $  67,161       4.00%  $  100,742      6.00%
Tier I Capital
   (to Average Assets--the Company)...........   $265,830        7.20%  $ 147,633       4.00%         N/A       N/A
Tier I Capital
   (to Average Assets--the Bank)..............   $263,229        7.14%  $ 147,565       4.00%  $  184,456      5.00%

AS OF DECEMBER 31, 2000:
Total Capital
   (to Risk Weighted Assets--the Company).....   $170,499       13.39%  $  101,847      8.00%         N/A       N/A
Total Capital
   (to Risk Weighted Assets--the Bank)........   $166,850       13.12%  $  101,735      8.00%  $  127,169     10.00%
Tier I Capital
   (to Risk Weighted Assets--the Company).....   $170,399       13.38%  $   50,923      4.00%         N/A       N/A
Tier I Capital
   (to Risk Weighted Assets--the Bank)........   $166,750       13.11%  $   50,867      4.00%  $   76,301      6.00%
Tier I Capital
   (to Average Assets--the Company)...........   $170,399        5.16%  $  132,218      4.00%         N/A       N/A
Tier I Capital
   (to Average Assets--the Bank)..............   $166,750        5.05%  $  132,172      4.00%  $  165,215      5.00%
</TABLE>

       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 approval of the
       Commissioner of Banks of the Commonwealth of Massachusetts 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.

                                       16
<PAGE>

11.    SEGMENT REPORTING

       The Company does not utilize segment information for internal reporting
       as management views the Company as one segment. The following represents
       net operating revenue by geographic area for the quarter ended March 31,
       2001 and 2000, and long-lived assets by geographic area as of March 31,
       2001 and December 31, 2000 (Dollars in thousands):

<TABLE>
<CAPTION>
                                     NET OPERATING REVENUE                     LONG-LIVED ASSETS
                                 ------------------------------        --------------------------------
                                    FOR THE THREE MONTHS
                                       ENDED MARCH 31,
                                 ----------------------------              MARCH 31,      DECEMBER 31,
       GEOGRAPHIC INFORMATION:        2001            2000                   2001             2000
       -----------------------   ---------------   ----------          --------------   --------------
       <S>                       <C>               <C>                 <C>              <C>
       United States..........   $       68,477    $  51,309           $      82,973    $      48,878
       Ireland................            1,667        1,153                     219              247
       Canada.................              517          587                      39               55
       Cayman Islands.........               21           20                       -                -
                                 ---------------   ----------          --------------   --------------
       Total..................   $       70,682    $  53,069           $      83,231    $      49,180
                                 ===============   ==========          ==============   ==============
</TABLE>

       No one customer accounted for 10% of the Company's consolidated net
       operating revenues for the quarter ended March 31, 2001 and 2000.

       The following represents the Company's asset servicing fees component of
       operating revenue by service line for the quarter ended March 31, 2001
       and 2000 (Dollars in thousands):

<TABLE>
<CAPTION>
                                                          ASSET SERVICING FEES
                                                     --------------------------------
                                                         FOR THE THREE MONTHS
                                                            ENDED MARCH 31,
                                                     ------------------------------
       ASSET SERVICING FEES BY SERVICE LINES:             2001            2000
       -------------------------------------------   --------------  --------------
       <S>                                           <C>             <C>
       Custody, accounting, transfer agency, and
          administration...........................  $      38,660   $      30,844
       Foreign exchange............................          3,957           2,946
       Cash management.............................          3,060           2,802
       Securities lending..........................          2,196           2,746
       Investment advisory.........................            559             378
                                                     --------------  --------------
       Total.......................................  $      48,432   $      39,716
                                                     ==============  ==============
</TABLE>

12.      SUBSEQUENT EVENT

         On May 1, 2001, the Bank assumed the operations of the U.S. asset
         administration unit of Barclays Global Investors, N.A. (`BGI'), a
         large international institutional investment manager. BGI's U.S.
         asset administration unit provides custody, accounting,
         administration and other operations functions for BGI's clients.

                                       17
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW

         YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH OUR CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, 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.

         We provide a broad range of services to a variety of financial asset
managers. These services include our core services, global custody and
multicurrency accounting, as well as our value-added services, such as mutual
fund administration, securities lending, foreign exchange, cash management,
performance measurement, institutional transfer agency and investment advisory
services. At March 31, 2001, we provided services for approximately $314 billion
in net assets, including approximately $17 billion of foreign assets.

         On October 1, 1998, we acquired the domestic institutional trust and
custody business of BankBoston, N.A. Under the terms of the purchase agreement,
we paid approximately $48 million to BankBoston as of the closing and
subsequently paid an additional $4.9 million based upon client retention. The
acquired business provides master trust and custody services to endowments,
pension funds, municipalities, mutual funds and other financial institutions.
The acquisition was accounted for using the purchase method of accounting. In
connection with the acquisition, we also entered into an outsourcing agreement
with BankBoston under which we provided custodial services for BankBoston's
private banking and institutional asset management businesses. In 2000, the
outsourcing agreement and a custody agreement with the BankBoston-sponsored 1784
Funds were terminated. As a result of the early termination of the outsourcing
agreement and the 1784 Funds custody agreement, we received a total of $11.4
million in termination fees. We have not experienced and do not anticipate a
material impact on net income due to the termination of either agreement. We
were informed by BankBoston that its decision to terminate both of the
agreements was not related in any way to our quality of service, but was made as
part of the integration process undertaken in connection with the merger of
BankBoston with Fleet.

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

         On February 1, 2001, we purchased the advisor custody unit of The Chase
Manhattan Bank. This unit provided institutional custody services to accounts
holding approximately $27 billion in assets as of February 1, 2001. These
accounts consist of individual accounts, trusts, endowments and corporate
accounts whose assets are managed by third-party investment advisors. Pursuant
to the terms of the asset purchase agreement, we paid to Chase as of closing
approximately $31.5 million of the total purchase price, plus $39.8 million in
exchange for the book value of loans to clients. We are obligated to pay up to
an additional $10.5 million contingent upon client retention. We expect the
client accounts to be converted to our custody system in mid-2001. The
transaction will be accounted for as a purchase.

         On May 1, 2001, we assumed the operations of the U.S. asset
administration unit of Barclays Global Investors, N.A. (`BGI'), a large
international institutional investment manager. BGI's U.S. asset
administration unit provides custody, accounting, administration and other
operations functions for BGI's clients.

REVENUE AND EXPENSE OVERVIEW

         We derive our revenue from financial asset servicing. Although interest
income and non-interest income are reported separately for financial statement
presentation purposes, our clients view the pricing of our service offerings on
a bundled basis. In establishing a fee structure for a specific client,
management analyzes all expected revenue and related expenses, as opposed to
separately analyzing fee income and interest income and related expenses for
each from the relationship. Accordingly, we believe net operating revenue (net
interest income plus non-interest income) and net income are the most meaningful
measures of our financial results. Net operating revenue increased 33% to $70.7
million in the first quarter of 2001 from $53.1 million in the same period in
2000.

                                       18
<PAGE>

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

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

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

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 SEC (including this
Form 10-Q) may contain statements which are not historical facts, so-called
"forward-looking statements," and which involve risks and uncertainties. These
statements relate to future events or our future financial performance and are
identified by words such as "may," "will," "could," "should," "expect," "plan,"
"intend," "seek," "anticipate," "believe," "estimate," "potential," or
"continue" or other comparable terms or the negative of those terms.
Forward-looking statements in this Form 10-Q include certain statements
regarding trends in industry market growth, liquidity, the timing of asset
conversions, 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.

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, including the
recent assumption of the U.S. asset administration unit of BGI. 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 our human resources. Also, we must
continue to expand our office space at reasonable rates in a competitive real
estate market.

OUR FUTURE RESULTS DEPEND, IN PART, ON SUCCESSFUL INTEGRATION OF PENDING AND
POSSIBLE FUTURE ACQUISITIONS.

         Our acquisition of the Chase advisor custody unit present us with
challenges and will demand management attention that has to be diverted from
other matters. Integration of acquisitions is complicated and frequently
presents unforeseen difficulties and expenses which can affect whether and
when a particular acquisition will be accretive to our earnings per share.
Any future acquisitions will present similar challenges.

                                       19
<PAGE>

WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR MARKET IN ORDER TO
SUCCEED.

         Qualified personnel, in particular managers and other senior personnel,
are in great demand throughout the financial services industry. We could find it
increasingly difficult to continue to attract and retain sufficient numbers of
these highly skilled employees.

OUR OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS IN INTEREST RATES AND THE
SECURITIES MARKETS.

         We base some of our fees on the market value of the assets we process.
Accordingly, our operating results are subject to fluctuations in interest rates
and declines in the securities markets as these fluctuations affect the market
value of assets processed. Fluctuations in interest rates or the securities
markets can also lead to investors seeking alternatives to the investment
offerings of our clients, which could result in a lesser amount of assets
processed and correspondingly lower fees. Also, our net interest income is
earned by investing depositors' funds and making loans. Rapid changes in
interest rates or changes in the relationship between different index rates
could adversely affect the market value of, or the earnings produced by, our
investment and loan portfolios.

WE FACE SIGNIFICANT COMPETITION FROM OTHER FINANCIAL SERVICES COMPANIES, WHICH
COULD NEGATIVELY AFFECT OUR OPERATING RESULTS.

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

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.

WE MAY INCUR SIGNIFICANT COSTS DEFENDING INFRINGEMENT CLAIMS.

         We have been sued in federal court claiming that we and others are
infringing a patent allegedly covering the creation and trading of certain
securities, including exchange traded funds. While we believe the claim is
without merit, we cannot be sure that we will prevail in the defense of this
claim. Any patent litigation would be costly and could divert the attention
of management. If we were found to infringe the patent, we would have to pay
damages and would be ordered to cease any infringing activity or seek a
license under the patent. We cannot be sure that we will be able to obtain a
license on a timely basis or on reasonable terms, if at all. While we are
indemnified against some costs and damages related to this claim, we may
incur significant expense. As a result, any determination of infringement
could have a material adverse effect upon our business, financial condition
and results of operations. We may become subject to similar infringement
claims in the future.

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:

         o  The timing of commencement or termination of client engagements; and

         o  The rate of net inflows and outflows of investor funds in the
            investment vehicles offered by our clients.

                                       20
<PAGE>

         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, which could
adversely affect our stock price.

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 banking
regulators are the Federal Reserve Board (`FRB'), the Federal Deposit Insurance
Commission (`FDIC') and the Massachusetts Commissioner of Banks. Virtually all
aspects of our operations are subject to specific requirements or restrictions
and general regulatory oversight including the following:

         o  The FRB and the FDIC maintain capital requirements that we must
            meet. Failure to meet those requirements could lead to severe
            regulatory action or even receivership. We are currently considered
            to be "well capitalized;"

         o  Under Massachusetts law, the Bank may be restricted in its ability
            to pay dividends to Investors Financial, which may in turn restrict
            our ability to pay dividends to our stockholders; and

         o  The FRB and the FDIC are empowered to assess monetary penalties
            against, and to order termination of activities by, companies or
            individuals who violate the law.

         Banking law restricts our ability to own the stock of certain companies
and also makes it more difficult for our company 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.

STATEMENT OF OPERATIONS

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2001
AND 2000

NON-INTEREST INCOME

         Non-interest income was $49.2 million in the first quarter of 2001, up
23% from the same period in 2000. Non-interest income consists of the following
items (Dollars in thousands):

<TABLE>
<CAPTION>
                                                     FOR THE THREE MONTHS ENDED
                                                              MARCH 31,
                                                   --------------------------------
                                                       2001             2000            CHANGE
                                                   -------------    --------------    ----------
             <S>                                   <C>
             Asset servicing fees.............      $48,432           $39,716            22%
             Other operating income...........          781               396            97
                                                   ---------        ---------
             Total non-interest income........      $49,213           $40,112            23%
                                                   =========        =========
</TABLE>

         Asset servicing fees were $48.4 million in the first quarter of 2001,
up 22% from the same period in 2000. The largest component of asset servicing
fees is asset-based fees, which increased due to the increase in assets
processed. Assets processed is the total dollar value of financial assets on the
reported date for which we provide one or more of the following services: global
custody, multicurrency accounting, mutual fund administration, securities
lending, foreign exchange, cash management, performance measurement, and
institutional transfer agency. Total net assets processed increased $11 billion
from December 31, 2000 to $314 billion at March 31, 2001. This net increase
includes several components (Dollars in billions):

<TABLE>
                  <S>                                                 <C>
                  Acquisition of Chase advisor custody unit            $27
                  Further penetration of existing clients                8
                  Sales to new clients                                   1
                  Fund flows and market gain/loss                      (25)
                                                                       ---
                  Net increase in assets processed                     $11
                                                                       ===
</TABLE>

                                       21
<PAGE>

         Another significant portion of the increase in asset servicing fees
resulted from the success in marketing ancillary services, such as foreign
exchange and securities lending services. Also, asset servicing fees include
$0.6 million of transaction fees related to exchange-traded funds.

         Other operating income consists of dividends received relating to the
Federal Home Loan Bank of Boston (`FHLBB') stock investment, computer service
fees and miscellaneous fees for systems consulting services. The increase in
other operating income resulted from the increase in FHLBB stock dividend income
due to an increase in the average investment in FHLBB stock during the quarter
ended March 31, 2001, and increased income from consulting services performed
for clients.

OPERATING EXPENSES

       Total operating expenses were $54.9 million in the first quarter of 2001,
up 31% from the same period in 2000. The components of operating expenses were
as follows (Dollars in thousands):

<TABLE>
<CAPTION>
                                           FOR THE THREE MONTHS
                                             ENDED MARCH 31,
                                         -------------------------
                                            2001         2000        CHANGE
                                         -----------  ------------  ---------
<S>                                      <C>          <C>            <C>
Compensation and benefits.............      $33,914   $    26,527         28%
Technology and telecommunications.....        8,042         4,595         75
Occupancy.............................        3,536         2,072         71
Transaction processing services.......        2,574         2,519          2
Depreciation and amortization.........        1,362         1,043         31
Travel and sales promotion............          998           669         49
Professional fees.....................          745         1,074        (31)
Amortization of goodwill..............          650           421         54
Other operating expenses..............        3,032         2,854          6
                                         -----------  ------------
   Total operating expenses...........   $   54,853   $    41,774         31%
                                         ===========  ============
</TABLE>

         Compensation and benefits expense was $33.9 million in the first
quarter of 2001, up 28% from the same period in 2000 due to several factors. The
average number of employees increased 21% to 1,843 during the quarter ended
March 31, 2001 from 1,523 for the quarter ended March 31, 2000. We increased the
number of employees to support the expansion of client relationships and to
service new business acquisitions. Approximately 58 employees were acquired as
part of the Chase acquisition as of February 1, 2001. Benefits, including
payroll taxes, group insurance plans, retirement plan contributions and tuition
reimbursement, increased $1.3 million for the three months ended March 31, 2001.
This increase was due principally to increased payroll taxes attributable to the
increase in compensation expense.

         Technology and telecommunications expense was $8.0 million in the first
quarter of 2001, up 75% from the same period in 2000. Transitional services
incurred as a result of the Chase acquisition agreement accounted for $2.3
million of the increase. Increased hardware, software and telecommunications
expenditures needed to support the growth in assets processed accounted for $0.7
million of the increase. Expenses related to outsourced network monitoring and
help desk service, which commenced in 2000, along with mainframe data
processing, disaster recovery and other outsourced services accounted for $0.5
million of the increase.

         Occupancy expense was $3.5 million in the first quarter of 2001, up 71%
from the same period in 2000. This increase was primarily due to increased rent
resulting from the expansion of our office space in Boston and New York at the
current market rental rates.

         Depreciation and amortization expense was $1.4 million in the first
quarter of 2001, up 31% from the same period in 2000. This increase resulted
from capitalized expenditures associated with the expansion into additional
office space and capitalized software.

         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 and our
foreign

                                       22
<PAGE>

subsidiaries. This expense was $1.0 million in the first quarter of 2001, up 49%
from the same period in 2000, due to the increased level of business activity
this year.

         Professional fees were $0.7 million in the first quarter of 2001, down
31% from 2000 primarily due to non-recurring consulting and legal services
incurred during the same period in 2000.

         Amortization of goodwill expense was $0.7 million in the first quarter
of 2001, up 54% from the same period in 2000. The increase results from the
increase in goodwill due to the acquisition of the Chase advisor custody unit,
which was accounted for as a purchase in the first three months of 2001. See
details in the "Overview" section.


       NET INTEREST INCOME

         Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. 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 quarter ended March 31, 2001 compared to the same period
ended March 31, 2000. Changes attributed to both volume and rate have been
allocated based on the proportion of change in each category (Dollars in
thousands):

<TABLE>
<CAPTION>
                                       FOR THE THREE MONTHS ENDED
                                             MARCH 31, 2001
                                 -------------------------- -------------
                                   CHANGE        CHANGE
                                   DUE TO        DUE TO
                                   VOLUME         RATE          NET
                                 ------------ ------------- -------------
<S>                              <C>          <C>              <C>
INTEREST-EARNING ASSETS:
Federal funds sold and other...           $7           $24           $31
Investment securities..........       19,640         1,901        21,541
Loans..........................         (225)          176           (49)
                                 ------------ ------------- -------------
   Total interest-earning
     assets....................      $19,422        $2,101       $21,523
                                 ------------ ------------- -------------
INTEREST-BEARING LIABILITIES:
Deposits.......................       $6,007          $914        $6,921
Borrowings.....................        6,778          (688)        6,090
                                 ------------ ------------- -------------
   Total interest-bearing
     liabilities...............      $12,785          $226       $13,011
                                 ------------ ------------- -------------
Change in net interest income..       $6,637        $1,875        $8,512
                                 ============ ============= =============
</TABLE>

         Net interest income was $21.5 million in the first quarter of 2001, up
65% from the same period in 2000. This net increase resulted from an increase in
interest income of $21.5 million net of an increase in interest expense of $13.0
million. The improvement in net interest income primarily reflects the positive
effect of balance sheet growth driven by increased client deposits and
borrowings. The net interest margin increased to 2.40% in the first quarter of
2001, up 25 basis points from the same period in 2000.

         Average interest-earning assets, primarily investment securities, were
$3.6 billion in the first quarter of 2001, up 50% from the same period in 2000.
Funding for the asset growth was provided by an increase in average short-term
borrowings, primarily client repurchase agreements, of $573 million and an
increase in average client deposits of $508 million. The effect of changes in
volume of interest-earning assets and interest-bearing liabilities was an
increase in net interest income of approximately $6.6 million in the first
quarter of 2001.

         Average yield on interest earning assets was 6.63% in the first quarter
of 2001, up 37 basis points from the same period in 2000. The average rate that
we paid on interest-bearing liabilities was 4.77% in the first quarter of 2001,
down 3 basis points from the same period in 2000. The effect on net interest
income due to changes in rates was an increase of approximately $1.9 million
during the quarter ended March 31, 2001.

         Effective January 1, 2001, We adopted SFAS 133, as amended and
interpreted, which established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are

                                       23
<PAGE>

required to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the change in the fair value of the derivative
and the item being hedged will be recognized in earnings. If the derivative is
designated as a cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded in other comprehensive income ("OCI").
Ineffective portions of changes, as determined in accordance with SFAS 133, in
the fair value of the cash flow hedges are recognized in earnings. For
derivatives that do not qualify as hedges, changes in their fair value are
recognized in earnings.

         The adoption of SFAS 133 on January 1, 2001, resulted in no cumulative
effect-type adjustment to net income. However, we recorded a reduction to OCI of
$3.9 million, net of tax, and a corresponding liability for the fair value of
the interest rate swaps. The reduction to OCI and the recognition of the
liability are primarily attributable to net unrealized losses on cash flow
hedges as of initial adoption.

         We use derivative instruments to manage exposures 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 liabilities in connection with securities
sold under repurchase agreements. By entering into a pay-fixed/receive-floating
interest rate swap, a portion of the liabilities is effectively converted to a
fixed rate liability for the term of the interest rate swap agreement. Most of
these derivatives have been designated as highly effective cash flow hedges. An
insignificant portion of the derivatives used to manage exposures to interest
rate risks were not considered highly effective and therefore, did not qualify
for hedge accounting.

         Hedge ineffectiveness, determined in accordance with SFAS 133, had an
insignificant impact on earnings for the three months ended March 31, 2001. No
cash flow hedges were dedesignated or discontinued for the three months ended
March 31, 2001.

       For the three months ended March 31, 2001, net interest income included a
net loss of $0.7 million, net of tax, on interest rate swaps relating to SFAS
133. The net loss consisted of a $0.3 million loss, net of tax, on changes in
the fair value of derivative instruments not designated as hedging instruments
and $0.4 million of derivative losses, net of tax, that resulted primarily from
the reclassification of transition adjustment-related derivative losses from OCI
to net interest income in accordance with SFAS 133. We estimate that $2.3
million, net of tax, of the remaining transition adjustment of net derivative
losses included in OCI will be reclassified into earnings within the next twelve
months. The recognition in net interest income of the transition adjustment
derivative losses from OCI will be offset by derivative gains from changes in
the fair value liability of the interest rate swaps as they reach maturity.

INCOME TAXES

       Taxes for the quarter ended March 31, 2001 were $5.1 million, up 40% from
the same period in 2000. The effective tax rate remained at 32% for both
three-month periods. The increase in tax expense reflects the higher level of
pretax income during the quarter ended March 31, 2001.

                                       24
<PAGE>

FINANCIAL CONDITION

INVESTMENT PORTFOLIO

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

<TABLE>
<CAPTION>
                                                                 MARCH 31,       DECEMBER 31,
                                                                   2001              2000
                                                              ---------------- -----------------
<S>                                                             <C>               <C>
SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities..................................       $1,053,493          $550,465
Federal agency securities...................................           30,189            54,129
Corporate debt..............................................           57,006            45,504
State and political subdivisions............................          222,857           122,235
                                                              ---------------- -----------------
   Total securities available for sale......................       $1,363,545          $772,333
                                                              ================ =================
SECURITIES HELD TO MATURITY:
Mortgage-backed securities..................................       $2,303,717        $1,900,301
Federal agency securities...................................          332,159           311,809
State and political subdivisions............................           79,894            79,618
Foreign government securities...............................            7,548             7,566
                                                              ---------------- -----------------
   Total securities held to maturity........................       $2,723,318        $2,299,294
                                                              ================ =================
</TABLE>

         Our investment portfolio is used to invest depositors' funds and
provide a secondary source of earnings for us. In addition, we use the
investment portfolio to secure open positions at securities clearing
institutions in connection with our custody services. The portfolio is comprised
of securities of state and political subdivisions, mortgage-backed securities
issued by the Federal National Mortgage Association (`FNMA' or `Fannie Mae') and
the Federal Home Loan Mortgage Corporation (`FHLMC' or `Freddie Mac'), and
Federal agency callable bonds issued by FHLMC and the FHLB, municipal
securities, corporate debt securities, and foreign government bonds issued by
the Canadian provinces of Ontario and Manitoba.

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

         We invest in foreign government bonds in order to generate foreign
source income to maximize the use of the foreign tax credit. The foreign
government bonds are denominated in U.S. dollars to avoid foreign currency risk.
These bonds are subject to credit risk.

                                       25
<PAGE>

         The book value and weighted average yield of our securities available
for sale at March 31, 2001 by effective maturity, are reflected in the following
table:

<TABLE>
<CAPTION>
                                                                      YEARS
                              --------------------------------------------------------------------------------------
                                   UNDER 1               1 TO 5                5 TO 10               OVER 10
                              ------------------ ----------------------- --------------------- ---------------------
                              AMOUNT     YIELD      AMOUNT       YIELD     AMOUNT      YIELD     AMOUNT      YIELD
                              --------  -------- -------------- -------- ------------ -------- ------------ --------
<S>                           <C>       <C>        <C>           <C>      <C>          <C>      <C>          <C>
Mortgage-backed securities.   $     -         -    $938,341      7.30%    $64,660      8.23%    $ 50,492     6.75%
Federal agency securities..         -         -      30,189      5.64           -         -            -        -
Corporate debt.............         -         -           -         -           -         -       57,006     4.77
State and political
   subdivisions............     3,125      4.20%     38,232      4.56     125,439      4.74       56,061     4.84
                              --------           ----------               -------               --------
   Total securities
     available for sale....   $ 3,125      4.20% $1,006,762      7.14%   $190,099      5.93%   $ 163,559     5.41%
                              ========           ==========               =======               ========
</TABLE>

         The book value and weighted average yield of our securities held to
maturity at March 31, 2001, by effective maturity, are reflected in the
following table (Dollars in thousands):

<TABLE>
<CAPTION>
                                                                    YEARS
                             -------------------------------------------------------------------------------------
                                  UNDER 1                1 TO 5                5 TO 10              OVER 10
                             -------------------  ---------------------  --------------------  -------------------
                               AMOUNT    YIELD      AMOUNT      YIELD      AMOUNT     YIELD      AMOUNT    YIELD
                             -------------------  ------------  -------  -----------  -------  ----------- -------
<S>                             <C>        <C>     <C>          <C>      <C>          <C>      <C>         <C>
Mortgage-backed securities.     $113,257   6.48%   $1,326,493     6.90%  $456,099       6.41%  $407,867      6.78%
Federal agency securities..            -      -       111,011     7.16    221,148       7.26          -         -
State and political
   subdivisions............            -      -             -        -      4,032       5.61     75,863      5.44
Foreign government
   securities..............        7,548   6.84             -        -          -          -          -         -
                             -----------          -----------            --------              --------
   Total securities held
     to maturity...........     $120,805   6.50%  $ 1,437,504     6.92%  $681,279       6.68%  $483,730      6.57%
                             ===========          ===========            ========              ========
</TABLE>

LOAN PORTFOLIO

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

<TABLE>
<CAPTION>
                                                      MARCH 31,      DECEMBER 31,
                                                        2001             2000
                                                    -------------- --------------
<S>                                                 <C>            <C>
Loans to mutual funds............................       $  32,791  $      86,316
Loans to individuals.............................          77,978         43,016
Loans to others..................................              37             37
                                                    -------------- --------------
                                                          110,806        129,369
Less: allowance for loan losses..................            (100)          (100)
                                                    -------------- --------------
Net loans........................................   $     110,706  $     129,269
                                                    ============== ==============
Floating Rate....................................   $     110,776  $     129,337
Fixed Rate.......................................              30             32
                                                    -------------- --------------
                                                    $     110,806  $     129,369
                                                    ============== ==============
</TABLE>

         Virtually all loans to individually managed account customers are
written on a demand basis, bear variable interest rates tied to the prime rate
and are fully secured by liquid collateral, primarily freely tradable securities
held in custody by us for the borrower. Loans to mutual funds 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 mutual funds. Loans to
mutual funds also include advances that we make to certain mutual fund clients
pursuant to the terms of our custody agreements with those clients to facilitate
securities transactions and redemptions.

                                       26
<PAGE>

         At March 31, 2001, our only lending concentrations which 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 or adverse credit actions in our history. It is our policy to place
a loan on non-accrual status when either principal or interest becomes 60 days
past due and the loan's collateral is not sufficient to cover both principal and
accrued interest. As of March 31, 2001, there were no loans on non-accrual
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 recorded an allowance for loan losses of $0.1
million at March 31, 2001. 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.

MARKET RISK

         We engage in investment activities to serve clients' investment needs
and contribute to overall corporate earnings. Interest-bearing liabilities are
generated by our clients who, in the course of their financial asset management,
maintain cash balances which they deposit on a short-term basis with us. We
invest these cash balances and remit a portion of the earnings on these
investments to our clients. In the conduct of these activities, we are subject
to market risk. Market risk is the risk of an adverse financial impact 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 structure for
our interest-earning assets. We also use interest rate swap agreements to
augment our management of interest rate exposure. The purpose of these
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 12 months
will not be reduced by more than 10% given a change in interest rates of up to
200 basis points (+ or -) over 12 months. Each quarter, our board of directors
reviews our investment position, including simulations of the effect of various
interest rate scenarios on our capital.

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

         The results of the income simulation model as of March 31, 2001 and
2000 indicated that an upward shift of interest rates by 200 basis points would
result in a reduction in projected net interest income of 7.0% and 8.0%,

                                       27
<PAGE>

respectively. Conversely, a downward shift of 200 basis points would result in
an increase in projected net interest income of 1.7% and 5.4%, respectively.

         We also use gap analysis as a secondary tool to manage our interest
rate sensitivity. Gap analysis involves measurement of the difference in asset
and liability repricing on a cumulative basis within a specified time frame. A
positive gap indicates that more interest-earning assets than interest-bearing
liabilities mature in a time frame, and a negative gap indicates the opposite.
By seeking to minimize the 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
table below, at March 31, 2001, interest-bearing liabilities repriced faster
than interest-earning assets, as has been typical for us. If all other variables
remained constant, in the short-term, falling interest rates would lead to net
interest income that is higher than it would have been; rising rates would lead
to lower net interest income. Other important determinants of net interest
income are rate levels, balance sheet growth and mix, and interest rate spreads.

       The following table presents the re-pricing schedule our interest-earning
assets and interest-bearing liabilities at March 31, 2001 (Dollars in
thousands):

<TABLE>
<CAPTION>
                                    WITHIN       THREE TO        SIX TO       ONE YEAR
                                    THREE          SIX           TWELVE        TO FIVE      OVER FIVE
                                    MONTHS        MONTHS         MONTHS         YEARS         YEARS        TOTAL
                                 -------------  ------------  -------------  ------------  ------------ --------------
<S>                              <C>            <C>           <C>            <C>           <C>          <C>
Interest-earning assets (1):
   Federal funds sold..........  $     17,000   $       -     $       -       $      -      $       -     $   17,000
   Investment securities (2)...     1,844,423     398,464       509,590        801,608        532,778      4,086,863
   Loans--variable rate.........      110,676           -             -              -              -        110,676
   Loans--fixed rate............           30           -             -              -              -             30
                                 ------------   ---------   -----------    -----------    -----------     ----------
     Total interest-earning
       assets..................  $  1,972,129   $ 398,464     $ 509,590      $ 801,608      $ 532,778     $4,214,569
Interest-bearing liabilities:
   Demand deposit accounts.....  $      4,028   $       -     $       -        $     -      $       -     $    4,028
   Savings accounts............     1,662,155           -             -         35,000              -      1,697,155
   Interest rate contracts.....      (610,000)     50,000       120,000        440,000              -              -
   Short-term and other
     borrowings................     1,673,805           -             -        300,000              -      1,973,805
                                 ------------   ---------     ---------      ---------      ---------     ----------
     Total interest-bearing
       liabilities.............  $  2,729,988   $  50,000       120,000      $ 775,000      $       -     $3,674,988
                                 ------------   ---------     ---------      ---------      ---------     ----------
     Net interest sensitivity
       gap during the period...  $   (757,859)  $ 348,464     $ 389,590      $  26,608      $ 532,778     $  539,581
                                 ============   =========     =========      =========      =========     ==========
     Cumulative gap............  $   (757,859)  $(409,395)    $ (19,805)     $   6,803      $ 539,581
                                 =============  =========     =========      =========      =========
Interest sensitive assets as a
   percent of interest
   sensitive liabilities
   (cumulative)................         72.24%      85.27%        99.32%        100.19%        114.68%
                                 ============   =========     ==========   ===========   ============
Interest sensitive assets as a
   percent of total assets
   (cumulative)................         44.52%      53.51%        65.01%         83.11%         95.13%
                                 ============   =========     ==========   ===========  =============

Net interest sensitivity gap
   as a percent of total
   assets......................        (17.11)%      7.87%         8.79%          0.60%         12.03%
                                 ============   =========     =========     ==========  =============
Cumulative gap as a percent of
   total assets................        (17.11)%     (9.24)%       (0.45)%         0.15%         12.18%
                                 =============  =========     =========    ===========  =============
</TABLE>

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


                                       28
<PAGE>

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 us, 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, new deposits, short-term borrowings, interest payments on
securities held to maturity and available for sale, and fees collected from
asset administration clients. As a result of our management of liquid assets and
the ability to generate liquidity through liability funds, 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 $0.08 per share for 2001 (approximately $2.5 million
based upon 31,713,176 shares outstanding as of March 31, 2001).

         Our ability to pay dividends on the common stock may depend on the
receipt of dividends from Investors Bank. Any dividend payments by Investors
Bank are subject to certain restrictions imposed by the Massachusetts
Commissioner of Banks. 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 I capital under the capital guidelines of the Federal
Reserve.

         We have informal borrowing arrangements with various counterparties.
Each counterparty has agreed to make funds available to us at the Federal funds
overnight rate. The aggregate amount of these borrowing arrangements as of March
31, 2001 was $657 million. 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 these borrowing arrangements at March 31, 2001 was $2.0
billion.

         We also have a borrowing arrangement with the FHLBB. We may borrow
amounts determined by prescribed collateral levels and the amount of FHLBB stock
we hold. We are required to hold FHLBB stock equal to no less than (i) 1% of our
outstanding residential mortgage loan principal (including mortgage pool
securities), (ii) 0.3% of total assets, or (iii) total advances from the FHLBB,
divided by a leverage factor of 20. The aggregate amount of borrowing available
to us under this arrangement at March 31, 2001 was $1.8 billion.

         Our cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities, and financing activities.
Net cash provided by operating activities was $15.6 million for the quarter
ended March 31, 2001. Net cash used for investing activities, consisting
primarily of the excess of purchases of investment securities over proceeds from
maturities of investment securities, was $600.4 million for the quarter ended
March 31, 2001. Net cash provided by financing activities, consisting primarily
of net activity in deposits and short-term borrowings, was $579.4 million for
the quarter ended March 31, 2001.

CAPITAL RESOURCES

         Historically, we have financed our operations principally through
internally generated cash flows. We incur capital expenditures for furniture,
fixtures and miscellaneous equipment needs. We lease microcomputers through
operating leases. Capital expenditures have been incurred and leases entered
into on an as-required basis, primarily to meet our growing operating needs. As
a result, our capital expenditures were $3.0 million and $1.2 million for the
quarters ended March 31, 2001 and 2000, respectively.

         Stockholders' equity at March 31, 2001 was $303.3 million, up 70%, from
December 31, 2000. The ratio of stockholders' equity to assets increased to 6.8%
at March 31, 2001 from 4.7% at December 31, 2000. The increase in stockholders'
equity is the result of the February 1, 2001 offering of 1,624,145 shares of
Common Stock, which raised approximately $115.8 million in capital.

                                       29
<PAGE>

         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. Some
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 I" and "Tier II"
capital elements, with at least half of the total capital required to be Tier I.
Tier I capital includes, with certain restrictions, the sum of common
stockholders' equity, non-cumulative perpetual preferred stock, a limited amount
of cumulative perpetual preferred stock, and minority interests in consolidated
subsidiaries, less certain intangible assets. Tier II 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.

         The following table summarizes our Tier I and total capital ratios at
March 31, 2001 (Dollars in thousands):

<TABLE>
<CAPTION>
                                                           AMOUNT      RATIO
                                                         ------------  -------
<S>                                                      <C>           <C>
Tier I capital........................................   $   265,830    15.80%
Tier I capital minimum requirement....................        67,290     4.00%
                                                         -----------   ------
Excess Tier I capital.................................   $   198,540    11.80%
                                                         ===========   ======
Total capital.........................................   $   265,930    15.81%
Total capital minimum requirement.....................       134,581     8.00%
                                                         -----------   ------
Excess total capital..................................   $   131,349     7.81%
                                                         ===========   ======
Risk adjusted assets, net of intangible assets........   $ 1,682,257
                                                         ===========
</TABLE>

         The following table summarizes Investors Bank's Tier I and total
capital ratios at March 31, 2001 (Dollars in thousands):

<TABLE>
<CAPTION>
                                                          AMOUNT     RATIO
                                                       ------------- -------
<S>                                                    <C>           <C>
Tier I capital.......................................  $    263,229   15.67%
Tier I capital minimum requirement...................        67,161    4.00%
                                                       ------------- -------
Excess Tier I capital................................  $    196,068   11.67%
                                                       ============= =======
Total capital........................................  $    263,329   15.68%
Total capital minimum requirement....................       134,323    8.00%
                                                       ------------- -------
Excess total capital.................................  $    129,006    7.68%
                                                       ============= =======
Risk adjusted assets, net of intangible assets.......  $  1,679,033
                                                       =============
</TABLE>

         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 I capital divided by its
adjusted total average assets. The Leverage Ratio adopted by the federal banking
agencies requires a ratio of 3.0% for top rated banking institutions. All other
banking institutions will be 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 Investors Bank be reduced by most
intangible assets. Our Leverage Ratio at March 31, 2001 was 7.20%, which is in
excess of regulatory requirements. The Bank's Leverage Ratio at March 31, 2001
was 7.14%, which is in excess of regulatory requirements.

                                       30
<PAGE>

         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):

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED MARCH 31, 2001       THREE MONTHS ENDED MARCH 31, 2000
                                      ---------------------------------------  -------------------------------------
                                        AVERAGE                   AVERAGE         AVERAGE                AVERAGE
                                        BALANCE       INTEREST   YIELD/COST       BALANCE     INTEREST   YIELD/COST
                                      -------------  ----------- ------------  -------------- ---------- -----------
<S>                                   <C>            <C>         <C>            <C>           <C>        <C>
INTEREST EARNING ASSETS:
   Federal funds sold and other.....  $     63,678        $ 929         5.84%  $     63,187   $    898        5.68%
   Investment securities (1)........     3,402,910       57,021         6.70%     2,225,774     35,480        6.38%
   Loans (2)........................       110,615        1,367         4.94%       124,802      1,416        4.54%
                                      ------------   ----------  -----------   ------------   --------   ---------
     Total interest earning assets..     3,577,203       59,317         6.63%     2,413,763     37,794        6.26%
                                                     ----------  -----------                  --------   ---------
   Allowance for loan losses........          (100)                                    (100)
   Non-interest-earning assets......       178,625                                  141,225
                                      ------------                             ------------
     Total assets...................  $  3,755,728                             $  2,554,888
                                      ============                             ============
INTEREST BEARING LIABILITIES:
   Deposits:
     Demand.........................  $      3,561       $   18         2.02%  $      4,459   $     22        1.97%
     Savings........................     1,625,566       19,400         4.77%     1,107,149     12,350        4.46%
     Time...........................           967           13         5.38%        10,000        138        5.52%
   Short-term and other borrowings..     1,546,089       18,417         4.76%       972,932     12,327        5.07%
                                      ------------       ------  -----------   ------------   --------  ----------
   Total interest bearing
     liabilities....................     3,176,183       37,848         4.77%     2,094,540     24,837        4.74%
                                                     ----------  -----------                 ---------  ----------
   Non-interest bearing liabilities
     Demand deposits................       166,396                                  203,737
     Savings........................        32,988                                        -
     Non-interest bearing time
       deposits.....................        65,000                                   65,000
     Other liabilities..............        42,610                                   25,253
                                      ------------                             ------------
   Total liabilities................     3,483,177                                2,388,530
   Trust preferred stock............        24,249                                   24,220
   Equity...........................       248,302                                  142,138
                                      ------------                             ------------
   Total liabilities and equity.....  $  3,755,728                             $  2,554,888
                                      ============                             ============
   Net interest income..............                    $21,469                               $ 12,957
                                                        =======                               ========
   Net interest margin (3)..........                                    2.40%                                 2.15%
                                                                 ===========                             =========
   Average interest rate
     spread (4).....................                                    1.86%                                 1.52%
                                                                 ===========                             =========
   Ratio of interest-earning assets
     to interest-bearing
     liabilities....................                                  112.63%                               115.24%
                                                                 ===========                             =========
</TABLE>

--------------
  (1)  Average yield/cost on available for sale securities is based on
       amortized cost.
  (2)  Average yield on loans includes accrual loan balances and non-accrual
       loan balances, if any.
  (3)  Net interest income divided by total interest-earning assets.
  (4)  Yield on interest-earning assets less rate paid on interest-bearing
       liabilities.

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

       The information required by this item is contained in the "Market Risk"
section in the "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as part of this Report.

                                       31
<PAGE>

PART II.  OTHER INFORMATION

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

                  NONE

                                   SIGNATURES

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

                               INVESTORS FINANCIAL SERVICES CORP.

Date: May 9, 2001          By: /s/ Kevin J. Sheehan
                               ------------------------------------------------
                               Kevin J. Sheehan
                               Chairman, President and Chief
                               Executive Officer

                           By: /s/ Karen C. Keenan
                               ------------------------------------------------
                               Karen C. Keenan
                               Chief Financial Officer
                               (Principal Financial and Accounting Officer)

                                       32