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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM 10-K

|(Mark One)                                                                                        |                                                                                         
|------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                                                                 | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2002                                                      
|or                                                                                               
|o                                                                                                 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                  to                
Commission File Number 0-26996

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

|Delaware                                                       |  | 04-3279817                       
|-------------------------------------------------------------- |  | ---------------------------------
|(State or other jurisdiction of
incorporation or organization) |  | (IRS Employer Identification No.)
|200 Clarendon Street
P.O. Box 9130
Boston, Massachusetts       |  | 02116                            
|(Address of principal executive offices)                       |  | (Zip Code)                       

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

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value
Series A Junior Preferred Stock Purchase Rights

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

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.    o

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

The
aggregate market value of Common Stock held by non-affiliates of the registrant was $2,062,923,818 based on the last reported sale price of $33.54 on The Nasdaq National
Market on June 30, 2002 as reported by Nasdaq.

As
of January 31, 2003, there were 64,860,837 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive Proxy Statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended
December 31, 2002. Portions of such Proxy Statement are incorporated by reference in Part III.

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PART I

ITEM 1.    BUSINESS.

General

Unless otherwise indicated or unless the context requires otherwise, all references in this Report to "Investors Financial," "we," "us,"
"our," or similar references mean Investors Financial Services Corp., together with our subsidiaries. "Investors Bank" or the "Bank" will be used to mean our subsidiary, Investors Bank & Trust
Company, alone.

Investors
Financial Services Corp. is a bank holding company. We were organized as a Delaware corporation in 1995. Through our subsidiaries, we provide asset servicing for the financial
services industry. We provide services from offices in Boston, New York, Sacramento, Toronto, Dublin and the Cayman Islands.

Our
primary operating subsidiary is Investors Bank & Trust Company® which was founded in 1969 as a banking subsidiary of Eaton Vance Corp., an investment management
firm. In 1995, we reorganized as a bank holding company, were spun-off to the stockholders of Eaton Vance and completed our initial public offering.

We
provide a broad range of services to financial asset managers, such as mutual fund complexes, investment advisors, banks and insurance companies. We think of these services in two
categories: core services and value-added services. Our core services include global custody, multicurrency accounting and mutual fund administration. Our value-added services include securities
lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment advisory
services, lines of credit, and brokerage services. At December 31, 2002, we provided services for approximately $785 billion in net assets, including approximately $86 billion of
foreign net assets.

Industry Overview

Asset managers invest and manage the financial assets entrusted to them. They do so using a broad range of financial products, including mutual funds, unit
investment trusts, separate accounts, variable annuities and other products that pool together money from many investors. Asset servicing companies like ours perform various services for asset
managers and the pooled financial products they sponsor. The following discussion sets forth our view of the key drivers in today's asset servicing industry.

Historical Financial Asset Growth.While financial assets have declined slightly in recent years, over the past ten years,
growth in financial assets under management has been strong. Factors driving this growth are an aging population, the privatization of retirement systems and the increased popularity of pooled
investment products, including mutual funds. The total amount of U.S. financial assets held in mutual funds, life insurance companies, private pension funds and bank personal trust accounts was $14.9
trillion at December 31, 2001, up from $5.4 trillion in 1991, a compounded annual growth rate of over 10%. Mutual funds, a primary market for our services, hold a large portion of the money
invested in pooled investment vehicles. Despite the above-mentioned recent declines, the U.S. mutual fund market has grown at a compounded annual growth rate of more than 16% since 1991, and

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held over $6 trillion in assets at December 31, 2001. The following table presents U.S. financial assets, including mutual funds (Dollars in billions):

|                                 |       | December 31, 2001 |          | December 31, 1991 |   | Compounded
Annual
Growth Rate |         
|-------------------------------- | ----- | ----------------- | -------- | ----------------- | - | ----------------------------- | --------
|U.S. Financial Assets            |       |                   |          |                   |   |                               |         
|Mutual Funds                     |       | $                 | 6,513.80 |                   | $ | 1,375.70                      |         
|Life Insurance Companies         |       |                   | 3,224.60 |                   |   | 1,479.50                      |         
|Private Pension Funds            |       |                   | 4,171.70 |                   |   | 1,939.60                      |         
|Bank Personal Trusts and Estates |       |                   | 996.30   |                   |   | 608.30                        |         
|                                 |       |                   |          |                   |   |                               |         
|                                 | Total |                   | $        | 14,906.40         |   | $                             | 5,403.10
|                                 |       |                   |          |                   |   |                               |         

Source: Federal Reserve Bank

Consolidation and Outsourcing Trends.Another important factor affecting the industry is consolidation in the number of asset servicing
providers.
Since the early 1990s, a number of small and mid-size asset servicers have consolidated with larger service providers or divested their asset servicing operations to focus their resources
on their core businesses. Also, numerous service providers have consolidated their operations with other companies. This ongoing consolidation has concentrated the industry around a smaller number of
providers and presents us with opportunities for growth as clients review their relationships with existing service providers and as consolidated financial institutions dispose of businesses that do
not fit with their core services.

Asset
servicing is viewed differently by asset management organizations depending on their operational philosophy. The majority of asset managers hire third parties to provide custody
services. Some use more than one custodian to foster cost reduction through competition. Large asset managers may have enough assets to justify the cost of providing in-house facilities to
handle accounting, administration and transfer agency services. Smaller asset managers generally hire third parties to provide accounting, administration and transfer agency services in addition to
custody services. Keeping abreast of developments like Internet data delivery, the Euro, decimalization of stock prices and compressed settlement cycles has forced significant increases in technology
spending across the financial services industry. We believe that this increase in spending requirements has accelerated the pace at which asset managers outsource back office operations to asset
servicers.

Technology.Information technology is a driving force in the financial services industry. Asset managers are able to create
innovative investment products using technological tools including:



Asset
servicers use technology as a competitive tool to deliver precise and functional information to asset managers. Technology also allows asset servicers to offer more value-added
services such as performance measurement. Examples of analytical tools used in performance measurement include reports showing time-weighted return, performance by sector, and
time-weighted return by sector.

Complex Investment Products.Asset managers create different investment structures in an effort to capture efficiencies of
larger pools of assets. One innovative example of this is the master-feeder

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structure. In the master-feeder structure, one or more investment vehicles (the "feeder funds") with identical investment objectives pool their assets in the common portfolio of a separate investment
vehicle (the "master fund"). This structure permits each of the feeder funds to be sold to a separate target market or through a different distribution channel. The feeder fund, if it were a
stand-alone fund, might not be large enough to support its operating costs. The feeder funds benefit from economies of scale available to the larger pool of assets invested in the master fund.

In
addition, a growing number of mutual funds have been structured as multi-class funds or as multi-manager funds in order to address the differing requirements and preferences of
potential investors. Multi-class arrangements allow an investment company to sell interests in a single investment portfolio to separate classes of stockholders. In this environment, investors have
the option of purchasing multi-class fund shares with the sales load structure that best meets their short-term and long-term investment strategy. Multi-manager funds have two
or more investment managers, who may have different investing styles, managing the assets of one fund. Multi-manager funds allow an investor to invest along multiple style lines with a single
investment.

Another
innovation in the mutual fund industry is the advent of exchange traded funds, or ETFs. ETFs are securities that replicate an index and are traded on a national securities
exchange, usually the American Stock Exchange. Unlike investing in a conventional index mutual fund, investing in an ETF allows investors to buy and sell shares throughout the trading day at market
prices. ETFs also offer potential tax efficiencies. According to an industry source, globally, ETF assets grew 35% from approximately $104.8 billion at year-end in 2001 to
$141.6 billion in 2002.

Asset
managers have also expanded their reach in the global marketplace to capitalize on cross-border and multi-national marketing opportunities. This creates demand for asset servicing
around the world and particular demand for value added services like foreign exchange.

Our Strategy

We believe that asset servicing companies operate most efficiently when bundling core services such as custody and accounting with value-added services such as
securities lending and foreign exchange. We also believe that efficient integration of these services is critical to both service quality and profitability.

Maintain Technological Expertise.One of our core strategies is to maintain our technological expertise. The asset servicing
industry requires the technological capability to support a wide range of global security types, currencies, and complex portfolio structures. Asset servicers must also maintain the telecommunications
flexibility to support the diversity of global communications standards. Technological change creates opportunities for product differentiation and cost reduction.

Our
Fund Accounting and Custody Tracking System, or FACTS, is a single integrated technology platform that combines our products into one solution for customers and can accommodate rapid
growth in net assets processed. FACTS provides the following functions in a single information system:



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By
consolidating these functions, we have eliminated redundancy in data capture and reduced the opportunity for clerical error.

The
consolidation of functions available through FACTS allows us to assign a dedicated client team to provide a full suite of services to each account. We believe that this approach
helps us to provide high quality service and to maintain better overall relationships with our clients.

The
FACTS architecture also enables us to modify the system quickly. Rapid modifications result in increased processing quality, efficiency, and an increased ability to implement service
innovations for our clients. We believe that the integrated nature of FACTS provides us with a competitive advantage by allowing us to respond quickly to the continuously changing technological
demands of the financial services industry. The separate systems used for different tasks by many other asset servicing providers may not provide the same advantages.

We
outsource our mainframe processing and network monitoring to Electronic Data Systems so that we can focus our resources on software and internal systems development. This arrangement
minimizes our capital investment in large-scale computer hardware, gives us access to state-of-the-art mainframe technology, and provides virtually unlimited
capacity and disaster recovery services. Our relationship with EDS also assures greater predictability of our processing expenses.

Maintain Expertise in Complex Products.Another of our core strategies is to maintain our strength in the rapidly growing
area of complex investment products. We have developed expertise in servicing master-feeder and multi-managed funds, limited partnerships and ETFs. We also have expertise in servicing the more
complicated fund of funds and offshore fund structures. Because the design of FACTS allows us to effect modifications or enhancements quickly, we are able to respond rapidly to the systems
requirements of complex structures.

Deliver Superior Service.We strive to deliver superior and innovative client service. We believe service quality in client
relationships is the key to maintaining and expanding existing business as well as attracting new clients. The consolidation of functions available through FACTS allows us to take an integrated
approach to servicing. We believe this approach is different from that employed by many of
our competitors. We dedicate a single operations team to handle all work for a particular account or fund. In addition, each client is assigned a client manager, independent of the operations team, to
anticipate the client's needs, to coordinate service delivery, and to provide consulting support.

Cross-Sell Services.We believe that our strong client relationships provide opportunities to
cross-sell value-added services to broaden our customer relationships. Many of our clients have multiple pools of assets that they manage. Once a mutual fund complex becomes a client, we
believe that complex is more likely to select us to service more funds, provide additional services, or both. For example, a mutual fund company may manage two or more families of mutual funds or an
insurance company may manage a family of retail mutual funds and a series of mutual funds to offer variable annuity products. If we are engaged to provide services for only some of the pools of assets
managed by our clients, we strive to expand the relationship to include more asset pools by providing superior quality client service. Also, some of our clients engage us to provide the core services
of global custody and multicurrency accounting, but do not use value-added services like foreign exchange or cash management. We target expanding these relationships by increasing the number of
services provided for each client.

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Service Offerings

We provide a broad range of services to financial asset managers, such as mutual fund complexes, investment advisors, banks and insurance companies. We think of
these services in two groupings: core services and value-added services.

Core Services

Value-Added Services Global Custody

 Securities Lending Multicurrency Accounting

 Foreign Exchange Mutual Fund Administration

 Cash Management Performance Measurement Institutional Transfer Agency Investment Advisory Services Lines of Credit Brokerage Services


Our
value-added services help support clients in developing and executing their strategies, enhancing their returns, and evaluating and managing risk. We strive to maximize the use of
our value-added services by our client base.

Fees
charged for core services vary from client to client based on the volume of assets processed, the number of securities held and portfolio transactions. Generally, fees are billed to
our client monthly in arrears and, upon their approval, charged directly to their account. Fees charged for core services reflect the price-sensitivity of the market for such services. Fees charged
for value-added services reflect a more favorable pricing environment for us, and we can increase activity in these areas without a proportionate increase in personnel or other resources.

The
following is a description of the various services we offer:

Core Services

Global Custody.Global custody entails overseeing the safekeeping of securities for clients and settlement of portfolio
transactions. Our domestic net assets processed have grown from $22 billion at October 31, 1990 to $699 billion at December 31, 2002. At December 31, 2002, our
foreign net assets processed totaled approximately $86 billion.

In
order to service our clients worldwide, we established a network of global subcustodians in 97 markets. Since we do not have our own branches in these countries, we are able to
operate in the foreign custody arena with minimal fixed costs, while our clients benefit from the ability to use a single custodian, Investors Bank, for all of their international investment needs.

Multicurrency Accounting.Multicurrency accounting entails the daily recordkeeping for each account or investment vehicle,
including the calculation of net asset value per share. In addition to providing these services to domestic-based accounts and investment vehicles, we also provide offshore fund accounting. We view
the offshore market as a significant business opportunity and will continue to invest in expansion to support client demand.

Mutual Fund Administration.Mutual fund administration services include management reporting, regulatory reporting,
compliance monitoring, tax accounting and return preparation, and partnership administration. In addition to these ongoing services, we also provide mutual fund start-up consulting
services, which typically includes assistance with product definition, service provider selection, and fund
structuring and registration. We have worked with a number of investment advisors to assist them in the development of new mutual funds and other pooled investment vehicles.

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Value-Added Services

Securities Lending.Securities lending involves the lending of clients' securities to brokers and other institutions for a
fee. Receipt of securities lending fees improves a client's return on the underlying securities. We act as agent for our clients for both international and domestic securities lending services. We
retain as compensation a portion of the lending fee due to the client as owner of the borrowed securities.

Foreign Exchange.We provide foreign exchange services to facilitate settlement of international securities transactions for
U.S. dollar denominated mutual funds and other accounts and to convert income payments denominated in a non-U.S. currency to U.S. dollars. By using us rather than a third party foreign
exchange bank to perform these functions, clients can reduce the amount of time spent coordinating currency delivery and monitoring delivery failures and claims.

Cash Management.We provide a number of investment options for cash balances held by our clients. Typically, we have a
standing arrangement to sweep client balances into one or more investments, including deposit accounts, short term funds and repurchase agreements. This allows our clients to conveniently maximize
their earnings on idle cash balances.

Performance Measurement.Performance measurement services involve the creation of systems and databases that enable asset
managers to construct, manage, and analyze their portfolios. Services include portfolio profile analysis, portfolio return analysis, and customized benchmark construction. Performance measurement uses
data already captured by FACTS to calculate statistics and report them to asset managers.

Institutional Transfer Agency.Transfer agency encompasses shareholder recordkeeping and communications. We provide these
services only to institutional clients with a small number of shareholder accounts or omnibus positions of retail shareholders.

Investment Advisory Services.The Bank acts as investment adviser to the Merrimac Master Portfolio, an open-end
management investment company registered under the Investment Company Act of 1940. The portfolio currently consists of a series of five master funds in a master-feeder structure. The Merrimac Cash
Portfolio and the Merrimac U.S. Government Portfolio are sub-advised by Allmerica Asset Management, Inc. The Merrimac Treasury Portfolio and the Merrimac Treasury Plus Portfolio are
sub-advised by M&I Investment Management Corp. The Merrimac Municipal Portfolio is sub-advised by ABN AMRO Asset Management (USA) LLC. At December 31, 2002, the total
net assets of the portfolio approximated $7.0 billion. The portfolio's master funds serve as investment vehicles for six domestic feeder funds and two offshore feeder funds, which we have
created and whose shares are sold to institutional investors.

Lines of Credit.We offer credit lines to our clients for the purpose of leveraging portfolios, covering overnight cash
shortfalls and other borrowing needs. We do not conduct consumer-banking operations. At December 31, 2002, we had gross loans outstanding to clients of approximately $144 million, which
represented approximately 2% of our total assets. The interest rates charged on the Bank's loans are indexed to either the Prime rate or the Federal Funds rate. We have never had a loan loss. All
loans are secured, or may be secured, by marketable securities and virtually all loans are due on demand, other than a loan made to a non-profit association for the purposes of the Community
Reinvestment Act. We earn commitment fees on the unused portion of certain redemption lines of credit to mutual fund clients. These commitment fees are calculated as a percentage of the total line of
credit.

Brokerage services.In 2002, we began offering introducing broker-dealer services to clients by accepting customer orders,
which we have elected to clear through a clearing broker-dealer. The clearing broker-dealer processes and settles customer transactions and maintains detailed customer

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records. This allows us to use the back office processing of the clearing broker while earning a commission on trades executed on behalf of clients. The brokerage services we offer do not include
margin accounts, short selling or market making activities. The results of this operation were not material to our financial condition and operating results as of and for the year ended
December 31, 2002.

Sales, Marketing and Client Support

We employ a direct sales staff that targets potential market opportunities, including investment management companies, insurance companies, banks and investment
advisors. Sales personnel are primarily based at our headquarters in Boston, and are given geographic area sales responsibility. We also have two sales personnel located in Dublin who are responsible
for international markets. Included in the sales staff are individuals who are dedicated to marketing services to institutional accounts. Senior managers from all functional areas are directly
involved in obtaining new clients, frequently working as a team with a sales professional.

In
order to service existing clients, client management staff based in our Boston, New York and Dublin offices provide client support. Each client is assigned a client manager
responsible for the client's overall satisfaction. The client manager is usually a senior professional with extensive industry experience and works with the client on designing new products and
specific systems requirements, providing consulting support, anticipating the client's needs and coordinating service delivery.

Financial
information regarding our geographic reporting can be found in Note 20 to our Notes to Consolidated Financial Statements included in this Annual Report.

Significant Clients

Barclays Global Investors, N.A. ("BGI") accounted for approximately 16.8% and 13.5% of our consolidated net operating revenues for the years ended
December 31, 2002 and 2001, respectively. No single client of ours represented more than 10% of net operating revenues for the year ended December 31, 2000, and no client other than BGI
accounted for more than 10% of our net operating revenues for the years ended December 31, 2002 or 2001.

Software Systems and Data Center

Our business requires that we provide daily and periodic reports of asset accounting and performance, and provide measurement and analytical data to asset
managers on-line on a real time basis. To help us meet these requirements, our asset servicing operations are supported by sophisticated computer technology. We receive vast amounts of
information across a worldwide computer network. That information covers a wide range of global security types and complex portfolio structures in various currencies. The information must be processed
and then used for system-wide updating and reporting.

Our
proprietary system, FACTS, is multi-tiered. FACTS uses personal computers linked to mainframe processing by means of local and wide area networks. This configuration combines the
best features of each platform. FACTS uses the power and capacity of the mainframe, the data distribution capabilities of the network and the independence of personal computers. The fully functional
microcomputer component of FACTS works independently of the mainframe throughout the processing cycle. This minimizes the amount of system-wide delay inherent in data processing. The FACTS
configuration also allows for fully distributed processing capabilities within multiple geographic locations in an effective and efficient manner.

The
integrated nature of the FACTS architecture allows us to effect modifications and enhancements quickly. Swift modifications and enhancements result in increased processing quality
and

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efficiency for our clients. They also help us implement service innovations for our clients. This integrated architecture helps differentiate us from our competitors. Technological enhancements and
upgrades are an ongoing part of asset servicing that are necessary for asset administrators to remain competitive and to create information delivery mechanisms that add value to the information
available as part of clearing and settling transactions. We have met and continue to meet these needs through standardized data extracts and automated interfaces developed over the past several years.

These
abilities help us add value to the custody and fund accounting information we gather by processing client assets. We have developed a comprehensive suite of standardized data
extracts and reports and created automated interfaces that allow our clients to access the full range of custody and fund accounting data. We have also developed interfaces that allow our clients to
connect electronically with our host systems and access data collected from clearance and settlement transactions in multiple currencies. Through these information-sharing tools, we are better
equipped to supplement our custody and accounting services with foreign exchange services and asset and transaction reporting and monitoring services. Electronic linkages also position us to respond
quickly to client requests.

We
use the Internet as a means to communicate with clients and external parties. Through the implementation of our strategic Internet plan, our goal is to position ourselves to take
advantage of Internet technologies while providing secure value-added services to our clients over the Internet. We utilize a secure extranet environment that provides the authentication, access
controls, intrusion detection, encryption and firewalls needed to assure the protection of client information assets. Internet-based applications provide our clients with secure access to their data
over the Internet as well as additional flexible ad-hoc data query and reporting tools.

Our
mainframe processing is provided by Electronic Data Systems, or EDS, located in Plano, Texas. By outsourcing mainframe processing, we focus our resources on systems development and
minimize our capital investment in large-scale computer equipment. EDS offers us state-of-the-art computer products and services, access to which we could not
otherwise afford, while removing the risk of product obsolescence. Due to its diverse customer base, EDS can invest in the latest computer technology and spread the related costs over multiple users.
We also receive the benefit of the continuing investment by EDS in its computer hardware.

Our
current agreement with EDS obligates EDS to provide us with comprehensive data processing services and obligates us to utilize EDS' services for substantially all of our data
processing requirements. We are billed monthly for these services on an as-used basis in accordance with a predetermined pricing schedule for specific products and services. EDS began
providing services for us in December 1990. Our current agreement with EDS is scheduled to expire on December 31, 2005. EDS also provides us with mainframe disaster recovery services.

Our
trust processing services are provided by SEI Investments Company, located in Oaks, Pennsylvania. SEI is a global provider of asset management and investment technology solutions. We
pay certain monthly service fees based upon usage. Our current agreement with SEI is schedule to expire on December 31, 2005.

We
maintain a comprehensive disaster recovery plan. The plan identifies teams to manage disaster situations and re-establish a functioning operational environment. The plan
provides for us to be able to relocate employees and resume operations quickly, if necessary.

The
securities industry is moving to a straight-through-processing environment where all trades will flow directly from a client's trading platform to our own system to produce a net
asset value calculation. We have begun making the systems infrastructure and functional modifications required to provide straight-through-processing capabilities. We believe that we can accomplish
the transition to a full straight-through-processing environment without adversely affecting our financial results, operations or the services we provide to our clients.

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Competition

We operate in a highly competitive environment in all areas of our business. Many of our competitors, including State Street Bank and Trust Company, JP Morgan
Chase and The Bank of New York, possess substantially greater financial and marketing resources than we do and process a greater amount of financial assets. Moreover, under the Gramm-Leach-Bliley Act
of 1999, securities firms, insurance companies and other financial services providers may now elect to become financial holding companies. Financial holding companies may acquire banks and other
financial institutions. Accordingly, the Gramm-Leach-Bliley Act may significantly change the competitive environment in which we conduct business. Other competitive factors include technological
advancement and flexibility, breadth of services provided and quality of service. We believe that we compete favorably in these categories.

Competition
in the asset servicing industry has compressed both pricing and margins of core services like global custody services and trustee services. Partially offsetting this trend is
the development of new services that have higher margins. Our continuous investment in technology has permitted us to offer value-added services to clients, such as middle-office outsourcing,
performance measurement, securities lending and foreign exchange, all on a global basis and at competitive prices. Technological evolution and service innovation have enabled us to generate additional
revenue to offset price pressure in maturing service lines.

We
believe that our size and responsiveness to client needs provide the asset management industry with a very attractive asset servicing alternative to superregional and money center
banks and other asset servicers. As our competitors grow even larger through acquisition, we believe that our customized and highly responsive service offerings become even more attractive. While
consolidation within the industry may adversely affect our ability to retain clients that have been acquired, it also creates opportunity for us as prospective clients review their relationships with
existing service providers. In addition, consolidation among large financial institutions may enable us to acquire, at a reasonable price, asset
servicing businesses that do not fit within the core focus of these new, consolidated financial institutions.

Intellectual Property

Our success is dependent upon our software development methodology and other intellectual property rights that we have developed and own, including FACTS. 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. There
can be no assurance that the steps we take in this regard will be adequate to deter misappropriation of our proprietary information or that we will be able to detect unauthorized use. Furthermore, our
intellectual property rights may be invalidated or our competitors may develop similar technology independently. In addition, effective copyright, trademark and other trade protection may not be
available in certain international markets that we service.

Employees

On December 31, 2002, we had 2,591 employees. We maintain a professional development program for entry level staff. Successful completion of the program is
required of most newly hired employees. This training program is supplemented by ongoing education on systems and technological developments and innovations, the industry and our client base.

None
of our employees is covered by collective bargaining agreements and we believe our relations with our employees are good.

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Regulation and Supervision

In addition to the generally applicable state and federal laws governing businesses and employers, we are further regulated by federal and state laws and
regulations applicable to financial institutions and their parent companies. Furthermore, the operations of our securities broker affiliate, Investors Securities Services, Inc., are subject to
federal and state securities laws, as well as the rules of both the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Virtually all aspects of our
operations are subject to specific requirements or restrictions and general regulatory oversight. State and federal banking laws have as their principal objective the maintenance of the safety and
soundness of financial institutions and the federal deposit insurance system, the protection of
consumers or classes of consumers or the furtherance of broad public policy goals, rather than the specific protection of stockholders of a bank or its parent company.

Several
of the more significant statutory and regulatory provisions applicable to banks and bank holding companies ("BHC") to which Investors Financial and its subsidiaries are subject
are described more fully below, together with certain statutory and regulatory matters concerning Investors Financial and its subsidiaries. The description of these statutory and regulatory provisions
does not purport to be complete and is qualified in its entirety by reference to the particular statutory or regulatory provision. Any change in applicable law or regulation may have a material effect
on Investors Financial's business, prospects and operations, as well as those of its subsidiaries.

Investors Financial

General.As a registered BHC, Investors Financial is subject to regulation under the Bank Holding Company Act of 1956, as
amended ("BHCA"), and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System ("FRB") and by the Massachusetts Commissioner of Banks ("Commissioner.") We are
required to file a report of our operations with, and are subject to examination by, the FRB and the Commissioner. The FRB has the authority to issue orders to BHCs to cease and desist from
unsound banking practices and violations of conditions imposed by, or violations of agreements with, the FRB. The FRB is also empowered to assess civil money penalties against companies or individuals
who violate the BHCA or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of BHCs and to order termination of
ownership and control of a non-banking subsidiary by a BHC.

BHCAActivities and Other Limitations.The BHCA prohibits a BHC from acquiring substantially all the assets of a
bank or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, or merging or consolidating with any
BHC without prior approval of the FRB. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally authorizes BHCs to acquire banks located in any state, possibly
subject to certain state-imposed age and deposit concentration limits, and also generally authorizes interstate mergers and to a lesser extent, interstate branching.

Unless
a BHC becomes a financial holding company ("FHC") under the Gramm-Leach-Bliley Act of 1999 ("GLBA") (as discussed below), the BHCA also prohibits a BHC from acquiring a direct or
indirect interest in or control of more than 5% of the voting shares of any company that is not a bank or a BHC and from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks or furnishing services to its subsidiary banks, except that it may engage in and may own shares of companies engaged in certain activities the FRB determined to be so
closely related to banking or managing and controlling banks as to be a proper incident thereto. In making such determinations, the FRB is required to weigh the expected benefit to the public, such as
greater
convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests or
unsound banking practices. In addition, as discussed more fully below, Massachusetts law imposes certain

11

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approval requirements with respect to acquisitions by a BHC of certain banking institutions and to mergers of BHCs.

The
GLBA established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and
expanding the BHCA framework to permit BHCs that qualify and elect to be treated as FHCs to engage in a range of financial activities broader than would be permissible for traditional BHCs, such as
Investors Financial, that have not elected to be treated as FHCs. "Financial activities" is broadly defined to include not only banking, insurance and securities activities, but also merchant banking
and additional activities that the FRB, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In sum, the GLBA permits a BHC that qualifies and elects to be treated as
a FHC to engage in a significantly broader range of financial activities than BHCs, such as Investors Financial, that have not elected FHC status.

In
order to elect to become a FHC and thus engage in a broader range of financial activities, a BHC, such as Investors Financial, must meet certain tests and file an election form with
the FRB. To qualify, all of a BHC's subsidiary banks must be well-capitalized (as discussed below under "Investors Bank") and well-managed, as measured by regulatory
guidelines. In addition, to engage in the new activities, each of the BHC's banks must have been rated "satisfactory" or better in its most recent federal Community Reinvestment Act ("CRA")
evaluation.

A
BHC that elects to be treated as a FHC may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement
with the FRB which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire
less than well-capitalized and well-managed institutions. At this time, Investors Financial has not elected, and has not otherwise determined whether it will elect, to become a
FHC.

Capital Requirements.The FRB has adopted capital adequacy guidelines, which it uses in assessing the adequacy of capital in
examining and supervising a BHC and in analyzing applications upon which it acts. The FRB's capital adequacy guidelines generally require BHCs to maintain total capital equal to 8% of total
risk-adjusted assets and off-balance sheet items (the "Total Risk-Based Capital Ratio"), with at least 50% of that amount consisting of Tier 1 or core capital and
the remaining amount consisting of Tier 2 or supplementary capital. Tier 1 capital for BHCs generally consists of the sum of common stockholders' equity and perpetual preferred stock (subject in the
case of the latter to limitations on the kind and amount of such stocks which may be included as Tier 1 capital), less goodwill and other non-qualifying intangible assets. Tier 2 capital
generally consists of hybrid capital instruments, perpetual debt and mandatory convertible debt securities; perpetual preferred stock, which is not eligible to be
included as Tier 1 capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan and lease losses. Assets are adjusted
under the risk-based guidelines to take into account different risk characteristics.

In
addition to the risk-based capital requirements, the FRB requires BHCs to maintain a minimum leverage capital ratio of Tier 1 capital (defined by reference to the
risk-based capital guidelines) to its average total consolidated assets (the "Leverage Ratio") of 3.0%. Total average consolidated assets for this purpose does not include, for example,
goodwill and any other intangible assets and investments that the FRB determines should be deducted from Tier 1 capital. The FRB has announced that the 3.0% Leverage Ratio requirement is the minimum
for the top-rated BHCs without any supervisory, financial or operational weaknesses or deficiencies or those, which are not experiencing or anticipating significant growth. All other BHCs
are required to maintain a minimum Leverage Ratio of 4.0%. BHCs

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with supervisory, financial, operational or managerial weaknesses, as well as BHCs that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the
minimum levels. Because we anticipate significant future growth, we will be required to maintain a Leverage Ratio of 4.0% or higher.

We
currently are in compliance with both the Total Risk-Based Capital Ratio and the Leverage Ratio requirements, and our management expects these ratios to remain in
compliance with the FRB's capital adequacy guidelines. (Separate, but substantially similar, capital adequacy guidelines under Federal Deposit Insurance Corporation ("FDIC") regulations apply to the
Bank, as discussed more fully below.) At December 31, 2002, our Total Risk-Based Capital Ratio and Leverage Ratio were, respectively, 15.51% and 5.50%.

U.S.
bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision ("Basel Committee"), currently are considering
changes to the risk-based capital adequacy framework, which ultimately could affect the appropriate capital guidelines, including changes (such as those relating to lending to registered
broker-dealers) that are of particular relevance to banks, such as the Bank, that engage in significant securities activities. Among other things, the Basel Committee rules, which are expected to be
proposed formally for public comment in the next 6 months and are expected to become effective around 2006, would add operational risk as a third component to the denominator of the
risk-capital calculation, which currently includes only credit and market risks. We are monitoring the status and progress of the Basel Committee rules and the related impact, if any, on
our operations and are preparing for their implementation.

Limitations on Acquisitions of Common Stock.The federal Change in Bank Control Act prohibits a person or group of persons
from acquiring "control" of a BHC unless the FRB has been given at least 60 days to review and does not object to the proposal. Under a rebuttable presumption established by the FRB, the
acquisition of 10% or more of a class of voting securities of a BHC, such as us, with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), would, under the circumstances set forth in the presumption, constitute the acquisition of control of the BHC. In addition, any company, as that term is broadly defined in the
statute, would be required to obtain the approval of the FRB under the BHCA before acquiring 25%
(5% in the case of an acquirer that is a BHC) or more, or otherwise obtaining control or a controlling influence over that BHC.

Massachusetts Law.Investors Financial is also considered a BHC for purposes of Massachusetts law due to the manner in which
it acquired the Bank. Accordingly, we have registered with the Commissioner and are obligated to make reports to the Commissioner. Further, as a Massachusetts BHC, Investors Financial may not acquire
all or substantially all of the assets of a banking institution, merge or consolidate with any other BHC or acquire direct or indirect ownership or control of any voting stock in any other banking
institution if it will own or control more than 5% thereof without the prior consent of the Massachusetts Board of Bank Incorporation. As a general matter, however, the Commissioner does not rule upon
or regulate the activities in which BHC or their nonbank subsidiaries engage.

Cash Dividends.FRB policy provides that a bank or a BHC generally should not maintain its existing rate of cash dividends on
common stock unless the organization's net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention
appears consistent with the organization's capital needs, asset quality and overall financial condition. FRB policy further provides that a BHC should not maintain a level of cash dividends to its
shareholders that places undue pressure on the capital of bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the BHC's ability to
serve as a source of strength.

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Source of Strength.FRB policy requires BHCs to serve as sources of financial and managerial strength to their subsidiary
banks and, in connection therewith, to stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and to maintain
the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks in a manner consistent with FRB policy. Accordingly, Investors Financial is
expected to commit resources to the Bank in circumstances where it might not do so absent such policy.

Disclosure Controls and Procedures.The Sarbanes-Oxley Act of 2002 and related rulemaking by the Securities and Exchange
Commission ("SEC"), which effect sweeping corporate disclosure and financial reporting reform, generally require public companies to focus on their disclosure controls and procedures. As a result
thereof, public companies, such as Investors Financial, now must have disclosure controls and procedures in place and make certain disclosures about them in their periodic SEC filings
(i.e.,Forms 10-K and 10-Q) and their chief executive officers and chief financial officers must certify in these filings that
they are responsible for developing and evaluating disclosure controls and procedures and disclose the results of an evaluation conducted by them within the 90-day period preceding the
filing of the relevant form, among other things. We are monitoring the status of other related ongoing rulemaking by the SEC and other regulatory entities. Currently, management believes that we are
in compliance with the rulemaking promulgated to date.

Investors Bank

General.The Bank is subject to extensive regulation and examination by the Commissioner and the FDIC, which insures the
Bank's deposits to the maximum extent permitted by law, and to certain requirements established by the FRB. The federal and state laws and regulations which are applicable to banks regulate among
other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of certain deposited funds and the nature and amount of and collateral for
certain loans.

FDIC Insurance Premiums.The Bank pays deposit insurance premiums to the FDIC based on an assessment rate established by the
FDIC for Bank Insurance Fund-member institutions. The FDIC has established a risk-based premium system under which the FDIC classifies institutions based on their capital
ratios and on other relevant information and generally assesses higher rates on those institutions that tend to pose greater risks to the federal deposit insurance funds.

Capital Requirements.The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy
of state-chartered banks, which, like the Bank, are not members of the Federal Reserve System. These requirements are substantially similar to those adopted by the FRB regarding BHCs, as described
above.

Moreover,
the federal banking agencies have promulgated substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the
Federal Deposit Insurance Act, as amended ("FDIA"). Under the regulations, a bank generally shall be deemed to be:



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An
institution generally must file a written capital restoration plan which meets specified requirements with an appropriate FDIC regional director within 45 days of the
date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. An institution, which is required to
submit a capital restoration plan, must concurrently submit a performance guaranty by each company that controls the institution. A critically undercapitalized institution generally is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally determines that forbearance from such action would better protect the deposit insurance fund.

Immediately
upon becoming undercapitalized, an institution becomes subject to the provisions of Section 38 of the FDIA, including for example, (i) restricting payment of
capital distributions and management fees, (ii) requiring that the FDIC monitor the condition of the institution and its efforts to restore its capital, (iii) requiring submission of a
capital restoration plan, (iv) restricting the growth of the institution's assets and (v) requiring prior approval of certain expansion proposals.

At
December 31, 2002, the Bank was deemed to be a well capitalized institution for the above purposes. Bank regulators may raise capital requirements applicable to banking
organizations beyond current levels. We are unable to predict whether higher capital requirements will be imposed and, if so, at what levels and on what schedules. Therefore, we cannot predict what
effect such higher requirements may have on us. As is discussed above, the Bank would be required to remain a well-capitalized institution at all times if we elected to be treated as an
FHC.

Brokered Deposits.Section 29 of the FDIA and FDIC regulations generally limit the ability of an insured depository
institution to accept, renew or roll over any brokered deposit depending on the institution's capital category. These restrictions have not had a material impact on the Bank's operations because the
Bank historically has not relied upon brokered deposits as a source of funding. At December 31, 2002, the Bank did not have any brokered deposits.

Transactions with Affiliates.Sections 23A and 23B of the Federal Reserve Act, which apply to the Bank, are designed
primarily to protect against a depository institution suffering losses in certain transactions with affiliates, which includes Investors Financial and other subsidiaries of Investors Financial. For
example, the Bank is subject to certain restrictions on loans to us, on investment in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower
and on the issuance of a guarantee or letter of credit on our behalf. The Bank also is subject to certain restrictions on most types of transactions with us, requiring that the terms of such
transactions be substantially equivalent to terms to similar transactions with non-affiliates. The FRB recently adopted a final rule, which will become effective April 1, 2003, to
implement comprehensively Sections 23A and 23B of the Federal Reserve Act. This new rule, among other things, specifies that derivative transactions are subject to Section 23B (including use of
daily marks and two way collateralization) but generally not to Section 23A, except derivatives in which the bank provides credit protection to a nonbank affiliate on behalf of an affiliate
will be treated as a guarantee for purposes of Section 23A, and requires banks to establish policies and procedures (which the Bank has established)

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to monitor credit exposure to affiliates. The FRB intends to propose in the near future regulations to treat derivatives that are the functional equivalent of a loan to an affiliate as subject to
Section 23A.

Activities and Investments of Insured State-Chartered Banks.Section 24 of the FDIA generally limits the activities as
principal and equity investments of FDIC-insured, state-chartered banks, such as the Bank, to those that are permissible for national banks. In 1999, the FDIC substantially revised its
regulations implementing Section 24 of the FDIA to ease the ability of FDIC-insured, state-chartered banks to engage in certain activities not permissible for national banks, and to
expedite FDIC review of bank applications and notice to engage in such activities.

Further,
the GLBA permits national banks and state banks, to the extent permitted under state law, to engage in certain new activities which are permissible for subsidiaries of an FHC.
Further, it expressly preserves the ability of national banks and state banks to retain all existing subsidiaries. In order to form a financial subsidiary, a national bank or state bank must be
well-capitalized, and such banks would be subject to certain capital deduction, risk management and affiliate transaction rules, among other things. Also, the FDIC's final rules governing
the establishment of financial subsidiaries adopt the position that activities that a national bank could only engage in through a financial subsidiary, such as securities underwriting, only may be
conducted in a financial subsidiary by a state nonmember bank. However, activities that a national bank could not engage in through a financial subsidiary, such as real estate development or
investment, continue to be governed by the FDIC's standard activities rules. Moreover, to mirror the FRB's actions with respect to state member banks, the final rules provide that a state bank
subsidiary that engages only in activities that the bank could engage in directly (regardless of the nature of the activities) will not be deemed to be a financial subsidiary.

CRA.The CRA requires the FDIC to assess an institution's record of helping to meet the credit needs of the local communities
in which the institution is chartered, consistent with the institution's safe and sound operation, and to take this record into account when evaluating certain applications. Massachusetts has also
enacted a similar statute that requires the Commissioner to evaluate the Bank's performance in helping to meet the credit needs of its entire community and to take that record into account in
considering certain applications. For purposes of the CRA, the Bank has been designated as a "wholesale institution" by the Commissioner and as a "special purpose" institution by the FDIC. The
wholesale institution designation reflects the nature of our business as other than a retail financial institution and prescribes CRA review criteria applicable to the Bank's particular type of
business. As a part of the CRA program, the Bank is subject to periodic CRA examinations by the Commissioner (but not the FDIC because special purpose institutions are exempt from such FDIC review)
and maintains comprehensive records of its CRA activities for this purpose. Management believes the Bank is currently in compliance with all CRA requirements.

Customer Information Security.The FDIC and other bank regulatory agencies have adopted final guidelines for establishing
standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the "Guidelines"). Among other things, the Guidelines require each financial
institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security
program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information; and to
protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

Privacy.The FDIC and other regulatory agencies have published final privacy rules pursuant to provisions of the GLBA
("Privacy Rules"). The Privacy Rules, which govern the treatment of nonpublic personal information about consumers by financial institutions, require a financial institution to provide notice to
customers (and other consumers in some circumstances) about its privacy policies and

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practices, describe the conditions under which a financial institution may disclose nonpublic personal information to nonaffiliated third parties and provide a method for consumers to prevent a
financial institution from disclosing that information to most nonaffiliated third parties by "opting-out" of that disclosure, subject to certain exceptions.

USA Patriot Act.The USA Patriot Act of 2001 (the "USA Patriot Act"), designed to deny terrorists and others the ability to
obtain anonymous access to the U.S. financial system, has significant implications for depository institutions, broker-dealers and other businesses involved in the transfer of money. The USA Patriot
Act, together with the implementing regulations of various federal regulatory agencies, require financial institutions, including the Bank, to implement additional or amend existing policies and
procedures with respect to, among other things, anti-money laundering compliance, suspicious activity and currency transaction reporting and due diligence on customers. They also permit
information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and
require the FRB (and other federal banking agencies) to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3
of the BHCA or the Bank Merger Act. Management believes that we are currently in compliance with all currently effective requirements prescribed by the USA Patriot Act and all applicable final
implementing regulations.

Massachusetts LawDividends.Under Massachusetts law, the board of directors of a trust company, such as the
Bank, may declare from "net profits" cash dividends no more often than quarterly, provided that
there is no impairment to the trust company's capital stock. Moreover, prior Commissioner approval is required if the total of all dividends declared by a trust company in any calendar year would
exceed the total of its net profits for that year combined with its retained net profits for the previous two years, less any required transfer to surplus or a fund for the retirement of any preferred
stock. These restrictions on the Bank's ability to declare and to pay dividends may restrict Investors Financial's ability to pay dividends to its stockholders. We cannot predict future dividend
payments of the Bank at this time.

Regulatory Enforcement Authority.The enforcement powers available to federal and state banking regulators include, among
other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Under certain circumstances federal and state law require disclosure and reports
of certain criminal offenses and also final enforcement actions by the federal banking agencies.

Transfer Agency.In order to serve as transfer agent to our clients that execute transactions in publicly-traded securities,
we must register with the SEC as a transfer agent under the Exchange Act. As a registered transfer agent, we are subject to certain reporting and record keeping requirements. Currently, management
believes that we are in compliance with these registration, reporting and record keeping requirements.

Regulation of Investment Companies.Certain of our mutual fund and unit investment trust clients are regulated as "investment
companies" as that term is defined under the Investment Company Act of 1940, as amended (the "ICA"), and are subject to examination and reporting requirements applicable to the services we provide.

The
provisions of the ICA and the regulations promulgated thereunder prescribe the type of institution which may act as a custodian of investment company assets, as well as the manner in
which a custodian administers the assets in its custody. Because we serve as custodian for a number of our

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investment company clients, these regulations require, among other things, that we maintain certain minimum aggregate capital, surplus, and undivided profits. Additionally, arrangements between us
and clearing agencies or other securities depositories must meet ICA requirements for segregation of assets, identification of assets and client approval. Future legislative and regulatory changes in
the existing laws and regulations governing custody of investment company assets, particularly with respect to custodian qualifications, may have a material and adverse impact on us. Currently,
management believes we are in compliance with all minimum capital and securities depository requirements. Further, we are not aware of any proposed or pending regulatory developments, which, if
approved, would adversely affect the ability of us to act as custodian to an investment company.

Investment
companies are also subject to extensive record keeping and reporting requirements. These requirements dictate the type, volume and duration of the record keeping we undertake,
either in our role as custodian for an investment company or as a provider of administrative services to an investment company. Further, we must follow specific ICA guidelines when calculating the net
asset value of a client mutual fund. Consequently, changes in the statutes or regulations governing record keeping and reporting or valuation calculations will affect the manner in which we conduct
our operations.

New
legislation or regulatory requirements could have a significant impact on the information reporting requirements applicable to our clients and may in the short term adversely affect
our ability to service those clients at a reasonable cost. Any failure by us to provide such support could cause the loss of customers and have a material adverse effect on our financial results.
Additionally, legislation or regulations may be proposed or enacted to regulate us in a manner which may adversely affect our financial results.

Other Securities Laws Issues.The GLBA amended the federal securities laws to eliminate the blanket exceptions that banks
traditionally have had from the definition of "broker" and "dealer" for a "bank." In February 2003, the SEC extended the temporary exemption from the definition of "dealer" for banks until
September 30, 2003 and, in May 2002, it extended the temporary exemption from the definition of "broker" until May 12, 2003. In February 2003, the SEC also issued final
rules that, among other things, adopt amendments to its rule granting an exemption to banks from dealer registration forde minimisriskless principal
transactions, and to its rule that defines terms used in the bank exception to dealer registration for asset-backed transactions and it adopted a new exemption for banks from the definition of broker
and dealer under the Exchange Act for certain securities lending transactions. Banks not falling within the specific exemptions provided by the new law may have to register with the SEC as a broker or
a dealer or both and become subject to SEC jurisdiction. We do not expect these new rules to have a material effect on us, as we recently formed a registered broker and dealer subsidiary.

The
GLBA also amended the federal securities laws to eliminate the blanket exceptions that banks traditionally have had from the definition of "investment adviser." With respect to
investment adviser registration, the GLBA requires a bank that acts as investment adviser to a registered investment company to register as an investment adviser or to conduct such advisory activities
through a separately identifiable department or division of the bank so registered. Accordingly, the Bank furnishes investment advice to registered investment companies through a separately
identifiable department or division of the Bank that is registered with the SEC as an investment adviser. Federal and state laws impose onerous obligations on registered investment advisers, including
fiduciary duties, recordkeeping requirements and disclosure obligations. Currently, management believes that we are in compliance with these requirements.

Future Legislation.Changes to the laws and regulations in the states and countries where Investors Financial and its
subsidiaries transact business can affect the operating environment of BHCs and their subsidiaries in substantial and unpredictable ways. We cannot accurately predict whether those changes in laws and
regulations will occur, and, if they do occur, the ultimate effect they would have upon our financial condition or results of operation.

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Selected Statistical Information

Deposits

The following table represents the average balance and weighted-average yield earned on deposits (Dollars in thousands):

|                     |  | December 31, 2002 |           | December 31, 2001 |     
|-------------------- |  | ----------------- | --------- | ----------------- | ----
|
|Interest-bearing:    |  |                   |           |                   |     
|Demand deposits      |  | $                 | 823       |                   | 0.49
|Savings              |  |                   | 1,945,550 |                   | 2.17
|Time deposits        |  |                   | 1,393     |                   | 1.72
|                     |  |                   |           |                   |     
|                     |  | $                 | 1,947,766 |                   | 2.17
|                     |  |                   |           |                   |     
|Noninterest-bearing: |  |                   |           |                   |     
|Demand deposits      |  | $                 | 180,065   |                   |    
|Savings              |  |                   | 124,416   |                   |    
|Time deposits        |  | 90,000            |           |                  |     
|                     |  | 394,481           |           |                   |     

Short-Term and Other Borrowings

The following tables reflect the amounts outstanding and weighted average interest rates of the primary components of short-term and other borrowings
as of and for the years ended December 31, 2002, 2001 and 2000 (Dollars in thousands):

|                                               |  | Federal Home Loan Bank of Boston Advances |        
|---------------------------------------------- |  | ----------------------------------------- | -------
|
|Balance at December 31                         |  | $                                         | 610,000
|Maximum outstanding at any month end           |  |                                           | 800,000
|Average outstanding during the year            |  |                                           | 590,603
|Weighted average interest rate at end of year  |  |                                           | 2.43   
|Weighted average interest rate during the year |  |                                           | 4.50   

|                                               |  | Federal Funds Purchased |        
|---------------------------------------------- |  | ----------------------- | -------
|
|Balance at December 31                         |  | $                       | 130,648
|Maximum outstanding at any month end           |  |                         | 375,000
|Average outstanding during the year            |  |                         | 254,093
|Weighted average interest rate at end of year  |  |                         | 1.20   
|Weighted average interest rate during the year |  |                         | 1.71   

For
the year ended December 31, 2002, maturities on Federal Home Loan Bank of Boston ("FHLBB") advances ranged from overnight to September 2006. For the year ended
December 31, 2001, maturities on FHLBB advances ranged from overnight to February 2005. During the year ended December 31, 2000, maturities on FHLBB advances ranged from overnight
to August 2000.

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Availability of Filings

You may access, free of charge, copies of the following documents on our web site at www.ibtco.com:

We
post these documents on our web site as soon as reasonably practicable after we file or furnish them electronically with or to the Securities and Exchange Commission. The information
contained on our web site is not incorporated by reference into this document and should not be considered a part of this Annual Report. Our web site address is included in this document as an
inactive textual reference only.

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ITEM 2.    PROPERTIES.

The following table provides certain summary information with respect to the principal properties that we leased as of December 31, 2002:

|Location                               |  | Function                                          |  | Sq. Ft. |  | Expiration Date |  
|-------------------------------------- |  | ------------------------------------------------- |  | ------- |  | --------------- | -
|200 Clarendon Street, Boston, MA       |  | Principal Executive Offices and Operations Center |  | 334,229 |  | 2011            |  
|100 Huntington Avenue, Boston, MA      |  | Operations Center                                 |  | 150,269 |  | 2007            |  
|1 Exeter Plaza, Boston, MA             |  | Training Center                                   |  | 14,870  |  | 2007            |  
|33 Maiden Lane, New York, NY           |  | Operations Center                                 |  | 21,994  |  | 2011            |  
|980 Ninth Street, Sacramento, CA       |  | Operations Center                                 |  | 53,580  |  | 2008            |  
|1277 Treat Boulevard, Walnut Creek, CA |  | Operations Center                                 |  | 18,921  |  | 2008            |  
|1 First Canadian Place, Toronto        |  | Offshore Processing Center                        |  | 17,790  |  | 2006            |  
|Upper Hatch Street, Dublin             |  | Offshore Processing Center                        |  | 4,100   |  | 2003            |  
|118/119 Lower Baggot Street, Dublin    |  | Offshore Processing Center                        |  | 12,199  |  | 2003            |  
|Iveagh Court, Dublin                   |  | Offshore Processing Center                        |  | 51,095  |  | 2028            | *

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For
more information, see Note 16 of the Notes to Consolidated Financial Statements.

ITEM 3.    LEGAL PROCEEDINGS.

On January 31, 2003, we were named in a class action lawsuit alleging, among other things, violations of California wage and hour laws at our Sacramento
and Walnut Creek facilities. The lawsuit was filed in the Superior Court of California, County of Sacramento. While we are in the early stages of investigating this complaint, we believe that we have
complied at all times with applicable law and we intend to defend this lawsuit vigorously. We do not yet know the amount of damages that the plaintiffs are seeking to recover. However, the defense of
class action lawsuits can be costly and time consuming, and can divert the attention of management. A determination that we violated applicable wage and hour laws could have a material adverse effect
on our business, financial condition and results of operations.

In
2002, the Bank received from the Commonwealth of Massachusetts Department of Revenue ("DOR") an assessment for additional state excise taxes of approximately $10.9 million plus
interest and penalties with respect to the Bank's tax years ended December 31, 1999, December 31, 2000 and December 31, 2001.

The
DOR contends that dividend distributions to the Bank by Investors Funding Corp. ("IFC"), a real estate investment trust 99.9% owned by the Bank, are fully taxable in Massachusetts.
We believe, after consultation with our advisors, that the Massachusetts statute that provides for a dividend received deduction equal to 95% of certain dividend distributions applies to the
distributions made by IFC to the Bank. Accordingly, no provision has been made in our financial statements for the amounts assessed or additional amounts that might be assessed in the future.

We
have been informed that the DOR has sent similar assessments to numerous other financial institutions in Massachusetts that reported a deduction for dividends received from a real
estate investment trust on their 1999, 2000 and 2001 Massachusetts financial institution excise tax returns.
Because the legal issues raised are identical for all of the financial institutions involved, we are acting together with those institutions to appeal the assessments and to pursue all available means
to defend

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our position vigorously. In addition, the Massachusetts legislature is considering retroactive legislation that may affect the outcome of our dispute with the DOR. Assessed amounts ultimately paid,
if any, would be deductible expenses for federal income tax purposes.

In
January 2001,Mopex, Inc. filed an action entitled Mopex, Inc. v. Chicago Stock Exchange, Inc., et al.,
Civil Action No. 01 C 0302 (the "Complaint"), in the United States District Court for the Northern District of Illinois. In the Complaint, Mopex alleges that the Bank and numerous other
entities, including Barclays Global Investors, State Street Bank and Trust Company, and Merrill Lynch, Pierce, Fenner & Smith, Inc., infringed U.S. Patent No. 6,088,685, entitled,
"Open End Mutual Fund Securitization Process," assigned to Mopex. In particular, Mopex alleges that the '685 patent covers the creation and trading of certain securities, including the Barclays
iShares exchange traded funds. The Complaint seeks injunctive relief, damages, and enhanced remedies (including attorneys' fees and treble damages).

In
April 2001, we filed an answer and counterclaim, denying any liability on Mopex's claim and seeking a declaratory judgment that the '685 patent is invalid and not infringed by
the Bank's activities. In April 2002, Mopex filed an amended complaint to, among other things, add nine new defendants. The number of defendants now totals twenty-two. In
June 2002, we filed a motion to dismiss the amended complaint. That motion is still pending.

We
are indemnified by the iShares Trust for certain defense costs and damages resulting from Mopex's claim. We believe the claim is without merit, and we will continue to vigorously
defend our rights. However, we cannot be sure that we will prevail in the defense of this claim. Patent litigation can 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. As a result, any determination of infringement could have a material adverse effect on our business, financial condition and results of operations.

In
July 2000, two of our Dublin subsidiaries, Investors Trust & Custodial Services (Ireland) Ltd. ("ITC") and Investors Fund Services (Ireland) Ltd. ("IFS"),
received a plenary summons in the High Court, Dublin, Ireland. The summons named ITC and IFS as defendants in an action brought by the FTF ForexConcept Fund Plc (the "Fund"), a former client. The
summons also named as defendants FTF Forex Trading and Finance, S.A., the Fund's investment manager, Ernst & Young, the Fund's auditors, and Dresdner Bank-Kleinwort Benson (Suisse)
S.A., a trading counterparty to the Fund. The Fund is an investment vehicle organized in Dublin to invest in foreign exchange contracts. A total of approximately $4.7 million had been invested
in the Fund. Most of that money was lost prior to the Fund's closing to subscriptions in June 1999.

In
January 2001, ITC, IFS and the other defendants named in the plenary summons received a statement of claim by the Fund seeking unspecified damages allegedly arising from breach
of contract, misrepresentation and breach of warranty, negligence and breach of duty of care, and breach of fiduciary duty, among others. We have notified our insurers and intend to defend this claim
vigorously. Based on our investigation through December 31, 2002, we do not expect this matter to have a material adverse effect on our business, financial condition or results of operations.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of our security holders during the quarter ended December 31, 2002.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY AND POLICY

Our common stock is quoted on the Nasdaq National Market under the symbol "IFIN". The following table sets forth, for the calendar periods indicated, the high and
low sale prices for the common stock as reported by Nasdaq and dividends per share paid on the common stock. All information in the table below has been restated to reflect the
two-for-one stock split paid June 14, 2002.

|               |  | High |       | Low |   | Dividend
|-------------- |  | ---- | ----- | --- | - | --------
|2002           |  |      |       |     |   |         
|First quarter  |  | $    | 39.41 |     | $ | 31.82   
|Second quarter |  |      | 39.35 |     |   | 32.06   
|Third quarter  |  |      | 33.87 |     |   | 24.77   
|Fourth quarter |  |      | 35.94 |     |   | 19.66   
|2001           |  |      |       |     |   |         
|First quarter  |  |      | 43.81 |     |   | 23.03   
|Second quarter |  |      | 40.06 |     |   | 25.31   
|Third quarter  |  |      | 40.38 |     |   | 23.00   
|Fourth quarter |  |      | 35.70 |     |   | 26.16   

As
of January 31, 2003, there were approximately 846 stockholders of record.

We
currently intend to retain the majority of future earnings to fund the development and growth of our business. Our ability to pay dividends on our common stock may depend on the
receipt of dividends from Investors Bank. In addition, we may not pay dividends on our common stock if we are in default under certain agreements that we entered into in connection with the sale of
the 9.77% Capital Securities by Investors Capital Trust I. See Note 11 of our Notes to Consolidated Financial
Statements included with this Annual Report. Any dividend payments by Investors Bank are subject to certain restrictions imposed by the Massachusetts Commissioner of Banks. See
"BusinessRegulation and Supervision." Subject to regulatory requirements, we expect to pay an annual dividend to our stockholders, currently estimated to be in an amount equal to $.06 per
share of outstanding common stock (approximately $3.9 million based upon 64,775,042 shares outstanding as of December 31, 2002). We expect to declare and pay such dividend ratably on a
quarterly basis.

The
information required under this item regarding securities authorized for issuance under equity compensation plans is incorporated herein by reference in the section entitled "Stock
Plans" contained in our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days
after the close of our fiscal year ended December 31, 2002.

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ITEM 6.    SELECTED FINANCIAL DATA.

The following table contains certain of our consolidated financial and statistical information, and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," our Consolidated Financial Statements and Notes to Consolidated Financial Statements, and other financial information appearing
elsewhere in this Annual Report. (Dollars in thousands, except per share and employee data).

|                                                 |  | For the Year Ended December 31, |            
|------------------------------------------------ |  | ------------------------------- | -----------
|
|Statement of Income Data (1):                    |  |                                 |            
|Net interest income                              |  | $                               | 143,478    
|Non-interest income                              |  |                                 | 294,116    
|                                                 |  |                                 |            
|Net operating revenues                           |  |                                 | 437,594    
|Operating expenses                               |  |                                 | 336,667    
|                                                 |  |                                 |            
|Income before income taxes and minority interest |  |                                 | 100,927    
|Income taxes                                     |  |                                 | 30,400     
|Minority interest expense                        |  |                                 | 1,581      
|                                                 |  |                                 |            
|Net income                                       |  | $                               | 68,946     
|                                                 |  |                                 |            
|Per Share Data (2):                              |  |                                 |            
|Basic earnings per share                         |  | $                               | 1.07       
|                                                 |  |                                 |            
|Diluted earnings per share                       |  | $                               | 1.04       
|                                                 |  |                                 |            
|Dividends per share                              |  | $                               | 0.05       
|                                                 |  |                                 |            
|Balance Sheet Data:                              |  |                                 |            
|Total assets at end of period                    |  | $                               | 7,214,777  
|Average Balance Sheet Data:                      |  |                                 |            
|Interest-earning assets                          |  | $                               | 5,778,689  
|Total assets                                     |  |                                 | 6,172,006  
|Total deposits                                   |  |                                 | 2,342,247  
|Preferred securities                             |  |                                 | 24,033     
|Common stockholders' equity                      |  |                                 | 394,422    
|Selected Financial Ratios:                       |  |                                 |            
|Return on average equity                         |  |                                 | 17.5       
|Return on average assets                         |  |                                 | 1.1        
|Common equity as % of total assets               |  |                                 | 6.4        
|Dividend payout ratio (3)                        |  |                                 | 4.8        
|Tier 1 capital ratio (4)                         |  |                                 | 15.5       
|Leverage ratio (4)                               |  |                                 | 5.5        
|Noninterest income as % of net operating income  |  |                                 | 67.2       
|Other Statistical Data:                          |  |                                 |            
|Assets processed at end of period (5)            |  | $                               | 785,418,321
|Employees at end of period                       |  |                                 | 2,591      

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

You should read the following discussion together with our Consolidated Financial Statements and related Notes to Consolidated Financial
Statements, which are included elsewhere in this Annual 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, multicurrency accounting and mutual fund
administration, as well as our value-added services, such as securities lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment advisory
services, lines of credit and brokerage services. At December 31, 2002, we provided services for approximately $785 billion in net assets, including approximately $86 billion of
foreign net 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 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 Bank, N.A.

On
February 16, 1999, our board of directors declared a two-for-one stock split in the form of a 100% stock dividend payable on March 17, 1999. All
numbers in this Report have been restated to reflect the two-for-one stock split paid March 17, 1999, where applicable.

On
March 10, 2000, we acquired the right to provide institutional custody and related services for accounts managed by the Trust Company of the West, formerly serviced by Sanwa
Bank California. The accounts subject to the agreement totaled approximately $4.6 billion in assets.

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
January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and the corresponding amendments and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities." On adoption of these new accounting standards, we recorded a transition adjustment recognizing an after tax reduction in
Other Comprehensive Income ("OCI") of $3.9 million. In conjunction with the adoption, we elected to reclassify approximately $402 million of securities from held to maturity to available
for sale, which further reduced OCI, net of tax, by approximately $1.4 million.

On
February 1, 2001, we completed the issuance and sale of 1,624,145 shares of Common Stock at $71.62 per share in a public offering. A portion of the proceeds was used to fund
the acquisition of the

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advisor custody unit of The Chase Manhattan Bank. The remaining proceeds were used for the assumption of the U.S. asset administration unit of Barclays Global Investors, N.A. and for working capital.

On
February 1, 2001, we purchased the operations of the advisor custody unit of The Chase Manhattan Bank ("Chase"). This unit provided institutional custody services to individual
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 at the closing of the transaction approximately $31.5 million of the total
purchase price, plus another $39.8 million in exchange for the book value of loans to its clients. Under the terms of the asset purchase agreement, we are not obligated to make any further
purchase price payments to Chase. The transaction was 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.
The unit, located in Sacramento, California, provides custody, fund accounting and other operations functions for BGI's clients. The transaction was accounted for as a purchase.

The
events of September 11, 2001 did not have a material effect on our financial condition or results of operations.

On
April 23, 2002, the Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend payable to stockholders of record as of
May 24, 2002. The dividend was paid on June 14, 2002.

On
January 31, 2003, we were named in a class action lawsuit alleging, among other things, violations of California wage and hour laws at our Sacramento and Walnut Creek
facilities. The lawsuit was filed in the Superior Court of California, County of Sacramento. While we are in the early stages of investigating this complaint, we believe that we have complied at all
times with applicable law and we intend to defend this lawsuit vigorously. We do not yet know the amount of damages that the plaintiffs are seeking to recover. However, the defense of class action
lawsuits can be costly and time consuming, and can divert the attention of management. A determination that we violated applicable wage and hour laws could have a material adverse effect on our
business, financial condition and results of operations.

In
2002, the Bank received from the Commonwealth of Massachusetts Department of Revenue ("DOR") an assessment for additional state excise taxes of approximately $10.9 million plus
interest and penalties with respect to the Bank's tax years ended December 31, 1999, December 31, 2000 and December 31, 2001.

The
DOR contends that dividend distributions to the Bank by Investors Funding Corp. ("IFC"), a real estate investment trust 99.9% owned by the Bank, are fully taxable in Massachusetts.
We believe, after consultation with our advisors, that the Massachusetts statute that provides for a dividend received deduction equal to 95% of certain dividend distributions applies to the
distributions made by IFC to the Bank. Accordingly, no provision has been made in our financial statements for the amounts assessed or additional amounts that might be assessed in the future.

We
have been informed that the DOR has sent similar assessments to numerous other financial institutions in Massachusetts that reported a deduction for dividends received from a real
estate investment trust on their 1999, 2000 and 2001 Massachusetts financial institution excise tax returns. Because the legal issues raised are identical for all of the financial institutions
involved, we are acting together with those institutions to appeal the assessments and to pursue all available means to defend our position vigorously. In addition, the Massachusetts legislature is
considering retroactive legislation

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that may affect the outcome of our dispute with the DOR. Assessed amounts ultimately paid, if any, would be deductible expenses for federal income tax purposes.

Revenue and Expense Overview

We derive our revenue from financial asset servicing. Although interest income and noninterest income are reported separately for financial statement presentation
purposes, we believe 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 noninterest income) and net income are the most meaningful measures of our financial results. Net operating revenue increased 21% to $438 million in 2002 from $361 million in
2001. Net income increased 37% to $68.9 million in 2002 from $50.2 million in 2001.

Noninterest
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 processed, portfolio transactions, income collected
and whether other value-added services such as foreign exchange, securities lending and cash management 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. Conversely, as asset
values fall, our revenue decreases by the
marginal rate charged on our sliding scale pricing model. As a result, as asset values decrease, fees will decrease, but at a smaller percentage than the asset value decrease.

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

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 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. We also rely on an established network of global subcustodians in order to service our clients worldwide, which is reflected in our transaction processing service expense.

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Significant Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us
to make estimates and assumptions. We have identified the following accounting policies that, as a result of the complexities of the underlying accounting standards and operations involved, could
result in significant changes to our consolidated financial condition or results of operations under different conditions or using different assumptions. Certain amounts in the prior periods'
financial statements have been reclassified to conform to the current year's presentation.

Derivative Financial InstrumentsWe do not purchase derivative financial instruments for trading purposes. 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. By entering into a pay-fixed/receive-floating interest rate swap, a portion of these liabilities is effectively converted
to a fixed rate liability for the term of the interest rate swap agreement. We also enter into fixed price purchase contracts that are designed to hedge the variability of the consideration to be paid
for the purchase of investment securities. By entering into these contracts, we are fixing the price to be paid at a future date for certain investment securities. At December 31, 2002, we had
$432.6 million of fixed price purchase contracts outstanding to purchase investment securities with an associated unrealized gain of $1.9 million. The unrealized gain is included within
the other assets category on our consolidated balance sheet. See "Market Risk" and Note 15 to our consolidated financial statements filed with this Annual Report for an evaluation of the
potential impact of these instruments on our operating results.

On
January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted, which established accounting and
reporting standards for derivative instruments. We also adopted SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain 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
OCI. Ineffective portions of changes, as determined in accordance with SFAS No. 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.

Hedge
accounting requires that we measure the changes in fair value of derivatives designated as hedges as compared to changes in expected cash flows of the underlying hedged
transactions for each reporting period. This process involves the estimation of the expected future cash flows of hedged transactions. Interest rate swaps are valued using a nationally recognized swap
valuation model. The LIBOR (London InterBank Offered Rate) curve in this model serves as the basis for computing the market value of the swap portfolio. If interest rates increase, the swaps would
gain in value. Conversely, if interest rates decrease there would be a corresponding decline in the market value of the swaps portfolio. Changes in conditions or the occurrence of unforeseen events
could affect the timing of the recognition of changes in fair value of certain hedging derivatives. The measurement of fair value is based upon market values, however, in the absence of quoted market
values, measurement involves valuation estimates. These estimates are based on methodologies deemed appropriate in the circumstances. However, the use of alternative assumptions could have a
significant effect on estimated fair value.

Hedge
ineffectiveness, determined in accordance with SFAS No. 133, had an insignificant impact on earnings for the years ended December 31, 2002 and 2001. No cash flow
hedges were dedesignated or discontinued for the years ended December 31, 2002 and 2001.

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We
enter into foreign exchange contracts with clients and strive to enter into a matched position with another bank. These contracts are subject to market value fluctuations in foreign
currencies. Gains and losses from such fluctuations are netted and recorded as an adjustment to asset servicing fees. Unrealized gains (losses) resulting from purchases and sales of foreign exchange
contracts are included within the respective other assets and other liabilities categories on our consolidated balance sheet. Unrealized gains in other assets were $4.4 million and
$6.3 million as of December 31, 2002 and 2001, respectively. Unrealized losses in other liabilities were $4.5 million and $6.8 million as of December 31, 2002 and
2001, respectively. The foreign exchange contracts have been reduced by balances with the same counterparty where a master netting agreement exists.

Stock-Based CompensationWe account for stock-based compensation using the intrinsic value-based method of Accounting
Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," as allowed under SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting
for Stock-Based CompensationTransition and Disclosure." Under APB No. 25, no compensation cost is recognized if the option exercise price is equal to the fair market price of the
common stock on the date of the grant. If stock-based compensation were recognized, stock options would be valued at grant date using the Black-Scholes valuation model and compensation costs would be
recognized by one of the three methods of transition as allowed by SFAS No. 148. The Black-Scholes option-pricing model uses assumptions including the expected life of an option, the expected
volatility of the underlying stock and an assumed risk-free interest rate. The expected life of an option and the volatility of the underlying stock determine a majority of the value of an
option and its ultimate compensation cost. As such, the longer the option life or the higher the volatility of the underlying stock, the higher the value of the option and the higher the related
compensation cost to the Company. For more information regarding the financial impact of our stock option plans, see Note 12 of our Notes to Consolidated Financial Statements included with this
Annual Report.

Defined Benefit Pension AssumptionsEach fiscal year, we must assess and select the discount rate, compensation increase
percentage and average return on plan assets assumptions in order to project our benefit obligations under our defined benefit plans. The discount rate is based on the weighted average yield on high
quality fixed income investments that are expected to match the plan's projected cash flows. The compensation increase percentage is based upon management's current and expected salary increases. The
average return on plan assets is based on the expected return on the plan's current investment portfolio, which can reflect the historical returns of the various asset classes. For the fiscal year
ended December 31, 2002 those percentages were 6.75%, 3.75% and 8.50%, respectively. The discount rate at December 31, 2002 was lower than that at December 31, 2001 by 75 basis
points due to a decline in interest rates, and the compensation increase percentage was 125 basis points lower than the prior year due to a decline in current and projected annual compensation
increases. These changes are expected to increase net periodic pension expense in 2003 by an immaterial amount. In addition, this increase in expense is expected to be partially offset by an increase
in the projected return on plan assets as a result of our $3.4 million maximum tax deductible contribution made in 2002. Net periodic pension expense for 2002 was $0.6 million and is
expected to be $0.8 million in fiscal year 2003.

The
discount rate and compensation increase percentage assumptions for our non-qualified, unfunded, supplemental retirement plan, which covers certain employees, are the same
as those of our defined benefit pension plan. The net periodic expense for 2002 for the supplemental retirement plan was $1.7 million and is expected to be $1.9 million in fiscal year
2003.

Capitalized Software CostsCapitalized software costs are accounted for under the method prescribed by AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," ("SOP 98-1") and are included within the furniture, fixtures and
equipment component. Capitalized software costs are amortized over the estimated useful life of a given project, which can range from 3 to 5 years. Our policy is to capitalize costs relating to
system

29

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development projects that provide significant functionality enhancements. Assets are placed in service and depreciation and/or amortization commences when successful testing has been achieved. Please
see the "Capital Resources" section of this Report regarding capitalized software expenditures made during the years ended December 31, 2002 and 2001.

Impairment of Long-Lived AssetsLong-lived assets to be held and used are reviewed on a quarterly
basis to determine whether any changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The evaluation process includes a review of each asset class for further
economic benefit or changes in external market conditions or other factors. Technological assets are reviewed to determine whether they are still in service. If long-lived assets are
determined to be impaired, they are written-down to their net realizable value. During the years ended December 31, 2002 and 2001, our analyses indicated that there was no
impairment of our long-lived assets.

New Accounting PrinciplesOn January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
which supersedes APB No. 17, "Intangible Assets." SFAS No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This
statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. This statement affects the accounting
of premiums, includes guidelines for the determination, measurement and testing of impairment, and requires disclosure of information about goodwill and other intangible assets in the years subsequent
to their acquisition that was not previously required. This Statement eliminates the amortization of goodwill and requires that goodwill be reviewed at least annually for impairment or when any event
occurs that could give rise to impairment. This Statement affects all goodwill recognized on our consolidated balance sheet, regardless of when the assets were initially recorded. Upon adoption of
SFAS No. 142, we ceased amortization of the $80 million goodwill asset on our consolidated balance sheet. As of December 31, 2002 there was no impairment of goodwill.

In
November 2001, the FASB issued Emerging Issues Task Force ("EITF") No. 01-14, "Income Statement Characterization of Reimbursements Received for
Out-Of-Pocket Expenses Incurred." This guidance requires companies to recognize the reimbursement of client-related expenses as revenue and the costs as operating expense.
Client reimbursements for out-of-pocket expenses are reflected in fee revenue in the accompanying financial statements. Prior periods have been reclassified to reflect this
presentation. The increases to fee revenue and operating expense as a result of this guidance were $9.4 million, $8.3 million and $7.5 million for the years ended
December 31, 2002, 2001 and 2000, respectively.

In
November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others." This interpretation elaborates on disclosures to be made by a guarantor about its obligations and requires recognition of a liability for the fair value of the obligation undertaken in
issuing guarantees. We lend securities to creditworthy broker-dealers on behalf of our clients and, in certain circumstances, we may indemnify clients for the fair market value of those securities
against a failure of the borrower to return such securities. We require the borrowers to provide collateral in an amount equal to or in excess of the fair market value of securities borrowed. The
borrowed securities are revalued daily to determine if additional collateral is necessary. Since the collateral we receive is in excess of the value of the securities that we would be required to
replace if the borrower defaulted and failed to return such securities, we have recorded no liability for the indemnification obligation. The maximum potential amount of future payments that we could
be required to make would be equal to the market value of the securities borrowed. Since the securities loans are over-collateralized by 2% to 5% of the fair market value of the loan made,
the collateral held by us would be used to satisfy the obligation. In addition, each borrowing agreement gives us "set-off" language that allows us to use any excess collateral on other
loans. However, there is a potential risk that the collateral would not be sufficient

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to cover such an obligation if the security on loan increased in value between the time the borrower defaulted and the time the security is "bought-in." In such instances, we would
"buy-in" the security using all available collateral and a loss would result from the difference between the value of the securities "bought-in" and the value of the collateral
held. We have never experienced a broker default.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on a reported basis. We account for stock-based
compensation using the intrinsic value-based method of APB No 25, "Accounting for Stock Issued to Employees." As a result, no compensation costs are recognized.

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-K) 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-K include certain statements regarding
liquidity, interest rate conditions, interest rate sensitivity, loss exposure on lines of credit, the timing and effect on earnings of derivative gains and losses, the effect on earnings of changes in
equity values, the effect of certain tax and legal claims against us and the nature of our controls and procedures. Our actual future results may differ significantly from those stated in any
forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. Each of these factors, and others, are discussed from time to time in
our filings with the SEC.

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

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 or the
securities markets as these fluctuations affect the market value of assets processed. Current market conditions, including the recent decline in equity markets, adversely affect our asset-based fees.
While reductions in these fees may be offset by increases in other sources of revenue, continued downward movement of the broad equity markets will have an adverse impact on our earnings. Fluctuations
in interest rates or the securities markets can also lead to investors seeking alternatives to the investment offerings of our clients, which could result in a lesser amount of assets processed and
correspondingly lower fees. Also, our net interest income is earned by investing depositors' funds and making loans. Rapid 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, and could adversely affect our net income.

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

As a result of our assumption of the operations of the U.S. asset administration unit of BGI in 2001 and our ongoing relationship with BGI's iShares and Master
Investment Portfolios, BGI accounted for
approximately 16.8%of our net operating revenue during the year ended December 31, 2002. We expect that BGI will continue to account for a
significant portion of our net operating revenue. While we provide services to BGI under long-term contracts, those contracts may be terminated for certain regulatory and fiduciary
reasons. The loss of BGI's business would cause our net

31

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operating revenue to decline and would have a material adverse effect on our quarterly and annual results.

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

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

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 assumption of the
operations 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.

We operate in a high volume, high complexity industry where operating errors can create significant financial liability.

Every day, we handle assets and transactions totaling in the hundreds of billions of dollars with little margin for error. As a result, even minor operational
errors can result in significant financial liabilities. While we believe that we possess industry-leading controls and processes, and we maintain appropriate insurance coverage, a significant
operational error or resulting financial liability could have a material adverse impact on our business, financial condition and results of operations.

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

Integration of acquisitions and outsourcing transactions is complicated and frequently presents unforeseen difficulties and expenses which can affect whether and
when a particular acquisition will be accretive to our earnings per share. Any future acquisitions or outsourcing transactions will present similar challenges.

We may not win our appeal of the Massachusetts Department of Revenue Notice of Assessment.

We received from the Commonwealth of Massachusetts Department of Revenue a Notice of Intent to Assess additional state excise taxes with respect to the years
1999, 2000 and 2001. After consultation with our advisors, we do not believe that we owe the additional excise tax. The Company intends to appeal the assessment and to pursue all available means to
defend its position vigorously. Legal proceedings to appeal and defend our position could be expensive and divert management's attention. In addition, the Massachusetts legislature is considering
retroactive legislation that may affect the outcome of our dispute with the DOR. If we do not prevail, or if unfavorable retroactive legislation is enacted, payment of the additional excise tax would
have a material adverse impact on our earnings for the period in which we pay the assessment.

32

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We may not be able to protect our proprietary technology.

Our proprietary technology is critical 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 and other claims.

We have been named in a suit 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. We have also been named in a class action lawsuit in California state court alleging violations of California laws, including wage and hour laws. While we
believe these claims are without merit, we cannot be sure that we will prevail in the defense of these claims. Patent and class action litigation is 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 defense costs and damages related to the patent
claim, we may incur significant expenses defending the claim. Also, if we were found to have violated California wage and hour laws, we could be liable for back wages and other penalties. As a result,
any determination of infringement or violation of California law could have a material adverse effect upon our business, financial condition and results of operations. We may become subject to other
legal claims in the future.

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

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

Our quarterly and annual operating results may fluctuate.

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



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

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 Corporation ("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:



33

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

Statement of Operations

Comparison of Operating Results for the Years Ended December 31, 2002 and 2001

Net Operating Revenue

The components of net operating revenue are as follows (Dollars in thousands):

|                            |  | For the Year Ended December 31, |        
|--------------------------- |  | ------------------------------- | -------
|
|Net interest income         |  | $                               | 143,478
|Non-interest income         |  |                                 | 294,116
|                            |  |                                 |        
|Total net operating revenue |  | $                               | 437,594
|                            |  |                                 |        

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 year ended December 31, 2002
compared to the year ended December 31, 2001. Changes attributed to both volume and rate have been allocated based on the proportion of change in each category (Dollars in thousands):

|                                   |  | For the Year Ended
December 31, 2002 vs. December 31, 2001 |       
|---------------------------------- |  | ---------------------------------------------------------- | ------
|
|Interest-earning assets            |  |                                                            |       
|Fed funds sold and securities      |  |                                                            |       
|purchased under resale agreements  |  | $                                                          | 329   
|Investment securities              |  |                                                            | 69,092
|Loans                              |  |                                                            | (148  
|                                   |  |                                                            |       
|Total interest-earning assets      |  | $                                                          | 69,273
|                                   |  |                                                            |       
|Interest-bearing liabilities       |  |                                                            |       
|Deposits                           |  | $                                                          | 8,129 
|Borrowings                         |  |                                                            | 28,215
|                                   |  |                                                            |       
|Total interest-bearing liabilities |  | $                                                          | 36,344
|                                   |  |                                                            |       
|Change in net interest income      |  | $                                                          | 32,929
|                                   |  |                                                            |       

Net
interest income was $143.5 million in 2002, up 31% from 2001. The improvement in net interest income primarily reflects the positive effect of balance sheet
growth driven by increased client deposits and a steep yield curve. The net interest margin decreased slightly to 2.48% in 2002, from 2.49% last year due to prepayment costs incurred during the year
as a result of an asset liability

34

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strategy to prepay higher rate Federal Home Loan Bank of Boston ("FHLBB") advances with borrowed funds at a more favorable rate.

Average
interest-earning assets, primarily investment securities, were $5.8 billion in 2002, up 32% from 2001. Funding for the asset growth was provided by a combination of client
deposits of $0.8 billion and external borrowings of $0.6 billion. The effect of changes in volume of interest-earning assets and interest-bearing liabilities was an increase in net
interest income of approximately $32.9 million in 2002.

Average
yield on interest-earning assets was 4.29% in 2002, down 146 basis points from 2001. The average rate that we paid on interest-bearing liabilities was 1.99% in 2002, down 164
basis points from 2001. The decrease in rates reflects the lower interest rate environment in 2002 compared with 2001. The effect on net interest income due to changes in rates was an increase of
approximately $1.3 million during the fiscal year ended December 31, 2002, an increase which was net of prepayment costs
incurred in 2002 associated with replacing borrowed funds at a more favorable rate. Prepayment costs were $7.6 million in 2002 and $2.4 million in 2001.

During
the past 24 months, our net interest margin has been unusually favorable. While interest rates remain low, the yield curve continues to flatten, meaning the difference
between short-term interest rates and long-term interest rates is decreasing. In addition, with mortgage rates at historic lows, refinancing activities increase, resulting in
prepayments of higher yielding mortgage-backed securities that we hold, the proceeds of which are reinvested at current market rates. These factors, among others, may decrease our net interest margin
to more traditional levels and reduce the unusually high growth rates in net interest income that we have experienced during the last two years.

On
January 1, 2001, we adopted SFAS No. 133, as amended and interpreted, which established accounting and reporting standards for derivative instruments. 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 OCI. Ineffective portions of changes, as determined in accordance with SFAS No. 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 No. 133 on January 1, 2001, resulted in no cumulative effect-type
adjustment to our 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. In conjunction with the adoption, we elected to reclassify
approximately $402 million of securities from held to maturity to available for sale, which further reduced OCI, net of tax, by approximately $1.4 million.

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. By entering into a pay-fixed/receive-floating interest rate swap, a portion of these
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, as
determined in accordance with SFAS No. 133. 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 No. 133, had an insignificant impact on earnings for the year ended December 31, 2002. No cash flow hedges were
dedesignated or discontinued for the year ended December 31, 2002.

35

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Net
interest income included net gains of $1.6 million, net of tax, for the twelve months ended December 31, 2002 derived from interest rate swaps relating to SFAS
No. 133. The net gain consisted of a $3.3 million gain, net of tax, for the twelve-month period on changes in the fair value of derivative instruments not designated as hedging
instruments. There were also $1.7 million of derivative losses, net of tax, for the twelve-month period that resulted primarily from the reclassification of transition adjustment-related
derivative losses from OCI to net interest income in accordance with SFAS No. 133. We estimate that $0.2 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.

Non-interest Income

Non-interest income was $294.1 million in 2002, up 17% from 2001. Non-interest income consists of the following items (Dollars in
thousands):

|                           |                                                         | For the Years Ended December 31, |        
|-------------------------- | ------------------------------------------------------- | -------------------------------- | -------
|
|Asset servicing fees:      |                                                         |                                  |        
|                           | Custody, accounting, transfer agency and administration |                                  | $      
|                           | Foreign exchange                                        |                                  |        
|                           | Cash management                                         |                                  |        
|                           | Securities lending                                      |                                  |        
|                           | Investment advisory                                     |                                  |        
|                           |                                                         |                                  |        
|Total asset servicing fees |                                                         |                                  | 291,667
|Other operating income     |                                                         |                                  | 2,449  
|                           |                                                         |                                  |        
|Total non-interest income  |                                                         | $                                | 294,116
|                           |                                                         |                                  |        

Asset
servicing fees for the year ended December 31, 2002 increased 17% to $291.7 million from 2001. The largest components of asset servicing fees are custody, accounting,
transfer agency and administration, which are based in part on assets processed. Assets processed is the total dollar value of financial assets on the reported date for which we provide global custody
or multicurrency accounting. Total net assets processed decreased $29 billion to $785 billion at December 31, 2002 from 2001. The change in net assets processed includes the
following components (Dollars in billions):

For the Year Ended December 31, 2002Sales to new clients

$
24Further penetration of existing clients


26Fund flows and market loss


(79
)Net change in assets processed

$
(29
)


Our
ability to win business and the ability of our clients to sell additional product, thus generating fund flows, has allowed us to minimize the impact of the market downturn in 2002.
Our tiered pricing structure for asset-based fees also contributes to this inverse correlation. Because our asset-based fees for most clients decrease as assets increase, as asset values deteriorate,
revenue is only impacted by the asset decline at the then marginal rate. Despite the decrease in assets processed, transaction volume increased, which positively impacted fee income.

Transaction-driven
income also includes our ancillary services such as foreign exchange, securities lending and cash management. Foreign exchange fees increased due to higher transaction
volumes and

36

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volatility in the currencies traded by our clients. Cash management and securities lending fees increased with the addition of new clients and increased excess client cash balances. Increased
investment advisory service fees were the result of growth in the asset size of the Merrimac Master Portfolio, an investment company for which we act as advisor, and where a portion of excess client
cash balances are invested.

Other
operating income consists primarily of dividends received relating to the FHLBB stock investment. The decrease in other operating income from 2001 resulted primarily from a
decrease in the dividend rate paid on the FHLBB stock.

Operating Expenses

Total operating expenses were $336.7 million in 2002, up 18% from 2001. The components of operating expenses were as follows (Dollars in thousands):

|                                  |  | For the Year Ended December 31, |        
|--------------------------------- |  | ------------------------------- | -------
|
|Compensation and benefits         |  | $                               | 192,785
|Technology and telecommunications |  |                                 | 42,190 
|Transaction processing services   |  |                                 | 33,713 
|Occupancy                         |  |                                 | 25,602 
|Depreciation and amortization     |  |                                 | 16,357 
|Professional fees                 |  |                                 | 7,101  
|Travel and sales promotion        |  |                                 | 5,819  
|Amortization of goodwill          |  |                                 |       
|Other operating expenses          |  |                                 | 13,100 
|                                  |  |                                 |        
|Total operating expenses          |  | $                               | 336,667
|                                  |  |                                 |        

Compensation
and benefits expense was $192.8 million in 2002, up 17% from 2001. The average number of employees increased 15% to 2,648 during the year ended December 31,
2002 from 2,299 for the year ended December 31, 2001. We increased the number of employees to support new business and the expansion of existing client relationships. Benefits, including
payroll taxes, group insurance plans, retirement plan contributions and tuition reimbursement, increased $6.6 million for the year ended December 31, 2002, consistent with the increase
in headcount. The increases in compensation and benefits expense were offset by $8.4 million, which was reclassified as capitalized software development costs in 2002.

Technology
and telecommunications expense was $42.2 million in 2002, up 8% from 2001. Technology and telecommunications expense consists primarily of contract programming,
outsourced services, hardware rent, telecommunications expense and software licenses. Increased hardware, software, mainframe and trust processing and telecommunications expenditures needed to support
new business and increased transaction volumes accounted for $7.8 million of the year-to-year change. Offsetting these increases were $4.8 million related to
outsourced network monitoring, help desk and other outsourced services required in 2001, and not in 2002, primarily due to the Chase acquisition.

Transaction
processing services expense was $33.7 million in 2002, up 17% from 2001. The increase relates primarily to increased subcustodian and pricing fees, driven by increased
volumes of transactions and changes in assets processed for clients, largely a result of the BGI U.S. asset administration unit assumption in May 2001 and the addition of new business in 2002.

Occupancy
expense was $25.6 million in 2002, up 43% from 2001. This increase was primarily due to increased space in our Boston, New York and Dublin offices and the California
offices assumed from BGI.

37

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Depreciation
and amortization expense was $16.4 million in 2002, up 95% from 2001. This increase resulted from completion of capitalized software projects in 2002 and their
placement into service and the addition of leasehold improvements as a result of the new space we occupied in Boston, New York, Dublin and California.

Professional
fees were $7.1 million in 2002, up 43% from 2001 primarily due to increased accounting, legal and consulting services provided during the periods, as well as
increased fees associated with the Merrimac Master Portfolio. These fees are asset-based and the increase results from growth in the size of the Merrimac Master Portfolio.

Travel
and sales promotion expense was $5.8 million, up 9% from 2001. Travel and sales promotion expense consists of expenses incurred by the sales force, client management staff
and other employees in connection with sales calls to potential clients, traveling to existing client sites, and to our New York and California offices and our foreign subsidiaries.

Amortization
of goodwill expense ceased as of January 1, 2002, as a result of the adoption of SFAS No. 142. Please refer to the "Significant Accounting Policies" section
for a further discussion of this pronouncement.

Other
operating expenses were $13.1 million, down 6% from 2001, as strict cost controls continued across the organization. Other operating expenses include fees for recruiting,
office supplies and postage, storage, temporary help, client accommodations and various regulatory fee assessments.

Income Taxes

Income taxes were $30.4 million in 2002, up 33% from 2001, consistent with the increased level of pre-tax income. The overall effective tax
rate was 30% for 2002 and 31% for 2001. The decrease in the effective tax rate reflects our increased investment in tax-exempt municipal securities in 2002.

Comparison of Operating Results for the Years Ended December 31, 2001 and 2000

Net Operating Revenue

The components of net operating revenue are as follows (Dollars in thousands):

|                            |  | For the Year Ended December 31, |        
|--------------------------- |  | ------------------------------- | -------
|
|Net interest income         |  | $                               | 109,281
|Non-interest income         |  |                                 | 251,524
|                            |  |                                 |        
|Total net operating revenue |  | $                               | 360,805
|                            |  |                                 |        

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 year ended December 31, 2001
compared to the year ended December 31, 2000. Changes

38

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

|                                                                |  | For the Year Ended
December 31, 2001 vs. December 31, 2000 |       
|--------------------------------------------------------------- |  | ---------------------------------------------------------- | ------
|
|Interest-earning assets                                         |  |                                                            |       
|Fed Funds sold and securities purchased under resale agreements |  | $                                                          | (1,974
|Investment securities                                           |  |                                                            | 99,377
|Loans                                                           |  |                                                            | (354  
|                                                                |  |                                                            |       
|Total interest-earning assets                                   |  | $                                                          | 97,049
|                                                                |  |                                                            |       
|Interest-bearing liabilities                                    |  |                                                            |       
|Deposits                                                        |  | $                                                          | 19,907
|Borrowings                                                      |  |                                                            | 47,962
|                                                                |  |                                                            |       
|Total interest-bearing liabilities                              |  | $                                                          | 67,869
|                                                                |  |                                                            |       
|Change in net interest income                                   |  | $                                                          | 29,180
|                                                                |  |                                                            |       

Net
interest income was $109.3 million in 2001, up 86% from 2000. The improvement in net interest income reflects the positive effect of balance sheet growth driven by increased
client deposits and borrowings and a more favorable interest rate environment. The net interest margin increased to 2.49% in 2001, up 35 basis points from 2000.

Average
interest-earning assets, primarily investment securities, were $4.4 billion in 2001, up 59% from 2000. Funding for the asset growth was provided by a combination of client
deposits of $0.8 billion and external borrowings of $0.8 billion. The effect of changes in volume of interest-earning assets and interest-bearing liabilities was an increase in net
interest income of approximately $29.2 million in 2001.

Average
yield on interest-earning assets was 5.75% in 2001, down 85 basis points from 2000. The average rate that we paid on interest-bearing liabilities was 3.63% in 2001, down 157
basis points from 2000. The decrease in rates reflects the lower interest rate environment in 2001 compared with 2000. The effect on net interest income due to changes in rates was an increase of
approximately $21.3 million during the fiscal year ended December 31, 2001.

On
January 1, 2001, we adopted SFAS No. 133, as amended and interpreted, which established accounting and reporting standards for derivative instruments. 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 OCI. Ineffective portions of changes, as determined in accordance with SFAS No. 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 No. 133 on January 1, 2001, resulted in no cumulative effect-type
adjustment to our 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. In conjunction with the adoption, we elected to reclassify
approximately $402 million of securities from held to maturity to available for sale, which further reduced OCI, net of tax, by approximately $1.4 million.

39

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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. By entering into a pay-fixed/receive-floating interest rate swap, a portion of these
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, as
determined in accordance with SFAS No. 133. 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 No. 133, had an insignificant impact on earnings for the year ended December 31, 2001. No cash flow hedges were
dedesignated or discontinued for the year ended December 31, 2001.

Net
interest income included net losses of $2.0 million, net of tax, for the twelve months ended December 31, 2001 derived from interest rate swaps relating to SFAS
No. 133. The net loss consisted of a $0.2 million gain, net of tax, for the twelve-month period on changes in the fair value of derivative instruments not designated as hedging
instruments. There were also $2.2 million of derivative losses, net of tax, for the twelve-month period that resulted primarily from the reclassification of transition adjustment-related
derivative losses from OCI to net interest income in accordance with SFAS No. 133.

Non-interest Income

Non-interest income was $251.5 million in 2001, up 48% from 2000. Non-interest income consists of the following items (Dollars in
thousands):

|                           |                                                         | For the Years Ended December 31, |        
|-------------------------- | ------------------------------------------------------- | -------------------------------- | -------
|
|Asset servicing fees:      |                                                         |                                  |        
|                           | Custody, accounting, transfer agency and administration |                                  | $      
|                           | Foreign exchange                                        |                                  |        
|                           | Cash management                                         |                                  |        
|                           | Securities lending                                      |                                  |        
|                           | Investment advisory                                     |                                  |        
|                           |                                                         |                                  |        
|Total asset servicing fees |                                                         |                                  | 248,396
|Other operating income     |                                                         |                                  | 3,128  
|                           |                                                         |                                  |        
|Total non-interest income  |                                                         | $                                | 251,524
|                           |                                                         |                                  |        

Asset
servicing fees were $248.4 million in 2001, up 49% from 2000. The largest component of asset servicing fees are custody, accounting, transfer agency and administration,
which are based in part on assets processed. Assets processed is the total dollar value of financial assets on the reported date for which we provide global custody or multicurrency accounting. Net
assets processed increased

40

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$511 billion to $814 billion at December 31, 2001 from 2000. This net increase includes several components (Dollars in billions):

For the Year Ended
December 31, 2001BGI Processing Agreement

$
515Chase Advisor Custody unit


27Further penetration of existing clients


22Sales to new clients


6Lost clients


(20
)Fund flows and market loss


(39
)Net change in assets processed

$
511


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.

Other
operating income consists of dividends received relating to FHLBB stock investment. The increase in other operating income resulted from an increase in FHLBB stock dividend income
due to an increase in the average investment in FHLBB stock during the year ended December 31, 2001.

Operating Expenses

Total operating expenses were $286.2 million in 2001, up 62% from 2000. The components of operating expenses were as follows (Dollars in thousands):

|                                  |  | For the Year Ended December 31, |        
|--------------------------------- |  | ------------------------------- | -------
|
|Compensation and benefits         |  | $                               | 164,186
|Technology and telecommunications |  |                                 | 39,194 
|Transaction processing services   |  |                                 | 28,710 
|Occupancy                         |  |                                 | 17,965 
|Depreciation and amortization     |  |                                 | 8,404  
|Travel and sales promotion        |  |                                 | 5,349  
|Professional fees                 |  |                                 | 4,970  
|Amortization of goodwill          |  |                                 | 3,559  
|Other operating expenses          |  |                                 | 13,876 
|                                  |  |                                 |        
|Total operating expenses          |  | $                               | 286,213
|                                  |  |                                 |        

Compensation
and benefits expense was $164.2 million in 2001, up 57% from 2000 due to several factors. The average number of employees increased 40% to 2,299 during the year ended
December 31, 2001 from 1,641 for the year ended December 31, 2000. We increased the number of employees to support the expansion of client relationships and to service new business
acquisitions. In addition, compensation expense related to our management incentive plans increased $13.1 million between years, consistent with higher earnings and additional
incentive-eligible managers. Benefits, including payroll taxes, group insurance plans, retirement plan contributions and tuition reimbursement, increased $7.3 million for the year ended
December 31, 2001. This increase was due principally to increased payroll taxes attributable to the increase in headcount.

Technology
and telecommunications expense was $39.2 million in 2001, up 61% from 2000. Transitional services incurred as a result of the Chase acquisition agreement accounted for
approximately $5.5 million of the increase. Increased hardware, software and telecommunications expenditures needed to support the growth in assets processed accounted for $5.6 million
of the

41

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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 $3.8 million of the increase.

Transaction
processing services expense was $28.7 million in 2001, up 118% from 2000. The increase relates primarily to increased subcustodian fees, driven by growth in assets
processed for clients.

Occupancy
expense was $18.0 million in 2001, up 63% from 2000. This increase was primarily due to increased rent resulting from the California offices assumed from BGI and the
expansion of our office space in Boston, New York and Dublin.

Depreciation
and amortization expense was $8.4 million in 2001, up 77% from 2000. This increase resulted from capitalized expenditures associated with the expansion into
additional office space and capitalized software.

Travel
and sales promotion expense was $5.3 million, up 44% from 2000. The increase was due to the increased level of business activity and the addition of a California office in
2001. Travel and sales promotion expense consists of expenses incurred by the sales force, client management staff and other employees in connection with sales calls to potential clients, traveling to
existing client sites, and to our New York and California offices and our foreign subsidiaries.

Professional
fees were $5.0 million in 2001, up 61% from 2000 primarily due to system conversion costs for the Advisor Custody unit acquired from Chase and for legal and other
consulting services.

Amortization
of goodwill expense was $3.6 million, up 126% from 2000. The increase was the result of the increase in goodwill from acquisition activities in 2001. Please refer to
the "Overview" section for a further discussion of acquisitions.

Other
operating expenses were $13.9 million in 2001, up 32% from 2000. Other operating expenses include fees for recruiting, office supplies, temporary help and various regulatory
fee assessments. Recruiting expenses and temporary help accounted for approximately $0.4 million of the increase while the growth in assets processed and the set-up of new offices
in 2001 contributed to the overall increase in other operating expenses.

Income Taxes

Income taxes were $22.8 million in 2001, up 37% from 2000, consistent with the increased level of pre-tax income. The overall effective tax
rate was 31% for 2001 and 32% for 2000. The decrease in the effective tax rate reflects our increased investment in nontaxable municipal securities in 2001.

42

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

|                                                                 |                                   | Year Ended December 31, 2002 |           | Year Ended December 31, 2001 |   | Year Ended December 31, 2000 |        
|---------------------------------------------------------------- | --------------------------------- | ---------------------------- | --------- | ---------------------------- | - | ---------------------------- | -------
|
|Interest-earning assets                                          |                                   |                              |           |                              |   |                              |        
|Fed Funds sold and securities                                    |                                   |                              |           |                              |   |                              |        
|                                                                 | Purchased under resale agreements |                              | $         | 45,042                       |   | $                            | 740    
|                                                                 | Investment securities (1)         |                              |           | 5,622,878                    |   |                              | 243,333
|                                                                 | Loans (2)                         |                              |           | 110,769                      |   |                              | 3,774  
|                                                                 |                                   |                              |           |                              |   |                              |        
|                                                                 | Total interest-earning assets     |                              |           | 5,778,689                    |   |                              | 247,847
|                                                                 |                                   |                              |           |                              |   |                              |        
|                                                                 | Allowance for loan losses         |                              |           | (100                         | ) |                              |        
|                                                                 | Noninterest-earning assets(3)     |                              |           | 393,417                      |   |                              |        
|                                                                 |                                   |                              |           |                              |   |                              |        
|                                                                 | Total assets                      |                              | $         | 6,172,006                    |   |                              |        
|                                                                 |                                   |                              |           |                              |   |                              |        
|Interest-bearing liabilities                                     |                                   |                              |           |                              |   |                              |        
|Deposits:                                                        |                                   |                              |           |                              |   |                              |        
|                                                                 | Demand                            |                              | $         | 823                          |   | $                            | 4      
|                                                                 | Savings                           |                              |           | 1,945,550                    |   |                              | 42,229 
|                                                                 | Time                              |                              |           | 1,393                        |   |                              | 24     
|Short-term borrowings                                            |                                   |                              | 2,895,436 |                              |   | 35,933                       |        
|Other borrowings (4)                                             |                                   |                              | 399,178   |                              |   | 26,179                       |        
|                                                                 |                                   |                              |           |                              |   |                              |        
|Total interest-bearing liabilities                               |                                   |                              | 5,242,380 |                              |   | 104,369                      |        
|                                                                 |                                   |                              |           |                              |   |                              |        
|Noninterest-bearing liabilities:                                 |                                   |                              |           |                              |   |                              |        
|                                                                 | Demand deposits                   |                              |           | 180,065                      |   |                              |        
|                                                                 | Savings                           |                              |           | 124,416                      |   |                              |        
|                                                                 | Noninterest-bearing time deposits |                              |           | 90,000                       |   |                              |        
|                                                                 | Other liabilities(3)              |                              |           | 116,690                      |   |                              |        
|                                                                 |                                   |                              |           |                              |   |                              |        
|Total liabilities                                                |                                   |                              | 5,753,551 |                              |   |                              |        
|Trust Preferred Securities                                       |                                   |                              | 24,033    |                              |   |                              |        
|Equity                                                           |                                   |                              | 394,422   |                              |   |                              |        
|                                                                 |                                   |                              |           |                              |   |                              |        
|Total liabilities and equity                                     |                                   | $                            | 6,172,006 |                              |   |                              |        
|                                                                 |                                   |                              |           |                              |   |                              |        
|Net interest income                                              |                                   |                              |           |                              | $ | 143,478                      |        
|                                                                 |                                   |                              |           |                              |   |                              |        
|Net interest margin (5)                                          |                                   |                              |           |                              |   |                              |        
|                                                                 |                                   |                              |           |                              |   |                              |        
|Average interest rate spread (6)                                 |                                   |                              |           |                              |   |                              |        
|                                                                 |                                   |                              |           |                              |   |                              |        
|Ratio of interest-earning assets to interest-bearing liabilities |                                   |                              |           |                              |   |                              |        
|                                                                 |                                   |                              |           |                              |   |                              |        

---

43

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Financial Condition

Investment Portfolio

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

|                                    |  | December 31,
|----------------------------------- |  | ------------
|
|Securities held to maturity:        |  |             
|Mortgage-backed securities          |  | $           
|Federal agency securities           |  |             
|State and political subdivisions    |  |             
|Foreign government securities       |  |             
|                                    |  |             
|Total securities held to maturity   |  | $           
|                                    |  |             
|Securities available for sale:      |  |             
|Mortgage-backed securities          |  | $           
|Federal agency securities           |  |             
|Corporate debt                      |  |             
|State and political subdivisions    |  |             
|                                    |  |             
|Total securities available for sale |  | $           
|                                    |  |             

Our
investment portfolio is used to invest depositors' funds and is a component of our asset processing business. In addition, we use the investment portfolio to secure open positions at
securities clearing institutions in connection with our custody services. The portfolio is comprised of securities of state and political subdivisions ("municipal securities"), mortgage-backed
securities issued by the Federal National Mortgage Association ("FNMA" or "Fannie Mae"), the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") and the Government National Mortgage
Association ("GNMA" or "Ginnie Mae"), Federal agency bonds issued by FHLMC, the Federal Home Loan Bank of Boston, securities issued by the Small Business Administration ("SBA") and corporate debt
securities.

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

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

44

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The
book value and weighted average yield of our securities held to maturity at December 31, 2002 are reflected in the following table (Dollars in thousands):

|                                  |  | Years |        
|--------------------------------- |  | ----- | -------
|
|
|Mortgage-backed securities        |  | $     | 317,963
|Federal agency securities         |  |       |       
|State and political subdivisions  |  |       |       
|                                  |  |       |        
|Total securities held to maturity |  | $     | 317,963
|                                  |  |       |        

The carrying value and weighted average yield of our securities available for sale at December 31, 2002 are reflected in the following
table (Dollars in thousands):

|                                    |  | Years |      
|----------------------------------- |  | ----- | -----
|
|
|Mortgage-backed securities          |  | $     |     
|Federal agency securities           |  |       |     
|Corporate debt                      |  |       |     
|State and political subdivisions    |  |       | 2,833
|                                    |  |       |      
|Total securities available for sale |  | $     | 2,833
|                                    |  |       |      

Loan Portfolio

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

|                                |  | December 31, |        
|------------------------------- |  | ------------ | -------
|
|Loans to individuals            |  | $            | 76,263 
|Loans to mutual funds           |  |              | 49,372 
|Loans to others                 |  |              | 18,202 
|                                |  |              |        
|                                |  |              | 143,837
|Less: allowance for loan losses |  |              | (100   
|                                |  |              |        
|Net loans                       |  | $            | 143,737
|                                |  |              |        
|Floating Rate                   |  | $            | 143,825
|Fixed Rate                      |  |              | 12     
|                                |  |              |        
|                                |  | $            | 143,837
|                                |  |              |        

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

45

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At
December 31, 2002, our only lending concentrations that exceeded 10% of total loan balances were the lines of credit to mutual fund clients discussed above. These loans were
made in the ordinary course of business on the same terms and conditions prevailing at the time for comparable transactions.

Our
credit loss experience has been excellent. There have been no loan charge-offs in our history. It is our policy to place a loan on nonaccrual status when either principal
or interest becomes 60 days past due and the loan's collateral is not sufficient to cover both principal and accrued interest. As of December 31, 2002, there were no loans on nonaccrual
status, no loans greater than 90 days past due, and no troubled debt restructurings. Although virtually all of our loans are fully collateralized with freely tradable securities, management
recognizes some credit risk inherent in the loan portfolio, and has recorded an allowance for loan losses of $0.1 million at December 31, 2002. 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 accommodate clients' cash management 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, including money-market assets and investments. We also use term borrowings and interest rate swap agreements to augment our management of interest rate exposure. The effect of
the swap agreements is to lengthen short-term variable-rate liabilities into longer-term fixed-rate liabilities.

Our
Board of Directors has set asset and liability management policies that define the overall framework for managing interest rate sensitivity, including accountabilities and controls
over investment activities. These policies delineate investment limits and strategies that are appropriate, given our liquidity and regulatory requirements. For example, we have established a policy
limit stating that projected net interest income over the next 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 asset and liability positions, including simulations of the effect of various interest rate scenarios on our capital. Due to current
interest rate levels, the Company's Board of Directors has approved a temporary exception to the 10% limit for decreases in interest rates. The Board of Directors approved the policy exception
because, with the Federal Funds target rate currently at 1.25%, a 200 basis point further reduction would move rates into a negative position and is therefore not likely to occur.

Our
Board of Directors has delegated day-to-day responsibility for oversight of the Asset and Liability Management function to our Asset and Liability Committee
("ALCO"). ALCO is a senior management committee consisting of the Chief Executive Officer, the President, the Chief Financial Officer and members of the Treasury function. ALCO meets twice monthly.
Our primary tool in

46

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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 December 31, 2002 and 2001 indicated that an upward shift of interest rates by 200 basis points would result in a reduction in
projected net interest income of 6.56% and 5.10%, respectively. A downward shift of 200 basis points would result in a decrease in projected net interest income of 14.20% and 9.96% at
December 31, 2002 and 2001, respectively. As discussed above, these exceptions to policy were approved by the Board of Directors.

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 December 31, 2002, interest-bearing liabilities repriced faster than interest-earning assets in the short term, as has been typical for
us. Generally speaking, 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. However, at the current
absolute level of interest rates, lower interest rates may also
lead to lower net income due to a diminished ability to lower interest-bearing liabilities, including certain client funds, as rates approach zero. Other important determinants of net interest income
are rate levels, balance sheet growth and mix, and interest rate spreads.

47

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The
following table presents the repricing schedule for our interest-earning assets and interest-bearing liabilities at December 31, 2002 (Dollars in thousands):

|                                                                                      |                               | Within
Three
Months                            |        | Three
To Six
Months |           | Six
To Twelve
Months |         | One
Year to
Five Years |        | Over Five
Years |         | Total 
|------------------------------------------------------------------------------------- | ----------------------------- | ---------------------------------------------- | ------ | ------------------- | --------- | -------------------- | ------- | ---------------------- | ------ | --------------- | ------- | ------
|Interest-earning assets (1):                                                          |                               |                                                |        |                     |           |                      |         |                        |        |                 |         |       
|                                                                                      | Investment securities (2) (3) |                                                | $      | 3,341,872           |           | $                    | 462,835 |                        | $      | 717,282         |         | $     
|                                                                                      | Loansvariable rate           |                                                |        | 143,825             |           |                      |        |                        |        |                |         |       
|                                                                                      | Loansfixed rate              |                                                |        |                    |           |                      | 12      |                        |        |                |         |       
|                                                                                      |                               |                                                |        |                     |           |                      |         |                        |        |                 |         |       
|                                                                                      |                               | Total interest-earning assets                  |        |                     | 3,485,697 |                      |         | 462,847                |        |                 | 717,282 |       
|Interest-bearing liabilities:                                                         |                               |                                                |        |                     |           |                      |         |                        |        |                 |         |       
|                                                                                      | Savings accounts              |                                                |        | 2,674,829           |           |                      |        |                        |        |                |         |       
|                                                                                      | Interest rate contracts       |                                                |        | (920,000            | )         |                      | 60,000  |                        |        | 160,000         |         |       
|                                                                                      | Short-term borrowings         |                                                |        | 2,643,081           |           |                      |        |                        |        |                |         |       
|                                                                                      |                               |                                                |        |                     |           |                      |         |                        |        |                 |         |       
|                                                                                      |                               | Total interest-bearing liabilities             |        |                     | 4,397,910 |                      |         | 60,000                 |        |                 | 160,000 |       
|                                                                                      |                               |                                                |        |                     |           |                      |         |                        |        |                 |         |       
|                                                                                      |                               | Net interest sensitivity gap during the period |        | $                   | (912,213  | )                    | $       | 402,847                |        | $               | 557,282 |       
|                                                                                      |                               |                                                |        |                     |           |                      |         |                        |        |                 |         |       
|                                                                                      |                               | Cumulative gap                                 |        | $                   | (912,213  | )                    | $       | (509,366               | )      | $               | 47,916  |       
|                                                                                      |                               |                                                |        |                     |           |                      |         |                        |        |                 |         |       
|Interest-sensitive assets as a percent of interest-sensitive liabilities (cumulative) |                               |                                                | 79.26  | %                   |           | 88.57                | %       |                        | 101.04 | %               |         | 108.12
|                                                                                      |                               |                                                |        |                     |           |                      |         |                        |        |                 |         |       
|Interest-sensitive assets as a percent of total assets (cumulative)                   |                               |                                                | 48.31  | %                   |           | 54.73                | %       |                        | 64.67  | %               |         | 86.11 
|                                                                                      |                               |                                                |        |                     |           |                      |         |                        |        |                 |         |       
|Net interest sensitivity gap as a percent of total assets                             |                               |                                                | (12.64 | )%                  |           | 5.58                 | %       |                        | 7.72   | %               |         | 5.80  
|                                                                                      |                               |                                                |        |                     |           |                      |         |                        |        |                 |         |       
|Cumulative gap as a percent of total assets                                           |                               |                                                | (12.64 | )%                  |           | (7.06                | )%      |                        | 0.66   | %               |         | 6.47  
|                                                                                      |                               |                                                |        |                     |           |                      |         |                        |        |                 |         |       

---

Liquidity

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

Our
primary sources of liquidity include cash and cash equivalents, Federal Funds sold, 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 $0.06 per
share for 2003 (approximately $3.9 million based upon 64,775,042 shares outstanding as of December 31, 2002).

48

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Our
ability to pay dividends on Common Stock may depend on the receipt of dividends from the Bank. Any dividend payments by the Bank are subject to certain restrictions imposed by the
Massachusetts Commissioner of Banks. In addition, we may not pay dividends on our Common Stock if we are in default under certain agreements entered into in connection with the sale of our Capital
Securities. The Capital Securities were issued by Investors Capital Trust I, a Delaware statutory business trust sponsored by us, and qualify as Tier 1 capital under the capital guidelines of
the Federal Reserve. For more information regarding our Capital Securities, see Note 11 of our Notes to Consolidated Financial Statements included with this Annual Report.

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 December 31, 2002 was $1.4 billion. Each bank may terminate its arrangement at any time and is under no contractual obligation to provide us with
requested funding. Our borrowings under these arrangements are typically on an overnight basis. We cannot be certain,
however, that such funding will be available. Lack of availability of liquid funds could have a material adverse impact on our operations.

We
also have Master Repurchase Agreements in place with various counterparties. Each broker has agreed to make funds available to us at various rates in exchange for collateral
consisting of marketable securities. The aggregate amount of these borrowing arrangements at December 31, 2002 was $3.1 billion.

We
also have a borrowing arrangement with the FHLBB. We may borrow amounts determined by prescribed collateral levels and the amount of FHLBB stock we hold. We are required to hold FHLBB
stock equal to no less than (i) 1% of our outstanding residential mortgage loan principal (including mortgage pool securities), (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 December 31, 2002 was $2.7 billion. The amount outstanding
under this arrangement at December 31, 2002 was $0.6 billion.

Our
cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating
activities was $60.7 million for the year ended December 31, 2002. Net cash used for investing activities for the year ended December 31, 2002 was $1.6 billion, consisting
primarily of the excess of purchases of investment securities over proceeds from maturities of investment securities. Net cash provided by financing activities, consisting primarily of increased time
deposits and savings deposits and short-term and other borrowings, was $1.5 billion for the year ended December 31, 2002.

The
following table details our contractual obligations as of December 31, 2002 (Dollars in thousands):

|                        |                                                                     | Payments due by period
|----------------------- | ------------------------------------------------------------------- | ----------------------
|
|Contractual obligations |                                                                     |                       
|                        | Long-term debt obligations                                          |                       
|                        | Mandatorily redeemable, preferred securities of subsidiary trust(1) |                       
|                        | Operating lease obligations                                         |                       
|                        |                                                                     |                       
|                        |                                                                     | Total                 
|                        |                                                                     |                       

---

49

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We
are contractually obligated to utilize the data processing services of Electronic Data Systems ("EDS") and SEI Investments Company ("SEI") through December 31, 2005. The
commitment to pay for services provided is volume driven. Based on current volumes, our annual service expenses for the years ended December 31, 2002, 2001 and 2000 were $7.4 million,
$5.0 million and $4.2 million for EDS, and $5.2 million, $4.2 million and $3.3 million for SEI.

Capital Resources

Historically, we have financed our operations principally through internally generated cash flows. We incur capital expenditures for furniture, fixtures,
capitalized software and miscellaneous equipment needs. 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 $48.6 million and $35.9 million for the years ended December 31, 2002 and 2001,
respectively. For the year ended December 31, 2002, capital expenditures were comprised of approximately $31.6 million in capitalized software and projects in process,
$14.0 million in fixed assets, and $3.0 million in leasehold improvements. For the year ended December 31, 2001, capital expenditures were comprised of approximately
$18.0 million in fixed assets, $13.1 million in capitalized software and projects in process, and $4.8 million in leasehold improvements.

Stockholders'
equity at December 31, 2002 was $443.0 million, up 29%, from 2001. The ratio of stockholders' equity to assets decreased to 6.1% at December 31, 2002
from 6.5% at December 31, 2001.

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 1" and "Tier 2" capital elements, with at least half of the total capital required to be Tier 1. Tier 1 capital includes, with
certain restrictions, the sum of common stockholders' equity, non-cumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and minority interests in
consolidated subsidiaries, less certain intangible assets. Tier 2 capital includes, with certain limitations, subordinated debt meeting certain requirements, intermediate-term
preferred stock, certain hybrid capital instruments, certain forms of perpetual preferred stock, as well as maturing capital instruments and general allowances for loan losses.

50

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The
following table summarizes our Tier 1 and total capital ratios at December 31, 2002 (Dollars in thousands):

Amount

RatioTier 1 capital

$
374,002

15.51
%Tier 1 capital minimum requirement


96,457

4.00
%Excess Tier 1 capital

$
277,545

11.51
%Total capital

$
374,102

15.51
%Total capital minimum requirement


192,915

8.00
%Excess total capital

$
181,187

7.51
%Risk-adjusted assets, net of intangible assets

$
2,411,436


The
following table summarizes Investors Bank's Tier 1 and total capital ratios at December 31, 2002 (Dollars in thousands):

Amount

RatioTier 1 capital

$
369,398

15.32
%Tier 1 capital minimum requirement


96,457

4.00
%Excess Tier 1 capital

$
272,941

11.32
%Total capital

$
369,498

15.32
%Total capital minimum requirement


192,915

8.00
%Excess total capital

$
176,583

7.32
%Risk-adjusted assets, net of intangible assets

$
2,411,431


In
addition to the risk-based capital guidelines, the FRB and the FDIC use a "Leverage Ratio" as an additional tool to evaluate capital adequacy. The Leverage Ratio is
defined to be a company's Tier 1
capital divided by its adjusted average total assets. The Leverage Ratio adopted by the federal banking agencies requires a ratio of 3.0% Tier 1 capital to adjusted average total assets for
top-rated banking institutions. All other banking institutions are expected to maintain a Leverage Ratio of 4.0% to 5.0%. The computation of the risk-based capital ratios and
the Leverage Ratio requires that the capital of Investors Financial and that of Investors Bank be reduced by most intangible assets. Our Leverage Ratio at December 31, 2002 was 5.50%, which is
in excess of regulatory minimums. Investors Bank's Leverage Ratio at December 31, 2002 was 5.43%, which is also in excess of regulatory minimums. See "BusinessRegulation and
Supervision."

51

---

ITEM 7a.    QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information required by this item is contained in the financial statements and schedules set forth in Item 15(a) under the captions "Consolidated Financial
Statements" and "Financial Statement Schedules" as a part of this Report.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

There have been no changes in or disagreements with accountants on accounting or financial disclosure matters during the Company's two most recent fiscal years.

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The
information required under this item is incorporated herein by reference to the information in the sections entitled "Directors and Executive Officers," "Election of Directors" and
"Compensation and Other Information Concerning Directors and Officers" contained in our definitive proxy statement
pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended
December 31, 2002.

ITEM 11.    EXECUTIVE COMPENSATION.

The information required under this item is incorporated herein by reference to the information in the section entitled "Compensation and other Information
Concerning Directors and Officers" contained in our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of our fiscal year ended December 31, 2002.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required under this item is incorporated herein by reference to the information in the section entitled "Management and Principal Holders of
Voting Securities" contained in our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than
120 days after the close of our fiscal year ended December 31, 2002.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required under this item is incorporated herein by reference to the information in the section entitled "Certain Relationships and Related
Transactions" contained in our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than
120 days after the close of our fiscal year ended December 31, 2002.

52

---

ITEM 14.    CONTROLS AND PROCEDURES.



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



Since
the date of the evaluation described above, there have not been any significant changes in our internal accounting controls or in other factors that could significantly affect
those controls.

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

|(a) |  | 1.  Consolidated Financial Statements.                                                                          
|--- |  | ----------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                 
|    |  | For the following consolidated financial information included herein, see Index on Page F-1:                    
|    |  | Report of Management to Stockholders.                                                                           
|    |  | FDICIA Independent Accountants' Report.                                                                         
|    |  | Independent Auditors' Report.                                                                                   
|    |  | Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001.                                      
|    |  | Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000.
|    |  | Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000.           
|    |  | Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000.                     
|    |  | Notes to Consolidated Financial Statements.                                                                     
|    |  | 2.  Financial Statement Schedules.                                                                              
|    |  | None.                                                                                                           
|    |  | 3.  List of Exhibits.                                                                                           

|Exhibit No. |      | Description                                                            
|----------- | ---- | -----------------------------------------------------------------------
|3.1         | (14) | Certificate of Incorporation of the Company                            
|3.2         | (9)  | Certificate of Amendment of Certificate of Incorporation of the Company
|3.3         | (13) | Certificate of Amendment of Certificate of Incorporation of the Company
|3.4         | (14) | Amended and Restated Bylaws of the Company                             
|4.1         | (14) | Specimen certificate representing the Common Stock of the Company      
|4.2         | (14) | Stockholder Rights Plan                                                
|4.3         | (6)  | Amendment No.1 to Stockholder Rights Plan                              
|4.4         | (10) | Amendment No.2 to Stockholder Rights Plan                              
|10.1*       |      | Amended and Restated 1995 Stock Plan                                   

53

---

|10.2  |       | Amended and Restated 1995 Non-Employee Director Stock Option Plan                                                                                                                   
|----- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3  | (14)  | Information Technology Services Contract between the Company and Electronic Data Systems, Inc. dated September 20, 1995                                                             
|10.4  | (1)   | Lease Agreement between the Company and John Hancock Mutual Life Insurance Company, dated November 13, 1995, for the premises located at 200 Clarendon Street, Boston, Massachusetts
|10.5  | (2)*  | 1997 Employee Stock Purchase Plan                                                                                                                                                   
|10.6  | (2)   | Amended and Restated Declaration of Trust among the Company and the Trustees named therein, dated January 31, 1997                                                                  
|10.7  | (2)   | Purchase Agreement among the Company, Investors Capital Trust I and Keefe, Bruyette & Woods, Inc., dated January 30, 1997 (Included in Exhibit 10.6)                                
|10.8  | (2)   | Indenture between the Company and The Bank of New York, dated January 31, 1997                                                                                                      
|10.9  | (2)   | Registration Rights Agreement, among the Company, Investors Capital Trust I and Keefe, Bruyette & Woods, Inc., dated January 31, 1997                                               
|10.10 | (2)   | Common Securities Guarantee Agreement by the Company as Guarantor, dated January 31, 1997                                                                                           
|10.11 | (2)   | Capital Securities Guarantee Agreement between the Company as Guarantor and The Bank of New York as Capital Securities Guarantee Trustee, dated January 31, 1997                    
|10.12 | (5)   | Agreement and Plan of Merger dated as of May 12, 1998 by and among the Company, AMT Capital Services, Inc., Alan M. Trager, Carla E. Dearing and the other parties named therein    
|10.13 | (7)   | Purchase and Sale Agreement dated as of July 17, 1998 by and between Investors Bank & Trust Company and BankBoston, N.A.                                                            
|10.14 | (8)   | Stock Purchase Agreement, dated as of March 19, 1999, by and between the Company and Oakmont Corporation                                                                            
|10.15 | (11)  | Asset Purchase Agreement between the Company and The Chase Manhattan Bank dated as of November 28, 2000                                                                             
|10.16 | (12)  | First Amendment, effective January 1, 2000 to Information Technology Services Contract between the Company and Electronic Data Systems, Inc. dated September 20, 1995               
|10.17 | (12)* | Amended and Restated Employment Agreement between the Company and Kevin Sheehan                                                                                                     
|10.18 | (12)* | Change of Control Employment Agreement between the Company and Kevin Sheehan                                                                                                        
|10.19 | (12)* | Amended and Restated Employment Agreement between the Company and Michael Rogers                                                                                                    
|10.20 | (12)* | Change of Control Employment Agreement between the Company and Michael Rogers                                                                                                       
|10.21 | (12)* | Amended and Restated Employment Agreement between the Company and Edmund Maroney                                                                                                    
|10.22 | (12)* | Change of Control Employment Agreement between the Company and Edmund Maroney                                                                                                       

54

---

|10.23 | (12)* | Amended and Restated Employment Agreement between the Company and Robert Mancuso                                                                                                                                         
|----- | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.24 | (12)* | Change of Control Employment Agreement between the Company and Robert Mancuso                                                                                                                                            
|10.25 | (12)* | Amended and Restated Employment Agreement between the Company and John Henry                                                                                                                                             
|10.26 | (12)* | Change of Control Employment Agreement between the Company and John Henry                                                                                                                                                
|10.27 | (14)* | Change of Control Employment Agreement between the Company and John N. Spinney, Jr.                                                                                                                                      
|10.28 | *     | Employment Agreement between the Company and John N. Spinney, Jr.                                                                                                                                                        
|21.1  |       | Subsidiaries of the Company                                                                                                                                                                                              
|23.1  |       | Consent of Deloitte & Touche LLP                                                                                                                                                                                         
|24.1  |       | Power of Attorney (See Page 57 of this Report)                                                                                                                                                                           
|99.1  |       | Certification of Kevin J. Sheehan, Chief Executive Officer, and John N. Spinney, Jr., Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

---

55

---



On October 10, 2002 and December 5, 2002, the Company filed current reports on Form 8-K providing information therein under Item
9 (Regulation FD Disclosure).



The Company hereby files as part of this Form 10-K the exhibits listed in Item 15(a)(3) above. Exhibits which are incorporated herein by
reference can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C.



None.

56

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in Boston, Massachusetts on the 27th day of February, 2003.

| |  | INVESTORS FINANCIAL SERVICES CORP.
| |  | ----------------------------------
| |  | By:                               

POWER OF ATTORNEY AND SIGNATURES

We, the undersigned officers and directors of Investors Financial Services Corp., hereby severally constitute and appoint Kevin J. Sheehan and
Michael F. Rogers, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, all
amendments to this report, and generally to do all things in our names and on our behalf in such capacities to enable Investors Financial Services Corp. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission.

Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities indicated on the 27th day
of February, 2003.

|Signature                                   |  | Title(s)                                                                                                        
|------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------
|                                            |  |                                                                                                                 
|/s/KEVIN J. SHEEHANKevin J. Sheehan         |  | Chief Executive Officer and Chairman of the Board (Principal Executive Officer); Director                       
|/s/MICHAEL F. ROGERSMichael F. Rogers       |  | President                                                                                                       
|/s/JOHN N. SPINNEY, JR.John N. Spinney, Jr. |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|/s/ROBERT B. FRASERRobert B. Fraser         |  | Director                                                                                                        
|/s/DONALD G. FRIEDLDonald G. Friedl         |  | Director                                                                                                        
|                                            |  |                                                                                                                 

57

---

|/s/JAMES M. OATESJames M. Oates             |  | Director
|------------------------------------------- |  | --------
|/s/PHYLLIS S. SWERSKYPhyllis S. Swersky     |  | Director
|/s/THOMAS P. MCDERMOTTThomas P. McDermott   |  | Director
|/s/FRANK B. CONDON, JR.Frank B. Condon, Jr. |  | Director

58

---

Certifications

I, Kevin J. Sheehan, Chairman and Chief Executive Officer, certify that:

1.    I
have reviewed this Annual Report on Form 10-K of Investors Financial Services Corp.;

2.    Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The
registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



5.    The
registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):



6.    The
registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

|Date: February 27, 2003 | /s/KEVIN J. SHEEHANKevin J. Sheehan Chairman and Chief Executive
Officer
|----------------------- | ------------------------------------------------------------------------

59

---

I,
John N. Spinney, Jr., Senior Vice President and Chief Financial Officer, certify that:

1.    I
have reviewed this Annual Report on Form 10-K of Investors Financial Services Corp.;

2.    Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The
registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



5.    The
registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):



6.    The
registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

|Date: February 27, 2003 |  | /s/JOHN N. SPINNEY, JR.John N. Spinney, Jr. Senior Vice President and Chief
Financial Officer
|----------------------- |  | ---------------------------------------------------------------------------------------------

60

---





INVESTORS FINANCIAL SERVICES CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                |  | Page
|--------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Management to Stockholders                                                                            |  | F-2 
|FDICIA Independent Accountants' Report                                                                          |  | F-4 
|Independent Auditors' Report                                                                                    |  | F-5 
|Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001                                       |  | F-6 
|Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000 |  | F-7 
|Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000            |  | F-8 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000                      |  | F-9 
|Notes to Consolidated Financial Statements                                                                      |  | F-10

F-1

---

REPORT OF MANAGEMENT TO STOCKHOLDERS

February 14,
2003

To
the Stockholders:

Financial Statements

The management of Investors Bank & Trust Company ("the Bank") is responsible for the preparation, integrity, and fair presentation of its published
financial statements and all other information presented in the Consolidated Financial Statements of Investors Financial Services Corp. (the "Company") contained in this Annual Report. The financial
statements of the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America and, as such, include amounts based on informed judgments and
estimates made by management.

Internal Control

Management is responsible for establishing and maintaining effective internal control over financial reporting, including safeguarding of assets, for financial
presentations in conformity with both accounting principles generally accepted in the United States of America and the Federal Financial Institutions Examination Council Instructions for Consolidated
Reports of Condition and Income for Schedules RC, RI, and RI-A ("Call Report Instructions"). The internal control contains monitoring mechanisms, and actions are taken to correct
deficiencies identified.

There
are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even
effective internal
control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

Management
assessed the institution's internal control over financial reporting, including safeguarding of assets, for financial presentations in conformity with both accounting
principles generally accepted in the United States of America and Call Report Instructions as of December 31, 2002. This assessment was based on criteria for effective internal control over
financial reporting, including safeguarding of assets, described in "Internal ControlIntegrated Framework"issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that the Bank maintained effective internal control over financial reporting, including safeguarding
of assets, presented in conformity with both accounting principles generally accepted in the United States of America and Call Report Instructions as of December 31, 2002.

The
Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of the Bank's management; it includes members with banking or related
management experience, has access to its own outside counsel, and does not include any large customers of the institution. The Audit Committee is responsible for recommending to the Board of Directors
the selection of independent auditors. It meets periodically with management, the independent auditors, and the internal auditors to ensure that they are carrying out their responsibilities. The
Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Bank in addition to reviewing the Bank's financial
reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of internal control
over financial reporting and any other matters which they believe should be brought to the attention of the Committee.

F-2

---

Compliance With Laws and Regulations

Management is also responsible for ensuring compliance with the federal laws and regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by the Federal Deposit Insurance Corporation ("FDIC") as safety and soundness laws and regulations.

Management
assessed its compliance with the designated safety and soundness laws and regulations and has maintained records of its determinations and assessments as required by the FDIC.
Based on this assessment, management believes that the Bank has complied, in all material respects, with the designated safety and soundness laws and regulations for the year ended December 31,
2002.

|/s/KEVIN J. SHEEHAN                          |  | 
|-------------------------------------------- |  | 
|Kevin J. Sheehan Chief Executive Officer     |  | 
|/s/JOHN N. SPINNEY, JR.                      |  | 
|John N. Spinney, Jr. Chief Financial Officer |  | 

F-3

---

INDEPENDENT ACCOUNTANTS' REPORT

To
the Audit Committee
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116

We
have examined management's assertion, included in the accompanying Report of Management to Stockholders, that Investors Bank & Trust Company (the "Bank") maintained effective
internal control over financial reporting, including safeguarding of assets, presented in conformity with both accounting principles generally accepted in the United States of America and the Federal
Financial Institutions Examination Council Instructions for Consolidated Reports of Condition and Income for Schedules RC, RI, and RI-A (the "Call Report Instructions") as of
December 31, 2002 based on the criteria established in"Internal ControlIntegrated Framework"issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the "COSO" report). Management is responsible for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion
on management's assertion based on our examination.

Our
examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an
understanding of internal control over financial reporting, testing, and evaluating the design and operating effectiveness
of the internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.

Because
of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of internal control over
financial reporting to future periods are subject to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In
our opinion, management's assertion that the Bank maintained effective internal control over financial reporting, including safeguarding of assets, presented in conformity with both
accounting principles generally accepted in the United States of America and the Call Report Instructions as of December 31, 2002, is fairly stated, in all material respects, based on the
criteria established in the COSO report.

DELOITTE &
TOUCHE LLP
Boston, Massachusetts

February 14,
2003

F-4

---

INDEPENDENT AUDITORS' REPORT

To
the Board of Directors and Stockholders
of Investors Financial Services Corp.:

We
have audited the accompanying consolidated balance sheets of Investors Financial Services Corp. and subsidiaries (collectively the "Company") as of December 31, 2002 and 2001,
and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2002 and 2001, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States
of America.

As
discussed in Note 2 to the consolidated financial statements, effective January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."

DELOITTE &
TOUCHE LLP
Boston, Massachusetts

February 14,
2003

F-5

---



INVESTORS FINANCIAL SERVICES CORP.        CONSOLIDATED BALANCE SHEETS        DECEMBER 31, 2002 AND 2001        (Dollars in thousands, except per share data)

|                                                                                                                                                                     |         | December 31,
2002          |           | December 31,
2001 |          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | -------------------------- | --------- | ----------------- | ---------
|ASSETS                                                                                                                                                               |         |                            |           |                   |          
|Cash and due from banks                                                                                                                                              |         | $                          | 14,568    |                   | $        
|Securities held to maturity (fair value of $3,460,754 and $3,157,209 at December 31, 2002 and 2001, respectively)                                                    |         |                            | 3,438,689 |                   |          
|Securities available for sale                                                                                                                                        |         |                            | 3,272,465 |                   |          
|Nonmarketable equity securities                                                                                                                                      |         |                            | 50,000    |                   |          
|Loans, less allowance for loan losses of $100 at December 31, 2002 and 2001                                                                                          |         |                            | 143,737   |                   |          
|Accrued interest and fees receivable                                                                                                                                 |         |                            | 67,261    |                   |          
|Equipment and leasehold improvements, net                                                                                                                            |         |                            | 74,869    |                   |          
|Goodwill                                                                                                                                                             |         |                            | 79,969    |                   |          
|Other assets                                                                                                                                                         |         |                            | 73,219    |                   |          
|                                                                                                                                                                     |         |                            |           |                   |          
|TOTAL ASSETS                                                                                                                                                         |         | $                          | 7,214,777 |                   | $        
|                                                                                                                                                                     |         |                            |           |                   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                 |         |                            |           |                   |          
|LIABILITIES:                                                                                                                                                         |         |                            |           |                   |          
|Deposits:                                                                                                                                                            |         |                            |           |                   |          
|                                                                                                                                                                     | Demand  |                            | $         | 384,461           |          
|                                                                                                                                                                     | Savings |                            |           | 2,858,457         |          
|                                                                                                                                                                     | Time    |                            |           | 90,000            |          
|                                                                                                                                                                     |         |                            |           |                   |          
|                                                                                                                                                                     |         | Total deposits             |           |                   | 3,332,918
|Securities sold under repurchase agreements                                                                                                                          |         |                            | 2,301,974 |                   |          
|Short-term and other borrowings                                                                                                                                      |         |                            | 741,107   |                   |          
|Due to brokers for open trades payable                                                                                                                               |         |                            | 286,843   |                   |          
|Other liabilities                                                                                                                                                    |         |                            | 85,676    |                   |          
|                                                                                                                                                                     |         |                            |           |                   |          
|                                                                                                                                                                     |         | Total liabilities          |           |                   | 6,748,518
|                                                                                                                                                                     |         |                            |           |                   |          
|Commitments and contingencies (See Note 16)                                                                                                                          |         |                            |           |                   |          
|Company-obligated, mandatorily redeemable, preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures of the Company |         |                            | 23,303    |                   |          
|                                                                                                                                                                     |         |                            |           |                   |          
|STOCKHOLDERS' EQUITY:                                                                                                                                                |         |                            |           |                   |          
|Preferred stock, par value $0.01 (shares authorized: 1,000,000; issued and
outstanding: none in 2002 and in 2001)                                                    |         |                            |          |                   |          
|Common stock, par value $0.01 (shares authorized: 100,000,000 in 2002 and
in 2001; issued and outstanding: 64,775,042 in 2002 and 31,971,404 in 2001)                |         |                            | 648       |                   |          
|Surplus                                                                                                                                                              |         |                            | 233,337   |                   |          
|Deferred compensation                                                                                                                                                |         |                            | (1,599    | )                 |          
|Retained earnings                                                                                                                                                    |         |                            | 198,282   |                   |          
|Accumulated other comprehensive income/(loss), net                                                                                                                   |         |                            | 12,288    |                   |          
|Treasury stock, par value $0.01 (10,814 shares in 2002 and 2001)                                                                                                     |         |                            |          |                   |          
|                                                                                                                                                                     |         |                            |           |                   |          
|                                                                                                                                                                     |         | Total stockholders' equity |           |                   | 442,956  
|                                                                                                                                                                     |         |                            |           |                   |          
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                           |         | $                          | 7,214,777 |                   | $        
|                                                                                                                                                                     |         |                            |           |                   |          

See
Notes to Consolidated Financial Statements.

F-6

---

INVESTORS FINANCIAL SERVICES CORP.        CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME        YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000        (Dollars in thousands,
except per share data)

|                                                                                          |                                                               | December 31,
2002                                                   |                          | December 31,
2001 |         | December 31,
2000
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------ | ----------------- | ------- | -----------------
|OPERATING REVENUE:                                                                        |                                                               |                                                                     |                          |                   |         |                  
|                                                                                          | Interest income:                                              |                                                                     |                          |                   |         |                  
|                                                                                          |                                                               | Federal Funds sold and securities purchased under resale agreements |                          | $                 | 740     |                  
|                                                                                          | Investment securities held to maturity and available for sale |                                                                     |                          | 243,333           |         |                  
|                                                                                          | Loans                                                         |                                                                     |                          | 3,774             |         |                  
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|                                                                                          |                                                               |                                                                     | Total interest income    |                   |         | 247,847          
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|                                                                                          | Interest expense:                                             |                                                                     |                          |                   |         |                  
|                                                                                          |                                                               | Deposits                                                            |                          |                   | 42,257  |                  
|                                                                                          |                                                               | Short-term and other borrowings                                     |                          |                   | 62,112  |                  
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|                                                                                          |                                                               |                                                                     | Total interest expense   |                   |         | 104,369          
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|                                                                                          |                                                               | Net interest income                                                 |                          |                   | 143,478 |                  
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|                                                                                          | Non-interest income:                                          |                                                                     |                          |                   |         |                  
|                                                                                          |                                                               | Asset servicing fees                                                |                          |                   | 291,667 |                  
|                                                                                          |                                                               | Other operating income                                              |                          |                   | 2,449   |                  
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|                                                                                          |                                                               | Net operating revenue                                               |                          |                   | 437,594 |                  
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|OPERATING EXPENSES:                                                                       |                                                               |                                                                     |                          |                   |         |                  
|                                                                                          |                                                               | Compensation and benefits                                           |                          |                   | 192,785 |                  
|                                                                                          |                                                               | Technology and telecommunications                                   |                          |                   | 42,190  |                  
|                                                                                          |                                                               | Transaction processing services                                     |                          |                   | 33,713  |                  
|                                                                                          |                                                               | Occupancy                                                           |                          |                   | 25,602  |                  
|                                                                                          |                                                               | Depreciation and amortization                                       |                          |                   | 16,357  |                  
|                                                                                          |                                                               | Professional fees                                                   |                          |                   | 7,101   |                  
|                                                                                          |                                                               | Travel and sales promotion                                          |                          |                   | 5,819   |                  
|                                                                                          |                                                               | Amortization of goodwill                                            |                          |                   |        |                  
|                                                                                          |                                                               | Other operating expenses                                            |                          |                   | 13,100  |                  
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|                                                                                          |                                                               |                                                                     | Total operating expenses |                   |         | 336,667          
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|INCOME BEFORE INCOME TAXES AND MINORITY INTEREST                                          |                                                               |                                                                     | 100,927                  |                   |         | 74,592           
|Provision for income taxes                                                                |                                                               |                                                                     | 30,400                   |                   |         | 22,804           
|Minority interest expense, net of income taxes                                            |                                                               |                                                                     | 1,581                    |                   |         | 1,588            
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|NET INCOME                                                                                |                                                               | $                                                                   | 68,946                   |                   | $       | 50,200           
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|BASIC EARNINGS PER SHARE                                                                  |                                                               | $                                                                   | 1.07                     |                   | $       | 0.79             
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|DILUTED EARNINGS PER SHARE                                                                |                                                               | $                                                                   | 1.04                     |                   | $       | 0.76             
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|COMPREHENSIVE INCOME:                                                                     |                                                               |                                                                     |                          |                   |         |                  
|Net income                                                                                |                                                               | $                                                                   | 68,946                   |                   | $       | 50,200           
|Other comprehensive income/(loss), net of tax of $12,161, ($4,769) and $962, respectively |                                                               |                                                                     |                          |                   |         |                  
|                                                                                          |                                                               | Cumulative effect of a change in accounting principle               |                          |                   |        |                  
|                                                                                          |                                                               | Net unrealized investment gain                                      |                          |                   | 32,100  |                  
|                                                                                          |                                                               | Net unrealized derivative instrument loss                           |                          |                   | (9,516  | )                
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|                                                                                          | Other comprehensive income/(loss)                             |                                                                     |                          | 22,584            |         |                  
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  
|COMPREHENSIVE INCOME                                                                      |                                                               | $                                                                   | 91,530                   |                   | $       | 41,343           
|                                                                                          |                                                               |                                                                     |                          |                   |         |                  

See Notes to Consolidated Financial Statements.

F-7

---



INVESTORS FINANCIAL SERVICES CORP.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000        (Dollars in thousands, except per
share data)

|                                                                                                                  |  | December 31,
2002 |            | December 31,
2001 |   | December 31,
2000 |  
|----------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | ----------------- | - | ----------------- | -
|Common shares                                                                                                     |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  |                   | 31,971,404 |                   |   | 29,912,711        |  
|Exercise of stock options                                                                                         |  |                   | 490,827    |                   |   | 381,896           |  
|Common stock issuance                                                                                             |  |                   | 143,889    |                   |   | 1,672,797         |  
|Restricted stock issuance                                                                                         |  |                   |           |                   |   | 4,000             |  
|Stock dividend, two-for-one split                                                                                 |  |                   | 32,168,922 |                   |   |                  |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  |                   | 64,775,042 |                   |   | 31,971,404        |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Treasury shares                                                                                                   |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  |                   | 10,814     |                   |   | 10,814            |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  |                   | 10,814     |                   |   | 10,814            |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Common stock                                                                                                      |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 | 320        |                   | $ | 299               |  
|Exercise of stock options                                                                                         |  |                   | 5          |                   |   | 5                 |  
|Common stock issuance                                                                                             |  |                   | 1          |                   |   | 16                |  
|Stock dividend, two-for-one split                                                                                 |  |                   | 322        |                   |   |                  |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 | 648        |                   | $ | 320               |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Surplus                                                                                                           |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 | 222,440    |                   | $ | 95,007            |  
|Exercise of stock options                                                                                         |  |                   | 2,864      |                   |   | 2,131             |  
|Tax benefit from stock options                                                                                    |  |                   | 4,152      |                   |   | 4,158             |  
|Common stock issuance                                                                                             |  |                   | 3,881      |                   |   | 119,014           |  
|Stock option issuance                                                                                             |  |                   |           |                   |   | 2,130             |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 | 233,337    |                   | $ | 222,440           |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Deferred compensation                                                                                             |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 | (2,563     | )                 | $ | (247              | )
|Restricted stock issuance                                                                                         |  |                   |           |                   |   | (335              | )
|Exercise of stock options                                                                                         |  |                   |           |                   |   | (13               | )
|Stock option issuance                                                                                             |  |                   |           |                   |   | (2,130            | )
|Amortization of deferred compensation                                                                             |  |                   | 964        |                   |   | 162               |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 | (1,599     | )                 | $ | (2,563            | )
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Retained earnings                                                                                                 |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 | 132,877    |                   | $ | 85,188            |  
|Net income                                                                                                        |  |                   | 68,946     |                   |   | 50,200            |  
|Stock dividend, two-for-one split                                                                                 |  |                   | (322       | )                 |   |                  |  
|Cash dividend, $0.05, $0.04 and $0.03 per share in the years ended December 31, 2002, 2001 and 2000, respectively |  |                   | (3,219     | )                 |   | (2,511            | )
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 | 198,282    |                   | $ | 132,877           |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Accumulated other comprehensive income/(loss), net                                                                |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 | (10,296    | )                 | $ | (1,439            | )
|Cumulative effect of change in accounting principle                                                               |  |                   |           |                   |   | (3,934            | )
|Net unrealized investment gain                                                                                    |  |                   | 32,100     |                   |   | 1,120             |  
|Net unrealized derivative instrument loss                                                                         |  |                   | (9,516     | )                 |   | (6,043            | )
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 | 12,288     |                   | $ | (10,296           | )
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Treasury stock                                                                                                    |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 |           |                   | $ |                  |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 |           |                   | $ |                  |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Total Stockholders' Equity                                                                                        |  | $                 | 442,956    |                   | $ | 342,778           |  
|                                                                                                                  |  |                   |            |                   |   |                   |  

See Notes to Consolidated Financial Statements.

F-8

---

INVESTORS FINANCIAL SERVICES CORP.        CONSOLIDATED STATEMENTS OF CASH FLOWS        YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Dollars in thousands)

|                                                                                                  |                                           | December 31,
2002 |            | December 31,
2001 |        | December 31,
2000 |           
|------------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------------- | ---------- | ----------------- | ------ | ----------------- | ----------
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                             |                                           |                   |            |                   |        |                   |           
|Net income                                                                                        |                                           | $                 | 68,946     |                   | $      | 50,200            |           
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|Adjustments to reconcile net income to net cash provided by operating activities:                 |                                           |                   |            |                   |        |                   |           
|Depreciation and amortization                                                                     |                                           |                   | 16,357     |                   |        | 11,963            |           
|Amortization of deferred compensation                                                             |                                           |                   | 964        |                   |        | 162               |           
|Amortization of premiums on securities, net of accretion of discounts                             |                                           |                   | 10,474     |                   |        | 255               |           
|Deferred income taxes                                                                             |                                           |                   | 3,972      |                   |        | (245              | )         
|Changes in assets and liabilities:                                                                |                                           |                   |            |                   |        |                   |           
|                                                                                                  | Accrued interest and fees receivable      |                   |            | (7,510            | )      |                   | (11,748   
|                                                                                                  | Other assets                              |                   |            | (25,618           | )      |                   | (25,329   
|                                                                                                  | Other liabilities                         |                   |            | (6,935            | )      |                   | 30,248    
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|                                                                                                  |                                           | Total adjustments |            |                   | (8,296 | )                 |           
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|                                                                                                  | Net cash provided by operating activities |                   |            | 60,650            |        |                   | 55,506    
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                             |                                           |                   |            |                   |        |                   |           
|Proceeds from paydowns/maturities of securities available for sale                                |                                           |                   | 699,980    |                   |        | 420,138           |           
|Proceeds from paydowns/maturities of securities held to maturity                                  |                                           |                   | 2,212,594  |                   |        | 1,193,524         |           
|Purchases of securities available for sale                                                        |                                           |                   | (2,020,022 | )                 |        | (865,218          | )         
|Purchases of securities held to maturity                                                          |                                           |                   | (2,520,097 | )                 |        | (2,432,570        | )         
|Purchase of nonmarketable equity securities                                                       |                                           |                   |           |                   |        | (35,000           | )         
|Net decrease (increase) in Federal Funds sold and repurchase agreements                           |                                           |                   |           |                   |        | 450,000           |           
|Net decrease (increase) in loans                                                                  |                                           |                   | 88,376     |                   |        | (102,844          | )         
|Purchase of business                                                                              |                                           |                   |           |                   |        | (49,434           | )         
|Purchases of equipment and leasehold improvements                                                 |                                           |                   | (48,579    | )                 |        | (35,908           | )         
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|                                                                                                  | Net cash used for investing activities    |                   |            | (1,587,748        | )      |                   | (1,457,312
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                             |                                           |                   |            |                   |        |                   |           
|Net (decrease) increase in demand deposits                                                        |                                           |                   | (122,606   | )                 |        | 144,121           |           
|Net increase (decrease) in time and savings deposits                                              |                                           |                   | 1,176,647  |                   |        | (197,128          | )         
|Net increase in short-term and other borrowings                                                   |                                           |                   | 469,488    |                   |        | 1,321,622         |           
|Proceeds from exercise of stock options                                                           |                                           |                   | 2,869      |                   |        | 2,123             |           
|Proceeds from issuance of common stock                                                            |                                           |                   | 3,882      |                   |        | 119,030           |           
|Cost of issuance of restricted stock                                                              |                                           |                   |           |                   |        | (335              | )         
|Repurchase of company-obligated, mandatorily redeemable, preferred securities of subsidiary trust |                                           |                   | (1,000     | )                 |        |                  |           
|Dividends paid to stockholders                                                                    |                                           |                   | (3,219     | )                 |        | (2,511            | )         
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|                                                                                                  | Net cash provided by financing activities |                   |            | 1,526,061         |        |                   | 1,386,922 
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|DECREASE IN CASH AND DUE FROM BANKS                                                               |                                           |                   | (1,037     | )                 |        | (14,884           | )         
|CASH AND DUE FROM BANKS, BEGINNING OF YEAR                                                        |                                           |                   | 15,605     |                   |        | 30,489            |           
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|CASH AND DUE FROM BANKS, END OF YEAR                                                              |                                           | $                 | 14,568     |                   | $      | 15,605            |           
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                 |                                           |                   |            |                   |        |                   |           
|Cash paid for interest                                                                            |                                           | $                 | 105,386    |                   | $      | 146,320           |           
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|Cash paid for income taxes                                                                        |                                           | $                 | 24,989     |                   | $      | 17,829            |           
|                                                                                                  |                                           |                   |            |                   |        |                   |           
|SCHEDULE OF NONCASH INVESTING ACTIVITIES                                                          |                                           |                   |            |                   |        |                   |           
|Change in due to brokers for open trades payable                                                  |                                           | $                 | 286,843    |                   |        |                  |           
|                                                                                                  |                                           |                   |            |                   |        |                   |           

See Notes to Consolidated Financial Statements.

F-9

---



INVESTORS FINANCIAL SERVICES CORP.    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

1. DESCRIPTION OF BUSINESS

Investors Financial Services Corp. ("IFSC") provides asset servicing for the financial services industry through its wholly-owned subsidiary, Investors
Bank & Trust Company (the "Bank"). As used herein, the defined term "the Company" shall mean IFSC together with the Bank and its domestic and foreign subsidiaries. The Company provides global
custody, multicurrency accounting, mutual fund administration, securities lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment advisory
services, lines of credit and brokerage 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, the Federal Deposit Insurance Corporation and the
National Association of Securities Dealers.

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.

On
February 1, 2001, the Company completed the issuance and sale of 1,624,145 shares of Common Stock at $71.62 per share in a public offering. A portion of the proceeds was used
to fund the acquisition of the operations of the advisor custody unit of The Chase Manhattan Bank. The remaining proceeds were used for the assumption of the U.S. asset administration unit of Barclays
Global Investors, N.A. and for working capital. These share numbers have not been restated to reflect the two-for-one stock split discussed below.

On
April 23, 2002, the Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend to stockholders of record as of
May 24, 2002. All share numbers have been restated to reflect the two-for-one stock split paid June 14, 2002, where applicable.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of PresentationThe consolidated financial statements include the accounts of the Company and
its domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated.



F-10

---



Cash and cash equivalentsFor purposes of reporting cash flows, the Company defines cash and cash equivalents to include cash,
due from banks, and interest-bearing deposits.

SecuritiesThe Company classifies all equity securities that have readily determinable fair values and all investments in debt
securities into one of three categories, as follows:



Non-marketable
securities consist of stock of the Federal Home Loan Bank of Boston ("FHLBB") and are carried at cost. The Company is required to hold stock under its
borrowing arrangement with the FHLBB.

The
Company's accounting policy for impairment requires recognition of an other than temporary impairment charge on a security if it is determined that the Company is unable to recover
all amounts due under the contractual obligations of the security.

The
specific identification method is used to determine gains and losses on sales of securities. Amortization and accretion of debt securities purchased at a premium or discount are
recognized over the life of the securities and are reported as a component of interest income.

Fair Value of Financial InstrumentsStatement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about
Fair Value of Financial Instruments," requires the disclosure of the estimated fair value of financial instruments, whether or not recognized in the Company's consolidated balance sheets, estimated
using available market information or other appropriate valuation methodologies.

The
carrying amounts of cash and due from banks are a reasonable estimate of their fair value. The fair value of securities owned is estimated based on quoted market prices. Both loans
(including commitments to lend) and deposits bear interest at variable rates and are subject to periodic repricing. As such, the carrying amount of loans and deposits is a reasonable estimate of fair
value. The fair value of the Company's interest rate swap contracts and foreign exchange contracts are estimated based on quoted market prices. The Company does not have any other significant
financial instruments.

LoansInterest on loans is credited to income as earned and is accrued only if deemed collectible. Accrual of interest is
discontinued when a loan is over 60 days delinquent or if management believes that collection is not probable. Interest income is recognized after all principal has been repaid or an
improvement in the condition of the loan has occurred that would warrant resumption of interest

F-11

---

accruals. Other loan fees and charges, representing service costs for the prepayment of loans, for the delinquent payments or for miscellaneous loan services, are recorded as income when collected.

Equipment, Leasehold Improvements and Capitalized Software CostsEquipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the assets which range from three to
seven years, and for leasehold improvements over the lesser of the useful life or the life of the lease. Capitalized software costs are accounted for under the method prescribed by AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Development or Obtained for Internal Use," ("SOP 98-1") and are included within the furniture, fixtures and
equipment component. Capitalized software costs are amortized over the estimated useful life of a given project, which can range from three to five years. The Company's policy is to capitalize costs
relating to system development projects that provide significant functionality enhancements.

Long-Lived AssetsLong-lived assets to be held and used by the Company are reviewed on a quarterly
basis to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the
Company bases its evaluation on such impairment indicators as the nature of the assets, the further economic benefit of the assets, any historical or future profitability measurements, as well as
other external market conditions or factors that may be present. The fair value of the asset is measured using quoted market prices. During the years ended December 31, 2002 and 2001, the
Company's analyses indicated there was not an impairment of its long-lived assets.

Income TaxesIncome tax expense is based on estimated taxes payable or refundable on a tax return basis for the current year
and the changes in deferred tax assets and liabilities during the year in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are established for
temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary
differences are realized or settled.

Translation of Foreign CurrenciesThe functional currency of the Company's foreign subsidiaries is the U.S. dollar.
Accordingly, gains and losses realized from the settlement of foreign currency transactions, which were not significant in the years ended December 31, 2002, 2001, and 2000, are included in
other operating expenses in the consolidated statements of income.

Derivative Financial InstrumentsThe Company does not purchase derivative financial instruments for trading purposes. Interest
rate swap agreements are matched with specific financial instruments reported on the consolidated balance sheet.

On
January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted, which established
accounting and reporting standards for derivative instruments. The Company also adopted SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain 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 No. 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 No. 133 on January 1, 2001, resulted
in no cumulative effect-type adjustment to net income. However, the

F-12

---

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 previously designated cash flow hedges. In conjunction with the adoption, the Company elected to reclassify approximately
$402 million of securities from held to maturity to available for sale, which further reduced OCI, net of tax, by approximately $1.4 million.

The
Company uses derivative instruments to manage exposure to interest rate risk. 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. By entering into a pay-fixed/receive-floating interest
rate swap, a portion of these 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 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 No. 133, had an insignificant impact on earnings for the years ended December 31, 2002 and 2001. No cash flow
hedges were dedesignated or discontinued for the years ended December 31, 2002 and 2001.

Prior
to the adoption of SFAS No. 133 on January 1, 2001, periodic cash payments were accrued on a settlement basis. The Company's policy had required settlement accounting
principles for interest rate swaps in which net interest rate differentials to be paid or received were recorded as adjustments to interest expense.

The
Company also enters into fixed price purchase contracts that are designed to hedge the variability of the consideration to be paid for the purchase of investment securities. By
entering into these contracts, we are fixing the price to be paid at a future date for certain investment securities. At December 31, 2002, the Company had $432.6 million of fixed price
purchase contracts outstanding to purchase investment securities with an associated unrealized gain of $1.9 million. The unrealized gain is included within the other assets category on the
Company's consolidated balance sheet.

The
Company enters into foreign exchange contracts with clients and strives to enter into a matched position with another bank. These contracts are subject to market value fluctuations
in foreign currencies. Gains and losses from such fluctuations are netted and recorded as an adjustment to asset servicing fees. Unrealized gains/(losses) resulting from purchases and sales of foreign
exchange contracts are included within the respective other assets and other liabilities categories on the Company's consolidated balance sheet. The foreign exchange contracts have been reduced by
balances with the same counterparty where a master netting agreement exists.

Stock-Based CompensationThe Company accounts for stock-based compensation using the intrinsic value-based method of
Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," as allowed under SFAS No. 123, "Accounting for Stock-Based Compensation." In December 2002,
the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure," which amends the disclosure requirements of SFAS No. 123 and provides
alternative methods of transition for a voluntary change to the fair value based method for stock-based employee compensation. Under APB No. 25, no compensation cost is recognized if the option
exercise price is equal to the fair market price of the common stock on the date of the grant. If stock-based compensation were recognized, stock options would be valued at grant date using the
Black-Scholes valuation model and compensation costs would be recognized by one of the three methods of transition as allowed by SFAS No. 148. The Black-Scholes option-pricing model uses
assumptions including the

F-13

---

expected life of an option, the expected volatility of the underlying stock and an assumed risk-free interest rate. The disclosure requirements of SFAS No. 148 are detailed further
in Note 12.

Earnings Per ShareSFAS No. 128, "Earnings per Share," requires that entities with publicly held common stock or
potential common stock compute, present, and disclose earnings per share based upon the Basic and/or Diluted earnings per share ("EPS"). Basic EPS were computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted EPS were computed by increasing the weighted average number of common shares outstanding used in Basic EPS by the number of
additional common shares that would have been outstanding if the dilutive common stock had been issued.

New Accounting PrinciplesOn January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB No. 17, "Intangible Assets." SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted
for after they have been initially recognized in the financial statements. This statement affects the accounting of premiums, includes guidelines for the determination, measurement and testing of
impairment, and requires disclosure of information about goodwill and other intangible assets in the years subsequent to their acquisition that was not previously required. This statement eliminates
the amortization of goodwill, and requires that goodwill be reviewed at least annually for impairment. This statement affects all goodwill recognized on our consolidated balance sheet, regardless of
when the assets were initially recorded. Upon adoption of SFAS No. 142, the Company ceased amortization of goodwill. As of December 31, 2002 there was no impairment of goodwill. The
disclosure requirements of SFAS No. 142 are detailed in Note 3.

In
November 2001, the FASB issued Emerging Issues Task Force ("EITF") No. 01-14, "Income Statement Characterization of Reimbursements Received for
Out-Of-Pocket Expenses Incurred." This guidance requires companies to recognize the reimbursement of client-related expenses as revenue and the costs as operating expense.
Client reimbursements for out-of-pocket expenses are reflected in fee revenue in the accompanying financial statements. Prior periods have been reclassified to reflect this
presentation, which resulted in increases to fee revenue and operating expense as a result of this guidance of $9.4 million, $8.3 million and $7.5 million for the years ended
December 31, 2002, 2001 and 2000, respectively.

In
November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation elaborates on disclosures to be made by a guarantor about its obligations and requires recognition of a liability for the fair value of the obligation
undertaken in issuing guarantees. The Company lends securities to creditworthy broker-dealers on behalf of its clients and, in certain circumstances, the Company may indemnify clients for the fair
market value of those securities against a failure of the borrower to return such securities. The Company requires the borrowers to provide collateral in an amount equal to or in excess of the fair
market value of securities borrowed. The borrowed securities are revalued daily to determine if additional collateral is necessary. Since the collateral the Company receives is in excess of the value
of the securities that the Company would be required to replace if the borrower defaulted and failed to return such securities, the Company has recorded no liability for the indemnification
obligation. The maximum potential amount of future payments that the Company could be required to make would be equal to the market value of the securities borrowed. Since the securities loans are
over-collateralized by 2% to 5% of the fair market value of the loan made, the collateral held by the Company would be used to satisfy the obligation. In

F-14

---

addition, each borrowing agreement gives the Company "set-off" language that allows it to use any excess collateral on other loans. However, there is a potential risk that the collateral
would not be sufficient to cover such an obligation if the security on loan increased in value between the time the borrower defaulted and the time the security is "bought-in." In such
instances, the Company would "buy-in" the security using all available collateral and a loss would result from the difference between the value of the securities "bought-in"
and the value of the collateral held. The Company has never experienced a broker default.

3. ACQUISITIONS

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 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 Bank, N.A.

On
March 10, 2000, the Bank acquired the right to provide institutional custody and related services for accounts managed by the Trust Company of the West, formerly serviced by
Sanwa Bank California. The accounts subject to the agreement totaled approximately $4.6 billion in assets. The transaction was accounted for as a purchase.

On
February 1, 2001, the Company purchased the operations of the advisor custody unit of The Chase Manhattan Bank. This unit provided institutional custody services to individual
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 Company 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. Under the terms of the asset purchase agreement, the Company is not obligated to make any further purchase
price payments to Chase. The transaction was accounted for as a purchase.

On
May 1, 2001, the Company assumed the operations of the U.S. asset administration unit of Barclays Global Investors, N.A. ("BGI"), a large international institutional investment
manager. The unit, located in Sacramento, California, provides custody accounting and other operations functions for BGI's clients. The transaction was accounted for as a purchase.

No
pro forma results of Chase or BGI are presented as they were not material to the Company's financial condition and operating results for the periods presented.

F-15

---

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

December 31,
2002

December 31,
2001Goodwill, beginning of year

$
79,969

$
34,094Plus purchase of businesses





49,434Less amortization expense





(3,559
)Goodwill, end of year

$
79,969

$
79,969


On
January 1, 2002, the Company adopted SFAS No. 142 and ceased amortization of goodwill. See "Summary of Significant Accounting Policies" (Note 2) for a further
discussion of this pronouncement. The following table represents the transitional disclosure related to the adoption of SFAS 142 (Dollars in thousands, except per share data):

|                                            |                     | December 31,
2002 |        | December 31,
2001 |   | December 31,
2000
|------------------------------------------- | ------------------- | ----------------- | ------ | ----------------- | - | -----------------
|Net income as reported                      |                     | $                 | 68,946 |                   | $ | 50,200           
|Add back: Goodwill amortization, net of tax |                     |                   |       |                   |   | 2,471            
|                                            |                     |                   |        |                   |   |                  
|Adjusted net income                         |                     | $                 | 68,946 |                   | $ | 52,671           
|                                            |                     |                   |        |                   |   |                  
|Earnings per share:                         |                     |                   |        |                   |   |                  
|                                            | Basic-as reported   |                   | $      | 1.07              |   | $                
|                                            | Basic-adjusted      |                   |        |                  |   |                  
|                                            | Diluted-as reported |                   | $      | 1.04              |   | $                
|                                            | Diluted-adjusted    |                   |        |                  |   |                  

4. SECURITIES

Amortized cost amounts and fair values of securities are summarized as follows as of December 31, 2002 (Dollars in thousands):

|Held to Maturity                 |  | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |  | Fair Value
|-------------------------------- |  | -------------- | --------- | ---------------- | - | ------------------- |  | ----------
|Mortgage-backed securities       |  | $              | 2,034,430 |                  | $ | 19,702              |  | $         
|Federal agency securities        |  |                | 1,287,238 |                  |   | 2,520               |  |           
|State and political subdivisions |  |                | 117,021   |                  |   | 5,566               |  |           
|                                 |  |                |           |                  |   |                     |  |           
|Total                            |  | $              | 3,438,689 |                  | $ | 27,788              |  | $         
|                                 |  |                |           |                  |   |                     |  |           

|Available for Sale               |  | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |  | Fair Value
|-------------------------------- |  | -------------- | --------- | ---------------- | - | ------------------- |  | ----------
|Mortgage-backed securities       |  | $              | 2,723,703 |                  | $ | 36,294              |  | $         
|State and political subdivisions |  |                | 290,241   |                  |   | 17,090              |  |           
|Federal agency securities        |  |                | 29,602    |                  |   | 1,279               |  |           
|Corporate debt                   |  |                | 179,612   |                  |   | 21                  |  |           
|                                 |  |                |           |                  |   |                     |  |           
|Total                            |  | $              | 3,223,158 |                  | $ | 54,684              |  | $         
|                                 |  |                |           |                  |   |                     |  |           

F-16

---

Amortized
cost amounts and fair values of securities are summarized as follows as of December 31, 2001 (Dollars in thousands):

|Held to Maturity                 |  | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |  | Fair Value
|-------------------------------- |  | -------------- | --------- | ---------------- | - | ------------------- |  | ----------
|Mortgage-backed securities       |  | $              | 2,585,287 |                  | $ | 25,885              |  | $         
|Federal agency securities        |  |                | 456,108   |                  |   | 952                 |  |           
|State and political subdivisions |  |                | 91,888    |                  |   | 2,357               |  |           
|Foreign government securities    |  |                | 2,501     |                  |   | 10                  |  |           
|                                 |  |                |           |                  |   |                     |  |           
|Total                            |  | $              | 3,135,784 |                  | $ | 29,204              |  | $         
|                                 |  |                |           |                  |   |                     |  |           

|Available for Sale               |  | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |  | Fair Value
|-------------------------------- |  | -------------- | --------- | ---------------- | - | ------------------- |  | ----------
|Mortgage-backed securities       |  | $              | 1,226,891 |                  | $ | 7,574               |  | $         
|State and political subdivisions |  |                | 240,769   |                  |   | 2,796               |  |           
|Federal agency securities        |  |                | 29,604    |                  |   | 1,244               |  |           
|Corporate debt                   |  |                | 124,886   |                  |   |                    |  |           
|                                 |  |                |           |                  |   |                     |  |           
|Total                            |  | $              | 1,622,150 |                  | $ | 11,614              |  | $         
|                                 |  |                |           |                  |   |                     |  |           

Non-marketable
equity securities at December 31, 2002 and 2001 consisted of stock of the FHLBB. The Company is 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
amortized cost amounts and fair values of securities by effective maturity are as follows (Dollars in thousands):

December 31, 2002Held to Maturity

Amortized
Cost

Fair ValueDue within one year

$
317,963

$
319,908Due from one to five years


1,326,627


1,340,378Due five years up to ten years


806,366


808,132Due after ten years


987,733


992,336Total

$
3,438,689

$
3,460,754


December 31, 2002Available for Sale

Amortized
Cost

Fair ValueDue within one year

$
2,786

$
2,833Due from one to five years


1,253,730


1,275,042Due five years up to ten years


317,421


329,449Due after ten years


1,649,221


1,665,141Total

$
3,223,158

$
3,272,465


F-17

---

The
maturity distributions of mortgage-backed securities have been allocated over maturity groupings based upon actual pre-payments to date and anticipated
pre-payments based upon historical experience.

There
were no sales of securities available for sale during the years ended December 31, 2002, 2001 and 2000.

The
carrying value of securities pledged amounted to approximately $3.5 billion and $3.0 billion at December 31, 2002 and 2001, respectively. Securities are pledged
primarily to secure clearings with other depository institutions and to secure public funds.

5. LOANS

Loans consist of demand loans to custody clients of the Company, including individuals and not-for-profit institutions and loans to mutual
fund clients. The loans to mutual funds and other pooled product clients include lines of credit and advances pursuant to the terms of the custody agreements between the Company and those 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, 2002 and 2001. In addition, there have been no loan
charge-offs or recoveries during the years ended December 31, 2002, 2001 and 2000. Loans consisted of the following (Dollars in thousands):

December 31,
2002

December 31,
2001Loans to individuals

$
76,263

$
164,443Loans to mutual funds


49,372


50,359Loans to others


18,202


17,411143,837


232,213Less allowance for loan losses


(100
)

(100
)Total

$
143,737

$
232,113


The
Company had commitments to lend of approximately $682 million and $390 million at December 31, 2002 and 2001, respectively. The terms of these commitments are
similar to the terms of outstanding loans.

6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

The major components of equipment and leasehold improvements are as follows (Dollars in thousands):

December 31,
2002

December 31,
2001Furniture, fixtures and equipment

$
90,434

$
48,761Leasehold improvements


9,837


6,880Total


100,271


55,641Less accumulated depreciation and amortization


(25,402
)

(13,023
)Equipment and leasehold improvements, net

$
74,869

$
42,618


F-18

---

Included
in net equipment and leasehold improvements were internally capitalized software costs, in accordance with SOP 98-1, of $47.5 million and $18.2 million
as of December 31, 2002 and 2001, respectively.

7. DEPOSITS

Time deposits at December 31, 2002 and 2001 included non-interest bearing amounts of $90 million. All time deposits had a minimum
balance of $100,000 and a maturity of less than three months at December 31, 2002 and 2001.

8. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

The Company enters into repurchase agreements whereby securities are sold by the Company under agreements to repurchase. Repurchase agreements were
$2.3 billion and $1.7 billion at December 31, 2002 and 2001, respectively. The interest rate on the outstanding agreements at December 31, 2002 ranged from 0.35% to 3.65%
with maturities ranging from January 2003 to December 2006. The interest
rate on the outstanding agreements at December 31, 2001 ranged from 0.79% to 4.56% with maturities ranging from January 2002 to December 2004.

The
following securities were pledged under the repurchase agreements (Dollars in thousands):

|                           |  | December 31, 2002 |           | December 31, 2001
|-------------------------- |  | ----------------- | --------- | -----------------
|
|Mortgage-backed securities |  | $                 | 2,249,988 |                  
|Federal agency securities  |  |                   | 180,532   |                  
|Corporate debt securities  |  |                   | 2,892     |                  
|                           |  |                   |           |                  
|Total                      |  | $                 | 2,433,412 |                  
|                           |  |                   |           |                  

The
highest amounts outstanding at any month end during the years ended December 31, 2002 and 2001 were the amounts outstanding at July 31, 2002 and November 30,
2001, respectively. The balances at July, 31 2002 and November 30, 2001 were $2.9 billion and $1.9 billion, respectively. The average balance during the years ended
December 31, 2002 and 2001 were approximately $2.4 billion and $1.5 billion, respectively. There were no balances with clients for which the amount at risk exceeded 10% of
stockholders' equity.

9. SHORT-TERM AND OTHER BORROWINGS

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

December 31,
2002

December 31,
2001Federal Home Loan Bank of Boston overnight advances

$
360,000

$
380,000Federal Home Loan Bank of Boston long-term advances


250,000


300,000Federal funds purchased


130,648


130,000Federal Home Loan Bank of Boston short-term advances





100,000Treasury, Tax and Loan account


459


281Total

$
741,107

$
910,281


F-19

---

For
the year ended December 31, 2002, maturities on FHLBB advances ranged from overnight to September 2006. For the year ended December 31, 2001, maturities on FHLBB
advances ranged from overnight to February 2005.

10. INCOME TAXES

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

December 31,
2002

December 31,
2001

December 31,
2000Current:Federal

$
25,835

$
22,646

$
15,656State


532


285


300Foreign


61


118


6826,428


23,049


16,024Deferred:Federal


3,972


(245
)

(224
)State








3,972


(245
)

(224
)Total income taxes

$
30,400

$
22,804

$
15,800


Differences
between the effective income tax rate and the federal statutory rates are as follows:

December 31,
2002

December 31,
2001

December 31,
2000Federal statutory rate

35.00
%
35.00
%
35.00
%State income tax rate, net of federal benefit

0.34

0.25

0.40Foreign income taxes with different rates





Tax-exempt income, net of disallowance

(5.98
)
(4.73
)
(3.72
)Other

0.64

0.05

0.32Effective tax rate

30.00
%
30.57
%
32.00
%


F-20

---

10. INCOME TAXES (Continued)

The
tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities consist of the following (Dollars in thousands):

December 31,
2002

December 31,
2001Deferred tax assets:Employee benefit plans

$
2,264

$
2,171Securities available for sale





171Unrealized hedging loss


10,497


5,373Other


210


27912,971


7,994Deferred tax liabilities:Depreciation and amortization


(3,204
)

(1,601
)Undistributed income of foreign subsidiaries


(1,735
)

(718
)Pension plan


(766
)

Securities available for sale


(17,113
)

Other


(610
)

(23,428
)

(2,319
)Net deferred tax (liability)/asset

$
(10,457
)
$
5,675


11. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES OF THE COMPANY

On January 31, 1997, a trust sponsored and wholly-owned by the Company issued $25 million in 9.77% Trust Preferred Securities (the "Capital
Securities"), the proceeds of which were invested by the trust in the same aggregate principal amount of the Company's newly issued 9.77% Junior Subordinated Deferrable Interest Debentures due
February 1, 2027 (the "Junior Subordinated Debentures"). The $25 million aggregate principal amount of the Junior Subordinated Debentures represents the sole asset of the Trust. The
Company has guaranteed, on a subordinated basis, distributions and other payments due on the Capital Securities (the "Guarantee"). The Guarantee, when taken together with the Company's obligations
under (i) the Junior Subordinated Debentures; (ii) the indenture pursuant to which the Junior Subordinated Debentures were issued; and (iii) the Amended and Restated Declaration
of Trust governing the Trust, constitutes a full and unconditional guarantee of the Trust's obligations under the Capital Securities. In 2002, the Company repurchased $1.0 million of the
preferred securities.

12. STOCKHOLDERS' EQUITY

As of December 31, 2002, the Company has authorized 1,000,000 shares of Preferred Stock and 100,000,000 shares of Common Stock, all with a par value of
$0.01 per share.

At
the Annual Meeting of Stockholders of the Company held on April 18, 2000, stockholders 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. At the Annual Meeting
of Stockholders of the Company held on April 17, 2001, stockholders approved an increase in the number

F-21

---

of authorized shares of Common Stock from 40,000,000 to 100,000,000. On April 25, 2001, the Company amended its Certificate of Incorporation increasing the number of authorized shares of
Common Stock to 100,000,000. These 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 stockholders 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 split. On April 23, 2002, the Board of Directors approved a
two-for-one stock split in the form of a 100% stock dividend to stockholders of record on May 24, 2002. The dividend was paid on June 14, 2002. A total of
32,168,922 shares of common stock were issued in connection with the stock split. The stock split did not result in a change in the $0.01 par value per share of the common stock or in total
stockholders' equity.

The
Company has three stock option plans: the Amended and Restated 1995 Stock Plan ("Stock Plan"), the Amended and Restated 1995 Non-Employee Director Stock Option Plan
("Director Plan"), and the 1997 Employee Stock Purchase Plan.

At
the Annual Meeting of Stockholders of the Company held on April 17, 2001, stockholders approved the amendment and restatement of the Company's Stock Plan to increase the number
of shares available for grant pursuant to the plan from 4,640,000 to 6,140,000. At the Annual Meeting of Stockholders of the Company held on April 23, 2002, stockholders approved the amendment
and restatement of the Company's Stock Plan to increase the number of shares available for grant pursuant to the plan from 6,140,000 to 7,640,000. Effective with the June 2002 stock split, the
number of shares available to grant increased to 15,280,000. Of the 15,280,000 shares of Common Stock authorized for issuance under the Stock Plan at December 31, 2002, 4,317,170 were available
for grant as of that date. Under the Stock Plan, the Company may grant options to purchase shares of Common Stock to certain employees, consultants, directors and officers. The options may be awarded
as incentive stock options (employees only), nonqualified stock options, stock awards or opportunities to make direct purchases of stock. No options were granted to consultants during the year ended
December 31, 2002.

The
terms of the Director Plan provide for the grant of options to non-employee directors to purchase up to a maximum of 400,000 shares of Common Stock. Effective with the
June 2002 stock split, the number of shares available to grant increased to 800,000. Of the 800,000 shares of Common Stock authorized for issuance under the plan, 137,140 were available for
grant at December 31, 2002.

Pursuant
to the terms of the Director Plan, options to purchase 20,000 shares of Common Stock were awarded on November 8, 1995 to each non-employee director then in
office. Each non-employee director receives an automatic annual grant of options to purchase the number of shares then specified by the Director Plan, as described below. Additionally, any
non-employee director may elect to receive options to acquire shares of the Company's Common Stock in lieu of such director's cash retainer. Any such election is subject to certain
restrictions under the Director Plan. The number of shares of stock underlying the option granted in lieu of cash is equal to the quotient obtained by dividing the cash retainer by the fair market
value of an option on the date of grant, which is based on the Black-Scholes option-pricing model.

At
the Annual Meeting of Stockholders of the Company held on April 23, 2002, stockholders approved amendments to the Director Plan providing that on the date of each Annual
Meeting, each person who is a member of the Board immediately after the Annual Meeting of the Company and who is not an employee of the Company, shall be automatically granted an option to purchase
the number of shares called for by the Director Plan as of that date.

F-22

---

Formerly,
each non-employee director received a grant of options upon their election or appointment and annually thereafter on their anniversary date. The amendments also
provide that the number of shares granted to each non-employee director annually be adjusted for stock splits and other capital changes. After giving effect to the stock split paid on
June 14, 2002, non-employee directors shall receive an annual grant of options to purchase 5,000 shares. In addition, the amendments provide that options granted under the Director
Plan will vest in 36 equal monthly installments beginning on the date of grant, rather than 48 equal monthly installments, subject to certain restrictions. Finally, the amendments to the Director Plan
provide that in the event a non-employee director ceases to be a member of the Board by reason of his or her retirement, the Board may vote to accelerate and fully vest all unvested
options held by the retiring non-employee director.

The
exercise price of options under the Director Plan and the incentive options under the Stock Plan may not be less than the fair market value at the date of the grant. The exercise
price of non-qualified options under the 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.

On
February 13, 2001, the Company granted 8,000 shares of Common Stock under the Stock Plan to former employees of the Chase advisor custody 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. During 2002, the Company chose not to exercise its right to repurchase 3,200 shares issued in connection with this grant when an employee's employment with the Company did
terminate.

On
May 1, 2001, the Company granted 58,000 nonqualified stock options under the Stock Plan to former employees of the U.S. asset administration unit of BGI in connection with the
assumption of the operations of the unit. The exercise price of the options is 10% of the fair market value of the Common Stock at the close of market on the date of grant. The grants are exercisable
immediately, but any shares acquired on exercise are subject to the Company's right to repurchase the shares at the exercise price 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.

On
October 16, 2001, the Company granted 10,000 nonqualified stock options to an officer of the Company under the Stock Plan. The exercise price of the options is 10% of the fair
market value of the Common Stock at the close of market on the date of grant. The grants are exercisable immediately, but any shares acquired on exercise are subject to the Company's right to
repurchase the shares at the exercise price 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.

The
Company has recorded deferred compensation of $1.6 million and $2.6 million at December 31, 2002 and 2001, respectively, related to the grants described in the
above three paragraphs.

Under
the terms of the 1997 Employee Stock Purchase Plan, the Company may issue up to 1,120,000 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 8,000 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 market value of
the Common

F-23

---

Stock on the first business day of the payment period, or (ii) 90% of the 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 both the Director Plan and the Stock Plan is as follows:

|                                        |  | December 31, 2002 |   | December 31, 2001 |    | December 31, 2000
|--------------------------------------- |  | ----------------- | - | ----------------- | -- | -----------------
|
|Outstanding at beginning of year        |  | 6,921,610         |   | $                 | 20 |                  
|Granted                                 |  | 674,414           |   |                   | 32 |                  
|Exercised                               |  | (761,893          | ) |                   | 7  |                  
|Canceled                                |  | (212,974          | ) |                   | 29 |                  
|                                        |  |                   |   |                   |    |                  
|Outstanding at end of year              |  | 6,621,157         |   | $                 | 22 |                  
|                                        |  |                   |   |                   |    |                  
|Outstanding and exercisable at year end |  | 4,202,545         |   |                   |    |                  
|                                        |  |                   |   |                   |    |                  

The
following table summarizes information about stock options outstanding at December 31, 2002:

|      |  | Options Outstanding |  |           |  |  
|----- |  | ------------------- |  | --------- |  | -
|
|
|
|$010 |  | 1,566,276           |  | 5.3 years |  | $
|1020 |  | 1,391,071           |  | 6.2       |  |  
|2030 |  | 59,606              |  | 7.2       |  |  
|3040 |  | 3,581,684           |  | 8.6       |  |  
|4050 |  | 22,520              |  | 8.1       |  |  
|      |  |                     |  |           |  |  
|      |  | 6,621,157           |  | 7.3       |  | $
|      |  |                     |  |           |  |  

A
summary of the 1997 Employee Stock Purchase Plan is as follows:

December 31,2002

2001

2000Shares

Shares

SharesTotal shares available under the plan beginning of
year

500,764

598,068

714,708Issued at June 30

(61,193
)
(41,976
)
(68,932
)Issued at December 31

(82,696
)
(55,328
)
(47,708
)Total shares available under the plan end of year

356,875

500,764

598,068


During
the year ended December 31, 2002, the exercise price of the stock was $30.00 and $24.75, or 90% of the market value of the Common Stock on the first business day of the
payment period ending June 30, 2002 and the last business day of the payment period ending December 31, 2002, respectively.

F-24

---

During
the year ended December 31, 2001, the exercise price of the stock was $30.25 and $29.875, or 90% of the market value of the Common Stock on the first business day of the
payment periods ending June 30, 2001 and December 31, 2001, respectively.

During
the year ended December 31, 2000, the exercise price of the stock was $10.50 and $18.125, or 90% of the market value of the Common Stock on the first business day of the
payment periods ending June 30, 2000 and December 31, 2000, respectively.

Employee Stock-Based CompensationWith respect to employee stock-based compensation, the Company has applied APB No. 25
and related interpretations in accounting for its plans, under which there is generally no charge to earnings for employee stock option awards and the dilutive effect of outstanding options is
reflected as additional share dilution in the computation of earnings per share. The compensation cost for restricted stock charged against income was $0.7 million, $0.4 million and
$0.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. The Company has adopted the disclosure-only requirements of SFAS No. 148. However, if
compensation cost had been determined for awards granted under the stock option plans based on fair value of the awards at the date of grant in accordance with the provisions of SFAS No. 123,
the Company's Net Income and Earnings Per Share would have decreased to the pro forma amounts indicated below (Dollars in thousands):

December 31,
2002

December 31,
2001

December 31,
2000Net income as reported

$
68,946

$
50,200

$
33,576Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(12,720
)

(11,581
)

(4,741
)Pro forma net income

$
56,226

$
38,619

$
29,835Earnings per share:Basicas reported

$
1.07

$
0.79

$
0.57Basicpro forma


0.87


0.61


0.49Dilutedas reported

$
1.04

$
0.76

$
0.54Dilutedpro forma


0.85


0.59


0.46


The
fair value of each option grant under the employee stock option plan was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions
for the years ended December 31, 2002, 2001, and 2000, respectively: an assumed risk-free interest rate of 2.40%, 4.05%, and 4.79%, an expected life of four years, an expected
volatility of 56.20%, 55.76%, and 50.33%, a dividend yield of 0.22%, 0.15%, and 0.11%.

The
fair value of each option grant under the employee stock purchase plan was estimated using the discounted stock price at grant date and a Black-Sholes option-pricing model.

F-25

---

Earnings Per ShareReconciliation from Basic EPS to Diluted EPS is as follows (Dollars in thousands, except per share data):

|                                                             |  | Income |        | Shares |            | Per Share
Amount |  
|------------------------------------------------------------ |  | ------ | ------ | ------ | ---------- | ---------------- | -
|December 31, 2002                                            |  |        |        |        |            |                  |  
|Basic EPS                                                    |  |        |        |        |            |                  |  
|Income available to common stockholders                      |  | $      | 68,946 |        | 64,429,592 |                  | $
|Dilutive effect of common equivalent shares of stock options |  |        |       |        | 1,942,102  |                  |  
|                                                             |  |        |        |        |            |                  |  
|Diluted EPS                                                  |  |        |        |        |            |                  |  
|Income available to common stockholders                      |  | $      | 68,946 |        | 66,371,694 |                  | $
|                                                             |  |        |        |        |            |                  |  
|December 31, 2001                                            |  |        |        |        |            |                  |  
|Basic EPS                                                    |  |        |        |        |            |                  |  
|Income available to common stockholders                      |  | $      | 50,200 |        | 63,303,594 |                  | $
|Dilutive effect of common equivalent shares of stock options |  |        |       |        | 2,433,124  |                  |  
|                                                             |  |        |        |        |            |                  |  
|Diluted EPS                                                  |  |        |        |        |            |                  |  
|Income available to common stockholders                      |  | $      | 50,200 |        | 65,736,718 |                  | $
|                                                             |  |        |        |        |            |                  |  
|December 31, 2000                                            |  |        |        |        |            |                  |  
|Basic EPS                                                    |  |        |        |        |            |                  |  
|Income available to common stockholders                      |  | $      | 33,576 |        | 59,415,492 |                  | $
|Dilutive effect of common equivalent shares of stock options |  |        |       |        | 2,646,962  |                  |  
|                                                             |  |        |        |        |            |                  |  
|Diluted EPS                                                  |  |        |        |        |            |                  |  
|Income available to common stockholders                      |  | $      | 33,576 |        | 62,062,454 |                  | $
|                                                             |  |        |        |        |            |                  |  

13. EMPLOYEE BENEFIT PLANS

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

Supplemental Retirement PlanThe Company also has a non-qualified, unfunded, supplemental retirement plan ("SERP")
which was established in 1994 and covers certain employees and pays benefits that supplement any benefits paid under the qualified plan. Benefits under the supplemental plan are generally based on
compensation not includable in the calculation of benefits to be paid under the qualified plan. The plan document was amended in April 2000 to eliminate the compensation cap and include bonuses
and commissions of certain employees.

These
plan changes created an unrecognized prior service cost in the non-qualified plan of $2.7 million that will be amortized over the average remaining working
lifetime of the participants. The projected benefit obligation was $13.3 million, $5.6 million and $3.8 million as of December 31, 2002,

F-26

---

2001 and 2000, respectively. The total cost of this plan to the Company was approximately $1.7 million, $0.9 million and $0.8 million for the years ended December 31,
2002, 2001 and 2000, respectively.

The
following table sets forth the status of the Company's qualified defined benefit pension plan and supplemental retirement plan (Dollars in thousands):

|                              |                                                     | December 31, 2002      |   | December 31, 2001 |        | December 31, 2000 |        
|----------------------------- | --------------------------------------------------- | ---------------------- | - | ----------------- | ------ | ----------------- | -------
|
|Change in benefit obligation: |                                                     |                        |   |                   |        |                   |        
|                              | Projected benefit obligation at beginning of year   |                        | $ | 10,761            |        | $                 | 5,604  
|                              |                                                     | Service cost           |   |                   | 702    |                   |        
|                              |                                                     | Interest cost          |   |                   | 902    |                   |        
|                              |                                                     | Actuarial loss         |   |                   | 2,406  |                   |        
|                              |                                                     | Benefits paid          |   |                   | (260   | )                 |        
|                              |                                                     | 2001 Plan amendment    |   |                   |       |                   |        
|                              |                                                     |                        |   |                   |        |                   |        
|                              | Projected benefit obligation at the end of the year |                        | $ | 14,511            |        | $                 | 13,309 
|                              |                                                     |                        |   |                   |        |                   |        
|Change in assets:             |                                                     |                        |   |                   |        |                   |        
|                              | Assets at the beginning of the year                 |                        | $ | 11,161            |        | $                 |       
|                              |                                                     | Employer contributions |   |                   | 3,400  |                   |        
|                              |                                                     | Actual return          |   |                   | (1,385 | )                 |        
|                              |                                                     | Benefits paid          |   |                   | (260   | )                 |        
|                              |                                                     |                        |   |                   |        |                   |        
|                              | Assets at the end of the year                       |                        | $ | 12,916            |        | $                 |       
|                              |                                                     |                        |   |                   |        |                   |        
|Funded status:                |                                                     |                        |   |                   |        |                   |        
|                              | Projected benefit obligation                        |                        | $ | (14,511           | )      | $                 | (13,309
|                              | Fair value of plan assets                           |                        |   | 12,916            |        |                   |       
|                              |                                                     |                        |   |                   |        |                   |        
|                              | Funded status                                       |                        |   | (1,595            | )      |                   | (13,309
|                              |                                                     |                        |   |                   |        |                   |        
|                              | Unrecognized net transition asset                   |                        |   | (145              | )      |                   | 25     
|                              | Unrecognized prior service cost                     |                        |   | (315              | )      |                   | 2,729  
|                              | Unrecognized net loss (gain)                        |                        |   | 4,245             |        |                   | 7,191  
|                              |                                                     |                        |   |                   |        |                   |        
|                              | Prepaid/(accrued) pension cost                      |                        | $ | 2,190             |        | $                 | (3,364 
|                              |                                                     |                        |   |                   |        |                   |        

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

|                                               |  | December 31, 2002 |        | December 31, 2001 |   | December 31, 2000
|---------------------------------------------- |  | ----------------- | ------ | ----------------- | - | -----------------
|
|Service costbenefits earned during the
period |  | $                 | 702    |                   | $ | 601              
|Interest cost on projected benefit obligations |  |                   | 902    |                   |   | 650              
|Return on plan assets                          |  |                   | 1,385  |                   |   |                 
|Net amortization and deferral                  |  |                   | (2,368 | )                 |   | 414              
|                                               |  |                   |        |                   |   |                  
|Net periodic pension cost                      |  | $                 | 621    |                   | $ | 1,665            
|                                               |  |                   |        |                   |   |                  

F-27

---

The weighted average discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the
projected benefit obligations were as follows:

|                                               |  | December 31, 2002 |   | December 31, 2001 |   | December 31, 2000 |  
|---------------------------------------------- |  | ----------------- | - | ----------------- | - | ----------------- | -
|
|Weighted average discount rate                 |  | 6.75              | % | 6.75              | % | 7.50              | %
|Rate of increase in future compensation levels |  | 3.75              |   | 3.75              |   | 5.00              |  
|Long-term rate of return on plan assets        |  | 8.50              |   |                  |   | 8.50              |  

Employee Savings PlanThe Company sponsors a qualified defined contribution employee
savings plan covering substantially all employees. The Company matches employee contributions to the plan up to
specified amounts. The total cost of this plan to the Company was $3.2 million, $2.1 million, and $1.3 million for the years ended December 31, 2002, 2001 and 2000,
respectively.

14. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

Credit-related financial instrumentsAt December 31, 2002, the Company had commitments to
individuals and mutual funds under collateralized open lines of credit totaling approximately $682 million, against which approximately $67 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.

Securities LendingOn behalf of its clients, the Company lends securities to creditworthy broker-dealers. In certain
circumstances, the Company may indemnify its clients for the fair market value of those securities against a failure of the borrower to return such securities. The Company requires the borrowers to
provide collateral in an amount equal to or in excess of 102% of the fair market value of U.S. dollar denominated securities borrowed and 105% of the fair market value of non-U.S. dollar
denominated securities borrowed. The borrowed securities are revalued daily to determine if additional collateral is necessary. In accordance with FIN No. 45, a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Since the collateral received by the Company is in excess of the value
of the securities that the Company would be required to replace if the borrower defaulted and failed to return such securities, the Company has recorded no liability for the indemnification
obligation. All securities are categorized as overnight loans. The maximum potential amount of future payments that the Company could be required to make would be equal to the market value of the
securities borrowed. Since the securities loans are over-collateralized by 2% to 5% of the fair market value of the loan made, the collateral held by the Company would be used to satisfy
the obligation. In addition, each borrowing agreement gives the Company "set-off" language that allows it to use any excess collateral on other loans. However, there is a potential risk
that the collateral would not be sufficient to cover such an obligation if the security on loan increased in value between the time the borrower defaulted and the time the security is
"bought-in." In such instances, the Company would "buy-in" the security using all available collateral and a loss would result from the difference between the value of the
securities "bought-in" and the value of the collateral held. The Company has never experienced a broker default. The Company held, as collateral, cash and U.S. government securities
totaling approximately $4.8 billion and $2.1 billion for indemnified securities on loan at December 31, 2002 and December 31, 2001, respectively.

F-28

---

15. DERIVATIVE FINANCIAL INSTRUMENTS

Interest-Rate ContractsThe contractual or notional amounts of derivative financial
instruments, swap agreements, held by the Company at December 31, 2002 and 2001 were approximately $980 million and
$780 million, respectively. Interest rate contracts involve an agreement with a counterparty to exchange cash flows based on an underlying interest rate index. A swap agreement involves the
exchange of a series of interest payments, either at a fixed or variable rate, based upon the notional amount without the exchange of the underlying principal amount. The Company's exposure from these
interest rate contracts results from the possibility that one party may default on its contractual obligation when the contracts are in a gain position. The Company experienced no terminations by
counterparties of interest rate swaps designated as hedges. Credit risk is limited to the positive fair value of the derivative financial instrument, which is significantly less than the notional
value. During 2002, the Company had agreements to assume fixed-rate interest payments in exchange for receiving variable market-indexed interest payments. The original terms range from 20
to 36 months. The weighted-average fixed-payment rates were 4.63% and 5.44% at December 31, 2002 and 2001, respectively. Variable-interest payments received are indexed to the Prime and
the overnight Federal Funds rate for 2002. At December 31, 2002 and 2001, the weighted-average rate of variable market-indexed interest payment obligations to the Company were 1.55% and 1.74%,
respectively. The effect of these agreements was to lengthen short-term variable rate liabilities into longer-term fixed rate liabilities. These contracts had no carrying value
and the fair values were approximately $(33.1) million and $(18.8) million at December 31, 2002 and 2001, respectively. These fair values are included in the other liabilities category on the
Company's consolidated balance sheet.

Net
interest income included net gains of $1.6 million, net of tax, for the twelve months ended December 31, 2002 on interest rate swaps relating to SFAS No. 133.
The net gain consisted of a $3.3 million gain, net of tax, for the twelve-month period on changes in the fair value of derivative instruments not designated as hedging instruments. There were
also $1.7 million of derivative losses, net of tax, for the twelve-month period that resulted primarily from the reclassification of transition adjustment-related derivative losses from OCI to
net interest income in accordance with SFAS No. 133. The Company estimates that $0.2 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.

Net
interest income included net losses of $2.0 million, net of tax, for the twelve months ended December 31, 2001 derived from interest rate swaps relating to SFAS
No. 133. The net loss consisted of a $0.2 million gain, net of tax, for the twelve-month period on changes in the fair value of derivative instruments not designated as hedging
instruments. There were also $2.2 million of derivative losses, net of tax, for the twelve-month period that resulted primarily from the reclassification of transition adjustment-related
derivative losses from OCI to net interest income in accordance with SFAS No. 133.

The
Company also enters into fixed price purchase contracts that are designed to hedge the variability of the consideration to be paid for the purchase of investment securities. By
entering into these contracts, we are fixing the price to be paid at a future date for certain investment securities. At December 31, 2002, the Company had $432.6 million of fixed price
purchase contracts outstanding to purchase investment securities with an associated unrealized gain of $1.9 million. The unrealized gain is included within the other assets category on the
Company's consolidated balance sheet.

Foreign Exchange ContractsForeign exchange contracts involve an agreement to exchange the currency of one country for the
currency of another country at an agreed-upon rate and settlement date. Foreign exchange contracts consist of swap agreements and forward and spot contracts.

F-29

---

Unrealized gains (losses) resulting from purchases and sales of foreign exchange contracts are included within the respective other assets and other liabilities categories on the Company's
consolidated balance sheet. Unrealized gains in other assets were $4.4 million and $6.3 million as of December 31, 2002 and 2001, respectively. Unrealized losses in other
liabilities were $4.5 million and $6.8 million as of December 31, 2002 and 2001, respectively. The foreign exchange contracts have been reduced by offsetting balances with the
same counterparty where a master netting agreement exists. The Company's risk from foreign exchange contracts results from the possibility that one party may default on its contractual obligation or
from movements in exchange rates. Credit risk is limited to the positive market value of the derivative financial instrument, which is significantly less than the notional value.

The
notional value of the Company's foreign exchange contracts as of December 31, 2002 and 2001 was $673.7 million and $776.7 million, respectively. As of
December 31, 2002 and 2001, the European Unit represented approximately 38% and 60% of the notional value outstanding as of December 31, 2002 and 2001, respectively. The estimated
replacement cost of foreign exchange contracts was $9.7 million and $8.3 million at December 31, 2002 and 2001, respectively.

As
of December 31, 2002, the Company had foreign exchange contracts with maturities ranging from January 2003 to August 2003.

16. COMMITMENTS AND CONTINGENCIES

Restrictions on Cash BalancesThe Company is required to maintain certain average cash reserve
balances. The average required reserve balance with the Federal Reserve Bank ("FRB") for the two-week period including December 31, 2002 was approximately $21.0 million. In
addition, other cash balances in the amount of approximately $12.2 million were pledged to secure clearings with a depository institution, Depository Trust Company, as of December 31,
2002.

Lease CommitmentsMinimum future commitments on non-cancelable operating leases at December 31, 2002 were
as follows (Dollars in thousands):

Fiscal Year Ending

Bank Premises

Equipment

Total2003

$
23,007

$
6,157

$
29,1642004


23,608


4,305


27,9132005


24,849


1,363


26,2122006


24,947


19


24,9662007 and beyond


56,174


23


56,197Total

$
152,585

$
11,867

$
164,452


Total
rent expense was approximately $34.5 million, $24.5 million and $16.5 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Effective
January 1, 2000, the Company renewed its five-year service agreement with Electronic Data Systems ("EDS"), which now expires on December 31, 2005.
Under the terms of the agreement, EDS provides data processing services to the Company, which has agreed to pay certain monthly service fees based on usage. Service expense under this contract was
$7.4 million, $5.0 million and $4.2 million for the years ended December 31, 2002, 2001 and 2000, respectively.

In
2001, the Company renewed its agreement with SEI Investments Company, which now expires on December 31, 2005. Under the terms of the agreement, SEI provides data processing
services to the Company, which has agreed to pay certain monthly service fees based upon usage. Service expense

F-30

---

under this contract was $5.2 million, $4.2 million and $3.3 million for the years ended December 31, 2002, 2001 and 2000, respectively.

ContingenciesThe Company provides a broad range of services to financial asset managers, such as mutual fund complexes,
investment advisors, banks and insurance companies. The core services include global custody, multicurrency accounting and mutual fund administration. The value-added services include securities
lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment advisory services, lines of credit and brokerage services. Assets processed, held by the
Company in a fiduciary capacity, are not included in the consolidated balance sheets since such items are not assets of the Company. Management conducts regular reviews of its fiduciary
responsibilities and considers the results in preparing its consolidated financial statements. In the opinion of management, there are no contingent liabilities at December 31, 2002 that are
material to the consolidated financial position or results of operations of the Company.

On
January 31, 2003, the Company was named in a class action lawsuit alleging, among other things, violations of California wage and hour laws at its Sacramento and Walnut Creek
facilities. The lawsuit was filed in the Superior Court of California, County of Sacramento. While the Company is in the early stages of investigating this complaint, the Company believes that it has
complied at all times with applicable law and the Company intends to defend this lawsuit vigorously. The Company does not yet know the amount of damages that the plaintiffs are seeking to recover.
However, the defense of class action lawsuits can be costly and time consuming, and can divert the attention of management. A determination that the Company violated applicable wage and hour laws
could have a material adverse effect on its business, financial condition and results of operations.

In
2002, the Bank received from the Commonwealth of Massachusetts Department of Revenue ("DOR") an assessment for additional state excise taxes of approximately $10.9 million plus
interest and penalties with respect to the Bank's tax years ended December 31, 1999, December 31, 2000 and December 31, 2001.

The
DOR contends that dividend distributions to the Bank by Investors Funding Corp. ("IFC"), a real estate investment trust 99.9% owned by the Bank, are fully taxable in Massachusetts.
The Company believes, after consultation with its advisors, that the Massachusetts statute that provides for a dividend received deduction equal to 95% of certain dividend distributions applies to the
distributions made by IFC to the Bank. Accordingly, no provision has been made to the Company's financial statements for the amounts assessed or additional amounts that might be assessed in the
future.

The
Company has been informed that the DOR has sent similar notices to numerous other financial institutions in Massachusetts that reported a deduction for dividends received from a real
estate investment trust on their 1999, 2000 and 2001 Massachusetts financial institution excise tax returns. Because the legal issues raised are identical for all of the financial institutions
involved, the Company is acting together with those institutions to appeal the assessments and to pursue all available means to
defend its position vigorously. In addition, the Massachusetts legislature is considering retroactive legislation that may affect the outcome of the Company's dispute with the DOR. Assessed amounts
ultimately paid, if any, would be deductible expenses for federal income tax purposes.

In
January 2001, Mopex, Inc. filed an action entitledMopex, Inc. v. Chicago Stock Exchange, Inc., et
al., Civil Action No. 01 C 0302 (the "Complaint"), in the United States District Court for the Northern District of Illinois. In the Complaint, Mopex alleges that the
Bank and numerous other entities, including Barclays Global Investors, State Street Bank and Trust Company, and Merrill Lynch, Pierce, Fenner & Smith, Inc., infringed U.S. Patent
No. 6,088,685, entitled, "Open End Mutual Fund Securitization Process," assigned to Mopex. In particular, Mopex alleges that the '685 patent covers the

F-31

---

creation and trading of certain securities, including the Barclays iShares exchange traded funds. The Complaint seeks injunctive relief, damages, and enhanced remedies (including attorneys' fees and
treble damages).

In
April 2001, the Bank filed an answer and counterclaim, denying any liability on Mopex's claim and seeking a declaratory judgment that the '685 patent is invalid and not
infringed by the Bank's activities. In April 2002, Mopex filed an amended complaint to, among other things, add nine new defendants. The number of defendents now totals twenty-two.
In June 2002, we filed a motion to dismiss the amended complaint. That motion is still pending.

The
Bank is indemnified by the iShares Trust for certain defense costs and damages resulting from Mopex's claim. The Bank believes the claim is without merit, and the Bank will continue
to vigorously defend its rights. However, the Bank cannot be sure that it will prevail in the defense of this claim. Patent litigation can be costly and could divert the attention of management. If
the Bank were found to infringe the patent, it would have to pay damages and would be ordered to cease any infringing activity or seek a license under the patent. The Bank cannot be sure that it will
be able to obtain a license on a timely basis or on reasonable terms, if at all. As a result, any determination of infringement could have a material adverse effect upon its business, financial
condition and results of operations.

In
July 2000, two of the Company's Dublin subsidiaries, Investors Trust & Custodial Services (Ireland) Ltd. ("ITC") and Investors Fund Services (Ireland) Ltd.
("IFS"), received a plenary summons in the High Court, Dublin, Ireland. The summons named ITC and IFS as defendants in an action brought by the FTF ForexConcept Fund Plc (the "Fund"), a former client.
The summons also named as defendants FTF Forex Trading and Finance, S.A., the Fund's investment manager, Ernst & Young, the Fund's auditors, and Dresdner Bank-Kleinwort Benson
(Suisse) S.A., a trading counterparty to the Fund. The Fund is an investment vehicle organized in Dublin to invest in foreign exchange contracts. A total of approximately $4.7 million had been
invested in the Fund. Most of that money was lost prior to the Fund's closing to subscriptions in June 1999.

In
January 2001, ITC, IFS and the other defendants named in the plenary summons received a statement of claim by the Fund seeking unspecified damages allegedly arising from breach
of contract,
misrepresentation and breach of warranty, negligence and breach of duty of care, and breach of fiduciary duty, among others. The Company has notified its insurers and intends to defend this claim
vigorously. Based on its investigation through December 31, 2002, the Company does not expect this matter to have a material adverse effect on its business, financial condition or results of
operations.

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17. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value and estimated fair value of financial instruments are as follows (Dollars in thousands):

|                          |                                             | December 31, 2002 |   | December 31, 2001
|------------------------- | ------------------------------------------- | ----------------- | - | -----------------
|
|On-balance sheet amounts: |                                             |                   |   |                  
|                          | Cash and due from banks                     |                   | $ | 14,568           
|                          | Securities held to maturity                 |                   |   | 3,438,689        
|                          | Securities available for sale               |                   |   | 3,272,465        
|                          | Loans                                       |                   |   | 143,737          
|                          | Deposits                                    |                   |   | 3,332,918        
|                          | Short term & other borrowings               |                   |   | 741,107          
|                          | Securities sold under repurchase agreements |                   |   | 2,301,974        
|                          | Interest rate swap agreements               |                   |   | 33,145           

The
fair value estimates presented herein are based on pertinent information available to management as of December 31, 2002 and 2001. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such amounts have not been significantly revalued for purposes of these consolidated financial statements since those dates
and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

The
Company uses the following methods and assumptions to determine the fair value of selected financial instruments:

Short-term financial assets and liabilitiesFor financial instruments with a short or no stated maturity,
prevailing market rates and limited credit risk, carrying amounts approximate fair value. Those financial instruments include cash and due from banks, other short-term investments, accrued
income receivable, deposits, Federal Funds borrowed, securities sold under repurchase agreements, short-term and other borrowings, amounts due to brokers for open trades payable and
accrued interest payable.

Securities, available for sale and held to maturityFair values were based on prices obtained from an independent nationally
recognized pricing service, or in the absence of such, prices were obtained directly from selected broker-dealers.

LoansFair values were based on current rates at which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.

Short-term and other borrowingsFair values of short-term and other borrowings were based on quoted
market prices, when available, and prevailing market rates for borrowings of similar terms.

Interest rate swap agreementsFair values were based on the estimated amount that the Company would receive or pay to
terminate the swap agreements, taking into account the current interest rates and the creditworthiness of the swap counterparties.

Foreign exchange contractsFair values were based on quoted market prices of comparable instruments and represent a net
liability to the Company. Foreign exchange contracts have been reduced by offsetting balances with the same counterparty where a master netting agreement exists.

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18. 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 effect on the Company's and the Bank's
financial statements. 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 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2002, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As
of December 31, 2002, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company and the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain minimum total risk-based, Tier 1 risk based, and Tier 1
leverage ratios as set forth in the 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 Bank and the Company (Dollars in thousands):

|                         |                                       | Actual |   | For Capital
Adequacy Purposes: |  | To Be Well
Capitalized Under
Prompt Corrective
Action Provisions: |  
|------------------------ | ------------------------------------- | ------ | - | ------------------------------ |  | ----------------------------------------------------------------- | -
|
|As of December 31, 2002: |                                       |        |   |                                |  |                                                                   |  
|Total Capital            |                                       |        |   |                                |  |                                                                   |  
|                         | (to Risk-Weighted Assets-the Company) |        | $ | 374,102                        |  | 15.51                                                             | %
|                         | (to Risk-Weighted Assets-the Bank)    |        | $ | 369,498                        |  | 15.32                                                             | %
|Tier 1 Capital           |                                       |        |   |                                |  |                                                                   |  
|                         | (to Risk-Weighted Assets-the Company) |        | $ | 374,002                        |  | 15.51                                                             | %
|                         | (to Risk-Weighted Assets-the Bank)    |        | $ | 369,398                        |  | 15.32                                                             | %
|Tier 1 Capital           |                                       |        |   |                                |  |                                                                   |  
|                         | (to Average Assets-the Company)       |        | $ | 374,002                        |  | 5.50                                                              | %
|                         | (to Average Assets-the Bank)          |        | $ | 369,398                        |  | 5.43                                                              | %
|As of December 31, 2001: |                                       |        |   |                                |  |                                                                   |  
|Total Capital            |                                       |        |   |                                |  |                                                                   |  
|                         | (to Risk-Weighted Assets-the Company) |        | $ | 297,479                        |  | 16.77                                                             | %
|                         | (to Risk-Weighted Assets-the Bank)    |        | $ | 293,706                        |  | 16.56                                                             | %
|Tier 1 Capital           |                                       |        |   |                                |  |                                                                   |  
|                         | (to Risk-Weighted Assets-the Company) |        | $ | 297,379                        |  | 16.76                                                             | %
|                         | (to Risk-Weighted Assets-the Bank)    |        | $ | 293,606                        |  | 16.55                                                             | %
|Tier 1 Capital           |                                       |        |   |                                |  |                                                                   |  
|                         | (to Average Assets-the Company)       |        | $ | 297,379                        |  | 5.88                                                              | %
|                         | (to Average Assets-the Bank)          |        | $ | 293,606                        |  | 5.80                                                              | %

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

F-34

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payments will not impair the Bank's capital stock and surplus account. Moreover, prior Commissioner approval is required if the total dividends for a calendar year would exceed net profits for that
year
combined with retained net profits for the previous two years. These restrictions on the ability of the Bank to pay dividends to the Company may restrict the ability of the Company to pay dividends to
its stockholders.

The
operations of the Company's securities broker affiliate, Investors Securities Services, Inc., are subject to federal and state securities laws, as well as the rules of both
the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Management believes, as of December 31, 2002, that Investors Securities
Services, Inc. met all requirements to which it is subject.

19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in thousands, except per share data):

|Year Ended December 31, 2002                     |  | First
Quarter |        | Second
Quarter |   | Third
Quarter |  | Fourth
Quarter
|------------------------------------------------ |  | ------------- | ------ | -------------- | - | ------------- |  | --------------
|Interest income                                  |  | $             | 58,632 |                | $ | 62,552        |  | $             
|Interest expense                                 |  |               | 22,895 |                |   | 28,172        |  |               
|Non-interest income                              |  |               | 69,917 |                |   | 75,334        |  |               
|Operating expenses                               |  |               | 82,108 |                |   | 84,364        |  |               
|Income before income taxes and minority interest |  |               | 23,546 |                |   | 25,350        |  |               
|Income taxes                                     |  |               | 7,094  |                |   | 7,636         |  |               
|Minority interest                                |  |               | 397    |                |   | 397           |  |               
|Net income                                       |  |               | 16,055 |                |   | 17,317        |  |               
|Basic earnings per share                         |  |               | 0.25   |                |   | 0.27          |  |               
|Diluted earnings per share                       |  |               | 0.24   |                |   | 0.26          |  |               

|Year Ended December 31, 2001                     |  | First
Quarter |        | Second
Quarter |   | Third
Quarter |  | Fourth
Quarter
|------------------------------------------------ |  | ------------- | ------ | -------------- | - | ------------- |  | --------------
|Interest income                                  |  | $             | 59,317 |                | $ | 65,301        |  | $             
|Interest expense                                 |  |               | 37,848 |                |   | 38,356        |  |               
|Non-interest income                              |  |               | 51,260 |                |   | 62,920        |  |               
|Operating expenses                               |  |               | 56,900 |                |   | 72,266        |  |               
|Income before income taxes and minority interest |  |               | 15,829 |                |   | 17,599        |  |               
|Income taxes                                     |  |               | 5,084  |                |   | 5,310         |  |               
|Minority interest                                |  |               | 397    |                |   | 397           |  |               
|Net income                                       |  |               | 10,348 |                |   | 11,892        |  |               
|Basic earnings per share                         |  |               | 0.17   |                |   | 0.18          |  |               
|Diluted earnings per share                       |  |               | 0.16   |                |   | 0.18          |  |               

In
November 2001, the FASB issued Emerging Issues Task Force ("EITF") No. 01-14, "Income Statement Characterization of Reimbursements Received for
Out-Of-Pocket Expenses Incurred." This guidance requires companies to recognize the reimbursement of client-related expenses as revenue and the costs as operating expense.
Client reimbursements for out-of-pocket expenses are reflected in non-interest income in the table above. Prior periods have been reclassified to reflect this
presentation. The increases to fee revenue and operating expense as a result of this guidance were $2.1 million and $2.2 million for the first and second quarter of 2002, respectively.
The increases were $2.0 million,
$2.1 million, $2.1 million and $2.1 million for the first, second, third and fourth quarter of 2001, respectively.

F-35

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20. GEOGRAPHIC REPORTING AND SERVICE LINES

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

|              |  | Net Operating Revenue
For the Years Ended December 31, |         |  |   |        
|------------- |  | ------------------------------------------------------ | ------- |  | - | -------
|
|
|
|United States |  | $                                                      | 423,640 |  | $ | 350,191
|Ireland       |  |                                                        | 11,960  |  |   | 8,282  
|Canada        |  |                                                        | 1,915   |  |   | 2,246  
|Cayman Island |  |                                                        | 79      |  |   | 86     
|              |  |                                                        |         |  |   |        
|Total         |  | $                                                      | 437,594 |  | $ | 360,805
|              |  |                                                        |         |  |   |        

BGI
accounted for 16.83% and 13.54% of the Company's consolidated net operating revenues for the years ended December 31, 2002 and 2001, respectively. No one customer exceeded 10%
of the Company's consolidated net operating revenues for the year ended December 31, 2000, and no client other than BGI accounted for more than 10% of the Company's consolidated net operating
revenues in the years ended December 31, 2001 or 2002.

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

|                                                        |  | For the Years Ended December 31,
|------------------------------------------------------- |  | --------------------------------
|
|
|Custody accounting, transfer agency, and administration |  | $                               
|Foreign exchange                                        |  |                                 
|Cash management                                         |  |                                 
|Securities lending                                      |  |                                 
|Investment advisory                                     |  |                                 
|                                                        |  |                                 
|Total                                                   |  | $                               
|                                                        |  |                                 

21. FINANCIAL STATEMENTS OF INVESTORS FINANCIAL SERVICES CORP. (PARENT ONLY)

The following represents the separate condensed financial statements of IFSC (Dollars in thousands):

|Statements of Income                                 |  | December 31, 2002 |        | December 31, 2001 |   | December 31, 2000 |  
|---------------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ----------------- | -
|Equity in undistributed income of bank subsidiary    |  | $                 | 70,808 |                   | $ | 52,270            |  
|Equity in undistributed loss of nonbank subsidiaries |  |                   | (58    | )                 |   | (196              | )
|Dividend income from nonbank subsidiaries            |  |                   | 96     |                   |   | 75                |  
|Management fee paid by nonbank subsidiaries          |  |                   | 55     |                   |   | 60                |  
|Interest expense on subordinated debt                |  |                   | (2,488 | )                 |   | (2,518            | )
|Income tax benefit                                   |  |                   | 1,000  |                   |   | 1,049             |  
|Operating expenses                                   |  |                   | (467   | )                 |   | (540              | )
|                                                     |  |                   |        |                   |   |                   |  
|Net Income                                           |  | $                 | 68,946 |                   | $ | 50,200            |  
|                                                     |  |                   |        |                   |   |                   |  

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|Balance Sheets                             |                                                    | December 31, 2002          |         | December 31, 2001 |        
|------------------------------------------ | -------------------------------------------------- | -------------------------- | ------- | ----------------- | -------
|Assets:                                    |                                                    |                            |         |                   |        
|                                           | Cash                                               |                            | $       | 3,016             |        
|                                           | Investments in bank subsidiary                     |                            |         | 461,655           |        
|                                           | Investments in nonbank subsidiaries                |                            |         | 497               |        
|                                           | Receivable due from bank subsidiary                |                            |         | 2,601             |        
|                                           | Other assets                                       |                            |         | 5                 |        
|                                           |                                                    |                            |         |                   |        
|Total Assets                               |                                                    | $                          | 467,774 |                   | $      
|                                           |                                                    |                            |         |                   |        
|Liabilities and Stockholders' Equity       |                                                    |                            |         |                   |        
|Liabilities:                               |                                                    |                            |         |                   |        
|                                           | Accrued expenses                                   |                            | $       | 42                |        
|                                           | Payable due to nonbank subsidiary                  |                            |         | 2                 |        
|                                           | Subordinated debt                                  |                            |         | 24,774            |        
|                                           |                                                    |                            |         |                   |        
|                                           |                                                    | Total liabilities          |         |                   | 24,818 
|                                           |                                                    |                            |         |                   |        
|Stockholders' Equity:                      |                                                    |                            |         |                   |        
|                                           | Common stock                                       |                            |         | 648               |        
|                                           | Surplus                                            |                            |         | 233,337           |        
|                                           | Deferred compensation                              |                            |         | (1,599            | )      
|                                           | Retained earnings                                  |                            |         | 198,282           |        
|                                           | Accumulated other comprehensive income/(loss), net |                            |         | 12,288            |        
|                                           | Treasury stock                                     |                            |         |                  |        
|                                           |                                                    |                            |         |                   |        
|                                           |                                                    | Total stockholders' equity |         |                   | 442,956
|                                           |                                                    |                            |         |                   |        
|Total Liabilities and Stockholders' Equity |                                                    | $                          | 467,774 |                   | $      
|                                           |                                                    |                            |         |                   |        

F-37

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(Dollars in thousands):

|Statements of Cash Flows                                                      |                                                                                                   | December 31,
2002                      |         | December 31,
2001 |      | December 31,
2000 |         
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------- | ------- | ----------------- | ---- | ----------------- | --------
|Cash flows from operating activities:                                         |                                                                                                   |                                        |         |                   |      |                   |         
|                                                                              | Net income                                                                                        |                                        | $       | 68,946            |      | $                 | 50,200  
|                                                                              |                                                                                                   |                                        |         |                   |      |                   |         
|Adjustments to reconcile net income to net cash used by operating activities: |                                                                                                   |                                        |         |                   |      |                   |         
|                                                                              | Amortization of deferred compensation                                                             |                                        |         | 964               |      |                   | 162     
|                                                                              | Change in assets and liabilities:                                                                 |                                        |         |                   |      |                   |         
|                                                                              |                                                                                                   | Receivable due from bank subsidiary    |         |                   | (583 | )                 |         
|                                                                              |                                                                                                   | Receivable due from nonbank subsidiary |         |                   |     |                   |         
|                                                                              |                                                                                                   | Income tax receivable                  |         |                   |     |                   |         
|                                                                              |                                                                                                   | Payable due to nonbank subsidiary      |         |                   | (207 | )                 |         
|                                                                              |                                                                                                   | Accrued expenses                       |         |                   | (12  | )                 |         
|                                                                              |                                                                                                   | Other assets                           |         |                   | 1    |                   |         
|                                                                              |                                                                                                   | Other liabilities                      |         |                   |     |                   |         
|                                                                              | Equity in undistributed earnings of bank subsidiary                                               |                                        |         | (70,808           | )    |                   | (52,270 
|                                                                              | Equity in undistributed earnings of nonbank subsidiary                                            |                                        |         | 58                |      |                   | 196     
|                                                                              |                                                                                                   |                                        |         |                   |      |                   |         
|Total adjustments                                                             |                                                                                                   |                                        | (70,587 | )                 |      | (52,756           | )       
|                                                                              |                                                                                                   |                                        |         |                   |      |                   |         
|Net cash used by operating activities                                         |                                                                                                   |                                        | (1,641  | )                 |      | (2,556            | )       
|                                                                              |                                                                                                   |                                        |         |                   |      |                   |         
|Cash flows from investing activities:                                         |                                                                                                   |                                        |         |                   |      |                   |         
|                                                                              | Payments for investments in and advances to subsidiary                                            |                                        |         |                  |      |                   | (116,338
|                                                                              |                                                                                                   |                                        |         |                   |      |                   |         
|Net cash used by investing activities                                         |                                                                                                   |                                        |        |                   |      | (116,338          | )       
|                                                                              |                                                                                                   |                                        |         |                   |      |                   |         
|Cash flows from financing activities:                                         |                                                                                                   |                                        |         |                   |      |                   |         
|                                                                              | Proceeds from exercise of stock options                                                           |                                        |         | 2,869             |      |                   | 2,123   
|                                                                              | Proceeds from issuance of common stock                                                            |                                        |         | 3,882             |      |                   | 119,030 
|                                                                              | Cost of issuance of restricted stock                                                              |                                        |         |                  |      |                   | (335    
|                                                                              | Repurchase of company-obligated, mandatorily redeemable, preferred securities of subsidiary trust |                                        |         | (1,000            | )    |                   |        
|                                                                              | Dividends paid                                                                                    |                                        |         | (3,219            | )    |                   | (2,511  
|                                                                              |                                                                                                   |                                        |         |                   |      |                   |         
|Net cash provided by financing activities                                     |                                                                                                   |                                        | 2,532   |                   |      | 118,307           |         
|                                                                              |                                                                                                   |                                        |         |                   |      |                   |         
|Net increase/(decrease) in cash and due from banks                            |                                                                                                   |                                        | 891     |                   |      | (587              | )       
|Cash and due from banks, beginning of year                                    |                                                                                                   |                                        | 2,125   |                   |      | 2,712             |         
|                                                                              |                                                                                                   |                                        |         |                   |      |                   |         
|Cash and due from banks, end of year                                          |                                                                                                   | $                                      | 3,016   |                   | $    | 2,125             |         
|                                                                              |                                                                                                   |                                        |         |                   |      |                   |         

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