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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, 2003                                                  
|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 $1,807,090,067 based on the last reported sale price of $29.03 on The Nasdaq National
Market on June 30, 2003 as reported by Nasdaq.

As
of January 31, 2004, there were 65,926,072 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, 2003. 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.

We
provide a broad range of services to financial asset managers, such as mutual fund complexes, investment advisors, family offices, banks and insurance companies. We define these
services as 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, middle office outsourcing, and brokerage and
transition management services. At December 31, 2003, we provided services for approximately $1.1 trillion in net assets, including approximately $177 billion of foreign net assets.

Investors
Financial Services Corp. is a bank holding company. We were organized as a Delaware corporation in 1995. 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 our services from offices in Boston, New York, Sacramento, Toronto, Dublin and the Cayman Islands.

Overview of the Asset Servicing Industry

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 back and middle office
services for asset managers and the pooled financial products they sponsor, allowing asset managers to focus on core competencies such as product development and distribution. In turn, asset servicing
companies like ours provide non-core services such as the third-party safekeeping of assets and administrative services that also give investors more confidence in the integrity of their
investments. The following discussion sets forth our view of the key drivers in today's asset servicing industry.

Historical Financial Asset Growth.While the rate of financial asset value growth decreased slightly in recent years, over
the past ten years growth in financial assets under management has been strong. Factors driving this growth include an aging population, the privatization of retirement systems and the increased
popularity of pooled investment products such as 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 $13.9 trillion at December 31, 2002, up from $5.9 trillion in 1992, a compounded annual growth rate of approximately 9%. Mutual funds, a primary market for our services, hold a
large portion of the money invested in pooled investment vehicles. Despite recent declines, the U.S. mutual fund market has grown at a compounded annual growth rate of approximately 14% since

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1992,
and held over $6 trillion in assets at December 31, 2002. The following table presents U.S. financial assets, including mutual funds (Dollars in billions):

|                                 |       | December 31, 2002 |          | December 31, 1992 |   | Compounded
Annual
Growth Rate |         
|-------------------------------- | ----- | ----------------- | -------- | ----------------- | - | ----------------------------- | --------
|U.S. Financial Assets            |       |                   |          |                   |   |                               |         
|Mutual Funds                     |       | $                 | 6,007.00 |                   | $ | 1,625.50                      |         
|Life Insurance Companies         |       |                   | 3,366.00 |                   |   | 1,587.00                      |         
|Private Pension Funds            |       |                   | 3,686.00 |                   |   | 2,051.40                      |         
|Bank Personal Trusts and Estates |       |                   | 807.90   |                   |   | 629.60                        |         
|                                 |       |                   |          |                   |   |                               |         
|                                 | Total |                   | $        | 13,866.90         |   | $                             | 5,893.50
|                                 |       |                   |          |                   |   |                               |         

Source: Federal Reserve Bank

Consolidation and Outsourcing Trends.Another important factor affecting the industry is the consolidation 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
finite resources on their core businesses. Also, numerous service providers have combined 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. In addition, as consolidated financial institutions
dispose of businesses that do not fit with their core services, we may see opportunities to acquire those business lines.

The
unique operational philosophy of a particular asset management organization determines its view of asset servicing. 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, regulatory changes, 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.

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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 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 the 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 commission 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 39% from approximately $142 billion at year end in 2002 to $198 billion at
year-end 2003.

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. In order to continue to grow our business,
we pursue our core strategies.

Maintain Our Technological Expertise.One of our core strategies is to commit the necessary capital and resources 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 service offerings 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.

Maintain Our 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 Our 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 client service. Also, some of our clients engage us to provide the core services of
global custody and multicurrency accounting, but do not use us for 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, family offices, 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 Investment Advisory Services Middle Office Outsourcing Performance Measurement Institutional Transfer Agency Lines of Credit Brokerage and Transition Management Services


Our
value-added services help clients develop and execute 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 value of assets processed, the number of securities held and portfolio transactions. Generally, fees are billed to
our clients 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 necessarily proportionate increase in personnel or other resources.
We also derive net interest income by investing cash balances that our clients leave on deposit with us. Our share of earnings from these investments is viewed as part of the total compensation that
our clients pay us for servicing their assets.

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

Core Services

Global Custody.Global custody entails the safekeeping of securities for clients and settlement of portfolio transactions.
Our net assets processed have grown from $22 billion at October 31, 1990 to $1.1
trillion at December 31, 2003. At December 31, 2003, our foreign net assets processed totaled approximately $177 billion.

In
order to service our clients worldwide, we have established a network of global subcustodians in 99 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.

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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 include 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.

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.

Foreign Exchange.We provide foreign exchange services to facilitate settlement of international securities transactions for
funds and other accounts and to convert income payments denominated in a non-base currency to base 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.

Investment Advisory Services.The Bank acts as investment advisor to the Merrimac Master Portfolio, an open-end
investment management company registered under the Investment Company Act of 1940. The portfolio currently consists of a series of six master funds in a master-feeder structure. The Merrimac Cash
Portfolio, the Merrimac Prime Portfolio and the Merrimac U.S. Government Portfolio are subadvised by Lincoln Capital Fixed Income Management Company, LLC. The Merrimac Treasury Portfolio and the
Merrimac Treasury Plus Portfolio are subadvised by M&I Investment Management Corp. The Merrimac Municipal Portfolio is subadvised by ABN AMRO Asset
Management (USA) LLC. At December 31, 2003, the total net assets of the portfolio approximated $7.0 billion. The portfolio's master funds serve as investment vehicles for seven domestic
feeder funds and two offshore feeder funds whose shares are sold to institutional investors.

Middle Office Outsourcing.We also provide middle office outsourcing services to clients. Middle office outsourcing services
represent the tasks that need to be performed for financial asset managers after they have initiated a particular trade to ensure accurate and timely trade processing and communications to any party
who needs to receive the trades. We perform some or all of the following functions for our outsourcing clients: trade operations management, settlements, portfolio and fund accounting, fund
administration, cash management, reconciliation, corporate actions, tax reclaims and tax filings, performance measurement, broker performance, and vendor data management.

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 in a customized format.

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.

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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 retail banking operations. At December 31, 2003, we had gross loans outstanding to clients of approximately $200 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 to individually managed account customers are due on demand.

Brokerage and Transition Management 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
records. This allows us to use the back office processing of the clearing broker-dealer while earning a commission on trades executed on behalf of clients. Transition management services are designed
to assist the process of moving a portfolio from one asset manager to another in as seamless a manner as possible. Components of these services include planning and customizing a strategy for the
transition, conducting performance analysis, and executing the transition in an efficient,
risk-managed fashion. The brokerage services we offer do not include margin accounts, short selling or market making activities.

Sales, Marketing and Client Support

We employ a direct sales staff that targets potential market opportunities, including investment management companies, insurance companies, family offices, banks
and investment advisors. Sales personnel are primarily based at our headquarters in Boston, and are given geographic area sales responsibility. We also have 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 21 of our Notes to Consolidated Financial Statements included in this Report.

Significant Clients

Barclays Global Investors, N.A. ("BGI") accounted for approximately 16.4% of our consolidated net operating revenues for each of the years ended
December 31, 2003 and 2002. No client other than BGI accounted for more than 5% of our net operating revenues for the years ended December 31, 2003 and 2002.

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.

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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 efficiency for our clients. These modifications and enhancements 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, 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. 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 and assets. Internet-based applications provide our clients with secure access to their data over the Internet
as well as 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 a significant amount 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.

Each
year we spend approximately 18-20% of revenue on technology. Because of our relationship with EDS and our system architecture, we are able to focus the majority of our
technology spend on development, rather than support or infrastructure.

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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 scheduled to expire on December 31, 2005.

Investors
Bank maintains a comprehensive Business Continuity Plan ("BCP"). The program has been developed to comply with guidelines issued by various regulatory and industry bodies such
as the Federal Financial Institutions Examination Council ("FFIEC"). The planning process begins with a business impact analysis which isolates critical business processes and determines their
recoverability under various disruption scenarios. In addition to maintaining regional backup facilities for all offices, Bank locations are geographically diverse in order to allow recovery of
essential functions to another
location in the event of a wide spread disruption. In 2003, BCP staff conducted over 80 different tests to ensure technology infrastructure, facilities, and staff could respond and recover in a
disaster.

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 made substantial progress in completing 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.

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, The Bank of New York, Citigroup, Mellon, and PNC, possess substantially greater financial and marketing resources than we do and process a greater amount of financial assets. 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, especially over the past decade, has impacted both pricing and margins in core services like global custody services and trustee services.
Partially offsetting this more competitive pricing environment 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 competitive pricing in maturing service lines.

We
believe that our size, commitment to technology development and enhancement, and responsiveness to client needs provide the asset management industry with a very attractive asset
servicing alternative to large 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

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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, 2003, we had 2,413 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 are covered by collective bargaining agreements and we believe our relations with our employees are good.

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. ("NASD"). 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 nonbanking activities of nonbanking subsidiaries of BHCs and to order termination of ownership and control of a
nonbanking 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, BHC or savings association, or increasing such ownership or control of any bank, BHC or
savings association, or merging or consolidating with any BHC without prior approval of

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the
FRB. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally authorizes adequately capitalized and managed BHCs, as determined by the FRB, 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. In
addition, as discussed more fully below, Massachusetts law imposes certain approval requirements with respect to acquisitions by a BHC of certain banking institutions and to mergers of BHCs.

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 securities 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. Before permitting a BHC to make such an investment, 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.

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 or incidental to such financial activities, or that the FRB determines
to be 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

12

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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 nonqualifying 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 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, 2003, our Total Risk-Based Capital Ratio and Leverage Ratio were 17.60% and 5.35%, respectively.

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
become effective around 2006,
would add operational risk as a third component to the denominator of the risk-capital calculation, in addition to 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 depository institution or a depository institution holding company unless the FRB has been given at least 60 days to review, public notice has been provided, and
the FRB 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 depository institution or depository
institution holding company, 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 depository institution or a depository institution holding company. 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 of any class of voting
securities of a bank or BHC or a savings association, or otherwise obtaining control or a controlling influence over such an institution.

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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 a BHC or its 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.

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. This support may be required
at times when the bank holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act ("FDIA"), the FDIC can hold any
FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the "default" of a commonly controlled FDIC-insured
depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution "in danger of default." 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, ("Sarbanes-Oxley") implements a broad range of corporate
governance and accounting measures for public companies (including publicly-held bank holding companies such as the Company) designed to promote honesty and transparency in corporate
America. Sarbanes-Oxley's principal provisions, many of which have been interpreted through regulations released in 2003, provide for and include, among other things:



14

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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. FDIA does not require the
FDIC to charge all banks deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels. However, as a result of general economic
conditions and recent bank failures, it is possible that the ratio of deposit insurance reserves to insured deposits could fall below the minimum ratio that FDIA requires, which would result in the
FDIC setting deposit insurance assessment rates sufficient to increase deposit insurance reserves to the required ratio. We cannot predict whether the FDIC will be required to increase deposit
insurance assessments above their current levels

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.

15

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Moreover, the federal banking agencies have promulgated substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the
FDIA. Under the regulations, a bank generally shall be deemed to be:



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, 2003, 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 a
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, 2003, 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

16

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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 nonaffiliates. The FRB recently adopted a final rule, which became 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) to monitor credit exposure to affiliates. The rule
treats derivatives in which a bank provides credit protection to a nonaffiliate with respect to an obligation of an affiliate as a guarantee of an obligation of an affiliate subject to regulation
under the rule.

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 establish a financial subsidiary to engage in certain new activities which are
permissible for subsidiaries of an FHC. In order to form a financial subsidiary, a national bank or state bank and each of its depository institution affiliates must be
well-capitalized and well-managed. Such banks that establish a financial subsidiary will become subject to certain capital deduction, risk management and affiliate transaction rules, among
other requirements. 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

17

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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 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 limit 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 recordkeeping requirements.

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Currently,
management believes that we are in compliance with these registration, reporting and recordkeeping 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 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 recordkeeping and reporting requirements. These requirements dictate the type, volume and duration of the recordkeeping 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 recordkeeping 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 April 2003, it extended the temporary exemption from the definition of "broker" until November 12, 2004. 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-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

19

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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.

Availability of Filings

You may access, free of charge, copies of the following documents and related amendments, if any, in the Investor Relations section of our web site at
www.ibtco.com:



You
may also access, free of charge, copies of the following corporate governance documents in the Investor Relations section of 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 or, in the case
of the corporate governance documents, as soon as reasonably practical after material amendment. The information contained on our web site is not incorporated by reference into this document and
should not be considered a part of this 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, 2003:

|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            |  
|Iveagh Court, Dublin                   |  | Offshore Processing Center                        |  | 49,306  |  | 2028            | *

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For
more information, see Note 17 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. On July 23, 2003, we reached agreement in principle with representatives of the
plaintiffs to settle the case. As currently agreed, the settlement will not have a material impact on our financial condition or results of operations. The settlement is subject to proper
administration of payments to the class members and final approval by the court. In anticipation of this settlement and related costs, we accrued a liability of approximately $1.0 million in
the second quarter of 2003.

On
June 27, 2003, we and an individual employee of ours were named in a lawsuit alleging, among other things, that we breached an implied covenant of good faith and fair dealing
in a subadvisory contract with Opus Investment Management, Inc. ("Opus") and that our individual employee engaged in a breach of fiduciary duties and tortious interference with a contract. Opus
had been a subadviser to the Merrimac Funds, for which we act as investment adviser. Upon the expiration of Opus' contract on June 1, 2003, the Merrimac Funds elected not to
re-appoint Opus as subadviser. The lawsuit was filed in Superior Court in Worcester, Massachusetts and seeks unspecified damages. We believe that the claims are without merit and intend to
defend our rights vigorously. On September 22, 2003, we filed a motion to dismiss all claims against us under the complaint. A hearing on the motion to dismiss is currently scheduled for
March 2004.

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, LLP, 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.

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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, 2003, 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, 2003.

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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
|-------------- |  | ---- | ----- | --- | - | --------
|2003           |  |      |       |     |   |         
|First quarter  |  | $    | 29.50 |     | $ | 21.53   
|Second quarter |  |      | 29.50 |     |   | 20.18   
|Third quarter  |  |      | 34.65 |     |   | 27.52   
|Fourth quarter |  |      | 39.09 |     |   | 31.40   
|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   

As
of January 31, 2004, there were approximately 835 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 Report. Any dividend payments by Investors Bank are
subject to certain restrictions imposed by the Massachusetts Commissioner of Banks. See "BusinessRegulation and Supervision" section for additional information. Subject to regulatory
requirements, we expect to pay an annual dividend to our stockholders, currently estimated to be in an amount equal to $0.07 per share of outstanding common stock (approximately $4.6 million
based upon 65,436,788 shares outstanding as of December 31, 2003). 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 to 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, 2003.

23

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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 Report. (Dollars in thousands, except per share and employee data).

|                                                |  | For the Year Ended December 31, |              
|----------------------------------------------- |  | ------------------------------- | -------------
|
|Statement of Income Data(1,2):                  |  |                                 |              
|Net interest income                             |  | $                               | 152,883      
|Noninterest income                              |  |                                 | 336,193      
|                                                |  |                                 |              
|Net operating revenues                          |  |                                 | 489,076      
|Operating expenses                              |  |                                 | 344,921      
|                                                |  |                                 |              
|Income before income taxes                      |  |                                 | 144,155      
|Income taxes                                    |  |                                 | 52,395       
|                                                |  |                                 |              
|Net income                                      |  | $                               | 91,760       
|                                                |  |                                 |              
|Per Share Data(3):                              |  |                                 |              
|Basic earnings per share                        |  | $                               | 1.41         
|                                                |  |                                 |              
|Diluted earnings per share                      |  | $                               | 1.38         
|                                                |  |                                 |              
|Dividends per share                             |  | $                               | 0.06         
|                                                |  |                                 |              
|Balance Sheet Data:                             |  |                                 |              
|Total assets at end of period                   |  | $                               | 9,224,572    
|Average Balance Sheet Data:                     |  |                                 |              
|Interest-earning assets                         |  | $                               | 7,565,040    
|Total assets                                    |  |                                 | 8,140,672    
|Total deposits                                  |  |                                 | 3,153,306    
|Junior subordinated debentures(4)               |  |                                 | 24,194       
|Trust preferred securities(4)                   |  |                                 |             
|Common stockholders' equity                     |  |                                 | 484,046      
|Selected Financial Ratios:                      |  |                                 |              
|Return on average equity                        |  |                                 | 19.0         
|Return on average assets                        |  |                                 | 1.1          
|Average common equity as a % of average assets  |  |                                 | 5.9          
|Dividend payout ratio(5)                        |  |                                 | 4.3          
|Tier 1 capital ratio(6)                         |  |                                 | 17.8         
|Leverage ratio(6)                               |  |                                 | 5.4          
|Noninterest income as % of net operating income |  |                                 | 68.7         
|Other Statistical Data:                         |  |                                 |              
|Assets processed at end of period(7)            |  | $                               | 1,056,871,924
|Employees at end of period                      |  |                                 | 2,413        

---

24

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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 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 asset administration services for the financial services industry through our wholly-owned subsidiary, Investors Bank & Trust Company. We provide core services and
value-added services to a variety of financial asset managers, including mutual fund complexes, investment advisors, family offices, banks and insurance companies. Core services include global
custody, multicurrency accounting and mutual fund administration. Value-added services include securities lending, foreign exchange, cash management, performance measurement, institutional transfer
agency, investment advisory services, lines of credit, middle office outsourcing and brokerage and transition management services. We have offices located in the United States, Ireland, Canada, and
the Cayman Islands with a vast subcustodian global network established to accommodate the international needs of our clients. At December 31, 2003, we provided services for approximately $1.1
trillion in net assets, including approximately $177 billion in foreign net assets.

We
grow our business by selling our services to new clients and by further penetrating our existing clients. We believe that we service less than 10% of the assets managed by our
existing clients, and we have traditionally achieved significant success in growing client relationships. Our ability to service new clients and expand our relationships with existing clients depends
on our provision of superior client service. Our growth is also affected by overall market conditions, the regulatory environment for us and our clients and the success of our clients marketing their
products.

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

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

In
2003, we settled a tax assessment with the Commonwealth of Massachusetts. In March 2003, a retroactive change in the Commonwealth of Massachusetts tax law disallowed a
dividends received deduction taken by the Bank on dividends it had received since 1999 from a wholly-owned real estate investment trust. During the second quarter of 2003, we settled this disputed tax
assessment with the

25

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Massachusetts
Department of Revenue, agreeing to pay approximately 50% of the liability. As a result of this change in tax law, we recorded an additional state tax expense of approximately
$7.2 million, net of federal income tax benefit, in 2003. Despite the additional tax expense, we were still able to generate a 33% growth in net income for the year ended December 31,
2003 when compared to the same period in the prior year.

We
continue to remain focused on our sales efforts, prudent expense management and increasing efficiency. These goals are complicated by the need to build infrastructure to support our
rapid growth, by the need to maintain state-of-the-art systems and by the need to retain and motivate our high caliber workforce.

In
our 2003 earnings releases, we reported operating income and per share information that exclude the effect of the state tax assessment settlement previously discussed above. We
believe that operating earnings provide a more meaningful presentation of the results of operations because they do not include the one-time tax charge which was unrelated to our
operations. The following table presents a reconciliation between earnings presented on the face of our Statement of Income and the non-GAAP measure of net operating income referenced in
our earnings releases (Dollars in thousands, except per share data):

GAAP Earnings

|                           |         | For the Year Ended December 31,
|-------------------------- | ------- | -------------------------------
|
|Income before taxes        |         | $                              
|Provision for income taxes |         |                                
|                           |         |                                
|Net Income                 |         | $                              
|                           |         |                                
|Earnings per share:        |         |                                
|                           | Basic   |                                
|                           |         |                                
|                           | Diluted |                                
|                           |         |                                

Pro Forma Operating Earnings

|                           |         | For the Year Ended December 31,
|-------------------------- | ------- | -------------------------------
|
|Income before taxes        |         | $                              
|Provision for income taxes |         |                                
|                           |         |                                
|Net Income                 |         | $                              
|                           |         |                                
|Earnings per share:        |         |                                
|                           | Basic   |                                
|                           |         |                                
|                           | Diluted |                                
|                           |         |                                

---

26

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Critical 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. Senior management has discussed these critical
accounting policies with the audit committee.

Derivative Financial Instruments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 under existing circumstances. However, the use of alternative assumptions could have a significant effect on estimated fair value.

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, 2003, the discount rate, compensation increase and average return on plan assets were 6.25%, 3.75% and 8.50%, respectively. The discount rate at
December 31, 2003 was lower than that at December 31, 2002 by 0.50% due to a decline in interest rates, and the compensation increase percentage was equal to the prior year as
assumptions on compensation increases remain consistent. The rate of return on plan assets of 8.50% has remained consistent with the prior year as the historical long-term return on plan assets has
been consistent with the estimated rate. In addition, this increase in expense is expected to be partially offset by the incremental return on our additional $3.0 million contribution made in
2003. Net periodic pension expense for 2003 was $1.0 million and is expected to be approximately $1.4 million in fiscal year 2004.

The
discount rate and compensation increase percentage assumptions for our nonqualified, unfunded, supplemental retirement plan, which covers certain employees, are the same as those of
our defined benefit pension plan. The net periodic expense for 2003 for the supplemental retirement plan was $2.4 million and is expected to be approximately $2.5 million in fiscal year
2004.

New Accounting Principles

In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149,Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133,Accounting for Derivative Instruments and Hedging
Activities, resulting in more consistent reporting of contracts as

27

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either
derivatives or hybrid instruments. SFAS No. 149 was effective for contracts entered into or modified after June 30, 2003, and is applied on a prospective basis. We have evaluated
our financial accounting and reporting for all derivative instruments and found them to be consistent with SFAS No. 149.

In
May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity.SFAS No. 150 requires an issuer to classify financial instruments within its scope as a liability (or an asset in some circumstances). This Statement provides
that these instruments must be classified as liabilities in the consolidated balance sheet and recorded at fair value. We adopted the provisions of this Statement effective July 1, 2003. The
adoption of this Statement did not have a material impact on our financial position.

In
January 2003, the FASB issued Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin ("ARB") 51.This interpretation addresses consolidation by business enterprises of variable interest entities ("VIE"). This
interpretation requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE's activities or entitled to receive a majority of the entity's
residual returns, or both. The provisions are effective for any new entities that are originated subsequent to January 31, 2003. For entities that were originated prior to February 1,
2003, the provisions of this interpretation were to be effective October 1, 2003. We have adopted the provisions of this interpretation. In 1997, Investors Capital Trust I ("ICTI"), a
wholly-owned subsidiary of the Company, issued mandatorily redeemable preferred securities, or Capital Securities. At the same time, in order to support payments under the Capital Securities, the
Company issued junior subordinated debentures to ICTI. As a result of the adoption of this interpretation, we were required to deconsolidate ICTI. Therefore, in its consolidated financial statements,
the Company presents the junior subordinated debentures underlying the Capital Securities as a liability and its investment in ICTI as a component of other assets. The income of ICTI for the three
months that ICTI was not consolidated is considered immaterial.

Certain Factors That May Affect Future Results

From time to time, information provided by us, statements made by our employees, or information included in our filings with the Securities and Exchange
Commission (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, annual dividend payments, interest rate conditions, interest rate sensitivity, loss exposure on lines of credit, the timing and effect on earnings of derivative
gains and losses, securities lending revenue, compensation expense, depreciation expense, effective tax rate, the effect on earnings of changes in equity values and the effect of certain legal claims
against us. Our actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors
discussed below. Each of these factors, and others, are discussed from time to time in our filings with the SEC.

28

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

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

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

As a result of our selection to service assets for Barclays Global Investors Canada, Ltd., our assumption of the operations of the U.S. asset
administration unit of BGI in 2001 and our ongoing relationship with BGI's iShares and Master Investment Portfolios, BGI accounted for approximately 16% of our net operating revenue during the year
ended December 31, 2003. We expect that BGI will continue to account for a significant portion of our net operating revenue. While we provide services to BGI under long-term
contracts, those contracts may be terminated for certain regulatory and fiduciary reasons. The loss of BGI's business would cause our net operating revenue to decline significantly and may have an
adverse effect on our quarterly and annual results.

We may incur losses due to operational errors.

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

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

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

We may incur significant costs defending legal claims.

We have been named in a lawsuit in Massachusetts state court alleging, among other things, violations of a covenant of good faith and fair dealing in a contract.
While we believe this claim is without merit, we cannot be sure that we will prevail in the defense of this claim. We are also party to

29

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other
litigation and we may become subject to other legal claims in the future. Litigation is costly and could divert the attention of management.

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

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

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

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

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

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

We may not be able to protect our proprietary technology.

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

Our quarterly and annual operating results may fluctuate.

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



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

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

Federal and state laws and regulations applicable to financial institutions and their parent companies apply to us. Our primary regulators are the Federal Reserve
Board ("FRB"), the Federal Deposit Insurance Corporation ("FDIC"), the Massachusetts Commissioner of Banks and the National

30

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Association
of Securities Dealers, Inc. ("NASD"). Virtually all aspects of our operations are subject to specific requirements or restrictions and general regulatory oversight including the following:



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

Statements of Operations

Comparison of Operating Results for the Years Ended December 31, 2003 and 2002.

Net income for the year ended December 31, 2003 was $91.8 million, up 33% from $68.9 million for the same period in 2002. The principal
factors contributing to the net income growth included 8% growth in net interest income caused by a decline in our cost of funds due to lower interest rates, and a 12% growth in noninterest income
caused by increased net assets processed related to sales to new and existing clients, fund flows, market appreciation, and increased client transaction activity. Net income growth was partially
offset by a 1% increase in operating expenses due to prudent expense management and capitalizing on technology improvements to create efficiencies and by the additional tax expense incurred as a
result of a settlement of a tax assessment by the Commonwealth of Massachusetts. Refer toIncome Taxeswithin this section for further discussion
regarding our settlement of this tax assessment.

Net Operating Revenue

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

|                            |  | For the Year Ended December 31, |        
|--------------------------- |  | ------------------------------- | -------
|
|Net interest income         |  | $                               | 152,883
|Noninterest income          |  |                                 | 336,193
|                            |  |                                 |        
|Total net operating revenue |  | $                               | 489,076
|                            |  |                                 |        

Net Interest Income

Net interest income was $152.9 million in 2003, up 8% from 2002. Net interest income is affected by the volume and mix of assets and liabilities, and the
movement and level of interest rates. For the majority of 2003, interest rates continued to decline in general with signs of stabilization beginning in the third quarter of 2003. The improvement in
our net interest income was primarily driven by declining rates on our liabilities. Our average rate paid on interest-bearing liabilities was 1.34% for the year ended December 31, 2003, a 69
basis point decline from 2.03% for the same period in 2002. During 2003 and 2002, the Company repaid long-term Federal Home Loan Bank of Boston

31

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("FHLBB")
borrowings and replaced these sources of funds with lower cost funding as a strategy to help maintain and preserve net interest margin. Although the average funding balance increased
$1.7 billion from $5.3 billion in 2002 to $7.0 billion in 2003, the average rates paid on interest-bearing liabilities declined more rapidly than the volume increase.

Also
during 2003, we experienced higher volumes of prepayments from our investment portfolio. The cash flows from these prepayments were reinvested in lower yielding interest-earning
assets. Through increased lower cost client funding, we were able to maintain our interest income at a pace relatively equivalent to the decline in average interest rates earned.

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, 2003 compared to the year ended December 31, 2002. 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, 2003 vs. December 31, 2002 |       
|--------------------------------------------------------------- |  | ---------------------------------------------------------- | ------
|
|Interest-earning assets                                         |  |                                                            |       
|Fed funds sold and securities purchased under resale agreements |  | $                                                          | (202  
|Investment securities                                           |  |                                                            | 66,558
|Loans                                                           |  |                                                            | 522   
|                                                                |  |                                                            |       
|Total interest-earning assets                                   |  | $                                                          | 66,878
|                                                                |  |                                                            |       
|Interest-bearing liabilities                                    |  |                                                            |       
|Deposits                                                        |  | $                                                          | 13,005
|Borrowings                                                      |  |                                                            | 14,075
|                                                                |  |                                                            |       
|Total interest-bearing liabilities                              |  | $                                                          | 27,080
|                                                                |  |                                                            |       
|Change in net interest income                                   |  | $                                                          | 39,798
|                                                                |  |                                                            |       

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 our liabilities is effectively converted to a fixed-rate liability for the term of the interest rate swap agreement. Our derivatives are
designated as highly effective cash flow hedges. To the extent there is hedge ineffectiveness it is included as a component of the net interest margin. Hedge ineffectiveness had an insignificant
impact on earnings for the years ended December 31, 2003 and 2002. We expect that hedge ineffectiveness will continue to have an insignificant effect on net interest margin in 2004.

We
periodically run interest rate simulation models to understand the effect of various interest rate scenarios on our capital and net income. The results of the income simulation model
as of December 31, 2003 indicated that an upward shift of interest rates by 200 basis points over a twelve-month period would result in a reduction in projected net interest income of 7.83%. We
also simulate a 200 basis point rate reduction over a twelve-month period, however, in the simulation we do not reduce rates below 0%. This modified simulation results in a decrease in projected net
interest income of 11.42%. Refer to the "Market Risk" section of this document for more detailed information regarding our income simulation methodology and policies.

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Noninterest Income

Noninterest income was $336.2 million in 2003, up 12% from 2002. The principal factors driving noninterest income are market trends and the level of client
activity. The S&P 500, Dow Jones Industrial Average, and Europe, Australia, Far East indices increased approximately 29%, 17% and 35%, respectively, in 2003 resulting in higher assets processed values
from which we generate our core service revenue. Noninterest income consists of the following items (Dollars in thousands):

|                           |                                        | For the Years Ended December 31,
|-------------------------- | -------------------------------------- | --------------------------------
|
|Core service fees:         |                                        |                                 
|                           | Custody, accounting and administration |                                 
|                           |                                        |                                 
|Ancillary service fees:    |                                        |                                 
|                           | Foreign exchange                       |                                 
|                           | Cash management                        |                                 
|                           | Investment advisory                    |                                 
|                           | Securities lending                     |                                 
|                           | Other service fees                     |                                 
|                           |                                        |                                 
|                           |                                        | Total ancillary service fees    
|                           |                                        |                                 
|Total asset servicing fees |                                        |                                 
|Other operating income     |                                        |                                 
|                           |                                        |                                 
|Total noninterest income   |                                        | $                               
|                           |                                        |                                 

Asset
servicing fees for the year ended December 31, 2003 increased 13% to $333.6 million from 2002. The largest components of asset servicing fees are custody, accounting
and administration, which increased 10% to $254.2 million for the year ended December 31, 2003 from $231.5 million in the same period of 2002. Custody, accounting and
administration fees are based in part on the value of assets processed. Assets processed is the total dollar value of financial assets on the reported date for which we provide global custody or
multicurrency accounting. The change in net assets processed includes the following components (Dollars in billions):

For the Year Ended
December 31, 2003Net assets processed, beginning of period

$
785Sales to new clients


1Lost clients


(3
)Further penetration of existing clients


39Fund flows and market gain


235Net assets processed, end of period

$
1,057


The
majority of the increase in assets processed resulted from improved market conditions over the course of the past year, and the ability of our clients to continue to generate new
products or additional fund flows, which are additional investments in their existing products. As indicated in our overview, our core services fees are generated by charging a fee based upon the
value of assets processed. As market values or clients' asset levels fluctuate, so will our revenue. Our tiered pricing structure, coupled with minimum and flat fees, allow us to manage this
volatility. As asset values increase, the basis point fee typically lowers, while when asset values decrease, revenue is only impacted by the asset decline at the then marginal rate.

33

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

Transaction-driven
income includes our ancillary services, such as foreign exchange, cash management and securities lending. Foreign exchange fees were $36.5 million for the year
ended December 31, 2003, up 49% from the same period in 2002. The increase in foreign exchange fees is attributable to further penetration of existing clients, the addition of new clients,
higher transaction volumes and increased volatility within the currencies traded by our clients. Future foreign exchange income is dependent on the level of client activity and the overall volatility
in the currencies traded. Cash management fees, which consist of sweep fees, were $20.9 million for the year ended December 31, 2003, up 23% from the same period in 2002. The increase is
primarily due to increased client balances. Cash management revenue will continue to depend on the level of client balances maintained in the cash management products. If our clients' funds continue
to attract high volumes of cash flows, our cash management revenue will be positively impacted. Securities lending fees were $8.9 million for the year ended December 31, 2003, down 21%
from the same period in 2002, primarily due to narrower spreads. Securities lending transaction volume is positively affected by the market value of the securities on loan, merger and acquisition
activity, increased IPO activity and a steeper short-end of the yield curve. If the capital markets experience any of the aforementioned activity, it is likely that our securities lending
revenue will be positively impacted. If we experience a reduction in our securities
lending portfolio, lower market values and continued compression of the spreads earned on securities lending activity, our securities lending revenue will likely be negatively impacted.

Operating Expenses

Total operating expenses were $344.9 million in 2003, up 1% from 2002. The marginal increase in operating expenses, despite strong revenue growth, is due
to our prudent expense management and our ability to benefit from technology efficiencies. It is expected that only incremental expense associated with new business will be added during 2004. The
components of operating expenses were as follows (Dollars in thousands):

|                                  |  | For the Year Ended December 31,
|--------------------------------- |  | -------------------------------
|
|Compensation and benefits         |  | $                              
|Technology and telecommunications |  |                                
|Transaction processing services   |  |                                
|Occupancy                         |  |                                
|Depreciation and amortization     |  |                                
|Professional fees                 |  |                                
|Travel and sales promotion        |  |                                
|Other operating expenses          |  |                                
|                                  |  |                                
|Total operating expenses          |  | $                              
|                                  |  |                                

34

---

Compensation
and benefits expense was $186.9 million in 2003, down 3% from 2002. The average number of employees decreased 7% to 2,459 during the year ended December 31,
2003 from 2,648 for the year ended December 31, 2002. We experienced a reduction in compensation costs as a result of efficiencies gained through technology enhancements made during 2002 and
2003. It is expected that compensation expense will increase in 2004 due to employee merit raises and additional compensation arising from new hires needed to support new business wins.

Technology
and telecommunications expense was $38.9 million in 2003, down 8% from 2002. Technology and telecommunications expense consists primarily of contract programming,
outsourced services, telecommunications and costs related to hardware and software licenses. In 2002, the Company incurred significant technology and telecommunications expense on the integration of
the BGI U.S. asset administration unit into our technology infrastructure, which was completed in January 2003. After the significant integration of 2002, we lowered our technology reinvestment
(reflected in both technology and compensation expenses) to our target of approximately 20% of revenue.

Transaction
processing services expense was $33.3 million in 2003, down 1% from 2002. Overall transaction volumes increased during 2003, generating larger subcustodian expense and
pricing fees. However, during 2002, we were in the process of converting the assets of the assumed BGI U.S. asset administration unit to our subcustodian network which resulted in significant
transaction processing expenses during the conversion period. This conversion was completed during 2002. Absent the expenses associated with the conversion, transaction processing fees increased on an
overall basis due to increased volumes of client activity. Future transaction processing servicing expense will be dependent on the volume of client activity.

Occupancy
expense was $29.2 million in 2003, up 14% from 2002. This increase was primarily due to increased space in our Dublin office to accommodate the significant growth
experienced by that office resulting from new client business. At the end of 2002, we signed a new lease agreement and increased our Dublin office from approximately 16 thousand square feet to
approximately 50 thousand square feet. Also, 2003 includes the full twelve-month impact of additional space in our Boston offices that we occupied in July 2002. Occupancy expense should
remain relatively consistent for 2004.

Depreciation
and amortization expense was $28.0 million in 2003, up 71% from 2002. This increase resulted from completion of capitalized software projects in late 2002 and 2003
and their placement into service along with the addition of leasehold improvements as a result of the new space we occupied in Boston and Dublin. The capitalized projects placed in service also
provided efficiencies that allowed us to reduce our compensation and benefits and technology and telecommunications expenses. Enhancements to our straight-through-processing platform resulted in a
significant amount of efficiency gain in 2003. Depreciation expense is expected to increase in 2004 as a result of additional capitalized software costs being placed into service in 2003 and 2004.

Income Taxes

Income taxes were $52.4 million for the year ended December 31, 2003, up 77% from the same period in 2002. Two factors contributed to the
significant increase in 2003, including a settlement of a tax assessment with the Commonwealth of Massachusetts Department of Revenue and increased pretax earnings.

In
March 2003, a retroactive change in the Commonwealth of Massachusetts tax law disallowed a dividends received deduction taken by the Bank on dividends it had received since
1999 from a wholly-owned real estate investment trust. During the second quarter of 2003, we settled this disputed tax assessment with the Massachusetts Department of Revenue, agreeing to pay
approximately 50% of the liability. As a result of this retroactive change in tax law, we recorded an additional state tax expense of approximately $7.2 million, net of federal income tax
benefit, in 2003.

In
2004, we expect that our effective rate will approximate 32.5% to 33.5% of pretax income.

35

---

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         |  | $                               | 141,046
|Noninterest income          |  |                                 | 298,844
|                            |  |                                 |        
|Total net operating revenue |  | $                               | 439,890
|                            |  |                                 |        

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                                                      |  |                                                            | 26,295
|                                                                |  |                                                            |       
|Total interest-bearing liabilities                              |  | $                                                          | 34,424
|                                                                |  |                                                            |       
|Change in net interest income                                   |  | $                                                          | 34,849
|                                                                |  |                                                            |       

Net
interest income was $141.0 million in 2002, up 32% from 2001. The improvement in net interest income primarily reflected the positive effect of balance sheet growth driven by
increased client deposits and a steep yield curve. The net interest margin remained constant at 2.44% in 2002 and 2001 due to prepayment costs incurred during the year as a result of an asset
liability strategy to prepay higher rate 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 $34.8 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 2.03% in 2002, down 164
basis points from 2001. The decrease in rates reflected the lower interest rate environment in 2002 compared with 2001.

36

---

The
effect on net interest income due to changes in rates was a decrease of approximately $0.6 million during the fiscal year ended December 31, 2002, a decrease 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.

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 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 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 were 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 by approximately $1.4 million, net of tax.

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

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. Approximately $0.2 million, net of tax, of the remaining transition adjustment of net derivative losses
included in OCI will be reclassified into earnings. The recognition in net interest income of the transition adjustment derivative losses from OCI was offset by derivative gains from changes in the
fair value liability of the interest rate swaps as they reach maturity.

37

---

Noninterest Income

Noninterest income was $298.8 million in 2002, up 17% from 2001. Noninterest income consists of the following items (Dollars in thousands):

|                        |                                        | For the Years Ended December 31,
|----------------------- | -------------------------------------- | --------------------------------
|
|Core service fees:      |                                        |                                 
|                        | Custody, accounting and administration |                                 
|                        |                                        |                                 
|Ancillary service fees: |                                        |                                 
|                        | Foreign exchange                       |                                 
|                        | Cash management                        |                                 
|                        | Securities lending                     |                                 
|                        | Investment advisory                    |                                 
|                        | Other service fees                     |                                 
|                        |                                        |                                 
|                        | Total ancillary service fees           |                                 
|                        |                                        |                                 
|                        | Total asset servicing fees             |                                 
|                        | Other operating income                 |                                 
|                        |                                        |                                 
|                        |                                        | Total noninterest income        
|                        |                                        |                                 

Asset
servicing fees for the year ended December 31, 2002 increased 18% to $296.4 million from 2001. The largest component of asset servicing fees are custody, accounting,
transfer agency and administration, which are based in part on assets processed. 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, allowed us to minimize the impact of the equity market downturn in
2002. Our tiered pricing structure for asset-based fees also contributed 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.

Foreign
exchange fees increased due to higher transaction volumes and 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 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 of dividends received relating to FHLBB stock investment. The decrease in 2002 other operating income compared to 2001 resulted primarily from a decrease
in the dividend rate paid on the FHLBB stock.

38

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Operating Expenses

Total operating expenses were $341.4 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         |  | $                              
|Technology and telecommunications |  |                                
|Transaction processing services   |  |                                
|Occupancy                         |  |                                
|Depreciation and amortization     |  |                                
|Professional fees                 |  |                                
|Travel and sales promotion        |  |                                
|Amortization of goodwill          |  |                                
|Other operating expenses          |  |                                
|                                  |  |                                
|Total operating expenses          |  | $                              
|                                  |  |                                

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. In 2002, 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 accounted for as capitalized software development costs in 2002.

Technology
and telecommunications expense was $42.2 million in 2002, up 8% from 2001. 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 was
$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 acquisition of certain institutional
custody business lines from Chase Manhattan Bank, N.A. in 2001.

Transaction
processing services expense was $33.7 million in 2002, up 17% from 2001. The increase related 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 due primarily to increased space in our Boston, New York and Dublin offices and the California
offices assumed from BGI.

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 $11.8 million in 2002, up 49% 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. The Merrimac fees are asset based and the increase results from growth in the size of the Merrimac Master Portfolio.

39

---

Travel
and sales promotion expense was $5.8 million in 2002, 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 Note 2 to our notes to consolidated
financial statements.

Other
operating expenses were $13.1 million in 2002, 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 $29.5 million in 2002, up 35% from 2001, consistent with the increased level of pre-tax income. The overall effective tax
rate was 30.0% for 2002 and 30.4% for 2001. The decrease in the effective tax rate reflects our increased investment in tax-exempt municipal securities in 2002.

40

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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, 2003 |           | Year Ended December 31, 2002 |   | Year Ended December 31, 2001 |       
|---------------------------------------------------------------- | ------- | ---------------------------- | --------- | ---------------------------- | - | ---------------------------- | ------
|
|Interest-earning assets                                          |         |                              |           |                              |   |                              |       
|Fed Funds sold and securities purchased under resale agreements  |         | $                            | 30,236    |                              | $ | 326                          |       
|Investment securities(1)                                         |         |                              | 7,407,352 |                              |   | 242,160                      |       
|Loans(2)                                                         |         |                              | 127,452   |                              |   | 3,577                        |       
|                                                                 |         |                              |           |                              |   |                              |       
|Total interest-earning assets                                    |         |                              | 7,565,040 |                              |   | 246,063                      |       
|                                                                 |         |                              |           |                              |   |                              |       
|Allowance for loan losses                                        |         |                              | (100      | )                            |   |                              |       
|Noninterest-earning assets(3)                                    |         |                              | 575,732   |                              |   |                              |       
|                                                                 |         |                              |           |                              |   |                              |       
|Total assets                                                     |         | $                            | 8,140,672 |                              |   |                              |       
|                                                                 |         |                              |           |                              |   |                              |       
|Interest-bearing liabilities                                     |         |                              |           |                              |   |                              |       
|Deposits:                                                        |         |                              |           |                              |   |                              |       
|                                                                 | Demand  |                              | $         |                             |   | $                            |      
|                                                                 | Savings |                              |           | 2,667,034                    |   |                              | 39,809
|                                                                 | Time    |                              |           | 1,356                        |   |                              | 10    
|Securities sold under repurchase agreements                      |         |                              | 3,278,555 |                              |   | 29,371                       |       
|Junior subordinated debentures(3)/
trust preferred securities    |         |                              | 24,194    |                              |   | 2,364                        |       
|Other borrowings(4)                                              |         |                              | 1,008,036 |                              |   | 21,626                       |       
|                                                                 |         |                              |           |                              |   |                              |       
|Total interest-bearing liabilities                               |         |                              | 6,979,175 |                              |   | 93,180                       |       
|                                                                 |         |                              |           |                              |   |                              |       
|Noninterest-bearing liabilities:                                 |         |                              |           |                              |   |                              |       
|Demand deposits                                                  |         |                              | 241,594   |                              |   |                              |       
|Savings                                                          |         |                              | 130,747   |                              |   |                              |       
|Noninterest-bearing time deposits                                |         |                              | 112,575   |                              |   |                              |       
|Other liabilities                                                |         |                              | 192,535   |                              |   |                              |       
|                                                                 |         |                              |           |                              |   |                              |       
|Total liabilities                                                |         |                              | 7,656,626 |                              |   |                              |       
|Equity                                                           |         |                              | 484,046   |                              |   |                              |       
|                                                                 |         |                              |           |                              |   |                              |       
|Total liabilities and equity                                     |         | $                            | 8,140,672 |                              |   |                              |       
|                                                                 |         |                              |           |                              |   |                              |       
|Net interest income                                              |         |                              |           |                              | $ | 152,883                      |       
|                                                                 |         |                              |           |                              |   |                              |       
|Net interest margin(5)                                           |         |                              |           |                              |   |                              |       
|                                                                 |         |                              |           |                              |   |                              |       
|Average interest rate spread(6)                                  |         |                              |           |                              |   |                              |       
|                                                                 |         |                              |           |                              |   |                              |       
|Ratio of interest-earning assets to interest-bearing liabilities |         |                              |           |                              |   |                              |       
|                                                                 |         |                              |           |                              |   |                              |       

---

41

---

Financial Condition

At December 31, 2003, our total assets were $9.2 billion, up 28% from December 31, 2002. We manage our balance sheet growth to accomplish
several goals, which include maintaining a leverage ratio of approximately 5.5%, utilizing our capital to provide maximum shareholder value, and accommodating the fund flows of our clients. Average
interest-earning assets increased $1.8 billion, or 31%, for the year ended December 31, 2003 compared to the same period last year. Funding for our asset growth was provided by a
combination of an increase in average client balances of approximately $1.2 billion and an increase in average external borrowings of approximately $0.6 billion for the year ended
December 31, 2003.

Investment Portfolio

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

|                                    |  | 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          |  | $           
|State and political subdivisions    |  |             
|Corporate debt                      |  |             
|US Treasury securities              |  |             
|Federal agency securities           |  |             
|Foreign government securities       |  |             
|                                    |  |             
|Total securities available for sale |  | $           
|                                    |  |             

The
overall increases in our held to maturity and available for sale portfolios are attributable to investing excess cash and borrowed funds to effectively utilize the Bank's capital and
accommodate client fund flows. Our held to maturity portfolio increased $868.9 million, or 25%, to $4.3 billion at December 31, 2003 from $3.4 billion at
December 31, 2002. As we continue to grow our balance sheet, we purchase investment securities that will protect our net interest margin, while maintaining an acceptable risk profile. The
increase in the held to maturity portfolio stems primarily from purchases of federal agency securities, particularly those issued by the Small Business Administration ("SBA"). SBA securities provide
an attractive yield with limited credit risk and prepayment risk in a rapidly changing
interest rate environment. The weighted-average life of the SBA securities correspond with our overall asset liability strategy. SBA securities that we hold are variable rate securities indexed to the
Prime rate and are purchased with an intent and ability to hold to maturity. The held to maturity investment portfolio is not viewed as our primary source of funds to satisfy liquidity needs.

Our
available for sale portfolio increased $1.0 billion, or 31%, to $4.3 billion at December 31, 2003 from $3.3 billion at December 31, 2002. The
increase in the available for sale portfolio is primarily due to an increase in our mortgage-backed securities portfolio of $852.2 million, or 31%, and the addition

42

---

of
$113.7 million of U.S. Treasury securities. In an effort to maintain our net interest margin, we have increased our position in mortgage-backed securities. As interest rates stop declining
and are likely to increase, floating rate and hybrid mortgage-backed securities should offer a healthy effective yield and limited extension risk, which aligns with our asset liability strategy. Refer
to the gap analysis under the "Market Risk" section for additional details regarding the matching of our interest-earning assets and interest-bearing liabilities.

The
average balance of our combined investment portfolios for the year ended December 31, 2003 was $7.4 billion, with an average yield of 3.27%, compared to an average
balance of $5.6 billion with an average yield of 4.33% during 2002. The decline in the yield is primarily due to the decline in the overall interest rate environment. As interest rates declined
throughout the year, we experienced a higher level of prepayments, resulting in increased principal cash payments that were reinvested in lower-yielding securities. In addition, the accelerated
prepayments caused us to recognize at a faster rate the premium amortization associated with the affected securities. During 2003, we recognized net amortization of $40.2 million for the year
ended December 31, 2003 compared to $10.5 million of net amortization in the same period of 2002. The effect of this accelerated amortization lowered our effective yield on the
investment portfolio. During the second half of 2003, interest rates began to stabilize, resulting in lower prepayments. A significant portion of our investment portfolio is variable rate in nature.
If interest rates were to rise during 2004, we would expect slower prepayments and our overall yield to increase as our variable rate securities reprice. Conversely, if interest rates were to decline
in 2004, we would expect that prepayments would accelerate and be comparative to the activity in 2003, with the cash flows from these prepayments being reinvested in lower-yielding assets of equal
quality and risk.

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

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

The
carrying value, weighted-average yield, and contractual maturity of our securities held to maturity at December 31, 2003 are reflected in the following table (Dollars in
thousands):

|                                  |  | Years |   
|--------------------------------- |  | ----- | --
|
|
|Mortgage-backed securities        |  | $     | 13
|Federal agency securities         |  |       |  
|State and political subdivisions  |  |       |  
|                                  |  |       |   
|Total securities held to maturity |  | $     | 13
|                                  |  |       |   

43

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The carrying value, weighted-average yield, and contractual maturity of our securities available for sale at December 31, 2003 are
reflected in the following table (Dollars in thousands):

|                                    |  | Years |       
|----------------------------------- |  | ----- | ------
|
|
|Mortgage-backed securities          |  | $     |      
|State and political subdivisions    |  |       | 5,394 
|Corporate debt                      |  |       |      
|US Treasury securities              |  |       |      
|Federal agency securities           |  |       | 29,609
|Foreign government                  |  |       |      
|                                    |  |       |       
|Total securities available for sale |  | $     | 35,003
|                                    |  |       |       

Loan Portfolio

Our loan portfolio increased $55.8 million, or 39%, to $199.5 million at December 31, 2003 from $143.7 million at December 31,
2002. The majority of the increase relates to additional advances on clients' lines of credit, partially offset by a decline in client overdrafts. At December 31, 2003, client overdrafts were
$54.3 million compared to $73.0 million at December 31, 2002.

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

|                                |  | December 31, |        
|------------------------------- |  | ------------ | -------
|
|Loans to mutual funds           |  | $            | 104,954
|Loans to individuals            |  |              | 67,641 
|Loans to others                 |  |              | 27,035 
|                                |  |              |        
|                                |  |              | 199,630
|Less: allowance for loan losses |  |              | (100   
|                                |  |              |        
|Net loans                       |  | $            | 199,530
|                                |  |              |        
|Floating Rate                   |  | $            | 199,618
|Fixed Rate                      |  |              | 12     
|                                |  |              |        
|                                |  | $            | 199,630
|                                |  |              |        

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

At
December 31, 2003, 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.

44

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Our
credit loss experience has been excellent. There have been no loan charge-offs in the last five years, or in the history of our Company. It is our policy to place a loan
on nonaccrual status when either principal or interest becomes 60 days past due and the loan's collateral is not sufficient to cover both principal and accrued interest. As of
December 31, 2003, there were no loans on nonaccrual status, no loans greater than 90 days past due, and no troubled debt restructurings. Although virtually all of our loans are fully
collateralized with freely tradable securities, management recognizes
some credit risk inherent in the loan portfolio, and has an allowance for loan losses of $0.1 million at December 31, 2003, a level of which has remained consistent for the past five
years. This amount is not allocated to any particular loan, but is intended to absorb any risk of loss inherent in the loan portfolio. Management actively monitors the loan portfolio and the
underlying collateral and regularly assesses the adequacy of the allowance for loan losses.

Deposits

Total deposits were $4.2 billion at December 31, 2003, up 26% from December 31, 2002. The increase in our deposit balances is a direct result
of our clients leaving more cash on deposit with us. We effectively utilized these cash balances to fund a portion of our asset growth. The following table represents the average balance and
weighted-average yield paid on deposits (Dollars in thousands):

|                     |  | December 31, 2003 |           | December 31, 2002 |     
|-------------------- |  | ----------------- | --------- | ----------------- | ----
|
|Interest-bearing:    |  |                   |           |                   |     
|Demand deposits      |  | $                 |          |                   | 0.00
|Savings              |  |                   | 2,667,034 |                   | 1.49
|Time deposits        |  |                   | 1,356     |                   | 0.74
|                     |  |                   |           |                   |     
|                     |  | $                 | 2,668,390 |                   | 1.49
|                     |  |                   |           |                   |     
|Noninterest-bearing: |  |                   |           |                   |     
|Demand deposits      |  | $                 | 241,594   |                   |    
|Savings              |  |                   | 130,747   |                   |    
|Time deposits        |  |                   | 112,575   |                   |    
|                     |  |                   |           |                   |     
|                     |  | $                 | 484,916   |                   |     
|                     |  |                   |           |                   |     

Repurchase Agreements and Short-Term and Other Borrowings

Asset growth was funded in part by increased securities sold under repurchase agreements. Repurchase agreements increased $1.0 billion, or 42%, to
$3.3 billion at December 31, 2003 from $2.3 billion at December 31, 2002. Repurchase agreements provide for the sale of securities for cash coupled with the obligation to
repurchase those securities on a set date or on demand. We use repurchase agreements, including client repurchase agreements, because they provide a lower cost source of funding than other
short-term borrowings. The average balance of securities sold under repurchase agreements for the year ended December 31, 2003 was $3.3 billion with an average cost of
approximately 0.90%, compared to an average balance of $2.4 billion and an average cost of approximately 1.27% for the same period last year. The decline in the average rate paid on repurchase
agreements relates to the overall decline in the indices to which the repurchase agreements are linked.

Short-term
and other borrowings increased $357.0 million, or 48%, to $1.1 billion at December 31, 2003 from $741.1 million at December 31,
2002. We use short-term and other borrowings to offset variability of deposit flow. The average balance of short-term and other borrowings for the year ended
December 31, 2003 was $1.0 billion with an average cost of approximately 2.15%, compared to an

45

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average
balance of $845.2 million and an average cost of approximately 3.66% for the same period last year. The average cost of borrowing for the year ended December 31, 2003, included
prepayment fees of $3.1 million. These fees were incurred to employ an asset-liability strategy in which we replaced a high cost borrowing with a new borrowing at a lower rate and purchased
assets with a similar maturity to lock in spread. We employed the same strategy in 2002. As a result, the average cost for the year ended December 31, 2002 included $7.6 million of
prepayment fees.

Market Risk

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

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

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

Our
Board of Directors has delegated day-to-day responsibility for oversight of the Asset and Liability Management function to our Asset and Liability Committee
("ALCO"). ALCO is a senior management committee consisting of the Chief Executive Officer, the President, the Chief Financial Officer, the Chief Risk Officer and members of the Treasury function. ALCO
meets twice monthly. Our primary tool in managing interest rate sensitivity is an income simulation model. Key assumptions in the simulation model include the timing of cash flows, maturities and
repricing of financial instruments, changes in market conditions, capital planning and deposit sensitivity. The model assumes that the composition of our interest-sensitive assets and liabilities
existing at the beginning of a period will change periodically over the period being measured. The model also assumes that a particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and liabilities. These assumptions are inherently uncertain, and

46

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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, 2003 and 2002 indicated that an upward shift of interest rates by 200 basis points over a twelve-month period would
result in a reduction in projected net interest income of 7.83% and 6.56%, respectively. We also simulate a 200 basis point rate reduction over a twelve-month period, however, in the simulation we do
not reduce rates below 0%. This modified simulation results in a decrease in projected net interest income of 11.42% and 14.20% at December 31, 2003 and 2002, respectively.

We
also use gap analysis as a secondary tool to manage our interest rate sensitivity. Gap analysis involves measurement of the difference in asset and liability repricing on a cumulative
basis within a specified time frame. A positive gap indicates that more interest-earning assets than interest-bearing liabilities mature in a time frame, and a negative gap indicates the opposite. By
seeking to minimize the net amount of assets and liabilities that could reprice in the same time frame, we attempt to reduce the risk of significant adverse effects on net interest income caused by
interest rate changes. As shown in the cumulative gap position in the table presented below, at December 31, 2003, interest-bearing liabilities repriced faster than interest-earning assets in
the short term, as has been typical for us. Generally speaking, during a period of falling interest rates, net interest income would be higher than it would have been until interest rates stabilize.
During a period of rising interest rates, net interest income would be lower until interest rates stabilize. However, at the current absolute level of interest rates, lower interest rates may also
lead to lower net interest income due to a diminished ability to lower the rates paid on interest-bearing liabilities, including certain client funds, as rates approach zero.
Other important determinants of net interest income are 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, 2003 (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)                    |                                                | $      | 4,352,805           |            | $                    | 450,629 |                        | $     | 734,110         |          | $     
|                                                                                      | Loansvariable rate                         |                                                |        | 199,618             |            |                      |        |                        |       |                |          |       
|                                                                                      | Loansfixed rate                            |                                                |        |                    |            |                      |        |                        |       |                |          |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Total interest-earning assets                  |        |                     | 4,552,423  |                      |         | 450,629                |       |                 | 734,110  |       
|Interest-bearing liabilities:                                                         |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      | Savings accounts                            |                                                |        | 3,582,146           |            |                      |        |                        |       |                |          |       
|                                                                                      | Interest rate contracts                     |                                                |        | (1,090,000          | )          |                      | 90,000  |                        |       | 180,000         |          |       
|                                                                                      | Securities sold under repurchase agreements |                                                |        | 2,858,001           |            |                      |        |                        |       |                |          |       
|                                                                                      | Short-term borrowings                       |                                                |        | 948,087             |            |                      |        |                        |       |                |          |       
|                                                                                      | Junior subordinated debentures              |                                                |        |                    |            |                      |        |                        |       |                |          |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Total interest-bearing liabilities             |        |                     | 6,298,234  |                      |         | 90,000                 |       |                 | 180,000  |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Net interest sensitivity gap during the period |        | $                   | (1,745,811 | )                    | $       | 360,629                |       | $               | 554,110  |       
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|                                                                                      |                                             | Cumulative gap                                 |        | $                   | (1,745,811 | )                    | $       | (1,385,182             | )     | $               | (831,072 | )     
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Interest-sensitive assets as a percent of interest-sensitive liabilities (cumulative) |                                             |                                                | 72.28  | %                   |            | 78.32                | %       |                        | 87.35 | %               |          | 104.89
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Interest-sensitive assets as a percent of total assets (cumulative)                   |                                             |                                                | 49.35  | %                   |            | 54.24                | %       |                        | 62.19 | %               |          | 91.13 
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Net interest sensitivity gap as a percent of total assets                             |                                             |                                                | (18.93 | )%                  |            | 3.91                 | %       |                        | 6.01  | %               |          | 13.26 
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       
|Cumulative gap as a percent of total assets                                           |                                             |                                                | (18.93 | )%                  |            | (15.02               | )%      |                        | (9.01 | )%              |          | 4.25  
|                                                                                      |                                             |                                                |        |                     |            |                      |         |                        |       |                 |          |       

---

48

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Liquidity

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

Our
primary sources of liquidity include cash and cash equivalents, Federal Funds sold, Federal Reserve Discount Window, new deposits, short-term borrowings, interest and
principal payments on securities held to maturity and available for sale, and fees collected from asset administration clients. As a result of our management of liquid assets and the ability to
generate liquidity through 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 $0.07 per share for 2004 (approximately $4.6 million based upon 65,436,788 shares outstanding as of December 31, 2003).

Our
ability to pay dividends on Common Stock may depend on the receipt of dividends from the Bank. Any dividend payments by the Bank are subject to certain restrictions imposed by the
Massachusetts Commissioner of Banks. During all periods presented in this report, the Company did not require dividends from the Bank in order to fund the Company's own dividends. In addition, we may
not pay dividends on our Common Stock if we are in default under certain agreements entered into in connection with the sale of our Capital Securities. The Capital Securities were issued by ICTI, a
Delaware statutory business trust sponsored by us, and qualify as Tier 1 capital under the capital guidelines of the Federal Reserve.

We
have informal borrowing arrangements with various counterparties. Each counterparty has agreed to make funds available to us at the Federal Funds overnight rate. The aggregate amount
of these borrowing arrangements as of December 31, 2003 was $2.4 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, 2003 was $3.9 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, 2003 was approximately $1.3 billion. The
amount outstanding under this arrangement at December 31, 2003 was $0.4 billion.

The
FHLBB is implementing a new capital structure and stock-investment rules to comply with the Gramm-Leach-Bliley Act of 1999 and regulations that were subsequently promulgated in 2001
by the FHLBB's regulator, the Federal Housing Finance Board. The Bank's capital stock investment in the FHLBB will remain at its current level of $50 million under the new capital plan which
takes effect on April 19, 2004. FHLBB capital stock investments require a five-year advance notice of withdrawal under the new capital plan. Under the new capital plan, our $50 million
stock investment in the FHLBB will provide a borrowing capacity of approximately $555 million.

49

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The
following table details our contractual obligations as of December 31, 2003 (Dollars in thousands):

|                        |                                                                     | Payments due by period
|----------------------- | ------------------------------------------------------------------- | ----------------------
|
|Contractual obligations |                                                                     |                       
|                        | Debt obligations                                                    |                       
|                        | Repurchase agreements                                               |                       
|                        | Mandatorily redeemable, preferred securities of subsidiary trust(1) |                       
|                        | Operating lease obligations                                         |                       
|                        |                                                                     |                       
|                        |                                                                     | Total                 
|                        |                                                                     |                       

---

|                  |                                       | Payments due by period
|----------------- | ------------------------------------- | ----------------------
|
|Other commitments |                                       |                       
|                  | Unused commitments to lend            |                       
|                  | Interest rate swaps (notional amount) |                       
|                  | Fixed price purchase contracts        |                       
|                  | Other                                 |                       
|                  |                                       |                       
|                  |                                       | Total                 
|                  |                                       |                       

Included
in the Other commitments line described above are contracts in which we are 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. The commitment to pay for these services is based upon transaction volumes
and includes inflationary price clauses. To estimate our future contractual obligations for these commitments, we assumed transaction volumes would remain consistent with 2003 volumes and increased
the amount by 3% each year.

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 $29.5 million and $48.6 million for the years ended December 31, 2003 and 2002, respectively. For the year ended
December 31, 2003, capital expenditures were comprised of approximately $15.7 million in capitalized software and projects in process, $7.4 million in fixed assets, and
$6.4 million in leasehold improvements. 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.

Stockholders'
equity at December 31, 2003 was $540.8 million, up 22%, from 2002, primarily due to net income growth in 2003. The ratio of average stockholders' equity to
average assets decreased to 5.9% at December 31, 2003 from 6.4% at December 31, 2002, primarily due to asset growth in

50

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investment
securities funded by increases in securities purchased under resale agreements and customer deposits.

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

FRB
and FDIC guidelines require that banking organizations have a minimum ratio of total capital to risk-adjusted assets and off-balance sheet items of 8.0%.
Total capital is defined as the sum of "Tier 1" and "Tier 2" capital elements, with at least half of the total capital required to be Tier 1. Tier 1 capital includes, with certain restrictions, the
sum of common stockholders' equity, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and minority interests in consolidated subsidiaries, less certain
intangible assets. Tier 2 capital includes, with certain limitations, subordinated debt meeting certain requirements, intermediate-term preferred stock, certain hybrid capital instruments,
certain forms of perpetual preferred stock, as well as maturing capital instruments and general allowances for loan losses. Our Total and Tier 1 capital ratios at December 31, 2003 were each
17.79%, which are in excess of minimum requirements. The Bank's Total and Tier 1 capital ratios at December 31, 2003 were 17.60% and 17.59%, respectively, which are in excess of minimum
requirements.

In
addition to the risk-based capital guidelines, the FRB and the FDIC use a "Leverage Ratio" as an additional tool to evaluate capital adequacy. The Leverage Ratio is
defined to be a company's Tier 1 capital divided by its adjusted average total assets. The Leverage Ratio adopted by the federal banking agencies requires a ratio of 3.0% Tier 1 capital to adjusted
average total assets for top-rated banking institutions. All other banking institutions are expected to maintain a Leverage Ratio of 4.0% to 5.0%. The computation of the
risk-based capital ratios and the Leverage Ratio requires that the capital of Investors Financial and that of Investors Bank be
reduced by most intangible assets. Our Leverage Ratio at December 31, 2003 was 5.41%, which is in excess of regulatory minimums. Investors Bank's Leverage Ratio at December 31, 2003 was
5.35%, which is also in excess of regulatory minimums. See "BusinessRegulation and Supervision" section for additional information.

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.

51

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ITEM 9a.    CONTROLS AND PROCEDURES.

As of December 31, 2003, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and
procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file or
submit to the Securities and Exchange Commission. Kevin J. Sheehan, our Chairman and Chief Executive Officer, and John N. Spinney, Jr.,
our Senior Vice President and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Sheehan and Spinney concluded that, as of
December 31, 2003, our disclosure controls were effective.

As
a result of the evaluation completed by us, and in which Messrs. Sheehan and Spinney participated, we have concluded that no changes occurred during our fiscal quarter ended
December 31, 2003 in our internal controls over financial reporting, which changes have materially affected, or are reasonably likely to affect, our internal controls over financial reporting.

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 Executive 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, 2003.

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, 2003.

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, 2003.

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, 2003.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required under this item is incorporated herein by reference to the information in the section entitled "Ratification of Selection of Auditors"
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, 2003.

52

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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.                                                                           
|    |  | Independent Accountants' Report.                                                                                
|    |  | Independent Auditors' Report.                                                                                   
|    |  | Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002.                                      
|    |  | Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2003, 2002 and 2001.
|    |  | Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001.           
|    |  | Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001.                     
|    |  | 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         | (16)  | Certificate of Amendment of Certificate of Incorporation of the Company                                                                                                             
|3.5         | (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        | (15)* | Amended and Restated 1995 Stock Plan                                                                                                                                                
|10.2        | (15)  | 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                                               
|            |       |                                                                                                                                                                                     

53

---

|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                                                         
|10.14 | (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                                                                                                                                            
|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 | (15)* | 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 Power of Attorney and Signature Page of this Report)                                                                                                                                              
|31.1  |       | Certificate of Kevin J. Sheehan, Chief Executive Officer                                                                                                                                                                 
|31.2  |       | Certificate of John N. Spinney, Jr., Chief Financial Officer                                                                                                                                                             
|32.1  |       | Certification of Kevin J. Sheehan, Chief Executive Officer, and John N. Spinney, Jr., Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

---

54

---

A Form 8-K was furnished to the Securities and Exchange Commission on October 20, 2003 furnishing information pursuant to Item 9
(Regulation FD) relating to a press release issued by Investors Financial Services Corp. on the same date.

A
Form 8-K was furnished to the Securities and Exchange Commission on October 15, 2003 furnishing information pursuant to Item 12 (Results of Operation and
Financial Condition) relating to the press release of Investors Financial Services Corp.'s financial results for the fiscal quarter ended September 30, 2003.



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.

55

---



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 20th day of February, 2004.

| |  | 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 20th day of
February, 2004.

|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                                                                                                        
|                                            |  |                                                                                                                 

56

---

|/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

57

---



INVESTORS FINANCIAL SERVICES CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                |  | Page
|--------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Management to Stockholders                                                                            |  | F-2 
|Independent Accountants' Report                                                                                 |  | F-4 
|Independent Auditors' Report                                                                                    |  | F-5 
|Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002                                       |  | F-6 
|Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2003, 2002 and 2001 |  | F-7 
|Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001            |  | F-8 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001                      |  | F-9 
|Notes to Consolidated Financial Statements                                                                      |  | F-10

F-1

---



REPORT OF MANAGEMENT TO STOCKHOLDERS

February
20, 2004

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 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, 2003. 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, 2003.

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,
2003.

|/s/KEVIN J. SHEEHAN                                                    |  | 
|---------------------------------------------------------------------- |  | 
|Kevin J. Sheehan Chairman and Chief Executive Officer                  |  | 
|/s/JOHN N. SPINNEY, JR.                                                |  | 
|John N. Spinney, Jr. Senior Vice President and
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, 2003 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, 2003, is fairly stated, in all material respects, based on the
criteria established in the COSO report.

DELOITTE
& TOUCHE LLP
Boston, Massachusetts

February
20, 2004

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, 2003 and 2002,
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, 2003. 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, 2003 and 2002, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 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," effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" and effective October 1, 2003, the Company adopted the provisions of FASB Interpretation
No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin ("ARB") 51."

DELOITTE
& TOUCHE LLP
Boston, Massachusetts

February
20, 2004

F-5

---



INVESTORS FINANCIAL SERVICES CORP.        CONSOLIDATED BALANCE SHEETS        December 31, 2003 and 2002        (Dollars in thousands, except per share data)

|                                                                                                                                                                               |               | December 31,
2003          |           | December 31,
2002 |          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------- | -------------------------- | --------- | ----------------- | ---------
|ASSETS                                                                                                                                                                         |               |                            |           |                   |          
|Cash and due from banks                                                                                                                                                        |               | $                          | 39,689    |                   | $        
|Securities held to maturity (fair value of $4,308,578 and $3,460,754 at December 31, 2003 and 2002, respectively) (Note 4)                                                     |               |                            | 4,307,610 |                   |          
|Securities available for sale (Note 4)                                                                                                                                         |               |                            | 4,296,637 |                   |          
|Nonmarketable equity securities (Note 4)                                                                                                                                       |               |                            | 50,000    |                   |          
|Loans, less allowance for loan losses of $100 at December 31, 2003 and 2002 (Note 5)                                                                                           |               |                            | 199,530   |                   |          
|Accrued interest and fees receivable                                                                                                                                           |               |                            | 72,816    |                   |          
|Equipment and leasehold improvements, less accumulated depreciation of $47,683 and $25,402 at December 31, 2003 and 2002, respectively (Note 6)                                |               |                            | 76,420    |                   |          
|Goodwill (Note 3)                                                                                                                                                              |               |                            | 79,969    |                   |          
|Other assets                                                                                                                                                                   |               |                            | 101,901   |                   |          
|                                                                                                                                                                               |               |                            |           |                   |          
|TOTAL ASSETS                                                                                                                                                                   |               | $                          | 9,224,572 |                   | $        
|                                                                                                                                                                               |               |                            |           |                   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                           |               |                            |           |                   |          
|LIABILITIES:                                                                                                                                                                   |               |                            |           |                   |          
|Deposits:                                                                                                                                                                      |               |                            |           |                   |          
|                                                                                                                                                                               | Demand        |                            | $         | 334,823           |          
|                                                                                                                                                                               | Savings       |                            |           | 3,682,295         |          
|                                                                                                                                                                               | Time (Note 7) |                            |           | 190,000           |          
|                                                                                                                                                                               |               |                            |           |                   |          
|                                                                                                                                                                               |               | Total deposits             |           |                   | 4,207,118
|Securities sold under repurchase agreements (Note 8)                                                                                                                           |               |                            | 3,258,001 |                   |          
|Short-term and other borrowings (Note 9)                                                                                                                                       |               |                            | 1,098,087 |                   |          
|Due to brokers for open trades payable                                                                                                                                         |               |                            |          |                   |          
|Junior subordinated deferrable interest debentures (Note 11)                                                                                                                   |               |                            | 24,774    |                   |          
|Other liabilities                                                                                                                                                              |               |                            | 95,757    |                   |          
|                                                                                                                                                                               |               |                            |           |                   |          
|                                                                                                                                                                               |               | Total liabilities          |           |                   | 8,683,737
|                                                                                                                                                                               |               |                            |           |                   |          
|Commitments and contingencies (Note 17)                                                                                                                                        |               |                            |           |                   |          
|Company-obligated, mandatorily redeemable, preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures of the Company (Note 11) |               |                            |          |                   |          
|                                                                                                                                                                               |               |                            |           |                   |          
|STOCKHOLDERS' EQUITY:                                                                                                                                                          |               |                            |           |                   |          
|Preferred stock, par value $0.01 (shares authorized: 1,000,000; issued and outstanding: none in 2003 and in 2002)                                                              |               |                            |          |                   |          
|Common stock, par value $0.01 (shares authorized: 100,000,000 in 2003 and in 2002; issued and outstanding: 65,436,788 and 64,775,042 in 2003 and 2002, respectively)           |               |                            | 655       |                   |          
|Surplus                                                                                                                                                                        |               |                            | 242,662   |                   |          
|Deferred compensation                                                                                                                                                          |               |                            | (1,076    | )                 |          
|Retained earnings                                                                                                                                                              |               |                            | 286,138   |                   |          
|Accumulated other comprehensive income, net                                                                                                                                    |               |                            | 13,006    |                   |          
|Treasury stock, at cost (26,508 and 10,814 shares in 2003 and 2002, respectively)                                                                                              |               |                            | (550      | )                 |          
|                                                                                                                                                                               |               |                            |           |                   |          
|                                                                                                                                                                               |               | Total stockholders' equity |           |                   | 540,835  
|                                                                                                                                                                               |               |                            |           |                   |          
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                     |               | $                          | 9,224,572 |                   | $        
|                                                                                                                                                                               |               |                            |           |                   |          

See Notes to Consolidated Financial Statements.

F-6

---



INVESTORS FINANCIAL SERVICES CORP.        CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME        Years Ended December 31, 2003, 2002 and 2001        (Dollars in thousands,
except per share data)

|                                             |                     | December 31,
2003                                                                                                                          |                          | December 31,
2002 |         | December 31,
2001 |  
|-------------------------------------------- | ------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------ | ----------------- | ------- | ----------------- | -
|OPERATING REVENUE:                           |                     |                                                                                                                                            |                          |                   |         |                   |  
|                                             | Interest income:    |                                                                                                                                            |                          |                   |         |                   |  
|                                             |                     | Federal Funds sold and securities purchased under resale agreements                                                                        |                          | $                 | 326     |                   | $
|                                             |                     | Investment securities held to maturity and available for sale (including non-taxable income of $20,477, $17,556 and $14,266, respectively) |                          |                   | 242,160 |                   |  
|                                             |                     | Loans                                                                                                                                      |                          |                   | 3,577   |                   |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|                                             |                     |                                                                                                                                            | Total interest income    |                   |         | 246,063           |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|                                             | Interest expense:   |                                                                                                                                            |                          |                   |         |                   |  
|                                             |                     | Deposits                                                                                                                                   |                          |                   | 39,819  |                   |  
|                                             |                     | Short-term and other borrowings                                                                                                            |                          |                   | 53,361  |                   |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|                                             |                     |                                                                                                                                            | Total interest expense   |                   |         | 93,180            |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|                                             |                     |                                                                                                                                            | Net interest income      |                   |         | 152,883           |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|                                             | Noninterest income: |                                                                                                                                            |                          |                   |         |                   |  
|                                             |                     | Asset servicing fees (Note 21)                                                                                                             |                          |                   | 333,586 |                   |  
|                                             |                     | Other operating income                                                                                                                     |                          |                   | 2,607   |                   |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|                                             |                     |                                                                                                                                            | Net operating revenue    |                   |         | 489,076           |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|OPERATING EXPENSES:                          |                     |                                                                                                                                            |                          |                   |         |                   |  
|                                             |                     | Compensation and benefits                                                                                                                  |                          |                   | 186,932 |                   |  
|                                             |                     | Technology and telecommunications                                                                                                          |                          |                   | 38,914  |                   |  
|                                             |                     | Transaction processing services                                                                                                            |                          |                   | 33,299  |                   |  
|                                             |                     | Occupancy                                                                                                                                  |                          |                   | 29,218  |                   |  
|                                             |                     | Depreciation and amortization                                                                                                              |                          |                   | 27,971  |                   |  
|                                             |                     | Professional fees                                                                                                                          |                          |                   | 11,189  |                   |  
|                                             |                     | Travel and sales promotion                                                                                                                 |                          |                   | 4,822   |                   |  
|                                             |                     | Amortization of goodwill (Note 3)                                                                                                          |                          |                   |        |                   |  
|                                             |                     | Other operating expenses                                                                                                                   |                          |                   | 12,576  |                   |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|                                             |                     |                                                                                                                                            | Total operating expenses |                   |         | 344,921           |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|INCOME BEFORE INCOME TAXES                   |                     |                                                                                                                                            | 144,155                  |                   |         | 98,495            |  
|Provision for income taxes (Note 10)         |                     |                                                                                                                                            | 52,395                   |                   |         | 29,549            |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|NET INCOME                                   |                     | $                                                                                                                                          | 91,760                   |                   | $       | 68,946            |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|BASIC EARNINGS PER SHARE                     |                     | $                                                                                                                                          | 1.41                     |                   | $       | 1.07              |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|DILUTED EARNINGS PER SHARE                   |                     | $                                                                                                                                          | 1.38                     |                   | $       | 1.04              |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|COMPREHENSIVE INCOME:                        |                     |                                                                                                                                            |                          |                   |         |                   |  
|Net income                                   |                     | $                                                                                                                                          | 91,760                   |                   | $       | 68,946            |  
|Other comprehensive income (loss) (Note 13): |                     |                                                                                                                                            |                          |                   |         |                   |  
|                                             |                     | Cumulative effect of a change in accounting principle                                                                                      |                          |                   |        |                   |  
|                                             |                     | Net unrealized investment (loss) gain                                                                                                      |                          |                   | (11,878 | )                 |  
|                                             |                     | Net unrealized derivative instrument gain (loss)                                                                                           |                          |                   | 12,019  |                   |  
|                                             |                     | Cumulative translation adjustment                                                                                                          |                          |                   | 577     |                   |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|                                             |                     | Other comprehensive income (loss)                                                                                                          |                          |                   | 718     |                   |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  
|COMPREHENSIVE INCOME                         |                     | $                                                                                                                                          | 92,478                   |                   | $       | 91,530            |  
|                                             |                     |                                                                                                                                            |                          |                   |         |                   |  

See Notes to Consolidated Financial Statements.

F-7

---



INVESTORS FINANCIAL SERVICES CORP.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        Years Ended December 31, 2003, 2002, and 2001        (Dollars in thousands, except
per share data)

|                                                                                                                  |  | December 31,
2003 |            | December 31,
2002 |   | December 31,
2001 |  
|----------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | ----------------- | - | ----------------- | -
|Common shares                                                                                                     |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  |                   | 64,775,042 |                   |   | 31,971,404        |  
|Exercise of stock options                                                                                         |  |                   | 548,069    |                   |   | 490,827           |  
|Common stock issuance                                                                                             |  |                   | 129,371    |                   |   | 143,889           |  
|Restricted stock issuance                                                                                         |  |                   |           |                   |   |                  |  
|Common stock repurchased                                                                                          |  |                   | (15,694    | )                 |   |                  |  
|Stock dividend, two-for-one split                                                                                 |  |                   |           |                   |   | 32,168,922        |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  |                   | 65,436,788 |                   |   | 64,775,042        |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Treasury shares                                                                                                   |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  |                   | 10,814     |                   |   | 10,814            |  
|Common stock repurchased                                                                                          |  |                   | 15,694     |                   |   |                  |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  |                   | 26,508     |                   |   | 10,814            |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Common stock                                                                                                      |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 | 648        |                   | $ | 320               |  
|Exercise of stock options                                                                                         |  |                   | 6          |                   |   | 5                 |  
|Common stock issuance                                                                                             |  |                   | 1          |                   |   | 1                 |  
|Stock dividend, two-for-one split                                                                                 |  |                   |           |                   |   | 322               |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 | 655        |                   | $ | 648               |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Surplus                                                                                                           |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 | 233,337    |                   | $ | 222,440           |  
|Exercise of stock options                                                                                         |  |                   | 2,971      |                   |   | 2,864             |  
|Tax benefit from stock options                                                                                    |  |                   | 3,008      |                   |   | 4,152             |  
|Common stock issuance                                                                                             |  |                   | 3,386      |                   |   | 3,881             |  
|Stock option issuance                                                                                             |  |                   |           |                   |   |                  |  
|Stock option forfeiture                                                                                           |  |                   | (40        | )                 |   |                  |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 | 242,662    |                   | $ | 233,337           |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Deferred compensation                                                                                             |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 | (1,599     | )                 | $ | (2,563            | )
|Restricted stock issuance                                                                                         |  |                   |           |                   |   |                  |  
|Exercise of stock options                                                                                         |  |                   |           |                   |   |                  |  
|Stock option issuance                                                                                             |  |                   |           |                   |   |                  |  
|Stock option forfeiture                                                                                           |  |                   | 40         |                   |   |                  |  
|Amortization of deferred compensation                                                                             |  |                   | 483        |                   |   | 964               |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 | (1,076     | )                 | $ | (1,599            | )
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Retained earnings                                                                                                 |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 | 198,282    |                   | $ | 132,877           |  
|Net income                                                                                                        |  |                   | 91,760     |                   |   | 68,946            |  
|Stock dividend, two-for-one split                                                                                 |  |                   |           |                   |   | (322              | )
|Cash dividend, $0.06, $0.05 and $0.04 per share in the years ended December 31, 2003, 2002 and 2001, respectively |  |                   | (3,904     | )                 |   | (3,219            | )
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 | 286,138    |                   | $ | 198,282           |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Accumulated other comprehensive income (loss), net                                                                |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 | 12,288     |                   | $ | (10,296           | )
|Cumulative effect of change in accounting principle                                                               |  |                   |           |                   |   |                  |  
|Net unrealized investment (loss) gain                                                                             |  |                   | (11,878    | )                 |   | 32,100            |  
|Net unrealized derivative instrument gain (loss)                                                                  |  |                   | 11,785     |                   |   | (11,129           | )
|Amortization of transition-related adjustment                                                                     |  |                   | 234        |                   |   | 1,613             |  
|Effect of foreign currency translation                                                                            |  |                   | 577        |                   |   |                  |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 | 13,006     |                   | $ | 12,288            |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Treasury stock                                                                                                    |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                        |  | $                 |           |                   | $ |                  |  
|Common stock repurchased (15,694 shares at an average price of $35.07)                                            |  |                   | (550       | )                 |   |                  |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                              |  | $                 | (550       | )                 | $ |                  |  
|                                                                                                                  |  |                   |            |                   |   |                   |  
|Total Stockholders' Equity                                                                                        |  | $                 | 540,835    |                   | $ | 442,956           |  
|                                                                                                                  |  |                   |            |                   |   |                   |  

See Notes to Consolidated Financial Statements.

F-8

---



INVESTORS FINANCIAL SERVICES CORP.        CONSOLIDATED STATEMENTS OF CASH FLOWS        Years Ended December 31, 2003, 2002 and 2001        (Dollars in thousands)

|                                                                                                  |                                           | December 31,
2003 |            | December 31,
2002 |   | December 31,
2001 |           
|------------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------------- | ---------- | ----------------- | - | ----------------- | ----------
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                             |                                           |                   |            |                   |   |                   |           
|Net income                                                                                        |                                           | $                 | 91,760     |                   | $ | 68,946            |           
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|Adjustments to reconcile net income to net cash provided by operating activities:                 |                                           |                   |            |                   |   |                   |           
|Equity in undistributed loss of unconsolidated subsidiary                                         |                                           |                   | 8          |                   |   |                  |           
|Depreciation and amortization                                                                     |                                           |                   | 27,971     |                   |   | 16,357            |           
|Amortization of deferred compensation                                                             |                                           |                   | 483        |                   |   | 964               |           
|Amortization of premiums on securities, net of accretion of discounts                             |                                           |                   | 40,231     |                   |   | 10,474            |           
|Deferred income taxes                                                                             |                                           |                   | 5,651      |                   |   | 3,972             |           
|Changes in assets and liabilities:                                                                |                                           |                   |            |                   |   |                   |           
|                                                                                                  | Accrued interest and fees receivable      |                   |            | (5,555            | ) |                   | (7,510    
|                                                                                                  | Other assets                              |                   |            | (29,878           | ) |                   | (25,618   
|                                                                                                  | Other liabilities                         |                   |            | 27,316            |   |                   | (6,935    
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|                                                                                                  | Net cash provided by operating activities |                   |            | 157,987           |   |                   | 60,650    
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                             |                                           |                   |            |                   |   |                   |           
|Proceeds from paydowns/maturities of securities available for sale                                |                                           |                   | 1,608,656  |                   |   | 699,980           |           
|Proceeds from paydowns/maturities of securities held to maturity                                  |                                           |                   | 1,902,187  |                   |   | 2,212,594         |           
|Purchases of securities available for sale                                                        |                                           |                   | (2,666,066 | )                 |   | (2,020,022        | )         
|Purchases of securities held to maturity                                                          |                                           |                   | (2,794,414 | )                 |   | (2,520,097        | )         
|Purchase of nonmarketable equity securities                                                       |                                           |                   |           |                   |   |                  |           
|Net decrease in due to brokers for open trades payable                                            |                                           |                   | (286,843   | )                 |   |                  |           
|Net decrease in Federal Funds sold and repurchase agreements                                      |                                           |                   |           |                   |   |                  |           
|Net (increase) decrease in loans                                                                  |                                           |                   | (55,793    | )                 |   | 88,376            |           
|Purchase of business                                                                              |                                           |                   |           |                   |   |                  |           
|Purchases of equipment and leasehold improvements                                                 |                                           |                   | (29,495    | )                 |   | (48,579           | )         
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|                                                                                                  | Net cash used in investing activities     |                   |            | (2,321,768        | ) |                   | (1,587,748
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                             |                                           |                   |            |                   |   |                   |           
|Net (decrease) increase in demand deposits                                                        |                                           |                   | (49,638    | )                 |   | (122,606          | )         
|Net increase (decrease) in time and savings deposits                                              |                                           |                   | 923,838    |                   |   | 1,176,647         |           
|Net increase in securities sold under repurchase agreements                                       |                                           |                   | 956,027    |                   |   | 638,662           |           
|Net increase (decrease) in short-term and other borrowings                                        |                                           |                   | 356,980    |                   |   | (169,174          | )         
|Proceeds from exercise of stock options                                                           |                                           |                   | 2,977      |                   |   | 2,869             |           
|Proceeds from issuance of common stock                                                            |                                           |                   | 3,387      |                   |   | 3,882             |           
|Common stock repurchase                                                                           |                                           |                   | (550       | )                 |   |                  |           
|Cost of issuance of restricted stock                                                              |                                           |                   |           |                   |   |                  |           
|Repurchase of company-obligated, mandatorily redeemable, preferred securities of subsidiary trust |                                           |                   |           |                   |   | (1,000            | )         
|Dividends paid to stockholders                                                                    |                                           |                   | (3,904     | )                 |   | (3,219            | )         
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|                                                                                                  | Net cash provided by financing activities |                   |            | 2,189,117         |   |                   | 1,526,061 
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|Effect of exchange rates on changes in cash                                                       |                                           |                   | (215       | )                 |   |                  |           
|NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS                                                |                                           |                   | 25,121     |                   |   | (1,037            | )         
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|CASH AND DUE FROM BANKS, BEGINNING OF YEAR                                                        |                                           |                   | 14,568     |                   |   | 15,605            |           
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|CASH AND DUE FROM BANKS, END OF YEAR                                                              |                                           | $                 | 39,689     |                   | $ | 14,568            |           
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                 |                                           |                   |            |                   |   |                   |           
|Cash paid for interest                                                                            |                                           | $                 | 91,858     |                   | $ | 105,386           |           
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|Cash paid for income taxes                                                                        |                                           | $                 | 39,859     |                   | $ | 24,989            |           
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|SCHEDULE OF NON-CASH 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, 2003, 2002 and 2001

1. DESCRIPTION OF BUSINESS

Investors Financial Services Corp. ("IFSC") provides asset administration services for the financial services industry through its wholly-owned subsidiary,
Investors Bank & Trust Company (the "Bank"). As used herein, the defined term "the Company" shall mean IFSC together with the Bank and its domestic and foreign subsidiaries. The Company
provides core services and value-added services to a variety of financial asset managers, including mutual fund complexes, investment advisors, family offices, banks and insurance companies. Core
services include global custody, multicurrency accounting and mutual fund administration. Value-added services include securities lending, foreign exchange, cash management, performance measurement,
institutional transfer agency, investment advisory services, lines of credit, middle office outsourcing and brokerage and transition management services. The Company is subject to regulation by the
Federal 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, Inc.

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 N.A. ("Chase"). 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.

The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain
amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation.

Revenue Recognition

Asset servicing revenueThe Company recognizes revenue from asset servicing and investment advisory services based on contractual terms signed by the
Company's clients. Generally, revenue is accrued by multiplying average or month-end net assets by contracted rates. Asset servicing revenue is considered earned daily as transactions are
processed or services are provided.

Value-added
servicesThe Company recognizes revenue from its value-added services, such as foreign exchange, securities lending and cash management services, based on the
specific type of

F-10

---

transaction
processed. Value-added service revenue is considered earned daily as transactions are processed or services are provided.

Interest
incomeThe Company recognizes and accrues income on its interest-earning assets as earned using a method which approximates the effective yield.

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. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried
at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and carried at fair value, with
unrealized gains and losses included in earnings. All other debt and equity securities not classified as either held to maturity or trading are classified as available for sale and carried at fair
value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

Nonmarketable
securities consist of stock of the Federal Home Loan Bank of Boston ("FHLBB") and are carried at cost and redeemable at par value. The Company is required to hold this
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
amortized or accreted into income by a method which approximates the effective yield. Actual prepayment experience is reviewed periodically and the timing of the accretion and amortization is adjusted
accordingly.

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 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 using 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. For costs incurred to develop computer software for internal use, the Company capitalizes costs incurred during the
application and development stage, which includes costs to design the software configuration and interfaces, coding, installation and testing. Costs incurred during the preliminary project along with
post-implementation stages are expensed as incurred. Capitalized software costs are amortized over the estimated useful life on the project, which can range from three to five years.

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

F-11

---

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. During the years ended
December 31, 2003 and 2002, the Company's analyses indicated there was no 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. 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 Company translates the financial statements of its foreign
operations into U.S. dollars. Where the functional currency is not in the U.S. dollar, assets and liabilities are translated into U.S. dollars at period-end exchange rates, while income
and expenses are translated using average rates for the period. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income in stockholders' equity.

For
foreign operations where the functional currency is the U.S. dollar, the financial statements are translated into U.S. dollars using period-end exchange rates for
monetary assets and liabilities, exchange rates in effect on the date of acquisition for premises and equipment (and related depreciation) and the average exchange rates during the period for income
and expenses. The resulting translation adjustments are recorded in current period 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. 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 are 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 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 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 also enters into fixed price purchase contracts that are designed to hedge the variability of the consideration to be paid for the purchase of investment securities. By
entering into these contracts, the Company is fixing the price to be paid at a future date for certain investment securities. At December 31, 2003 and 2002, the Company had
$792.1 million and $432.6 million of fixed price purchase contracts outstanding to purchase investment securities. 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 financial institution. These contracts are subject to market
value

F-12

---

fluctuations
in foreign currencies. Gains and losses from such fluctuations are netted and recorded as an adjustment to asset servicing fees. Unrealized gains or losses resulting from purchases and
sales of foreign exchange contracts are included within the respective other assets and other liabilities categories on the Company's consolidated balance sheet. The foreign exchange contracts have
been reduced by balances with the same counterparty where a master netting agreement exists.

Securities Sold Under Repurchase AgreementsThe Company enters into sales of securities under
agreements to repurchase. These agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the consolidated balance sheets. Securities
pledged as collateral under agreements to repurchase are reflected as assets in the accompanying consolidated balance sheets.

Stock-Based CompensationThe Company measures compensation expense for stock-based compensation plans
using the intrinsic value method. The intrinsic value method measures compensation cost as the difference of the option exercise price and the fair market value of the
common stock on the measurement date, which is typically the date of grant. Generally, options granted have an exercise price equivalent to the fair market value at the measurement date. Accordingly,
no compensation cost has been recorded. If stock-based compensation were recognized using the fair value method, stock options would be valued at grant date using the Black-Scholes valuation model and
resulting compensation costs would have decreased net income as indicated below (Dollars in thousands):

December 31,
2003

December 31,
2002

December 31,
2001Net income as reported

$
91,760

$
68,946

$
50,200Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(10,529
)

(12,720
)

(11,581
)Pro forma net income

$
81,231

$
56,226

$
38,619Earnings per share:Basic-as reported

$
1.41

$
1.07

$
0.79Basic-pro forma


1.25


0.87


0.61Diluted-as reported

$
1.38

$
1.04

$
0.76Diluted-pro forma


1.22


0.85


0.59


The fair value of each option grant was estimated on the date of grant using the Black-Scholes valuation model with the following assumptions for
the years ended December 31, 2003, 2002, and 2001, respectively: an average assumed risk-free interest rate, based on the five-year Treasury rate, of 2.37%, 2.40%, and
4.05%, an expected life of four years, an
average expected volatility of 55.86%, 56.20%, and 55.76%, and average dividend yield of 0.20%, 0.22%, and 0.15%.

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

F-13

---

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

Income

Shares

Per Share
AmountDecember 31, 2003Basic EPSIncome available to common stockholders

$
91,760

65,098,960

$
1.41Dilutive effect of common equivalent shares of stock options




1,376,502


(0.03
)Diluted EPS

$
91,760

66,475,462

$
1.38December 31, 2002Basic EPSIncome available to common stockholders

$
68,946

64,429,592

$
1.07Dilutive effect of common equivalent shares of stock options




1,942,102


(0.03
)Diluted EPS

$
68,946

66,371,694

$
1.04December 31, 2001Basic EPSIncome available to common stockholders

$
50,200

63,303,594

$
0.79Dilutive effect of common equivalent shares of stock options




2,433,124


(0.03
)Diluted EPS

$
50,200

65,736,718

$
0.76


There were 3,517,655 option shares which were not considered dilutive for earnings per share calculations for the year ended December 31,
2003.

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

Goodwill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, 2003, there was no impairment of goodwill. The disclosure requirements of SFAS No. 142 are detailed in Note 3.

F-14

---

New Accounting PrinciplesThe Company has adopted SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among its provisions, this Statement rescinds
Statement No. 4,Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements, and eliminates the extraordinary item treatment of reporting gains and
losses from extinguishments of debt. During the year ended December 31, 2003, the Company recorded an early extinguishment of $100 million of its FHLBB debt by replacing it with new
debt. The Company recognized a $3.1 million early termination fee which has been classified in interest expense. The adoption of this Statement did not have a material impact on the Company's
financial position or results of operations.

The
Company has adopted SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal activities by requiring that a liability for a cost associated with an exit or disposal activity be recognized and
measured initially at fair value only when the liability is incurred. The adoption of this Statement did not have a material impact on the Company's financial position or results of operations.

In
April 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, resulting in more consistent reporting of contracts as either
derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively. The Company has evaluated
its financial accounting and reporting methods for all derivative instruments and has found them to be consistent with SFAS No. 149.

In
May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. SFAS No. 150 requires an issuer to classify financial instruments within its scope as a liability (or an asset in some circumstances). The Statement provides
that these instruments must be classified as liabilities in the consolidated balance sheet and recorded at fair value. On November 7, 2003, the measurement provisions relating to
non-controlling mandatorily redeemable instruments were deferred. The classification provisions of this Statement remain in effect. The Company adopted the provisions of this Statement
effective July 1, 2003. The adoption of this Statement did not have a material impact on the Company's financial position.

In
January 2003, the FASB issued Interpretation No. 46 (revised December 2003),Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin ("ARB") 51("FIN 46"). This interpretation addresses consolidation by business enterprises of variable interest entities ("VIE").
This interpretation requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE's activities or entitled to receive a majority of the
entity's residual returns, or both. The provisions are effective for any new entities that are originated subsequent to January 31, 2003. For entities that were originated prior to
February 1, 2003, the provisions of this interpretation were to be effective October 1, 2003.

Effective
October 1, 2003, the Company adopted provisions of FIN 46. As a result of the adoption of this interpretation, the Company was required to deconsolidate Investors
Capital Trust I ("ICTI"), the wholly-owned trust that issued trust preferred securities. Therefore, the Company presents in its consolidated financial statements junior subordinated debentures as a
liability and its investment in ICTI as a component of other assets. The income for the three months that ICTI was not consolidated is considered immaterial. Refer to Note 11 for additional
information.

F-15

---

3. ACQUISITIONS

On February 1, 2001, the Company purchased the operations of the advisor custody unit of 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, 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. The contingency payment clause expired in 2002, therefore, 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, administration and other operations functions for BGI's North American assets. 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.

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

December 31,
2003

December 31,
2002

December 31,
2001Goodwill, beginning of year

$
79,969

$
79,969

$
34,094Plus purchase of businesses








49,434Less amortization expense








(3,559
)Goodwill, end of year

$
79,969

$
79,969

$
79,969


On
January 1, 2002, the Company ceased amortization of goodwill. The following table represents the transitional disclosure related to the adoption of SFAS No. 142 (Dollars
in thousands, except per share data):

|                                            |                     | December 31,
2003 |        | December 31,
2002 |   | December 31,
2001
|------------------------------------------- | ------------------- | ----------------- | ------ | ----------------- | - | -----------------
|Net income as reported                      |                     | $                 | 91,760 |                   | $ | 68,946           
|Add back: Goodwill amortization, net of tax |                     |                   |       |                   |   |                 
|                                            |                     |                   |        |                   |   |                  
|Adjusted net income                         |                     | $                 | 91,760 |                   | $ | 68,946           
|                                            |                     |                   |        |                   |   |                  
|Earnings per share:                         |                     |                   |        |                   |   |                  
|                                            | Basic-as reported   |                   | $      | 1.41              |   | $                
|                                            | Basic-adjusted      |                   |        | 1.41              |   |                  
|                                            | Diluted-as reported |                   | $      | 1.38              |   | $                
|                                            | Diluted-adjusted    |                   |        | 1.38              |   |                  

F-16

---

4. SECURITIES

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

|Held to Maturity                 |       | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |        | Fair Value
|-------------------------------- | ----- | -------------- | --------- | ---------------- | - | ------------------- | ------ | ----------
|Mortgage-backed securities       |       | $              | 2,273,466 |                  | $ | 11,596              |        | $         
|Federal agency securities        |       |                | 1,906,512 |                  |   | 1,699               |        |           
|State and political subdivisions |       |                | 127,632   |                  |   | 6,890               |        |           
|                                 |       |                |           |                  |   |                     |        |           
|                                 | Total |                | $         | 4,307,610        |   | $                   | 20,185 |           
|                                 |       |                |           |                  |   |                     |        |           

|Available for Sale               |       | Amortized
Cost |           | Unrealized
Gains |   | Unrealized
(Losses) |        | Fair Value
|-------------------------------- | ----- | -------------- | --------- | ---------------- | - | ------------------- | ------ | ----------
|Mortgage-backed securities       |       | $              | 3,600,924 |                  | $ | 22,658              |        | $         
|State and political subdivisions |       |                | 333,777   |                  |   | 22,119              |        |           
|Corporate debt                   |       |                | 178,394   |                  |   | 314                 |        |           
|US Treasury securities           |       |                | 111,305   |                  |   | 2,396               |        |           
|Federal agency securities        |       |                | 29,600    |                  |   | 9                   |        |           
|Foreign government securities    |       |                | 9,644     |                  |   | 59                  |        |           
|                                 |       |                |           |                  |   |                     |        |           
|                                 | Total |                | $         | 4,263,644        |   | $                   | 47,555 |           
|                                 |       |                |           |                  |   |                     |        |           

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 |           
|                                 |       |                |           |                  |   |                     |        |           

Nonmarketable
equity securities at December 31, 2003 and 2002 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.

F-17

---

The
amortized cost amounts and fair values of securities by contractual maturity are as follows (Dollars in thousands):

December 31, 2003Held to Maturity

Amortized
Cost

Fair ValueDue within one year

$
13

$
14Due from one to five years


39,448


40,670Due five years up to ten years


71,115


71,785Due after ten years


4,197,034


4,196,109Total

$
4,307,610

$
4,308,578


December 31, 2003Available for Sale

Amortized
Cost

Fair ValueDue within one year

$
34,932

$
35,003Due from one to five years


93,294


99,993Due five years up to ten years


314,560


329,761Due after ten years


3,820,858


3,831,880Total

$
4,263,644

$
4,296,637


There
were no sales of securities available for sale during the years ended December 31, 2003, 2002 and 2001.

The
carrying value of securities pledged amounted to approximately $5.6 billion at December 31, 2003. Securities are pledged primarily to secure clearings with other
depository institutions, secure repurchase agreements and secure outstanding FHLBB borrowings.

The
following table represents the information about our temporarily impaired investments at December 31, 2003 (Dollars in thousands):

|                                       |  | Less than 12 months |           | 12 months or longer |   | Total 
|-------------------------------------- |  | ------------------- | --------- | ------------------- | - | ------
|
|Mortgage-backed securities             |  | $                   | 2,457,689 |                     | $ | 17,806
|Federal agency securities              |  |                     | 1,005,518 |                     |   | 8,378 
|Corporate debt                         |  |                     | 25,667    |                     |   | 333   
|State and political subdivisions       |  |                     | 9,591     |                     |   | 154   
|                                       |  |                     |           |                     |   |       
|Total temporarily impaired securities: |  | $                   | 3,498,465 |                     | $ | 26,671
|                                       |  |                     |           |                     |   |       

Federal
agency securities in a loss position greater than 12 months are represented by securities issued by the Small Business Association and are guaranteed to recover the
contractual principal of these investments. These securities are classified as held to maturity and management believes that the Company will recover all principal; therefore, no impairment losses
have been recognized. Corporate debt securities in a loss position are represented by Trust Preferred securities ("Trups") issued by reputable financial institutions. The credit ratings of the
underlying issuers range from A1 to AA3 ratings. The Company holds senior tranches of these issuances and believes that it will recover all contractual payments; therefore, no impairment losses have
been recognized.

F-18

---

The
Company holds Trups issued by other financial institutions. The Company has evaluated its ownership interests of each security and has concluded that the Company is not the primary
beneficiary and as such does not need to consolidate the Trups holdings under the guidance of FIN 46.

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, 2003 and 2002. In addition, there have been no loan charge-offs or recoveries during the years ended
December 31, 2003, 2002 and 2001. Loans consisted of the following (Dollars in thousands):

December 31,
2003

December 31,
2002Loans to mutual funds

$
104,954

$
49,372Loans to individuals


67,641


76,263Loans to others


27,035


18,202199,630


143,837Less allowance for loan losses


(100
)

(100
)Total

$
199,530

$
143,737


The
Company had unused commitments to lend of approximately $759.5 million and $682.4 million at December 31, 2003 and 2002, 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,
2003

December 31,
2002Furniture, fixtures and equipment

$
108,278

$
90,434Leasehold improvements


15,825


9,837Total


124,103


100,271Less accumulated depreciation and amortization


(47,683
)

(25,402
)Equipment and leasehold improvements, net

$
76,420

$
74,869


Included
in furniture, fixtures and equipment were internal software costs, capitalized in accordance with SOP 98-1, of $61.5 million and $47.5 million as of
December 31, 2003 and 2002, respectively. Depreciation expense was $26.1 million, $14.8 million and $7.6 million for the years ended December 31, 2003, 2002 and
2001, respectively. Amortization expense was $1.9 million, $1.6 million and $0.8 million for the years ended December 31, 2003, 2002 and 2001, respectively.

F-19

---

7. DEPOSITS

Time deposits at December 31, 2003 and 2002 included non-interest bearing amounts of $190 million and $90 million, respectively.
All time deposits had a minimum balance of $100,000 and a maturity of less than three months at December 31, 2003 and 2002. At December 31, 2003 and 2002, $54.3 million and
$73.0 million of overdrafts were reclassified to loans.

8. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

The following table represents information regarding the Company's securities sold under repurchase agreements (Dollars in thousands):

|                                       |  | December 31,
2003 |           | December 31,
2002 |   | December 31,
2001 |  
|-------------------------------------- |  | ----------------- | --------- | ----------------- | - | ----------------- | -
|Outstanding at end of period           |  | $                 | 3,258,001 |                   | $ | 2,301,974         |  
|Maximum outstanding at any month end   |  |                   | 3,546,131 |                   |   | 2,931,041         |  
|Average balance for the year           |  |                   | 3,278,555 |                   |   | 2,449,368         |  
|Weighted average rate at end of period |  |                   | 1.09      | %                 |   | 1.20              | %
|Weighted average rate for the period   |  |                   | 0.90      | %                 |   | 1.27              | %

As
of December 31, 2003, $3.4 billion of securities were pledged to collateralize repurchase agreements.

9. SHORT-TERM AND OTHER BORROWINGS

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

December 31,
2003

December 31,
2002Federal funds purchased

$
697,855

$
130,648Federal Home Loan Bank of Boston overnight advances


250,000


360,000Federal Home Loan Bank of Boston long-term advances


150,000


250,000Treasury, Tax and Loan account


232


459Total

$
1,098,087

$
741,107


For
the years ended December 31, 2003 and 2002, maturities on FHLBB advances ranged from overnight to September 2006. As of December 31, 2003, $1.9 billion of
securities were pledged to collateralize FHLBB overnight and long-term advances.

The
following table represents information regarding the Company's Federal Funds purchased (Dollars in thousands):

|                                       |  | December 31,
2003 |         | December 31,
2002 |   | December 31,
2001 |  
|-------------------------------------- |  | ----------------- | ------- | ----------------- | - | ----------------- | -
|Outstanding at end of period           |  | $                 | 697,855 |                   | $ | 130,648           |  
|Maximum outstanding at any month end   |  |                   | 697,855 |                   |   | 375,000           |  
|Average balance for the year           |  |                   | 432,490 |                   |   | 254,093           |  
|Weighted-average rate at end of period |  |                   | 0.99    | %                 |   | 1.20              | %
|Weighted-average rate for the period   |  |                   | 1.14    | %                 |   | 1.71              | %

F-20

---

10. INCOME TAXES

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

December 31,
2003

December 31,
2002

December 31,
2001Current:Federal

$
32,396

$
24,984

$
21,791State


14,296


532


285Foreign


52


61


11846,744


25,577


22,194Deferred:Federal


5,989


3,972


(245
)State


(338
)




5,651


3,972


(245
)Total income taxes

$
52,395

$
29,549

$
21,949


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

December 31,
2003

December 31,
2002

December 31,
2001Federal statutory rate

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

6.29

0.34

0.25Tax-exempt income, net of disallowance

(4.93
)
(5.98
)
(4.73
)Other

(0.01
)
0.64

(0.10
)Effective tax rate

36.35
%
30.00
%
30.42
%


In
March 2003, a retroactive change in the Commonwealth of Massachusetts tax law disallowed a dividends received deduction taken by the Bank on dividends it had received since
1999 from a wholly-owned real estate investment trust. During the second quarter of 2003, we settled this disputed tax assessment with the Massachusetts Department of Revenue, agreeing to pay
approximately 50% of the liability. As a result of this retroactive change in tax law, we recorded an additional state tax expense of approximately $7.2 million, net of federal income tax
benefit, in 2003.

F-21

---

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,
2003

December 31,
2002Deferred tax assets:Employee benefit plans

$
3,190

$
2,264Unrealized hedging loss


5,231


10,497Other


441


2108,862


12,971Deferred tax liabilities:Depreciation and amortization


(8,266
)

(3,204
)Undistributed income of foreign subsidiaries


(2,887
)

(1,735
)Pension plan


(1,462
)

(766
)Securities available for sale


(11,874
)

(17,113
)Other


(508
)

(610
)(24,997
)

(23,428
)Net deferred tax liability

$
(16,135
)
$
(10,457
)


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

On January 31, 1997, ICTI, 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 Capital Securities have a call date of February 1, 2007. The $25 million aggregate principal amount of the Junior
Subordinated Debentures represents the sole asset of ICTI. 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 ICTI, constitutes a full and unconditional guarantee of ICTI's obligations under the Capital Securities. No other
subsidiary of the Company guarantees these Capital Securities. Certain of the Company's subsidiaries may require prior approval of the Commissioner of Banks of the Commonwealth of Massachusetts if the
total dividends for a calendar year would exceed net profits for the year combined with retained net profits for the previous two years. These restrictions on the ability to pay dividends to the
Company may restrict the Company's ability to pay dividends to the shareholders. In 2002, the Company repurchased $1.0 million of the Capital Securities.

Effective
October 1, 2003, the Company adopted provisions of FIN 46. As a result of the adoption of this Interpretation, the Company was required to deconsolidate ICTI, the
wholly-owned trust that issued the Capital Securities. Therefore, the Company presents in its consolidated financial statements junior subordinated debentures as a liability and its investment in ICTI
as a component of other assets. The income for the three months that ICTI was not consolidated is considered immaterial.

F-22

---

12. STOCKHOLDERS' EQUITY

As of December 31, 2003, 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.

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, 2003, 3,877,277 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, 2003.

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, 103,035 were available for
grant at December 31, 2003.

Pursuant
to the terms of the Director Plan, 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 valuation 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.

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

F-23

---

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 nonqualified 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
terminated.

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. During 2003, the Company canceled 1,200 options relating to the unvested portion for an
employee whose employment terminated during the year.

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 $1.1 million and $1.6 million at December 31, 2003 and 2002, respectively, related to the grants described in the
above three paragraphs. Amortization of deferred compensation was $483,000, $964,000, and $162,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

F-24

---

A
summary of option activity under both the Director Plan and the Stock Plan is as follows:

|                                        |  | December 31, 2003 |   | December 31, 2002 |    | December 31, 2001
|--------------------------------------- |  | ----------------- | - | ----------------- | -- | -----------------
|
|Outstanding at beginning of year        |  | 6,621,157         |   | $                 | 22 |                  
|Granted                                 |  | 737,399           |   |                   | 34 |                  
|Exercised                               |  | (654,230          | ) |                   | 9  |                  
|Canceled                                |  | (157,240          | ) |                   | 32 |                  
|                                        |  |                   |   |                   |    |                  
|Outstanding at end of year              |  | 6,547,086         |   | $                 | 24 |                  
|                                        |  |                   |   |                   |    |                  
|Outstanding and exercisable at year end |  | 4,712,586         |   |                   |    |                  
|                                        |  |                   |   |                   |    |                  

The
following table summarizes information about stock options outstanding at December 31, 2003:

|      |  | Options Outstanding |  |           |  |  
|----- |  | ------------------- |  | --------- |  | -
|
|
|
|$010 |  | 1,150,458           |  | 4.3 years |  | $
|1020 |  | 1,188,384           |  | 5.1       |  |  
|2030 |  | 128,923             |  | 6.6       |  |  
|3040 |  | 4,057,301           |  | 7.9       |  |  
|4050 |  | 22,020              |  | 7.1       |  |  
|      |  |                     |  |           |  |  
|      |  | 6,547,086           |  | 6.7       |  | $
|      |  |                     |  |           |  |  

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 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 the 1997 Employee Stock Purchase Plan is as follows:

December 31,2003

2002

2001Shares

Shares

SharesTotal shares available under the plan beginning of year

356,875

500,764

598,068Issued at June 30

(70,606
)
(61,193
)
(41,976
)Issued at December 31

(58,765
)
(82,696
)
(55,328
)Total shares available under the plan end of year

227,504

356,875

500,764


F-25

---

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

During
the year ended December 31, 2002, the purchase prices of the stock were $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.

During
the year ended December 31, 2001, the purchase prices of the stock were $30.25 and $29.88, 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.

13. COMPREHENSIVE INCOME

Comprehensive income represents the change in equity of the Company during a period from transactions and other events and circumstances from
non-shareholder sources. It includes all changes in equity during a period except those resulting from investments by shareholders and distributions to shareholders. The Company's other
comprehensive income and related tax effects for the years ended December 31, 2003, 2002 and 2001 is as follows (Dollars in thousands):

|                                                    |                            | Pre-tax
Amount |         | Tax (Expense)
Benefit |   | After-tax
Amount |        
|--------------------------------------------------- | -------------------------- | -------------- | ------- | --------------------- | - | ---------------- | -------
|2003                                                |                            |                |         |                       |   |                  |        
|Unrealized losses on securities:                    |                            |                |         |                       |   |                  |        
|Unrealized holding losses arising during the period |                            | $              | (16,314 | )                     | $ | 5,439            |        
|Other                                               |                            |                | (1,542  | )                     |   | 539              |        
|                                                    |                            |                |         |                       |   |                  |        
|                                                    | Net unrealized losses      |                |         | (17,856               | ) |                  | 5,978  
|Net unrealized derivative instrument gain           |                            |                | 17,663  |                       |   | (5,878           | )      
|Amortization of transition related adjustment       |                            |                | 361     |                       |   | (127             | )      
|Currency translation adjustment                     |                            |                | 577     |                       |   |                 |        
|                                                    |                            |                |         |                       |   |                  |        
|                                                    | Other comprehensive income |                | $       | 745                   |   | $                | (27    
|                                                    |                            |                |         |                       |   |                  |        
|2002                                                |                            |                |         |                       |   |                  |        
|Unrealized gains on securities:                     |                            |                |         |                       |   |                  |        
|Unrealized holding gains arising during the period  |                            | $              | 49,796  |                       | $ | (17,696          | )      
|                                                    |                            |                |         |                       |   |                  |        
|                                                    | Net unrealized gains       |                |         | 49,796                |   |                  | (17,696
|Net unrealized derivative instrument loss           |                            |                | (17,122 | )                     |   | 5,993            |        
|Amortization of transition related adjustment       |                            |                | 2,482   |                       |   | (869             | )      
|Currency translation adjustment                     |                            |                |        |                       |   |                 |        
|                                                    |                            |                |         |                       |   |                  |        
|                                                    | Other comprehensive income |                | $       | 35,156                |   | $                | (12,572
|                                                    |                            |                |         |                       |   |                  |        
|                                                    |                            |                |         |                       |   |                  |        

F-26

---

|2001                                                |                            |   |         |         |   |        |       |   |        |       
|--------------------------------------------------- | -------------------------- | - | ------- | ------- | - | ------ | ----- | - | ------ | ------
|Unrealized gains on securities:                     |                            |   |         |         |   |        |       |   |        |       
|Unrealized holding gains arising during the period  |                            | $ | 1,947   |         | $ | (827   | )     | $ | 1,120  |       
|                                                    |                            |   |         |         |   |        |      
|                                                    | Net unrealized gains       |   |         | 1,947   |   |        | (827  | ) |        | 1,120 
|Net unrealized derivative instrument loss           |                            |   | (12,537 | )       |   | 4,388  |       |   | (8,149 | )     
|Amortization of transition related adjustment       |                            |   | 3,240   |         |   | (1,134 | )     |   | 2,106  |       
|Cumulative effect of change in accounting principle |                            |   | (6,052  | )       |   | 2,118  |       |   | (3,934 | )     
|Currency translation adjustment                     |                            |   |        |         |   |       |       |   |       |       
|                                                    |                            |   |         |         |   |        |      
|                                                    | Other comprehensive income |   | $       | (13,402 | ) | $      | 4,545 |   | $      | (8,857
|                                                    |                            |   |         |         |   |        |      

14. EMPLOYEE BENEFIT PLANS

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

Supplemental Retirement PlanThe Company also has a nonqualified, unfunded, supplemental retirement
plan ("SERP") which was established in 1994 and covers certain employees and pays benefits that supplement any benefits paid under the qualified plan. Benefits under the supplemental plan are
generally based on compensation not includable in the calculation of benefits to be paid under the qualified plan. The plan document was amended in April 2000 to eliminate the compensation cap
and include bonuses and commissions of certain employees. The Company uses a December 31 measurement date for this plan.

F-27

---

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, 2003      |       | December 31, 2002 |       
|----------------------------- | --------------------------------------------------- | ---------------------- | ----- | ----------------- | ------
|
|Change in benefit obligation: |                                                     |                        |       |                   |       
|                              | Benefit obligation at beginning of year             |                        | $     | 14,511            |       
|                              |                                                     | Service cost           |       |                   | 834   
|                              |                                                     | Interest cost          |       |                   | 1,025 
|                              |                                                     | Actuarial loss         |       |                   | 2,728 
|                              |                                                     | Benefits paid          |       |                   | (1,048
|                              |                                                     | 2001 Plan amendment    |       |                   |      
|                              |                                                     |                        |       |                   |       
|                              | Projected benefit obligation at the end of the year |                        |       | 18,050            |       
|                              |                                                     |                        |       |                   |       
|Change in plan assets:        |                                                     |                        |       |                   |       
|                              | Assets at the beginning of the year                 |                        |       | 12,916            |       
|                              |                                                     | Employer contributions |       |                   | 3,000 
|                              |                                                     | Actual return          |       |                   | 2,378 
|                              |                                                     | Benefits paid          |       |                   | (1,048
|                              |                                                     |                        |       |                   |       
|                              | Assets at the end of the year                       |                        |       | 17,246            |       
|                              |                                                     |                        |       |                   |       
|Funded status                 |                                                     |                        | (804  | )                 |       
|                              |                                                     |                        |       |                   |       
|                              | Unrecognized net transition asset                   |                        |       | (106              | )     
|                              | Unrecognized prior service cost                     |                        |       | (306              | )     
|                              | Unrecognized net loss                               |                        |       | 5,392             |       
|                              |                                                     |                        |       |                   |       
|Net amount recognized         |                                                     | $                      | 4,176 |                   | $     
|                              |                                                     |                        |       |                   |       

Amounts
recognized in the consolidated balance sheet consist of the following (Dollars in thousands):

|                                       |  | December 31, 2003 |       | December 31, 2002 |  
|-------------------------------------- |  | ----------------- | ----- | ----------------- | -
|
|Prepaid benefit cost                   |  | $                 | 4,176 |                   | $
|Accrued benefit cost                   |  |                   |      |                   |  
|Intangible assets                      |  |                   |      |                   |  
|Accumulated other comprehensive income |  |                   |      |                   |  
|                                       |  |                   |       |                   |  
|Net amount recognized                  |  | $                 | 4,176 |                   | $
|                                       |  |                   |       |                   |  

The
accumulated benefit obligation for the qualified defined benefit pension plan was $13.0 million and $10.7 million at December 31, 2003 and 2002, respectively.
The accumulated benefit obligation for the supplemental retirement plan was $8.3 million and $5.2 million at December 31, 2003 and 2002, respectively.

F-28

---

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

|                                                 |  | December 31, 2003 |        | December 31, 2002
|------------------------------------------------ |  | ----------------- | ------ | -----------------
|
|Service costbenefits earned/benefit obligations |  | $                 | 834    |                  
|Interest cost on projected benefit obligations   |  |                   | 1,025  |                  
|Expected return on plan assets                   |  |                   | (1,085 | )                
|Net amortization and deferral                    |  |                   | 248    |                  
|                                                 |  |                   |        |                  
|Net periodic pension cost                        |  | $                 | 1,022  |                  
|                                                 |  |                   |        |                  

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, 2003 |   | December 31, 2002 |  
|------------------------------ |  | ----------------- | - | ----------------- | -
|
|Discount rate                  |  | 6.25              | % | 6.25              | %
|Rate of compensation increases |  | 3.75              |   | 3.75              |  

The
weighted-average discount rate, rate of increase in future compensation levels and expected return on plan assets used in determining the net periodic pension cost were as follows:

|                                       |  | December 31, 2003 |   | December 31, 2002 |  
|-------------------------------------- |  | ----------------- | - | ----------------- | -
|
|Discount rate                          |  | 6.75              | % | 6.75              | %
|Rate of compensation increases         |  | 3.75              |   | 3.75              |  
|Expected rate of return on plan assets |  | 8.50              |   |                  |  

The
Company has utilized an expected rate of return on plan assets of 8.5% as the historical actual long-term return on plan assets accords with this assumption.

The
Company's pension plan allocation by asset category are as follows:

|Asset Category                  |  | December 31,
2003 |   | December 31,
2002 |  
|------------------------------- |  | ----------------- | - | ----------------- | -
|Cash and short-term investments |  | 23.3              | % | 31.8              | %
|Equity securities               |  | 60.0              |   | 46.3              |  
|Debt securities                 |  | 16.7              |   | 21.9              |  
|                                |  |                   |   |                   |  
|Total                           |  | 100.0             | % | 100.0             | %
|                                |  |                   |   |                   |  

The
Company's core investment objectives for the pension trust are long-term capital appreciation and growth of income, while protecting the principal value of trust assets from
long-term permanent loss and, within reason, from large short-term fluctuations. The approved investment policies of the trust anticipate fixed income investments to compose
25-55% and equity securities to compose 45-75% of the total portfolio. Cash equivalents may be used to provide liquidity, income and stability to the portfolio.

Cash
and short-term investments represent money market funds at December 31, 2003 and 2002. Equity securities supply current income and growth through market
appreciation. The Company invests in quality companies with securities that are readily marketable. The equity securities portfolio is

F-29

---

diversified
with no more than 10% of the portfolio invested in any one particular industry at December 31, 2003 and 2002. Debt securities offer a source of current income, reduce the
variability of the portfolio's total market value and hedge against inflation. Fixed income investments were limited to issues by the United States Government and its agencies, and corporate bonds
with top four quality ratings of recognized credit services at December 31, 2003 and 2002. The pension trust was in full compliance with the approved pension objectives and policies for the
years ended December 31, 2003 and 2002. At December 31, 2003 and 2002, the pension did not hold any securities of the Company.

The
Company expects to contribute approximately $2 to $4 million to its pension plan during 2004.

At
December 31, 2003 and 2002, the SERP plan remained an unfunded plan. The Company does not expect contributing to the plan during 2004.

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,
$3.2 million and $2.1 million for the years ended December 31, 2003, 2002 and 2001, respectively.

15. OFF BALANCE SHEET FINANCIAL INSTRUMENTS

Lines of CreditAt December 31, 2003, the Company had commitments to individuals and mutual
funds under collateralized open lines of credit totaling $901.5 million, against which $142.0 million in loans were drawn. The credit risk involved in issuing lines of credit is
essentially the same as that involved in extending demand loans. The Company does not anticipate any loss as a result of these lines of credit.

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

With
respect to the indemnified securities lending portfolio, the cash and U.S. government securities held by the Company as collateral at December 31, 2003 totaled
$4.5 billion while the fair value of the portfolio totaled approximately $4.3 billion. Given that the collateral held was in excess of the value of the securities that the Company would
be required to replace if the borrower defaulted and failed to return such securities, the Company's indemnification obligation was zero and no liability was recorded.

All
securities loans are categorized as overnight loans. The maximum potential amount of future payments that the Company could be required to make would be equal to the market value of
the securities borrowed. Since the securities loans are overcollateralized by 2% (for U.S. dollar-denominated securities) to 5% (for non-U.S. dollar-denominated securities) of the fair
market value of the loan made, the collateral held by the Company would be used to satisfy the obligation. In addition, each borrowing agreement includes "set-off" language that allows the
Company to use any excess

F-30

---

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

16. DERIVATIVE FINANCIAL INSTRUMENTS

Interest Rate ContractsInterest rate contracts involve an agreement with a counterparty to exchange
cash flows based on an underlying interest rate index. A swap agreement involves the exchange of a series of interest payments, either at a fixed or variable rate, based upon the notional amount
without the exchange of the underlying principal amount. The Company's exposure from these interest rate contracts results from the possibility that one party may default on its contractual obligation
when the contracts are in a gain position. The Company has experienced no terminations by counterparties of interest rate swaps. Credit risk is limited to the positive fair value of the derivative
financial instrument, which is significantly less than the notional value. During 2003, the Company had agreements to assume fixed-rate interest payments in exchange for receiving variable
market-indexed interest payments. The original terms range from 24 to 36 months. The contractual or notional amounts of the interest rate swap agreements held by the Company were approximately
$1.2 billion and $1.0 billion at December 31, 2003 and 2002, respectively. The weighted-average fixed-payment rates were 3.92% and 4.63% at December 31, 2003 and 2002,
respectively. Variable-interest payments received are indexed to the Prime and the overnight Federal Funds rate for 2003. At December 31, 2003 and 2002, the weighted-average rate of variable
market-indexed interest payment obligations to the Company were 1.70% and 1.55%, respectively. The effect of these agreements was to lengthen short-term variable-rate liabilities into
longer-term fixed-rate liabilities. These contracts had net fair values of approximately $(14.9) million and $(33.1) million at December 31, 2003 and 2002, respectively. These fair
values are included in the respective other assets and other liabilities categories on the Company's consolidated balance sheet. See also Note 18 for additional information on the fair value of
the interest rate contracts. These instruments have been designated as cash flow hedges. Changes in fair value of effective portions are included as a component of other comprehensive income. Changes
in fair value of ineffective portions are included in net interest income.

Hedge
ineffectiveness, determined in accordance with SFAS No. 133, had an insignificant impact on earnings for the years ended December 31, 2003, 2002 and 2001. Net
interest income also included $0.4 million of derivative losses for the twelve-month period that resulted from the reclassification of transition adjustment-related derivative losses from OCI
to net interest income in accordance with SFAS No. 133. 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 As of December 31, 2003, the Company had reclassified into earnings all of the remaining transition
adjustment of net derivative losses included in OCI.

Foreign Exchange ContractsForeign exchange contracts involve an agreement to exchange the currency of
one country for the currency of another country at an agreed-upon rate and settlement date. Foreign exchange contracts consist of spot, forward and swap contracts. Spot contracts call for
the exchange of one currency for another and usually settle in two business days. Forward contracts call for the exchange of one currency for another at a date beyond spot. In a currency swap, the
holder of a currency transacts simultaneously both a spot and a forward transaction in that currency for an equivalent amount of another currency to get temporary liquidity in the currency owned. The
Company's risk from foreign exchange contracts results from the possibility that one party may default

F-31

---

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, 2003 and 2002 was $1.6 billion and $0.7 billion, respectively. As of
December 31, 2003 and 2002, the European Unit represented approximately 31% and 38% of the notional value outstanding as of December 31, 2003 and 2002, respectively. Unrealized gains or
losses resulting from purchases and sales of foreign exchange contracts are included within the respective other assets and other liabilities categories on the Company's consolidated balance sheet.
Unrealized gains in other assets were $16.1 million and $4.4 million as of December 31, 2003 and 2002, respectively. Unrealized losses in other liabilities were
$15.9 million and $4.5 million as of December 31, 2003 and 2002, respectively. See also Note 18 for additional information on the fair value of our foreign exchange
contracts. Foreign exchange contracts have been reduced by offsetting balances with the same counterparty where a master netting agreement exists. These contracts have not been designated as hedging
instruments; therefore, all changes in fair value are included in asset servicing fees.

OtherThe Company also enters into fixed price purchase contracts that are designed to hedge the
variability of the consideration to be paid for the purchase of investment securities. By entering into these contracts, the Company is fixing the price to be paid at a future date for certain
investment securities. At December 31, 2003 and 2002, the Company had $792.1 million and $432.6 million, respectively, of fixed price purchase contracts outstanding to purchase
investment securities. Changes in fair value of these cash flow hedges are included as a component of other comprehensive income.

17. 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, 2003 was approximately $22.3 million. In
addition, the Company's other assets category includes deposits totaling $29.5 million, which were pledged to secure clearings with depository institutions.

Lease CommitmentsMinimum future commitments on noncancelable operating leases at December 31,
2003 were as follows (Dollars in thousands):

Fiscal Year Ending

Bank Premises

Equipment

Total2004

$
25,128

$
10,941

$
36,0692005


25,361


6,212


31,5732006


25,461


1,789


27,2502007


22,259


33


22,2922008 and beyond


40,344


16


40,360Total

$
138,553

$
18,991

$
157,544


Total
rent expense was approximately $36.1 million, $34.5 million and $24.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Effective
January 1, 2001, the Company renewed its five-year service agreement with Electronic Data Systems ("EDS"), which now expires 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
$7.7 million, $7.4 million and $5.0 million for the years ended December 31, 2003, 2002 and 2001, respectively.

F-32

---



In
2001, the Company renewed its agreement with SEI Investments Company, which now expires on December 31, 2005. Under the terms of this agreement, SEI provides data processing
services to the Company, which has agreed to pay certain monthly service fees based upon usage. Service expense under this contract was $4.9 million, $5.2 million and $4.2 million
for the years ended December 31, 2003, 2002 and 2001, respectively.

ContingenciesThe Company provides a broad range of services to financial asset managers, such as
mutual fund complexes, family offices, investment advisors, banks and insurance companies. Core services include global custody, multicurrency accounting and mutual fund administration. Value-added
services include securities lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment advisory services, lines of credit, middle office outsourcing
and brokerage and transition management services. 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, 2003 that are material to the consolidated financial position or results of operations of the Company.

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, LLP, 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, 2003, the Company does not expect this matter to have a material adverse effect on its business, financial condition or
results of operations.

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. On or about May 9, 2003, the parties to the action executed a settlement agreement and filed a joint stipulated order of
dismissal. On May 13, 2003, the court entered the order of dismissal, terminating the case. The order of dismissal entered by the court provided for the dismissal of Mopex's claims without
prejudice. We did not pay or promise to pay any money to Mopex to obtain the dismissal. Moreover, our counterclaims against Mopex were dismissed without prejudice, keeping alive our defenses in the
event of any further litigation involving this patent.

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 the Company's Sacramento and
Walnut Creek facilities. The lawsuit was filed in the Superior Court of California, County of Sacramento. On July 23,

F-33

---

2003,
the Company reached an agreement in principle with representatives of the plaintiffs to settle the case. As currently agreed, the settlement will not have a material impact on the Company's
business, financial condition or results of operations. The settlement is subject to proper administration of payments to the class members and final approval by the court. In anticipation of this
settlement and related costs, the Company accrued a liability of approximately $1.0 million in the second quarter of 2003.

In
March 2003, a retroactive change in the Commonwealth of Massachusetts tax law disallowed a dividends received deduction taken by the Bank on dividends it had received since
1999 from a wholly-owned real estate investment trust. During the second quarter of 2003, we settled this disputed tax assessment with the Massachusetts Department of Revenue, agreeing to pay
approximately 50% of the liability. As a result of this retroactive change in tax law, we recorded an additional state tax expense of approximately $7.2 million, net of federal income tax
benefit, in 2003.

18. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

|                       |                                             | December 31, 2003 |   | December 31, 2002
|---------------------- | ------------------------------------------- | ----------------- | - | -----------------
|
|Financial Assets:      |                                             |                   |   |                  
|                       | Cash and due from banks                     |                   | $ | 39,689           
|                       | Securities held to maturity                 |                   |   | 4,307,610        
|                       | Securities available for sale               |                   |   | 4,296,637        
|                       | Loans, net allowance                        |                   |   | 199,530          
|                       | Interest rate contracts                     |                   |   | 158              
|                       | Foreign exchange contracts                  |                   |   | 16,114           
|Financial Liabilities: |                                             |                   |   |                  
|                       | Deposits                                    |                   |   | 4,207,118        
|                       | Securities sold under repurchase agreements |                   |   | 3,258,001        
|                       | Short-term & other borrowings               |                   |   | 1,098,087        
|                       | Interest rate contracts                     |                   |   | 15,103           
|                       | Foreign exchange contracts                  |                   |   | 15,901           

The
fair value estimates presented herein are based on pertinent information available to management as of December 31, 2003 and 2002. 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, loans and deposits.

F-34

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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.

Securities sold under repurchase agreements and short-term and other borrowingsFair
values of the Company's long-term borrowings and
long-term repurchase agreements were based on quoted market prices, when available, and prevailing market rates for borrowings of similar terms. Carrying amounts for short-term
borrowings and short-term repurchase agreements approximate fair value due to the short-term nature of these instruments.

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.
Foreign exchange contracts have been reduced by offsetting balances with the same counterparty where a master netting agreement exists.

19. 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, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

F-35

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As
of December 31, 2003, 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, 2003: |                                       |        |   |                                |  |                                                                   |  
|Total Capital            |                                       |        |   |                                |  |                                                                   |  
|                         | (to Risk-Weighted Assets-the Company) |        | $ | 472,511                        |  | 17.79                                                             | %
|                         | (to Risk-Weighted Assets-the Bank)    |        | $ | 466,933                        |  | 17.60                                                             | %
|Tier 1 Capital           |                                       |        |   |                                |  |                                                                   |  
|                         | (to Risk-Weighted Assets-the Company) |        | $ | 472,411                        |  | 17.79                                                             | %
|                         | (to Risk-Weighted Assets-the Bank)    |        | $ | 466,833                        |  | 17.59                                                             | %
|Tier 1 Capital           |                                       |        |   |                                |  |                                                                   |  
|                         | (to Average Assets-the Company)       |        | $ | 472,411                        |  | 5.41                                                              | %
|                         | (to Average Assets-the Bank)          |        | $ | 466,833                        |  | 5.35                                                              | %
|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                                                              | %

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

The
operations of the Company's securities broker affiliate, Investors Securities Services, Inc., are subject to federal and state securities laws, as well as the rules of both
the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. Management believes, as of December 31, 2003, that Investors Securities
Services, Inc. met all requirements to which it is subject.

F-36

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

|Year Ended December 31, 2003 |  | First
Quarter |        | Second
Quarter |   | Third
Quarter |  | Fourth
Quarter
|---------------------------- |  | ------------- | ------ | -------------- | - | ------------- |  | --------------
|Interest income              |  | $             | 60,349 |                | $ | 61,205        |  | $             
|Interest expense             |  |               | 21,566 |                |   | 23,623        |  |               
|Noninterest income           |  |               | 74,916 |                |   | 84,393        |  |               
|Operating expenses           |  |               | 85,719 |                |   | 90,953        |  |               
|Income before income taxes   |  |               | 27,980 |                |   | 31,022        |  |               
|Income taxes                 |  |               | 22,568 |                |   | 3,002         |  |               
|Net income                   |  |               | 5,412  |                |   | 28,020        |  |               
|Basic earnings per share     |  |               | 0.08   |                |   | 0.43          |  |               
|Diluted earnings per share   |  |               | 0.08   |                |   | 0.42          |  |               

|Year Ended December 31, 2002 |  | First
Quarter |        | Second
Quarter |   | Third
Quarter |  | Fourth
Quarter
|---------------------------- |  | ------------- | ------ | -------------- | - | ------------- |  | --------------
|Interest income              |  | $             | 58,632 |                | $ | 62,552        |  | $             
|Interest expense             |  |               | 23,505 |                |   | 28,783        |  |               
|Noninterest income           |  |               | 71,042 |                |   | 76,565        |  |               
|Operating expenses           |  |               | 83,233 |                |   | 85,595        |  |               
|Income before income taxes   |  |               | 22,936 |                |   | 24,739        |  |               
|Income taxes                 |  |               | 6,881  |                |   | 7,422         |  |               
|Net income                   |  |               | 16,055 |                |   | 17,317        |  |               
|Basic earnings per share     |  |               | 0.25   |                |   | 0.27          |  |               
|Diluted earnings per share   |  |               | 0.24   |                |   | 0.26          |  |               

21. 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  |  | $                                                      | 467,693 |  | $ | 425,936
|Ireland        |  |                                                        | 18,601  |  |   | 11,960 
|Canada         |  |                                                        | 2,579   |  |   | 1,915  
|Cayman Islands |  |                                                        | 203     |  |   | 79     
|               |  |                                                        |         |  |   |        
|Total          |  | $                                                      | 489,076 |  | $ | 439,890
|               |  |                                                        |         |  |   |        

BGI
accounted for 16.42%, 16.38% and 13.21% of the Company's consolidated net operating revenues for the years ended December 31, 2003, 2002 and 2001, respectively. No client
other than BGI accounted for more than 5% of the Company's consolidated net operating revenues in the years ended December 31, 2003 and 2002. For the year ended December 31, 2001, the
Commonfund represented 5.3% of total revenue.

F-37

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

|                        |                                        | For the Years Ended December 31,
|----------------------- | -------------------------------------- | --------------------------------
|
|
|Core service fees:      |                                        |                                 
|                        | Custody, accounting and administration |                                 
|                        |                                        |                                 
|Ancillary service fees: |                                        |                                 
|                        | Foreign exchange                       |                                 
|                        | Cash management                        |                                 
|                        | Investment advisory                    |                                 
|                        | Securities lending                     |                                 
|                        | Other service fees                     |                                 
|                        |                                        |                                 
|                        |                                        | Total ancillary service fees    
|                        |                                        |                                 
|Total                   |                                        | $                               
|                        |                                        |                                 

22. 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, 2003 |        | December 31, 2002 |   | December 31, 2001 |  
|---------------------------------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ----------------- | -
|Equity in undistributed income of bank subsidiary                      |  | $                 | 94,427 |                   | $ | 70,808            |  
|Equity in undistributed income (loss) of                               |  |                   |        |                   |   |                   |  
|nonbank subsidiary                                                     |  |                   | 278    |                   |   | (58               | )
|Equity in undistributed loss of unconsolidated                         |  |                   |        |                   |   |                   |  
|nonbank subsidiary                                                     |  |                   | (8     | )                 |   |                  |  
|Dividend income from nonbank subsidiaries                              |  |                   | 57     |                   |   | 96                |  
|Dividend income from unconsolidated nonbank subsidiary                 |  |                   | 19     |                   |   |                  |  
|Management fee paid by nonbank subsidiaries                            |  |                   |       |                   |   | 55                |  
|Interest expense on junior subordinated deferrable interest debentures |  |                   | (2,420 | )                 |   | (2,488            | )
|Operating expenses                                                     |  |                   | (2,214 | )                 |   | (467              | )
|Income tax benefit                                                     |  |                   | 1,621  |                   |   | 1,000             |  
|                                                                       |  |                   |        |                   |   |                   |  
|Net Income                                                             |  | $                 | 91,760 |                   | $ | 68,946            |  
|                                                                       |  |                   |        |                   |   |                   |  

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|Balance Sheets                             |                                             | December 31, 2003          |         | December 31, 2002 |        
|------------------------------------------ | ------------------------------------------- | -------------------------- | ------- | ----------------- | -------
|Assets:                                    |                                             |                            |         |                   |        
|                                           | Cash                                        |                            | $       | 3,433             |        
|                                           | Investments in bank subsidiary              |                            |         | 559,809           |        
|                                           | Investments in nonbank subsidiaries         |                            |         | 766               |        
|                                           | Receivable due from bank subsidiary         |                            |         | 1,659             |        
|                                           | Other assets                                |                            |         | 1,155             |        
|                                           |                                             |                            |         |                   |        
|Total Assets                               |                                             | $                          | 566,822 |                   | $      
|                                           |                                             |                            |         |                   |        
|Liabilities and Stockholders' Equity       |                                             |                            |         |                   |        
|Liabilities:                               |                                             |                            |         |                   |        
|                                           | Accrued expenses                            |                            | $       | 56                |        
|                                           | Payable due to nonbank subsidiary           |                            |         | 1,157             |        
|                                           | Subordinated debt                           |                            |         | 24,774            |        
|                                           |                                             |                            |         |                   |        
|                                           |                                             | Total liabilities          |         |                   | 25,987 
|                                           |                                             |                            |         |                   |        
|Stockholders' Equity:                      |                                             |                            |         |                   |        
|                                           | Common stock                                |                            |         | 655               |        
|                                           | Surplus                                     |                            |         | 242,662           |        
|                                           | Deferred compensation                       |                            |         | (1,076            | )      
|                                           | Retained earnings                           |                            |         | 286,138           |        
|                                           | Accumulated other comprehensive income, net |                            |         | 13,006            |        
|                                           | Treasury stock                              |                            |         | (550              | )      
|                                           |                                             |                            |         |                   |        
|                                           |                                             | Total stockholders' equity |         |                   | 540,835
|                                           |                                             |                            |         |                   |        
|Total Liabilities and Stockholders' Equity |                                             | $                          | 566,822 |                   | $      
|                                           |                                             |                            |         |                   |        

F-39

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|Statements of Cash Flows                                                      |                                                                                                   | December 31,
2003                      |        | December 31,
2002 |       | December 31,
2001 |        
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------- | ------ | ----------------- | ----- | ----------------- | -------
|Cash flows from operating activities:                                         |                                                                                                   |                                        |        |                   |       |                   |        
|                                                                              | Net income                                                                                        |                                        | $      | 91,760            |       | $                 | 68,946 
|                                                                              |                                                                                                   |                                        |        |                   |       |                   |        
|Adjustments to reconcile net income to net cash used by operating activities: |                                                                                                   |                                        |        |                   |       |                   |        
|                                                                              | Amortization of deferred compensation                                                             |                                        |        | 483               |       |                   | 964    
|                                                                              | Amortization of premium expense                                                                   |                                        |        | 195               |       |                   |       
|                                                                              | Change in assets and liabilities:                                                                 |                                        |        |                   |       |                   |        
|                                                                              |                                                                                                   | Receivable due from bank subsidiary    |        |                   | 942   |                   |        
|                                                                              |                                                                                                   | Receivable due from nonbank subsidiary |        |                   |      |                   |        
|                                                                              |                                                                                                   | Income tax receivable                  |        |                   | (484  | )                 |        
|                                                                              |                                                                                                   | Payable due to nonbank subsidiary      |        |                   | 1,155 |                   |        
|                                                                              |                                                                                                   | Accrued expenses                       |        |                   | 14    |                   |        
|                                                                              |                                                                                                   | Other assets                           |        |                   | (861  | )                 |        
|                                                                              | Equity in undistributed income of bank subsidiary                                                 |                                        |        | (94,427           | )     |                   | (70,808
|                                                                              | Equity in undistributed (income) loss of nonbank subsidiary                                       |                                        |        | (278              | )     |                   | 58     
|                                                                              | Equity in undistributed loss of unconsolidated nonbank subsidiary                                 |                                        |        | 8                 |       |                   |       
|                                                                              |                                                                                                   |                                        |        |                   |       |                   |        
|Net cash used in operating activities                                         |                                                                                                   |                                        | (1,493 | )                 |       | (1,641            | )      
|                                                                              |                                                                                                   |                                        |        |                   |       |                   |        
|Cash flows from investing activities:                                         |                                                                                                   |                                        |        |                   |       |                   |        
|                                                                              | Payments for investments in and advances to subsidiary                                            |                                        |        |                  |       |                   |       
|                                                                              |                                                                                                   |                                        |        |                   |       |                   |        
|Net cash used in investing activities                                         |                                                                                                   |                                        |       |                   |       |                  |        
|                                                                              |                                                                                                   |                                        |        |                   |       |                   |        
|Cash flows from financing activities:                                         |                                                                                                   |                                        |        |                   |       |                   |        
|                                                                              | Proceeds from exercise of stock options                                                           |                                        |        | 2,977             |       |                   | 2,869  
|                                                                              | Proceeds from issuance of common stock                                                            |                                        |        | 3,387             |       |                   | 3,882  
|                                                                              | Common stock repurchased                                                                          |                                        |        | (550              | )     |                   |       
|                                                                              | Cost of issuance of restricted stock                                                              |                                        |        |                  |       |                   |       
|                                                                              | Repurchase of company-obligated, mandatorily redeemable, preferred securities of subsidiary trust |                                        |        |                  |       |                   | (1,000 
|                                                                              | Dividends paid                                                                                    |                                        |        | (3,904            | )     |                   | (3,219 
|                                                                              |                                                                                                   |                                        |        |                   |       |                   |        
|Net cash provided by financing activities                                     |                                                                                                   |                                        | 1,910  |                   |       | 2,532             |        
|                                                                              |                                                                                                   |                                        |        |                   |       |                   |        
|Net increase (decrease) in cash and due from banks                            |                                                                                                   |                                        | 417    |                   |       | 891               |        
|Cash and due from banks, beginning of year                                    |                                                                                                   |                                        | 3,016  |                   |       | 2,125             |        
|                                                                              |                                                                                                   |                                        |        |                   |       |                   |        
|Cash and due from banks, end of year                                          |                                                                                                   | $                                      | 3,433  |                   | $     | 3,016             |        
|                                                                              |                                                                                                   |                                        |        |                   |       |                   |        

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