UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, 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, 2004                                                  
|or                                                                                           
|o                                                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                to              
Commission File Number 0-26996

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

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

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

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

None

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

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

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

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

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

The aggregate market value of Common Stock held by non-affiliates of the registrant was $2,763,194,519 based on the last reported sale price of $43.58 on The
Nasdaq National Market on June 30, 2004 as reported by Nasdaq.

As
of January 31, 2005, there were 66,666,722 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant will file a definitive Proxy Statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended
December 31, 2004. 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 middle office outsourcing, global custody, multicurrency accounting and fund administration. Our value-added services
include securities lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment advisory services, lines of credit and brokerage and transition
management services. At December 31, 2004, we provided services for approximately $1.4 trillion in net assets, including approximately $236 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 multiple 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 addition, 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.Despite the stock market declines of 2000 through 2002, over the past ten years growth in
financial assets under management has remained 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 $15.8
trillion at December 31, 2003, up from $6.8 trillion in 1993, 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. The U.S. mutual fund market has grown at a compounded annual growth rate of approximately 13% since 1993, and held almost $7 trillion in assets

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at
December 31, 2003. The following table presents U.S. financial assets, including mutual funds (Dollars in billions):

|                                 |  | December 31, 2003 |        | December 31, 1993 |   | Compounded
Annual
Growth Rate | 
|-------------------------------- |  | ----------------- | ------ | ----------------- | - | ----------------------------- | 
|U.S. Financial Assets            |  |                   |        |                   |   |                               | 
|Mutual Funds                     |  | $                 | 6,896  |                   | $ | 2,051                         | 
|Life Insurance Companies         |  |                   | 3,823  |                   |   | 1,755                         | 
|Private Pension Funds            |  |                   | 4,194  |                   |   | 2,304                         | 
|Bank Personal Trusts and Estates |  |                   | 899    |                   |   | 661                           | 
|                                 |  |                   |        |                   |   |                               | 
|Total                            |  | $                 | 15,812 |                   | $ | 6,771                         | 
|                                 |  |                   |        |                   |   |                               | 

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 service providers
and presents us with opportunities for growth as clients react to consolidation and review their relationships with existing 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 in an attempt 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. Other asset managers generally hire third parties to provide accounting, administration and transfer agency services in
addition to custody services. Keeping abreast of developments like regulatory changes, Internet data delivery, 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 and
appeal to investors with diverse means, risk tolerances, diversification requirements, and time horizons. One innovative example of this is 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, domestic ETF assets increased 50% to approximately
$226 billion as of December 31, 2004 from approximately $151 billion as of December 31, 2003.

Alternative
investments, including hedge funds, private equity funds, venture capital funds and commodity pools, are another example of complex investment products that have recently
experienced dramatic growth. According to an industry consultant, hedge fund assets in particular have grown at an impressive rate for several years and total approximately $1 trillion at the end of
2004. Hedge fund assets have increased due to widening interest from institutional investors such as pension plans and
endowments as well as high net worth individuals. These asset pools often feature increasingly sophisticated trading strategies, financial instruments and product structures such as distressed debt,
swaps, and asset-backed securities that require more specialized operational support than traditional mutual funds.

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. 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
product innovation 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.

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 particularly 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. The following discussion outlines the key
components of our growth strategy.

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.

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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:



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 allow us to constantly improve processing quality and efficiency and to implement service
innovations for our clients quickly. 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. We believe 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 ETFs, various alternative investment structures, master-feeder funds and multi-managed funds. 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 is the key
to maintaining and expanding existing client relationships and to attracting new clients. The consolidation of functions available through FACTS allows us to take an integrated approach to client
servicing. We believe this approach is different from that employed by many of our competitors. We dedicate a single operations team to handle all tasks 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 manage multiple pools of assets. Once an investment manager becomes a client, we believe that this client is more likely to select
us to service more products, provide additional services, or both. If we are engaged to provide services for only certain 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

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not
use us for value-added services like foreign exchange or cash management. We target expanding these relationships through increasing the number of services provided for each client.

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 Middle Office Outsourcing

 Securities Lending Global Custody

 Foreign Exchange Multicurrency Accounting

 Cash Management Fund Administration

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


Our
value-added services help clients develop and execute their strategies, and evaluate and manage their risks, which we believe provides them with the opportunity to enhance their
returns. 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 the number of 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

Middle Office Outsourcing.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 affected by 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.

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 $1.4 trillion at December 31, 2004. At December 31, 2004, our foreign net assets processed
totaled approximately $236 billion.

In
order to service our clients worldwide, we have established a network of global subcustodians in almost 100 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.

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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 fund accounting services to clients
in Europe and Canada, which we continue to view as areas of significant business opportunity.

Fund Administration.Fund administration services include management reporting, regulatory reporting, compliance monitoring,
tax accounting and return preparation, partnership administration, and chief compliance officer services and support. In addition to these ongoing services, we also provide 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 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, 2004, the total net
assets of the portfolio approximated $6.1 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.

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, 2004, we had gross loans outstanding to clients of approximately $135 million, which
represented approximately 1% 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 infrastructure 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 who works with the client on designing new products and
specific systems requirements, provides consulting support, anticipates the client's needs and coordinates 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 17% of our consolidated net operating revenues for the year ended December 31, 2004 and
approximately 16% for the years ended December 31, 2003 and 2002. No client other than BGI accounted for more than 10% of our net operating revenues for the years ended December 31,
2004, 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 information 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 and must be processed before being 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 quickly 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.

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

We
use the Internet as a means to communicate with clients and external parties. We also provide secure value-added services to our clients over the Internet. We utilize a secure
extranet environment that provides the authentication, access controls, intrusion detection, encryption and firewalls needed to
ensure the protection of client information and assets. Internet-based applications provide our clients with secure electronic access to their data as well as flexible ad-hoc data query and reporting
tools.

Our
mainframe processing and mainframe disaster recovery capability is provided by Electronic Data Systems ("EDS"), located in Plano, Texas. During the summer of 2004, we signed an
agreement with International Business Machines, ("IBM"), located in Armonk, New York. Under this agreement, IBM provides support for our network and hardware environments and our help desk services.
By outsourcing these infrastructure support functions, we can focus our resources on systems development and minimize our capital investment in large-scale computer equipment. EDS and IBM offer 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 their diverse customer bases, EDS and IBM 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 and IBM in their computer hardware. Under
both contracts we are billed monthly for services provided by EDS or IBM on an as-used basis in accordance with a predetermined pricing schedule for specific products and services. Our current
agreement with EDS is scheduled to expire on December 31, 2005. Our current agreement with IBM is scheduled to expire on June 30, 2011.

Each
year we target spending approximately 18-20% of revenue on technology. Because of our relationships with EDS and IBM and our system architecture, we are able to devote the majority
of our technology investments to development, rather than support or infrastructure.

Our
trust processing services are provided by SEI Investments Company ("SEI"), located in Oaks, Pennsylvania. SEI is a global provider of asset management and investment technology
solutions. We

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pay
certain monthly service fees based upon usage. Our current agreement with SEI is scheduled to expire on December 31, 2009.

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, our locations are geographically diverse in order to allow recovery of
essential functions at another location in the event of a widespread disruption. In 2004, BCP staff conducted over 100 different tests to ensure that our technology infrastructure, facilities, and
staff could respond and recover in a disaster.

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, 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 many of our competitors grow larger through acquisition, we believe that our customized and highly responsive service
offerings become even more attractive. While consolidation within the investment management and asset servicing industries 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 that are affected by acquisitions. In addition, consolidation among large financial
institutions may enable us to acquire, at a reasonable price, asset servicing businesses that do not fit within the core focus of these new consolidated financial institutions.

Intellectual Property

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

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Employees

On December 31, 2004, we had 2,778 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, the regulatory environment
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

Virtually all aspects of our business and operations are regulated under state and federal law. In addition to the laws governing businesses and employers
generally, we are subject to federal and state laws and regulations applicable to financial institutions and their parent companies. The operations of our securities broker affiliate, Investors
Securities Services, Inc., are also 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"). The principal objective of state and federal banking laws is the maintenance of the safety and soundness of financial institutions and the federal deposit insurance
system, the protection of consumers or classes of consumers and the furtherance of broad public policy goals, rather than the specific protection of stockholders of a bank or its parent company. Some
of the significant statutory and regulatory provisions to which we and our subsidiaries are subject are described below. The description of these statutory and regulatory provisions is not 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 our business, prospects and
operations, as well as those of our 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 reports of our operations with, and are subject to examination by, the FRB and the Commissioner. The FRB has the authority to issue orders to bank holding companies ("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 any class 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 the FRB. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal") permits
adequately capitalized and adequately managed BHCs, as determined by the FRB, to acquire banks located in any state, subject to certain concentration limits and other conditions. Subject to certain
conditions, Riegle-Neal also generally authorizes the interstate mergers of banks and to a lesser extent, interstate branching so long as the law of the host state specifically authorizes such action.
Massachusetts law imposes certain approval requirements with respect to acquisitions by a BHC of certain banking institutions and to mergers of BHCs.

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Unless
a BHC becomes a financial holding company ("FHC") under the Gramm-Leach-Bliley Act of 1999 ("GLBA"), 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 engage in such activities that are closely related to banking or making an investment in a
company engaged in such activities, 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 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. "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. To elect to become a
FHC, a BHC, such as Investors Financial, must meet certain tests and file an election with the FRB. To qualify, all of a BHC's subsidiary banks must be well-capitalized and well-managed, as measured
by regulatory guidelines. In addition, 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. Investors Financial has not elected to become a FHC.

Capital Requirements.The FRB has adopted capital adequacy guidelines applicable to United States banking organizations. 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 to certain limitations), 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, not 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 to its average total consolidated assets (the
"Leverage Ratio") of 3.0%. Total average consolidated assets for this purpose does not include 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. 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
are currently in compliance with both the Total Risk-Based Capital Ratio and the Leverage Ratio requirements, and management expects these ratios to remain in compliance with the
FRB's

12

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capital
adequacy guidelines. At December 31, 2004, our Total Risk-Based Capital Ratio and Leverage Ratio were 20.54% and 5.85%, respectively.

The
Basel Committee on Banking Supervision is in the process of developing a new proposed capital adequacy framework ("the New Accord" or "Basel II"). The New Accord is expected to be
implemented on a transitional basis in the United States in 2007 and become fully effective in 2008. We are monitoring the status and progress of the Basel II and the related impact, if any, on our
operations and are preparing for their implementation.

Control Acquisitions.The 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 notified and has not objected 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 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.

Massachusetts Law.Investors Financial is also considered a BHC for purposes of Massachusetts law. Accordingly, we have
registered with the Commissioner and are obligated to make reports to the Commissioner. Under Massachusetts law, any person that proposes to acquire, directly or indirectly, 25% or more of any class
of voting securities of a company must give prior notice to the Massachusetts Commissioner of Banks, who may disapprove the transaction. Additionally, any company that is a BHC under Massachusetts law
must obtain the approval of the Massachusetts Board of Bank Incorporation ("Massachusetts BBI") before acquiring more than 5% of the voting stock of a company. 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, if necessary, 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 BHC may not have
the resources to provide it. Accordingly, Investors Financial is expected to commit resources to the Bank in circumstances where it might not do so absent such policy.

Investors Bank

General.The Bank is subject to extensive regulation and examination by the Commissioner and the Federal Deposit Insurance
Corporation ("FDIC"), which insures the Bank's deposits, and to certain

13

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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. The Federal Deposit Insurance Act ("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, 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.

The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the federal bank regulatory agencies to implement systems for
"prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to
capital raising requirements. An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability of
the parent holding company under any such guarantee is
limited to the lesser of five percent of the bank's assets at the time it became "undercapitalized" or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the
parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital
standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not
meet such standards.

The
various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1
risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 risk-based capital ratio of at least six percent, a total risk-based capital ratio of at least ten percent
and a leverage ratio of at least five percent and not be subject to a capital directive order. Regulators also must take into consideration (a) concentrations of credit risk;
(b) interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position); and (c) risks
from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation will be made as a part of the
institution's regular safety and

14

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soundness
examination. At December 31, 2004, the Bank was deemed to be a well-capitalized institution.

The Community Reinvestment Act.The Community Reinvestment Act ("CRA") requires lenders to identify the communities served by
the institution's offices and other deposit taking facilities and to make loans and investments and provide services that meet the credit needs of these communities. Regulatory agencies examine each
of the banks and rate such institutions' compliance with CRA as "Outstanding", "Satisfactory", "Needs to Improve" or "Substantial Noncompliance". Failure of an institution to receive at least a
"Satisfactory" rating could inhibit such institution or its holding company from undertaking certain activities, including engaging in activities newly permitted as a financial holding company under
the GLBA and acquisitions of other financial institutions. The FRB and the FDIC must take into account the record of performance of banks in meeting the credit needs of the entire community served,
including low- and moderate-income neighborhoods before they approve certain bank acquisitions, mergers, branch establishments and other transactions proposed by banking organizations. 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. Management believes the Bank is currently in compliance with all CRA requirements.

Customer Information Security.The FDIC and other bank regulatory agencies have established standards for safeguarding
nonpublic personal information about customers that implement provisions of the GLBA. Specifically, the Information Security Guidelines established by the GLBA require each financial institution,
under the supervision and ongoing oversight of its Board of Directors or an appropriate Board committee, to develop, implement and maintain a comprehensive written
information security program designed to ensure the security and confidentiality of customer information, to protect against 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 GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic
personal information about consumers to nonaffiliated third parties. In general, the statute requires financial institutions to explain to consumers their policies and procedures regarding the
disclosure of such nonpublic personal information, and, unless otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided in
their policies and procedures.

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 adopt and implement policies and procedures with respect
to, among other things, anti-money laundering compliance, suspicious activity and currency transaction reporting, customer identity verification and customer risk analysis. The statute and its
underlying regulations 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 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 requirements prescribed by the USA Patriot Act and all applicable regulations.

Dividends.The FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its
opinion, the payment of dividends would constitute an unsafe or unsound

15

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practice.
Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. 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.

Other Securities Law Issues.The GLBA requires a bank that acts as investment adviser to a registered investment company to
register as an investment adviser or to conduct such advisory activities through
a separately identifiable department or division of the bank so registered. Accordingly, the Bank furnishes investment advice to registered investment companies through a separately identifiable
department or division of the Bank that is registered with the SEC as an investment adviser. Federal and state laws impose onerous obligations on registered investment advisers, including fiduciary
duties, recordkeeping requirements and disclosure obligations. Currently, management believes that we are in compliance with these requirements.

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. Currently, management believes we are in compliance with all minimum capital and securities depository requirements. 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.

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:

16

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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.

ITEM 2.    PROPERTIES.

The following table provides certain summary information with respect to the principal properties that we leased as of December 31, 2004:

|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 16 of the Notes to Consolidated Financial Statements.

ITEM 3.    LEGAL PROCEEDINGS.

On January 31, 2003, we were named in a class action lawsuit alleging, among other things, violations of California wage and hour laws at our Sacramento
and Walnut Creek facilities. The lawsuit was filed in the Superior Court of California, County of Sacramento. In March 2004, a settlement between the parties was approved by the court and
administration and payment of the settlement of the claim was completed in June 2004. The Company's payment under the settlement agreement was approximately $0.9 million.

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. The lawsuit is currently in the discovery phase. We believe that the claims are without
merit and intend to defend our rights vigorously.

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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 Forex Concept 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. We have notified our insurers and intend to defend this claim
vigorously. Based on our investigation through December 31, 2004, 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, 2004.

18

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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.

|               |  | High |       | Low |   | Dividend
|-------------- |  | ---- | ----- | --- | - | --------
|2004           |  |      |       |     |   |         
|First quarter  |  | $    | 46.15 |     | $ | 37.87   
|Second quarter |  |      | 44.75 |     |   | 34.68   
|Third quarter  |  |      | 48.90 |     |   | 39.79   
|Fourth quarter |  |      | 50.40 |     |   | 35.00   
|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   

As
of January 31, 2005, there were approximately 864 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 10 of our Notes to Consolidated Financial Statements included with this Report. Any dividend payments by Investors Bank are
subject to certain restrictions imposed by federal law and by the Massachusetts Commissioner of Banks. See "BusinessRegulation and Supervision" 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 $0.08 per share of outstanding common stock (approximately
$5.3 million based upon 66,595,349 shares outstanding as of December 31, 2004). 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, 2004.

19

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

|Period (shares in thousands)   |  | Total
Number of
Shares
Purchased(1) |  | Average
Price Paid Per
Share
|------------------------------ |  | ----------------------------------- |  | ----------------------------
|October 1 - October 31, 2004   |  | 41                                  |  | $                           
|November 1 - November 30, 2004 |  | 59                                  |  |                             
|December 1 - December 31, 2004 |  | 2                                   |  |                             
|                               |  |                                     |  |                             
|                               |  | 102                                 |  | $                           
|                               |  |                                     |  |                             

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The
Company does not currently maintain publicly announced repurchase plans or programs.

20

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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(2):                    |  |                                 |              
|Noninterest income                              |  | $                               | 425,491      
|Net interest income                             |  |                                 | 187,680      
|                                                |  |                                 |              
|Net operating revenues                          |  |                                 | 613,171      
|Operating expenses                              |  |                                 | 398,383      
|                                                |  |                                 |              
|Income before income taxes                      |  |                                 | 214,788      
|Income taxes                                    |  |                                 | 72,826       
|                                                |  |                                 |              
|Net income                                      |  | $                               | 141,962      
|                                                |  |                                 |              
|Per Share Data(3):                              |  |                                 |              
|Basic earnings per share                        |  | $                               | 2.15         
|                                                |  |                                 |              
|Diluted earnings per share                      |  | $                               | 2.09         
|                                                |  |                                 |              
|Dividends per share                             |  | $                               | 0.07         
|                                                |  |                                 |              
|Balance Sheet Data:                             |  |                                 |              
|Total assets at end of period                   |  | $                               | 11,167,825   
|Average Balance Sheet Data:                     |  |                                 |              
|Interest-earning assets                         |  | $                               | 9,770,924    
|Total assets                                    |  |                                 | 10,306,015   
|Total deposits                                  |  |                                 | 4,495,858    
|Junior subordinated debentures(4)               |  |                                 | 24,774       
|Trust preferred securities(4)                   |  |                                 |             
|Common stockholders' equity                     |  |                                 | 625,964      
|Selected Financial Ratios:                      |  |                                 |              
|Return on average equity                        |  |                                 | 22.7         
|Return on average assets                        |  |                                 | 1.4          
|Average common equity as a % of average assets  |  |                                 | 6.1          
|Dividend payout ratio(5)                        |  |                                 | 3.3          
|Tier 1 capital ratio(6)                         |  |                                 | 20.5         
|Leverage ratio(6)                               |  |                                 | 5.9          
|Noninterest income as % of net operating income |  |                                 | 69.4         
|Other Statistical Data:                         |  |                                 |              
|Assets processed at end of period(7)            |  | $                               | 1,430,471,217
|Employees at end of period                      |  |                                 | 2,778        

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

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. See "Certain Factors That May Affect Future Results" herein.

Overview

We provide asset administration services for the financial services industry through our wholly-owned subsidiary, Investors Bank & Trust Company. We
provide core services and value-added services to a variety of financial asset managers, including mutual fund complexes, investment advisors, family offices, banks and insurance companies. Core
services include middle office outsourcing, global custody, multicurrency accounting and fund administration. Value-added services include securities lending, foreign exchange, cash management,
performance measurement, institutional transfer agency, investment advisory services, lines of credit and brokerage and transition management services. We have offices located in the United States,
Ireland, Canada, and the Cayman Islands with a vast global subcustodian network established to accommodate the international needs of our clients. At December 31, 2004, we provided services for
approximately $1.4 trillion in net assets, including approximately $236 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 in 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. Since we price our service offerings on a bundled basis, our share of earnings from these investments is viewed
as part of the total compensation that our clients pay us for servicing their assets. 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 two years, we have benefited from the appreciation of the market values of the assets we service for our clients. A significant portion of our core
services revenue is based upon the amount of assets under administration. As market values of underlying assets fluctuate, so will our revenue. We have managed this volatility by offering a tiered
pricing structure for our asset-based fees. As asset values increase, the basis point fee is reduced for the incremental assets. Many of our value-added services are transactional based, and we
receive a fee for each transaction processed. We have continued to experience net interest margin compression during 2004 due to lower spreads, primarily resulting from lower yielding investment
securities, as a result of increased purchases of variable-rate securities during 2004. In addition, we experienced prepayments of higher yielding fixed-rate securities during 2004. We primarily
reinvested the cash flows from the securities that prepaid in lower yielding variable-rate securities. Our net interest margin compression was also due to prepayment penalties, related to the
prepayment of high-rate borrowings, and higher interest rates

22

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during
the second half of 2004, which caused an increase in average rates paid on our interest-bearing liabilities in 2004 as compared to 2003.

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 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.

We
remain focused on our sales efforts, prudent expense management and increasing our operating 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 workforce.

In
our 2004 and 2003 earnings releases, we reported non-GAAP operating income and non-GAAP operating earnings per share information that exclude the effect of the state tax assessment
settlement discussed above. We believe that non-GAAP operating earnings provide a more meaningful presentation of our 2003 results of operations because they do not include the one-time tax charge
which was unrelated to our core operations. The following table presents a reconciliation between net income and earnings per share presented on the face of our Statements 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 |                                
|                           |         |                                

Non-GAAP Operating Earnings

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

---

23

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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 swap portfolio. The measurement of fair value is based upon market values, however, in the absence of quoted market values, measurement involves the use of valuation models. The use of alternative
valuation methodologies 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, 2004, the discount rate, compensation increase and average return on plan assets were 5.8%, 4.0% and 8.5%, respectively. The discount rate was lower by 0.45% compared to
December 31, 2003 due to a decline in interest rates. The compensation increase assumption at December 31, 2004 was slightly higher by 0.25% than at December 31, 2003 and the rate
of return on plan assets of 8.5% has remained consistent with the prior year. Net periodic pension expense for 2004 was $0.8 million and is expected to be approximately $0.9 million in
fiscal year 2005.

At
December 31, 2004, the discount rate assumption for our nonqualified, unfunded, supplemental retirement plan, which covers certain employees, was 5.8%. The compensation
increase percentage
assumption ranged from 4.0% to 10.0% at December 31, 2004, compared to 3.75% at December 31, 2003. The net periodic expense for 2004 for the supplemental retirement plan was
$2.5 million and is expected to be approximately $3.8 million in fiscal year 2005. The increase in the expected pension cost in 2005 is due to a lower discount rate, combined with
changes in the participant mortality rates and an increase in the compensation increase percentage assumption.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004),Share-Based
Payment. SFAS 123R requires that compensation cost relating to share-based payment transactions be recognized in the financial statements, with measurement based upon
the fair value of the equity or liability instruments issued. The Statement is effective as of the beginning of the first interim reporting period that begins after June 15, 2005, and replaces
SFAS No. 123,Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25,Accounting for Stock
Issued to Employees.We currently use the intrinsic-value method to measure compensation cost related

24

---



to
our share-based transactions. We will adopt SFAS 123R in the third quarter of 2005 and are in the process of determining the methodology we will use and the impact on our results of
operations and financial condition. We do not anticipate any material impact to our financial condition or results of operations as a result of the adoption of SFAS 123R.

In
March 2004, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on EITF Issue No. 03-1,The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.As originally issued, EITF Issue No. 03-1 was to be effective for all annual or interim financial statements for
periods beginning after June 15, 2004, however, a partial deferral was issued in September 2004. EITF Issue No. 03-1 addresses the identification of other-than-temporarily
impaired investments, and requires that an impairment charge be recognized for other-than-temporarily impaired investments for which there is neither the ability nor intent to hold either until
maturity or until the market value of the investment recovers. We continue to monitor the FASB's discussions regarding EITF Issue No. 03-1, and to assess the impact of its application on our
financial condition and results of operations.

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," which are made under Section 21E of the Securities
Exchange Act of 1934 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, net interest income, operating expenses, compensation expense, pension plan and supplemental pension 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.

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, in
small part, by making loans. 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.

25

---



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 17% of our net operating revenue during the year
ended December 31, 2004. We expect that BGI will continue to account for a significant portion of our net operating revenue. While we provide services to BGI under long-term contracts, those
contracts may be terminated for certain regulatory and fiduciary reasons.
The loss of BGI's business would cause our net operating revenue to decline 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 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

26

---



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 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:



27

---





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 Income

Comparison of Operating Results for the Years Ended December 31, 2004 and 2003.

Net income for the year ended December 31, 2004 was $142.0 million, up 54% from $92.4 million for the same period in 2003. The principal
factors contributing to our net income growth were growth in asset servicing fees of 27% in addition to a 22% increase in net interest income. Net income growth was partially offset by a 16% increase
in operating expenses, largely due to new business, additional headcount and technology requirements. Our income statement for the year ended December 31, 2003 reflects the net effect of the
first quarter 2003 tax accrual and its later partial reversal resulting from our settlement with the Massachusetts Department of Revenue. Absent the effects of this tax matter, net income for the year
ended December 31, 2004 increased 43% from net operating income for the same period in 2003.

Fees and Other Revenue

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

|                             |  | For the Year Ended December 31, |        
|---------------------------- |  | ------------------------------- | -------
|
|Total asset servicing fees   |  | $                               | 423,200
|Other operating income       |  |                                 | 2,057  
|Gain on sale of investment   |  |                                 | 234    
|                             |  |                                 |        
|Total fees and other revenue |  | $                               | 425,491
|                             |  |                                 |        

The
largest components of asset servicing fees are custody, accounting and administration, which increased 24% to $314.3 million for the year ended December 31, 2004 from
$254.2 million for the same period in 2003. Custody, accounting and administration fees are based in part on the value of assets processed. Assets processed is the total dollar value of
financial assets on the reported date for which we provide one or more of the following services: middle office outsourcing, global custody, multicurrency accounting, fund administration, securities
lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment advisory services, lines of credit and brokerage and transition management services.

The
change in net assets processed includes the following components (Dollars in billions):

For the Year Ended
December 31, 2004Net assets processed, beginning of period

$
1,057Change in net assets processed:Sales to new clients


54Further penetration of existing clients


37Lost clients


(3
)Fund flows and market gain


285Total change in net assets processed


373Net assets processed, end of period

$
1,430


The
majority of the increase in assets processed was due to sales to new and existing clients, the ability of our clients to develop and sell product, which generates fund flows that
have a direct, positive impact on our business, and higher asset values compared to a year ago. As indicated in the

28

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"Overview"
section, 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 to a certain extent. As asset values increase, the basis point fee typically lowers. When asset values
decrease, revenue is only impacted by the asset decline at the then marginal rate.

If
the value of equity assets held by our clients were to increase or decrease by 10%, we estimate currently that this, by itself, would cause a corresponding change of approximately 3%
in our earnings per share. If the value of fixed-income assets held by our clients were to increase or decrease by 10%, we estimate currently that this, by itself, would cause a corresponding change
of approximately 2% in
our earnings per share. In practice, earnings per share do not track precisely to the value of the equity and fixed-income 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 or fixed-income markets.

Transaction-driven
income includes our ancillary services, such as foreign exchange, cash management and securities lending. Foreign exchange fees were $54.5 million for the year
ended December 31, 2004, up 49% from the same period in 2003. The increase in foreign exchange fees is attributable to new clients, increased activity in international markets and volatility in
currency markets. 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 $26.4 million for the year ended December 31, 2004, up 26% from the same period in 2003. The increase is the result of higher domestic and foreign cash balances held by our clients.
Cash management revenue will continue to depend on the level of client balances maintained in our cash management products.

Investment
advisory fees were $15.0 million for the year ended December 31, 2004, up 28% from the same period in 2003. The increase in investment advisory fees is
attributable to increased average asset values 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.
Future investment advisory fees are dependent upon the asset levels within the Merrimac Master Portfolio, which are driven by overall market conditions, client activity and transaction volumes.
Securities lending fees were $10.4 million for the year ended December 31, 2004, up 17% from the same period in 2003, primarily due to improved spreads and volumes. 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 continue to experience the aforementioned activity, it is likely that our securities lending revenue will continue to be positively impacted. If we experience a reduction in our
securities lending portfolio, lower market values or compression of the spreads earned on our securities lending activity, our securities lending revenue will likely be negatively impacted.

29

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Net Interest Income

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

|                          |  | For the Year Ended December 31, |        
|------------------------- |  | ------------------------------- | -------
|
|Interest income           |  | $                               | 313,149
|Interest expense          |  |                                 | 125,469
|                          |  |                                 |        
|Total net interest income |  | $                               | 187,680
|                          |  |                                 |        

Net
interest income is affected by the volume and mix of assets and liabilities, and the movement and level of interest rates. The improvement in our net interest income was primarily
due to balance sheet growth, driven by healthy client funding, partially offset by lower investment spreads.

During
2004 we continued to employ a strategy of prepaying high-rate borrowings and replacing them with lower cost term funding in order to maintain our net interest margin. Prepayment
fees were incurred during the first half of 2004 and were $6.8 million, compared to $3.1 million during 2003. This
strategy combined with a rising interest rate environment during the second half of 2004 resulted in a 5 basis point increase in the average rate paid on interest-bearing liabilities to 1.39% for the
year ended December 31, 2004 from 1.34% for the same period in 2003. The majority of our funding sources are priced based on the Federal Funds rate.

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, 2004 compared to the year ended December 31, 2003. 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, 2004 vs. December 31, 2003
|--------------------------------------------------------------- |  | ----------------------------------------------------------
|
|Interest-earning assets                                         |  |                                                           
|Fed funds sold and securities purchased under resale agreements |  | $                                                         
|Investment securities                                           |  |                                                           
|Loans                                                           |  |                                                           
|                                                                |  |                                                           
|Total interest-earning assets                                   |  | $                                                         
|                                                                |  |                                                           
|Interest-bearing liabilities                                    |  |                                                           
|Deposits                                                        |  | $                                                         
|Borrowings                                                      |  |                                                           
|                                                                |  |                                                           
|Total interest-bearing liabilities                              |  | $                                                         
|                                                                |  |                                                           
|Change in net interest income                                   |  | $                                                         
|                                                                |  |                                                           

In
addition to investing in both variable and fixed-rate securities, we use derivative instruments to manage our exposure to interest rate risks. See the "Market Risk" section for more
detailed information.

Operating Expenses

Total operating expenses were $398.4 million in 2004, up 16% from 2003. The growth in our cost structure was largely driven by the new business that we won
during 2004, which required us to invest

30

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in
headcount and technology. It is expected that only incremental expense associated with new business will be added during 2005. The components of operating expenses were as follows (Dollars in
thousands):

|                                  |  | For the Year Ended December 31, |        
|--------------------------------- |  | ------------------------------- | -------
|
|Compensation and benefits         |  | $                               | 205,728
|Technology and telecommunications |  |                                 | 49,816 
|Transaction processing services   |  |                                 | 42,159 
|Depreciation and amortization     |  |                                 | 32,124 
|Occupancy                         |  |                                 | 29,032 
|Professional fees                 |  |                                 | 15,346 
|Travel and sales promotion        |  |                                 | 5,470  
|Insurance                         |  |                                 | 4,625  
|Other operating expenses          |  |                                 | 14,083 
|                                  |  |                                 |        
|Total operating expenses          |  | $                               | 398,383
|                                  |  |                                 |        

Compensation
and benefits increased $18.8 million, or 10%, from 2003. Salaries increased due to higher headcount and annual merit raises by approximately $4.9 million and
$3.0 million, respectively, from 2003 to 2004. In addition, incentive payments that are directly tied to our earnings per share outperformance increased approximately $8.6 million from
2003 to 2004. These increases were partially offset by employee costs that shifted to technology and telecommunications expense as part of our outsourcing arrangement with IBM that was entered into in
the summer of 2004. Further increases in compensation expense in 2005 will be primarily driven by new business wins, annual merit increases and stock option expenses.

Technology
and telecommunications expense increased $10.9 million, or 28%, from 2003 as a result of increased infrastructure investments in 2004. As mentioned in the Item I. Businesssection, we entered into
an agreement with IBM in the summer of 2004 to outsource certain technical infrastructure
services. Service expense under this agreement was $9.5 million during 2004, which included initial start-up costs. The costs of these services are offset by decreases in other technology and
telecommunications expenses, as the services were previously performed internally or by other service providers. Future technology and telecommunications expense will be dependent upon the amount of
new business we win, client integrations and ongoing improvement to our infrastructure. Generally, we expect technology investment to equal approximately 18-20% of net operating revenue.

Transaction
processing services expense increased 27% from 2003 as a result of higher global asset values and transactions with our subcustodians. Future transaction processing servicing
expense will be dependent on asset levels and the volume of client transaction activity.

Depreciation
and amortization expense increased 15% from 2003. This increase resulted from the completion of capitalized software projects in late 2003 and early 2004 and their placement
into service. This increase was partially offset by fully depreciated equipment from our 2001 assumption of BGI's North American asset administration unit. We will continue to invest in, and place
into service, technology projects in 2005.

Professional
fees expense increased 37% from 2003, primarily due to increased fees associated with the Merrimac Master Portfolio. The Merrimac fees are asset based and have grown along
with the assets of the portfolios. Also in 2004, we incurred additional technical consulting fees as we hired external consultants to work on certain technology initiatives. Future professional fees
are dependent upon changes in the value of the Merrimac portfolios and upon other business needs for outside professional services.

31

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Travel
and sales promotion expense increased 13% from 2003. Travel and sales promotion expense consists of expenses incurred by the sales force, client management staff and other
employees in connection with sales calls with potential clients and traveling to: existing client sites, our offices in New York and California and our foreign subsidiaries. All of these activities
may increase in 2005, dependent upon new business leads and other client and business needs.

Insurance
expense was up 44% from 2003. In May 2003, our five-year fixed-rate insurance policy expired, resulting in increased premiums. Our insurance policies are renewed
annually and we expect insurance expense in 2005 to continue at approximately the same level as in 2004.

Other
operating expense increased 50% from 2003. The primary contributors to the increase include higher regulatory assessments due to higher deposit liabilities, higher recruiting
expense due to increased staffing needs, increased advertising expense and increased miscellaneous office expense due
to the overall growth of our business. We expect other operating expense to increase in 2005 due to new business wins.

Income Taxes

Income taxes were $72.8 million for the year ended December 31, 2004, up 38% from the same period in 2003. This is attributable to a 48% increase in
pretax earnings for the year ended December 31, 2004 from the same period in 2003.

In
2005, we expect that our effective tax rate will approximate 34.5% to 35.5% of pretax income.

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

Net income for the year ended December 31, 2003 was $92.4 million, up 37% from $67.4 million for the same period in 2002. This increase was
the result of growth in net interest income caused by a decline in our cost of funds due to lower interest rates. The increase was also due to growth in fees and other revenue caused by increased net
assets processed related to sales to new and existing clients, fund flows, market appreciation during 2003, and increased client transaction activity. Net income growth was partially offset by a 1%
increase in operating expenses and by the additional tax expense incurred as a result of our settlement of a tax assessment by the Commonwealth of Massachusetts.

Fees and Other Revenue

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

For the Year Ended December 31,2003

2002

ChangeTotal asset servicing fees

$
333,586

$
296,395

13
%Other operating income


2,607


2,449

6
%Total fees and other revenue

$
336,193

$
298,844

12
%


The
largest components of asset servicing fees are custody, accounting and administration, which increased 10% to $254.2 million. These fees are based in part on the total dollar
value of financial assets on the reported date for which we provide one or more of the following services: middle office outsourcing, global custody, multicurrency accounting, fund administration,
securities lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment

32

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advisory
services, lines of credit and brokerage and transition management services. 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

$
785Change in net assets processed:Sales to new clients


1Lost clients


(3
)Further penetration of existing clients


39Fund flows and market gain


235Total change in net assets processed


272Net assets processed, end of period

$
1,057


The
majority of the increase in assets processed was due to wins from existing clients, the ability of our clients to develop and sell product, which generates fund flows that have a
direct, positive impact on our business and higher asset values compared to 2002. 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 to a certain
extent. As asset values increase, the basis point fee typically lowers. When asset values decrease, revenue is only impacted by the asset decline at the then marginal rate.

Transaction-driven
income includes our ancillary services, such as foreign exchange, cash management and securities lending. The 49% increase in foreign exchange fees from 2002 is
attributable to further penetration of existing clients, the addition of new clients, higher transaction volumes and volatility within the currencies traded by our clients. The 23% increase in cash
management fees from 2002 is primarily due to increased client balances. Securities lending fees were down 21% from 2002 primarily due to narrower spreads.

Net Interest Income

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

For the Year Ended December 31,2003

2002

ChangeInterest income

$
247,094

$
245,526

1
%Interest expense


93,180


106,801

(13
)%Total net interest income

$
153,914

$
138,725

11
%


The
improvement in our net interest income was primarily driven by declining rates on our liabilities. Although the average funding balance increased $1.7 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.

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

33

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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                                           |  |                                                            | 66,265
|Loans                                                           |  |                                                            | 522   
|                                                                |  |                                                            |       
|Total interest-earning assets                                   |  | $                                                          | 66,585
|                                                                |  |                                                            |       
|Interest-bearing liabilities                                    |  |                                                            |       
|Deposits                                                        |  | $                                                          | 13,005
|Borrowings                                                      |  |                                                            | 14,075
|                                                                |  |                                                            |       
|Total interest-bearing liabilities                              |  | $                                                          | 27,080
|                                                                |  |                                                            |       
|Change in net interest income                                   |  | $                                                          | 39,505
|                                                                |  |                                                            |       

Operating Expenses

The components of operating expenses were as follows (Dollars in thousands):

|                                  |  | For the Year Ended December 31, |        
|--------------------------------- |  | ------------------------------- | -------
|
|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  
|Other operating expenses          |  |                                 | 12,576 
|                                  |  |                                 |        
|Total operating expenses          |  | $                               | 344,921
|                                  |  |                                 |        

Total
operating expenses were $344.9 million in 2003, up 1% from 2002. The marginal increase in operating expenses, despite strong revenue growth, was due to our prudent expense
management and our ability to benefit from technology efficiencies.

Compensation
and benefits expense decreased 3% from 2002 due to a reduction in our average number of employees during 2003 as a result of efficiencies gained through technology
enhancements.

Technology
and telecommunications expense decreased 8% from 2002. Significant technology and telecommunications expense was incurred in 2002 related to the integration of the BGI U.S.
asset administration unit into our technology infrastructure which was completed in January 2003.

Transaction
processing services expense decreased 1% from 2002. 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.

34

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Occupancy
expense increased 14% from 2002. This increase was primarily due to increased space in our Boston and Dublin offices to accommodate growth resulting from new client business.

Depreciation
and amortization expense increased 71% from 2002 as a result of the completion of capitalized software projects in late 2002 and 2003 and their placement into service along
with additional leasehold improvements as a result of the new space we occupied in Boston and Dublin.

Income Taxes

Income taxes were $52.8 million for the year ended December 31, 2003, up 84% from the same period in 2002. The factors that contributed to the
significant increase in 2003 included a settlement of our tax assessment with the Commonwealth of Massachusetts Department of Revenue and increased pretax earnings.

35

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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, 2004 |            | Year Ended December 31, 2003 |   | Year Ended December 31, 2002 |       
|---------------------------------------------------------------- | --------------------------------- | ---------------------------- | ---------- | ---------------------------- | - | ---------------------------- | ------
|
|Interest-earning assets                                          |                                   |                              |            |                              |   |                              |       
|Fed Funds sold and securities purchased under resale agreements  |                                   | $                            | 52,544     |                              | $ | 667                          |       
|Investment securities(1)                                         |                                   |                              | 9,552,816  |                              |   | 307,895                      |       
|Loans(2)                                                         |                                   |                              | 165,564    |                              |   | 4,587                        |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Total interest-earning assets                                    |                                   |                              | 9,770,924  |                              |   | 313,149                      |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Allowance for loan losses                                        |                                   |                              | (100       | )                            |   |                              |       
|Noninterest-earning assets(4)                                    |                                   |                              | 535,191    |                              |   |                              |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Total assets                                                     |                                   | $                            | 10,306,015 |                              |   |                              |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Interest-bearing liabilities                                     |                                   |                              |            |                              |   |                              |       
|Deposits:                                                        |                                   |                              |            |                              |   |                              |       
|                                                                 | Demand                            |                              | $          |                             |   | $                            |      
|                                                                 | Savings                           |                              |            | 3,947,865                    |   |                              | 49,622
|                                                                 | Time                              |                              |            | 68,594                       |   |                              | 1,099 
|Securities sold under repurchase agreements(3)                   |                                   |                              | 4,162,132  |                              |   | 54,376                       |       
|Junior subordinated debentures(4)/trust preferred securities     |                                   |                              | 24,774     |                              |   | 2,420                        |       
|Other borrowings(5)                                              |                                   |                              | 841,708    |                              |   | 17,952                       |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Total interest-bearing liabilities                               |                                   |                              | 9,045,073  |                              |   | 125,469                      |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Noninterest-bearing liabilities:                                 |                                   |                              |            |                              |   |                              |       
|                                                                 | Demand deposits                   |                              |            | 252,246                      |   |                              |       
|                                                                 | Savings                           |                              |            | 72,536                       |   |                              |       
|                                                                 | Noninterest-bearing time deposits |                              |            | 154,617                      |   |                              |       
|                                                                 | Other liabilities                 |                              |            | 155,579                      |   |                              |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Total liabilities                                                |                                   |                              | 9,680,051  |                              |   |                              |       
|Equity                                                           |                                   |                              | 625,964    |                              |   |                              |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Total liabilities and equity                                     |                                   | $                            | 10,306,015 |                              |   |                              |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Net interest income                                              |                                   |                              |            |                              | $ | 187,680                      |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Net interest margin(6)                                           |                                   |                              |            |                              |   |                              |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Average interest rate spread(7)                                  |                                   |                              |            |                              |   |                              |       
|                                                                 |                                   |                              |            |                              |   |                              |       
|Ratio of interest-earning assets to interest-bearing liabilities |                                   |                              |            |                              |   |                              |       
|                                                                 |                                   |                              |            |                              |   |                              |       

---

36

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Financial Condition

At December 31, 2004, our total assets were $11.2 billion, up 21% from December 31, 2003. Average interest-earning assets increased
$2.2 billion, or 29%, for the year ended December 31, 2004 compared to the same period last year. Funding for our asset growth was provided by an increase in average client balances of
approximately $2.1 billion offset by a decrease in average external borrowings of approximately $0.1 billion for the year ended December 31, 2004.

Investment Portfolio

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

|                                    |  | December 31,
|----------------------------------- |  | ------------
|
|Securities held to maturity:        |  |             
|Mortgage-backed securities          |  | $           
|Federal agency securities           |  |             
|State and political subdivisions    |  |             
|                                    |  |             
|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 client deposits and borrowed funds to effectively utilize the Bank's capital
and accommodate client fund flows. The $1.6 billion, or 38%, increase in our held to maturity portfolio from 2003 to 2004 is due to investment security purchases that we expect, as we continue
to grow our balance sheet, will protect our net interest margin, while maintaining an acceptable risk profile. The investment security purchases primarily included floating-rate mortgage-backed and
Small Business Administration ("SBA") securities, which offer an attractive yield and reprice as interest rates increase. Our held to maturity portfolio securities 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.

The
$0.3 billion, or 6%, increase in our available for sale portfolio from 2003 to 2004 is due to purchases of mortgage-backed securities, which allow us to diversify our
portfolio with assets that reprice more frequently. In addition, we believe that we are able to take advantage of attractive yield and limited extension risk which aligns with our asset and 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, 2004 was $9.6 billion, with an average yield of 3.22%, compared to an average
balance of $7.4 billion with an average yield of 3.29% during 2003. The decline in yield is primarily due to an increase in the level of

37

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variable-rate
securities in our investment portfolio during 2004 and prepayments of higher yielding fixed-rate securities. During the second half of 2004 interest rates began to increase, resulting in
lower prepayments. For the years ended December 31, 2004 and 2003, we recognized net amortization of $40.7 million and $39.2 million, respectively. If interest rates rise during
2005, 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 2005, we would expect that
prepayments would accelerate, with the cash flows from these prepayments being reinvested in lower-yielding assets of equal quality and risk.

We
invest in mortgage-backed securities and Federal agency securities 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 prepayment risk. Credit risk results from the possibility that the Federal agency issuing the securities may be unable to meet the terms of
the security. 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 call risk. However, all municipal securities that we invest in are insured and AAA rated. 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 issuing municipality prior to the maturity date of the
bond.

The
carrying value, weighted-average yield, and contractual maturity of our securities held to maturity at December 31, 2004 are reflected in the following table (Dollars in
thousands):

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

The carrying value, weighted-average yield, and contractual maturity of our securities available for sale at December 31, 2004 are
reflected in the following table (Dollars in thousands):

|                                    |  | Years |      
|----------------------------------- |  | ----- | -----
|
|
|Mortgage-backed securities          |  | $     |     
|State and political subdivisions    |  |       | 6,625
|Corporate debt                      |  |       |     
|US Treasury securities              |  |       |     
|Foreign government                  |  |       |     
|                                    |  |       |      
|Total securities available for sale |  | $     | 6,625
|                                    |  |       |      

Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.

38

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Loan Portfolio

Our loan portfolio decreased $65.0 million, or 33%, from 2003 to 2004 primarily due to a decline in client overdrafts and line of credit advances.

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

|                                |  | December 31, |        
|------------------------------- |  | ------------ | -------
|
|Loans to mutual funds           |  | $            | 22,520 
|Loans to individuals            |  |              | 69,402 
|Loans to others                 |  |              | 42,708 
|                                |  |              |        
|                                |  |              | 134,630
|Less: allowance for loan losses |  |              | (100   
|                                |  |              |        
|Net loans                       |  | $            | 134,530
|                                |  |              |        
|Floating Rate                   |  | $            | 134,618
|Fixed Rate                      |  |              | 12     
|                                |  |              |        
|                                |  | $            | 134,630
|                                |  |              |        

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. We monitor the value of collateral daily to ensure the amount of collateral held by us exceeds the loan balance by a certain threshold. 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, 2004, our only lending concentrations that exceeded 10% of total loan balances were the lines of credit to mutual fund clients discussed above. These loans were
made in the ordinary course of business on the same terms and conditions prevailing at the time for comparable transactions.

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

Deposits

Total deposits were $5.4 billion at December 31, 2004, up 28% from December 31, 2003. The increase in our deposit balances is a direct result
of the growth in assets processed from our custody

39

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business.
We effectively utilized these cash balances to fund a significant portion of our asset growth. The following table represents the average balance and weighted-average yield paid on deposits
(Dollars in thousands):

|                     |  | December 31, 2004 |           | December 31, 2003 |     
|-------------------- |  | ----------------- | --------- | ----------------- | ----
|
|Interest-bearing:    |  |                   |           |                   |     
|Savings              |  | $                 | 3,947,865 |                   | 1.26
|Time deposits        |  |                   | 68,594    |                   | 1.60
|                     |  |                   |           |                   |     
|                     |  | $                 | 4,016,459 |                   | 1.26
|                     |  |                   |           |                   |     
|Noninterest-bearing: |  |                   |           |                   |     
|Demand deposits      |  | $                 | 252,246   |                   |    
|Savings              |  |                   | 72,536    |                   |    
|Time deposits        |  |                   | 154,617   |                   |    
|                     |  |                   |           |                   |     
|                     |  | $                 | 479,399   |                   |     
|                     |  |                   |           |                   |     

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 31%, from 2003
to 2004. The majority of our repurchase agreements are with clients who prefer a more collateralized form of deposit. 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 and allow our clients the extra benefit of collateralization of their deposits. The average balance of securities sold under repurchase agreements for the year ended
December 31, 2004 was $4.2 billion with an average cost of approximately 1.31%, compared to an average balance of $3.3 billion and an average cost of approximately 0.90% for the
same period last year. The rate increase is due to a higher interest rate environment during the last half of 2004 and to a prepayment fee of $2.9 million incurred in 2004. There were no
prepayment fees for the year ended December 31, 2003.

Short-term
and other borrowings decreased $0.5 billion, or 46%, from 2003 to 2004. 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, 2004 was $0.8 billion with an average cost of approximately 2.13%, compared to an average balance of
$1.0 billion and an average cost of approximately 2.15% for the same period last year. The average cost of borrowing for the years ended December 31, 2004 and 2003 included prepayment
fees of $3.9 million and $3.1 million, respectively. These fees were incurred to employ an asset and liability strategy in which we replaced high cost borrowings with new borrowings at
lower rates.

Market Risk

Our clients, in the course of their financial asset management, maintain cash balances, which they can deposit with us on a short-term basis in interest-bearing
accounts or client repurchase agreements. We either directly invest these cash balances to earn interest income, or place these deposits in third-party vehicles and remit a portion of the earnings on
these investments to our clients after deducting a fee as our compensation for investing clients' funds in these investment vehicles. In the conduct of these activities, we are subject to market risk.

40

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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 income under various economic conditions.

Our
Board of Directors has set asset and liability management policies that define the overall framework for managing interest rate sensitivity, including accountabilities and controls
over investment activities. These policies delineate investment limits and strategies that are appropriate, given our liquidity and regulatory requirements. For example, we have established a policy
limit stating that projected net interest income over the next twelve months will not change by more than 10% given a change in interest rates of up to 200 basis points (+ or ) over
twelve months. Each quarter, our Board of Directors reviews our asset and liability positions, including simulations of the effect of various interest rate scenarios on our capital.

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

The
results of the income simulation model as of December 31, 2004 and 2003 indicated that an upward shift of interest rates by 200 basis points over a twelve-month period would
result in a reduction in projected net interest income of 7.13% and 7.83%, respectively, which is within our 10% policy limit. 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% because of the low likelihood that rates will decrease to below 0%. This modified simulation would also result in a reduction in
projected net interest income of 0.16% and 11.42% at December 31, 2004 and 2003, respectively. In 2003, the Company's Board of Directors approved a temporary exception to the 10% limit for
decreases in interest rates, as a 200 basis point reduction would have moved interest rates into a negative position.

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, 2004, interest-bearing liabilities repriced faster than interest-earning assets in
the short term, as has been typical for us. Generally speaking, during a period of falling interest rates, net interest income would be higher than it would have been until interest rates stabilize.
During a period of rising interest rates, net interest income would be lower than it would have been until interest rates stabilize. Other important determinants of net interest income are general
rate levels, balance sheet growth and mix, and interest rate spreads. We continue to run a closely matched balance sheet by investing the majority of our

41

---



assets
in short duration, variable-rate securities and adding interest rate swaps against client liabilities, including client repurchase agreements.

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.
Client deposits and repurchase agreements, which are predominantly short term, are our primary sources of funds. 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. The weighted-average fixed-payment rates were
3.09% and 3.92% at December 31, 2004 and 2003, respectively. Variable-interest payments received are currently indexed to the overnight Federal Funds rate. At December 31, 2004 and 2003,
the weighted-average rate of variable market-indexed interest payment obligations to the Company were 2.22% and 1.70%, respectively. The original terms range from 2 to 40 months. These
contracts had net fair values of approximately $1.5 million and $(14.9) million at December 31, 2004 and 2003, respectively.

42

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

|                                                                                      |                                             | Within
Three
Months                            |       | Three
To Six
Months |            | Six
To Twelve
Months |         | One
Year to
Five Years |        | Over Five
Years |           | Total 
|------------------------------------------------------------------------------------- | ------------------------------------------- | ---------------------------------------------- | ----- | ------------------- | ---------- | -------------------- | ------- | ---------------------- | ------ | --------------- | --------- | ------
|Interest-earning assets(1):                                                           |                                             |                                                |       |                     |            |                      |         |                        |        |                 |           |       
|                                                                                      | Investment securities(2,3)                  |                                                | $     | 5,751,344           |            | $                    | 695,135 |                        | $      | 1,163,591       |           | $     
|                                                                                      | Loansvariable- rate                        |                                                |       | 134,618             |            |                      |        |                        |        |                |           |       
|                                                                                      | Loansfixed rate                            |                                                |       |                    |            |                      |        |                        |        |                |           |       
|                                                                                      |                                             |                                                |       |                     |            |                      |         |                        |        |                 |           |       
|                                                                                      |                                             | Total interest-earning assets                  |       |                     | 5,885,962  |                      |         | 695,135                |        |                 | 1,163,591 |       
|Interest-bearing liabilities:                                                         |                                             |                                                |       |                     |            |                      |         |                        |        |                 |           |       
|                                                                                      | Savings accounts                            |                                                |       | 4,324,303           |            |                      |        |                        |        |                |           |       
|                                                                                      | Time deposits                               |                                                |       | 97,669              |            |                      |        |                        |        |                |           |       
|                                                                                      | Interest rate contracts                     |                                                |       | (1,560,000          | )          |                      | 90,000  |                        |        | 240,000         |           |       
|                                                                                      | Securities sold under repurchase agreements |                                                |       | 3,505,497           |            |                      |        |                        |        | 100,000         |           |       
|                                                                                      | Short-term and other borrowings             |                                                |       | 544,681             |            |                      |        |                        |        |                |           |       
|                                                                                      | Junior subordinated debentures              |                                                |       |                    |            |                      |        |                        |        |                |           |       
|                                                                                      |                                             |                                                |       |                     |            |                      |         |                        |        |                 |           |       
|                                                                                      |                                             | Total interest-bearing liabilities             |       |                     | 6,912,150  |                      |         | 90,000                 |        |                 | 340,000   |       
|                                                                                      |                                             |                                                |       |                     |            |                      |         |                        |        |                 |           |       
|                                                                                      |                                             | Net interest sensitivity gap during the period |       | $                   | (1,026,188 | )                    | $       | 605,135                |        | $               | 823,591   |       
|                                                                                      |                                             |                                                |       |                     |            |                      |         |                        |        |                 |           |       
|                                                                                      |                                             | Cumulative gap                                 |       | $                   | (1,026,188 | )                    | $       | (421,053               | )      | $               | 402,538   |       
|                                                                                      |                                             |                                                |       |                     |            |                      |         |                        |        |                 |           |       
|Interest-sensitive assets as a percent of interest-sensitive liabilities (cumulative) |                                             |                                                | 85.15 | %                   |            | 93.99                | %       |                        | 105.48 | %               |           | 109.10
|                                                                                      |                                             |                                                |       |                     |            |                      |         |                        |        |                 |           |       
|Interest-sensitive assets as a percent of total assets (cumulative)                   |                                             |                                                | 52.70 | %                   |            | 58.93                | %       |                        | 69.35  | %               |           | 91.20 
|                                                                                      |                                             |                                                |       |                     |            |                      |         |                        |        |                 |           |       
|Net interest sensitivity gap as a percent of total assets                             |                                             |                                                | (9.19 | %)                  |            | 5.42                 | %       |                        | 7.37   | %               |           | 4.00  
|                                                                                      |                                             |                                                |       |                     |            |                      |         |                        |        |                 |           |       
|Cumulative gap as a percent of total assets                                           |                                             |                                                | (9.19 | %)                  |            | (3.77                | %)      |                        | 3.60   | %               |           | 7.61  
|                                                                                      |                                             |                                                |       |                     |            |                      |         |                        |        |                 |           |       

---

43

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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 our ability to generate
liquidity through liability funds, management believes that we maintain overall liquidity sufficient to meet our depositors' needs, to satisfy our operating requirements and to fund the payment of an
anticipated annual cash dividend of $0.08 per share for 2005 (approximately $5.3 million based upon 66,595,349 shares outstanding as of December 31, 2004).

Our
ability to pay dividends on Common Stock may depend on the receipt of dividends from the Bank. Any dividend payments by the Bank are subject to certain restrictions imposed by the
Massachusetts Commissioner of Banks. During all periods presented in this report, the Company did not require dividends from the Bank in order to fund the Company's own dividends. In addition, we may
not pay dividends on our Common Stock if we are in default under certain agreements entered into in connection with the sale of our Capital Securities. The Capital Securities were issued by Investors
Capital Trust I, ("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, 2004 was $3.2 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 counterparty 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, 2004 was $5.6 billion.

On
April 19, 2004, the Federal Home Loan Bank of Boston ("FHLBB") implemented a new capital structure mandated for all Federal Home Loan Banks by the Gramm-Leach-Bliley Act of
1999 and regulations that were subsequently promulgated in 2001 by the FHLBB's regulator, the Federal Housing Finance Board. The Bank's capital stock investment in the FHLBB totaled $50 million
as of December 31, 2004. The $50 million capital stock investment includes both a $25 million membership component and a $25 million activity-based component. The Bank's
$50 million capital stock investment in the FHLBB provides a borrowing capacity of approximately $555 million. Under the new capital plan, FHLBB capital stock investments require a
five-year advance notice of withdrawal. The amount outstanding under this arrangement at December 31, 2004 was $250 million. Additional borrowing is available to the Bank based on
prescribed collateral levels and increased investment in FHLBB capital stock. The Bank currently has no plans to increase its investment in FHLBB capital stock.

44

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The
following table details our contractual obligations as of December 31, 2004 (Dollars in thousands):

|                        |                                   | Payments due by period
|----------------------- | --------------------------------- | ----------------------
|
|Contractual obligations |                                   |                       
|                        | Debt obligations(1)               |                       
|                        | Repurchase agreements             |                       
|                        | Junior subordinated debentures(2) |                       
|                        | Operating lease obligations       |                       
|                        |                                   |                       
|                        |                                   | Total                 
|                        |                                   |                       

---

|                  |                                | Payments due by period
|----------------- | ------------------------------ | ----------------------
|
|Other commitments |                                |                       
|                  | Unused commitments to lend     |                       
|                  | Fixed price purchase contracts |                       
|                  | Other                          |                       
|                  |                                |                       
|                  |                                | Total                 
|                  |                                |                       

Included
in the Other commitments line presented above are contracts in which we are obligated to utilize the data processing services of Electronic Data Systems ("EDS")
through December 31, 2005, SEI Investments Company through December 31, 2009 and International Business Machines Corporation ("IBM") through June 30, 2011. The IBM agreement was
signed in the summer of 2004. Under the terms of this new agreement, IBM provides to us help desk, identification administration, network management, deskside services, server monitoring and
management, on demand computing services and webhosting. Certain of these services were previously provided by EDS. The commitment to pay for these services is based upon transaction volumes and
includes inflationary price clauses.

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 computing equipment 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 $23.6 million and $29.5 million for the years ended December 31, 2004 and 2003,
respectively. For the year ended December 31, 2004, capital expenditures were comprised of approximately $15.4 million in capitalized software and projects in process,
$7.9 million in fixed assets, and $0.3 million in leasehold improvements. 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. Leasehold improvement expenditures for the
year ended December 31, 2003 were primarily related to increased space in our Dublin office, which was needed to support new business.

Stockholders'
equity at December 31, 2004 was $712.3 million, up 32% from 2003, primarily due to net income growth in 2004 and the issuance of common stock related to
option exercises and employee

45

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stock
purchase plan purchases. The ratio of average stockholders' equity to average assets remained constant at approximately 6% for December 31, 2004 and 2003.

The
FRB has adopted capital adequacy guidelines applicable to United States banking organizations. 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 to certain
limitations), 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, not 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 to its average total consolidated assets (the
"Leverage Ratio") of 3.0%. Total average consolidated assets for this purpose does not include 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. 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
are currently in compliance with both the Total Risk-Based Capital Ratio and the Leverage Ratio requirements, and management expects these ratios to remain in compliance with the
FRB's capital adequacy guidelines. At December 31, 2004, our Total Risk-Based Capital Ratio and Leverage Ratio were 20.54% and 5.85%, respectively.

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 9A. CONTROLS AND PROCEDURES.



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

46

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REPORT OF MANAGEMENT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS

February 28,
2005

To
the Board of Directors and Stockholders:

Financial Statements

The management of Investors Financial Services Corp. and its subsidiaries, ("the Company") 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 the Company contained in this Report. The financial statements of the Company 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 accounting principles generally accepted in the United States of America. 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
has made a comprehensive review, evaluation and assessment of the Company's internal control over financial reporting, including safeguarding of assets, for financial
presentations in conformity with accounting principles generally accepted in the United States of America as of December 31, 2004. 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 has concluded that the Company maintained effective internal control over financial reporting,
including safeguarding of assets, presented in conformity with accounting principles generally accepted in the United States of America as of December 31, 2004.

The
Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of the Company's management; it includes members with banking or related
management experience, has access to its own outside counsel, and does not include representatives of 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 Company in addition to
reviewing the Company'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 Audit Committee.

47

---



Deloitte &
Touche, LLP, an Independent Registered Public Accounting Firm, has reported on management's assertion with respect to the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004.

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

48

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited management's assessment, included in the accompanying Report of Management to Stockholders, that Investors Financial Services Corp. and subsidiaries (the "Company")
maintained effective internal control over financial reporting, as of December 31, 2004, based on the criteria established inInternal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion
on the effectiveness of the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls 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 assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on the criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of
the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the
criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year
ended December 31, 2004 of the Company and our report dated February 28, 2005, expressed an unqualified opinion on those financial statements.

DELOITTE &
TOUCHE LLP
February 28, 2005

49

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ITEM 9B. OTHER INFORMATION

On November 15, 2004, the Company granted options to purchase shares of the Company's common stock to executive officers in the amounts set forth below.
The stock option agreements relating to these grants have been filed as exhibits to this Report.

Name

Number of
Shares Underlying
Option GrantKevin J. Sheehan

93,514Michael F. Rogers

90,697Edmund J. Maroney

36,736John N. Spinney, Jr.

20,000Robert D. Mancuso

111,294


50

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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, 2004.

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, 2004.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

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, 2004.

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, 2004.

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 Independent
Registered Public Accounting Firm" 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, 2004.

51

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

|(a) |  | 1.  Consolidated Financial Statements.                                                                          
|--- |  | ----------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                 
|    |  | For the following consolidated financial information included herein, see Index on Page F-1:                    
|    |  | Report of Independent Registered Public Accounting Firm.                                                        
|    |  | Consolidated Balance Sheets as of December 31, 2004 and December 31, 2003.                                      
|    |  | Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2004, 2003 and 2002.
|    |  | Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004, 2003 and 2002.           
|    |  | Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002.                     
|    |  | Notes to Consolidated Financial Statements.                                                                     
|    |  | 2.  Financial Statement Schedules.                                                                              
|    |  | None.                                                                                                           
|    |  | 3.  List of Exhibits.                                                                                           

|Exhibit No. |       | Description                                                                                                                                                                         
|----------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         | (12)  | Certificate of Incorporation of the Company                                                                                                                                         
|3.2         | (8)   | Certificate of Amendment of Certificate of Incorporation of the Company                                                                                                             
|3.3         | (11)  | Certificate of Amendment of Certificate of Incorporation of the Company                                                                                                             
|3.4         | (14)  | Certificate of Amendment of Certificate of Incorporation of the Company                                                                                                             
|3.5         | (12)  | Amended and Restated Bylaws of the Company                                                                                                                                          
|4.1         | (12)  | Specimen certificate representing the Common Stock of the Company                                                                                                                   
|4.2         | (12)  | Stockholder Rights Plan                                                                                                                                                             
|4.3         | (6)   | Amendment No.1 to Stockholder Rights Plan                                                                                                                                           
|4.4         | (9)   | Amendment No.2 to Stockholder Rights Plan                                                                                                                                           
|10.1        | (13)* | Amended and Restated 1995 Stock Plan                                                                                                                                                
|10.2        | (13)* | Amended and Restated 1995 Non-Employee Director Stock Option Plan                                                                                                                   
|10.3        | (12)  | 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        | (16)* | 1997 Employee Stock Purchase Plan, as amended.                                                                                                                                      
|10.6        | (2)   | Amended and Restated Declaration of Trust among the Company and the Trustees named therein, dated January 31, 1997                                                                  
|10.7        | (2)   | Indenture between the Company and The Bank of New York, dated January 31, 1997                                                                                                      
|10.8        | (2)   | Common Securities Guarantee Agreement by the Company as Guarantor, dated January 31, 1997                                                                                           
|10.9        | (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                    
|            |       |                                                                                                                                                                                     

52

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|10.10 | (10)  | First Amendment, effective January 1, 2000 to Information Technology Services Contract between the Company and Electronic Data Systems, Inc. dated September 20, 1995
|----- | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.11 | (10)* | Amended and Restated Employment Agreement between the Company and Kevin Sheehan                                                                                      
|10.12 | (10)* | Change of Control Employment Agreement between the Company and Kevin Sheehan                                                                                         
|10.13 | (10)* | Amended and Restated Employment Agreement between the Company and Michael Rogers                                                                                     
|10.14 | (10)* | Change of Control Employment Agreement between the Company and Michael Rogers                                                                                        
|10.15 | (10)* | Amended and Restated Employment Agreement between the Company and Edmund Maroney                                                                                     
|10.16 | (10)* | Change of Control Employment Agreement between the Company and Edmund Maroney                                                                                        
|10.17 | (10)* | Amended and Restated Employment Agreement between the Company and Robert Mancuso                                                                                     
|10.18 | (10)* | Change of Control Employment Agreement between the Company and Robert Mancuso                                                                                        
|10.19 | (10)* | Amended and Restated Employment Agreement between the Company and John Henry                                                                                         
|10.20 | (10)* | Change of Control Employment Agreement between the Company and John Henry                                                                                            
|10.21 | (12)* | Change of Control Employment Agreement between the Company and John N. Spinney, Jr.                                                                                  
|10.22 | (13)* | Employment Agreement between the Company and John N. Spinney, Jr.                                                                                                    
|10.23 | (16)  | Information Technology Services Agreement dated July 1, 2004 between the Company and International Business Machines Corporation.                                    
|10.24 | *     | Stock Option Agreement dated November 15, 2004 between the Company and Kevin J. Sheehan                                                                              
|10.25 | *     | Stock Option Agreement dated November 15, 2004 between the Company and Kevin J. Sheehan                                                                              
|10.26 | *     | Stock Option Agreement dated November 15, 2004 between the Company and Michael F. Rogers                                                                             
|10.27 | *     | Stock Option Agreement dated November 15, 2004 between the Company and Michael F. Rogers                                                                             
|      |       |                                                                                                                                                                      

53

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|10.28 | *    | Stock Option Agreement dated November 15, 2004 between the Company and Edmund J. Maroney                                                                                                                                 
|----- | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.29 | *    | Stock Option Agreement dated November 15, 2004 between the Company and Edmund J. Maroney                                                                                                                                 
|10.30 | *    | Stock Option Agreement dated November 15, 2004 between the Company and John N. Spinney, Jr.                                                                                                                              
|10.31 | *    | Stock Option Agreement dated November 15, 2004 between the Company and Robert D. Mancuso                                                                                                                                 
|21.1  | (15) | Subsidiaries of the Company                                                                                                                                                                                              
|23.1  |      | Consent of Deloitte & Touche LLP                                                                                                                                                                                         
|24.1  | (15) | Power of Attorney                                                                                                                                                                                                        
|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

---



---

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

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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 28th day of February, 2005.

| |  | 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
28th day of February, 2005.

|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

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|/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
|/s/EDWARD F. HINESEdward F. Hines           |  | Director

57

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INVESTORS FINANCIAL SERVICES CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                |  | Page
|--------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                                         |  | F-2 
|Consolidated Balance Sheets as of December 31, 2004 and December 31, 2003                                       |  | F-3 
|Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2004, 2003 and 2002 |  | F-4 
|Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004, 2003 and 2002            |  | F-5 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002                      |  | F-6 
|Notes to Consolidated Financial Statements                                                                      |  | F-7 

F-1

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2004 and 2003,
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, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

As
noted in Note 10 to the consolidated financial statements, 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."

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over
financial reporting as of December 31, 2004, based on the criteria established inInternal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the
Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

DELOITTE & TOUCHE LLP

Boston,
Massachusetts
February 28, 2005

F-2

---





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

|                                                                                                                                                                                                |         | December 31,
2004          |            | December 31,
2003 |           
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | -------------------------- | ---------- | ----------------- | ----------
|ASSETS                                                                                                                                                                                          |         |                            |            |                   |           
|Cash and due from banks                                                                                                                                                                         |         | $                          | 49,059     |                   | $         
|Securities held to maturity (fair value of $5,937,462 and $4,308,578 at December 31, 2004 and 2003, respectively) (Note 3)                                                                      |         |                            | 5,942,717  |                   |           
|Securities available for sale (Note 3)                                                                                                                                                          |         |                            | 4,565,505  |                   |           
|Nonmarketable equity securities (Note 3)                                                                                                                                                        |         |                            | 50,000     |                   |           
|Loans, less allowance for loan losses of $100 at December 31, 2004 and 2003 (Note 4)                                                                                                            |         |                            | 134,530    |                   |           
|Accrued interest and fees receivable                                                                                                                                                            |         |                            | 89,292     |                   |           
|Equipment and leasehold improvements, less accumulated depreciation of $61,017 and $47,683 at December 31, 2004 and 2003, respectively (Note 5)                                                 |         |                            | 67,883     |                   |           
|Goodwill                                                                                                                                                                                        |         |                            | 79,969     |                   |           
|Other assets                                                                                                                                                                                    |         |                            | 188,870    |                   |           
|                                                                                                                                                                                                |         |                            |            |                   |           
|TOTAL ASSETS                                                                                                                                                                                    |         | $                          | 11,167,825 |                   | $         
|                                                                                                                                                                                                |         |                            |            |                   |           
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                            |         |                            |            |                   |           
|LIABILITIES:                                                                                                                                                                                    |         |                            |            |                   |           
|Deposits (Note 6):                                                                                                                                                                              |         |                            |            |                   |           
|                                                                                                                                                                                                | Demand  |                            | $          | 690,308           |           
|                                                                                                                                                                                                | Savings |                            |            | 4,448,405         |           
|                                                                                                                                                                                                | Time    |                            |            | 257,669           |           
|                                                                                                                                                                                                |         |                            |            |                   |           
|                                                                                                                                                                                                |         | Total deposits             |            |                   | 5,396,382 
|Securities sold under repurchase agreements (Note 7)                                                                                                                                            |         |                            | 4,255,497  |                   |           
|Short-term and other borrowings (Note 8)                                                                                                                                                        |         |                            | 594,681    |                   |           
|Due to brokers for open trades payable                                                                                                                                                          |         |                            | 5,475      |                   |           
|Junior subordinated deferrable interest debentures (Note 10)                                                                                                                                    |         |                            | 24,774     |                   |           
|Accrued taxes and other expenses                                                                                                                                                                |         |                            | 54,967     |                   |           
|Other liabilities                                                                                                                                                                               |         |                            | 123,787    |                   |           
|                                                                                                                                                                                                |         |                            |            |                   |           
|                                                                                                                                                                                                |         | Total liabilities          |            |                   | 10,455,563
|                                                                                                                                                                                                |         |                            |            |                   |           
|Commitments and contingencies (Note 16)                                                                                                                                                         |         |                            |            |                   |           
|STOCKHOLDERS' EQUITY:                                                                                                                                                                           |         |                            |            |                   |           
|Preferred stock, par value $0.01 (shares authorized: 1,000,000; issued and outstanding: none in 2004 and 2003)                                                                                  |         |                            |           |                   |           
|Common stock, par value $0.01 (shares authorized: 175,000,000 and 100,000,000 in 2004 and 2003, respectively; issued and outstanding: 66,595,349 and 65,436,788 in 2004 and 2003, respectively) |         |                            | 667        |                   |           
|Surplus                                                                                                                                                                                         |         |                            | 272,536    |                   |           
|Deferred compensation                                                                                                                                                                           |         |                            | (572       | )                 |           
|Retained earnings                                                                                                                                                                               |         |                            | 418,034    |                   |           
|Accumulated other comprehensive income, net                                                                                                                                                     |         |                            | 23,888     |                   |           
|Treasury stock, at cost (73,235 and 26,508 shares in 2004 and 2003, respectively)                                                                                                               |         |                            | (2,291     | )                 |           
|                                                                                                                                                                                                |         |                            |            |                   |           
|                                                                                                                                                                                                |         | Total stockholders' equity |            |                   | 712,262   
|                                                                                                                                                                                                |         |                            |            |                   |           
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                      |         | $                          | 11,167,825 |                   | $         
|                                                                                                                                                                                                |         |                            |            |                   |           

See Notes to Consolidated Financial Statements.

F-3

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INVESTORS FINANCIAL SERVICES CORP.        CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME        Years Ended December 31, 2004, 2003 and 2002        (Dollars in thousands,
except per share data)

|                                      |                                                  | December 31,
2004                 |         | December 31,
2003 |         | December 31,
2002 |        
|------------------------------------- | ------------------------------------------------ | --------------------------------- | ------- | ----------------- | ------- | ----------------- | -------
|FEES AND OTHER REVENUE:               |                                                  |                                   |         |                   |         |                   |        
|Asset servicing fees:                 |                                                  |                                   |         |                   |         |                   |        
|                                      | Core service fees                                |                                   | $       | 314,272           |         | $                 | 254,225
|                                      | Ancillary service fees                           |                                   |         | 108,928           |         |                   | 79,361 
|                                      |                                                  |                                   |         |                   |         |                   |        
|                                      |                                                  | Total asset servicing fees        |         |                   | 423,200 |                   |        
|                                      |                                                  |                                   |         |                   |         |                   |        
|                                      | Other operating income                           |                                   |         | 2,057             |         |                   | 2,607  
|                                      | Gain on sale of investment                       |                                   |         | 234               |         |                   |       
|                                      |                                                  |                                   |         |                   |         |                   |        
|                                      |                                                  | Total fees and other revenue      |         |                   | 425,491 |                   |        
|                                      |                                                  |                                   |         |                   |         |                   |        
|                                      | Interest income                                  |                                   |         | 313,149           |         |                   | 247,094
|                                      | Interest expense                                 |                                   |         | 125,469           |         |                   | 93,180 
|                                      |                                                  |                                   |         |                   |         |                   |        
|                                      |                                                  | Net interest income               |         |                   | 187,680 |                   |        
|                                      |                                                  |                                   |         |                   |         |                   |        
|                                      |                                                  | Net operating revenue             |         |                   | 613,171 |                   |        
|                                      |                                                  |                                   |         |                   |         |                   |        
|OPERATING EXPENSES:                   |                                                  |                                   |         |                   |         |                   |        
|Compensation and benefits             |                                                  |                                   | 205,728 |                   |         | 186,932           |        
|Technology and telecommunications     |                                                  |                                   | 49,816  |                   |         | 38,914            |        
|Transaction processing services       |                                                  |                                   | 42,159  |                   |         | 33,299            |        
|Depreciation and amortization         |                                                  |                                   | 32,124  |                   |         | 27,971            |        
|Occupancy                             |                                                  |                                   | 29,032  |                   |         | 29,218            |        
|Professional fees                     |                                                  |                                   | 15,346  |                   |         | 11,189            |        
|Travel and sales promotion            |                                                  |                                   | 5,470   |                   |         | 4,822             |        
|Insurance                             |                                                  |                                   | 4,625   |                   |         | 3,203             |        
|Other operating expenses              |                                                  |                                   | 14,083  |                   |         | 9,373             |        
|                                      |                                                  |                                   |         |                   |         |                   |        
|                                      |                                                  | Total operating expenses          |         |                   | 398,383 |                   |        
|                                      |                                                  |                                   |         |                   |         |                   |        
|INCOME BEFORE INCOME TAXES            |                                                  |                                   | 214,788 |                   |         | 145,186           |        
|Provision for income taxes (Note 9)   |                                                  |                                   | 72,826  |                   |         | 52,765            |        
|                                      |                                                  |                                   |         |                   |         |                   |        
|NET INCOME                            |                                                  | $                                 | 141,962 |                   | $       | 92,421            |        
|                                      |                                                  |                                   |         |                   |         |                   |        
|BASIC EARNINGS PER SHARE              |                                                  | $                                 | 2.15    |                   | $       | 1.42              |        
|                                      |                                                  |                                   |         |                   |         |                   |        
|DILUTED EARNINGS PER SHARE            |                                                  | $                                 | 2.09    |                   | $       | 1.39              |        
|                                      |                                                  |                                   |         |                   |         |                   |        
|COMPREHENSIVE INCOME:                 |                                                  |                                   |         |                   |         |                   |        
|Net income                            |                                                  | $                                 | 141,962 |                   | $       | 92,421            |        
|Other comprehensive income (Note 12): |                                                  |                                   |         |                   |         |                   |        
|                                      | Net unrealized investment (loss) gain            |                                   |         | (7,854            | )       |                   | (12,963
|                                      | Net unrealized derivative instrument gain (loss) |                                   |         | 13,031            |         |                   | 12,019 
|                                      | Cumulative translation adjustment                |                                   |         | 846               |         |                   | 577    
|                                      |                                                  |                                   |         |                   |         |                   |        
|                                      |                                                  | Other comprehensive income (loss) |         |                   | 6,023   |                   |        
|                                      |                                                  |                                   |         |                   |         |                   |        
|Comprehensive income                  |                                                  | $                                 | 147,985 |                   | $       | 92,054            |        
|                                      |                                                  |                                   |         |                   |         |                   |        

See Notes to Consolidated Financial Statements.

F-4

---





INVESTORS FINANCIAL SERVICES CORP.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        Years Ended December 31, 2004, 2003, and 2002        (Dollars in thousands, except
per share data)

|                                                                                                                                       |  | December 31,
2004 |            | December 31,
2003 |   | December 31,
2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | ----------------- | - | ----------------- | -
|Common shares                                                                                                                          |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                                             |  |                   | 65,436,788 |                   |   | 64,775,042        |  
|Exercise of stock options                                                                                                              |  |                   | 1,114,051  |                   |   | 548,069           |  
|Common stock issuance                                                                                                                  |  |                   | 91,237     |                   |   | 129,371           |  
|Common stock repurchased                                                                                                               |  |                   | (46,727    | )                 |   | (15,694           | )
|Stock dividend, two-for-one split                                                                                                      |  |                   |           |                   |   |                  |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                                                   |  |                   | 66,595,349 |                   |   | 65,436,788        |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Treasury shares                                                                                                                        |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                                             |  |                   | 26,508     |                   |   | 10,814            |  
|Common stock repurchased                                                                                                               |  |                   | 46,727     |                   |   | 15,694            |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                                                   |  |                   | 73,235     |                   |   | 26,508            |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Common stock                                                                                                                           |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                                             |  | $                 | 655        |                   | $ | 648               |  
|Exercise of stock options                                                                                                              |  |                   | 12         |                   |   | 6                 |  
|Common stock issuance                                                                                                                  |  |                   |           |                   |   | 1                 |  
|Stock dividend, two-for-one split                                                                                                      |  |                   |           |                   |   |                  |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                                                   |  | $                 | 667        |                   | $ | 655               |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Surplus                                                                                                                                |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                                             |  | $                 | 242,662    |                   | $ | 233,337           |  
|Exercise of stock options                                                                                                              |  |                   | 16,056     |                   |   | 2,971             |  
|Tax benefit from stock options                                                                                                         |  |                   | 10,651     |                   |   | 3,008             |  
|Common stock issuance                                                                                                                  |  |                   | 3,355      |                   |   | 3,386             |  
|Stock option forfeiture                                                                                                                |  |                   | (188       | )                 |   | (40               | )
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                                                   |  | $                 | 272,536    |                   | $ | 242,662           |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Deferred compensation                                                                                                                  |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                                             |  | $                 | (1,076     | )                 | $ | (1,599            | )
|Stock option forfeiture                                                                                                                |  |                   | 188        |                   |   | 40                |  
|Amortization of deferred compensation                                                                                                  |  |                   | 316        |                   |   | 483               |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                                                   |  | $                 | (572       | )                 | $ | (1,076            | )
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Retained earnings                                                                                                                      |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                                             |  | $                 | 280,701    |                   | $ | 192,184           |  
|Net income                                                                                                                             |  |                   | 141,962    |                   |   | 92,421            |  
|Stock dividend, two-for-one split                                                                                                      |  |                   |           |                   |   |                  |  
|Cash dividend, $0.07, $0.06 and $0.05 per share in the years ended December 31, 2004, 2003 and 2002, respectively                      |  |                   | (4,629     | )                 |   | (3,904            | )
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                                                   |  | $                 | 418,034    |                   | $ | 280,701           |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Accumulated other comprehensive income (loss), net                                                                                     |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                                             |  | $                 | 17,865     |                   | $ | 18,232            |  
|Net unrealized investment (loss) gain                                                                                                  |  |                   | (7,854     | )                 |   | (12,963           | )
|Net unrealized derivative instrument gain (loss)                                                                                       |  |                   | 12,973     |                   |   | 11,785            |  
|Amortization of transition-related adjustment                                                                                          |  |                   |           |                   |   | 234               |  
|Amortization of terminated interest rate swap agreements                                                                               |  |                   | 58         |                   |   |                  |  
|Effect of foreign currency translation                                                                                                 |  |                   | 846        |                   |   | 577               |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                                                   |  | $                 | 23,888     |                   | $ | 17,865            |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Treasury stock                                                                                                                         |  |                   |            |                   |   |                   |  
|Balance, beginning of year                                                                                                             |  | $                 | (550       | )                 | $ |                  |  
|Common stock repurchased (46,727 shares at an average price of $37.24 in 2004 and 15,694 shares at an average price of $35.07 in 2003) |  |                   | (1,741     | )                 |   | (550              | )
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Balance, end of year                                                                                                                   |  | $                 | (2,291     | )                 | $ | (550              | )
|                                                                                                                                       |  |                   |            |                   |   |                   |  
|Total Stockholders' Equity                                                                                                             |  | $                 | 712,262    |                   | $ | 540,257           |  
|                                                                                                                                       |  |                   |            |                   |   |                   |  

See Notes to Consolidated Financial Statements.

F-5

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INVESTORS FINANCIAL SERVICES CORP.        CONSOLIDATED STATEMENTS OF CASH FLOWS        Years Ended December 31, 2004, 2003 and 2002        (Dollars in thousands)

|                                                                                                  |                                           | December 31,
2004 |            | December 31,
2003 |   | December 31,
2002 |           
|------------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------------- | ---------- | ----------------- | - | ----------------- | ----------
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                             |                                           |                   |            |                   |   |                   |           
|Net income                                                                                        |                                           | $                 | 141,962    |                   | $ | 92,421            |           
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|Adjustments to reconcile net income to net cash provided by operating activities:                 |                                           |                   |            |                   |   |                   |           
|Equity in undistributed loss of unconsolidated subsidiary                                         |                                           |                   | 28         |                   |   | 8                 |           
|Depreciation and amortization                                                                     |                                           |                   | 32,124     |                   |   | 27,971            |           
|Amortization of deferred compensation                                                             |                                           |                   | 316        |                   |   | 483               |           
|Amortization of premiums on securities, net of accretion of discounts                             |                                           |                   | 40,743     |                   |   | 39,200            |           
|Gain on sale of investment                                                                        |                                           |                   | (234       | )                 |   |                  |           
|Deferred income taxes                                                                             |                                           |                   | 2,997      |                   |   | 5,651             |           
|Changes in assets and liabilities:                                                                |                                           |                   |            |                   |   |                   |           
|                                                                                                  | Accrued interest and fees receivable      |                   |            | (16,476           | ) |                   | (5,555    
|                                                                                                  | Other assets                              |                   |            | (89,667           | ) |                   | (29,878   
|                                                                                                  | Accrued taxes and other expenses          |                   |            | 2,745             |   |                   | 21,465    
|                                                                                                  | Other liabilities                         |                   |            | 106,795           |   |                   | 6,221     
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|                                                                                                  | Net cash provided by operating activities |                   |            | 221,333           |   |                   | 157,987   
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                             |                                           |                   |            |                   |   |                   |           
|Proceeds from paydowns/maturities of securities available for sale                                |                                           |                   | 1,392,295  |                   |   | 1,608,656         |           
|Proceeds from paydowns/maturities of securities held to maturity                                  |                                           |                   | 1,410,133  |                   |   | 1,902,187         |           
|Proceeds from sale of securities available for sale                                               |                                           |                   | 25,041     |                   |   |                  |           
|Purchases of securities available for sale                                                        |                                           |                   | (1,704,293 | )                 |   | (2,666,066        | )         
|Purchases of securities held to maturity                                                          |                                           |                   | (3,078,456 | )                 |   | (2,794,414        | )         
|Net increase (decrease) in due to brokers for open trades payable                                 |                                           |                   | 5,475      |                   |   | (286,843          | )         
|Net decrease (increase) in loans                                                                  |                                           |                   | 65,000     |                   |   | (55,793           | )         
|Purchases of equipment and leasehold improvements                                                 |                                           |                   | (23,559    | )                 |   | (29,495           | )         
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|                                                                                                  | Net cash used in investing activities     |                   |            | (1,908,364        | ) |                   | (2,321,768
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                             |                                           |                   |            |                   |   |                   |           
|Net increase (decrease) in demand deposits                                                        |                                           |                   | 355,485    |                   |   | (49,638           | )         
|Net increase in time and savings deposits                                                         |                                           |                   | 833,779    |                   |   | 923,838           |           
|Net increase in securities sold under repurchase agreements                                       |                                           |                   | 997,496    |                   |   | 956,027           |           
|Net (decrease) increase in short-term and other borrowings                                        |                                           |                   | (503,406   | )                 |   | 356,980           |           
|Proceeds from exercise of stock options                                                           |                                           |                   | 16,068     |                   |   | 2,977             |           
|Proceeds from issuance of common stock                                                            |                                           |                   | 3,355      |                   |   | 3,387             |           
|Common stock repurchase                                                                           |                                           |                   | (1,741     | )                 |   | (550              | )         
|Repurchase of company-obligated, mandatorily redeemable, preferred securities of subsidiary trust |                                           |                   |           |                   |   |                  |           
|Dividends paid to stockholders                                                                    |                                           |                   | (4,629     | )                 |   | (3,904            | )         
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|                                                                                                  | Net cash provided by financing activities |                   |            | 1,696,407         |   |                   | 2,189,117 
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|EFFECT OF EXCHANGE RATES ON CHANGES IN CASH                                                       |                                           |                   | (6         | )                 |   | (215              | )         
|NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS                                                |                                           |                   | 9,370      |                   |   | 25,121            |           
|CASH AND DUE FROM BANKS, BEGINNING OF YEAR                                                        |                                           |                   | 39,689     |                   |   | 14,568            |           
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|CASH AND DUE FROM BANKS, END OF YEAR                                                              |                                           | $                 | 49,059     |                   | $ | 39,689            |           
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                 |                                           |                   |            |                   |   |                   |           
|                                                                                                  | Cash paid for interest                    |                   | $          | 121,542           |   | $                 | 91,858    
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|                                                                                                  | Cash paid for income taxes                |                   | $          | 77,819            |   | $                 | 39,859    
|                                                                                                  |                                           |                   |            |                   |   |                   |           
|SCHEDULE OF NON-CASH INVESTING ACTIVITIES                                                         |                                           |                   |            |                   |   |                   |           
|Change in due to brokers for open trades payable                                                  |                                           | $                 |           |                   | $ |                  |           
|                                                                                                  |                                           |                   |            |                   |   |                   |           

See Notes to Consolidated Financial Statements.

F-6

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INVESTORS FINANCIAL SERVICES CORP.    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    Years Ended December 31, 2004, 2003 and 2002

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 middle office outsourcing, global custody, multicurrency accounting and fund administration. Value-added services include securities lending, foreign exchange, cash management,
performance measurement, institutional transfer agency, investment advisory services, lines of credit and brokerage and transition management services. The Company is subject to regulation by the
Federal Deposit Insurance Corporation, the Federal Reserve Board of Governors, the Office of the Commissioner of Banks of the Commonwealth of Massachusetts, the Securities and Exchange Commission
("SEC"), the National Association of Securities Dealers, Inc. ("NASD"), the Office of the Superintendent of Financial Institutions in Canada, the Irish Financial Services Regulatory Authority,
and the State of Vermont Department of Banking, Insurance, Securities & Health Care Administration.

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

F-7

---



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. The Company applies Financial Accounting Standard No. 91,Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases("FAS 91") for the amortization of premiums and accretion of
discounts.

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 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

F-8

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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, 2004
and 2003, 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 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 ("OCI") 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Derivative financial instruments are recorded in the Company's
balance sheet at fair value. The Company utilizes derivative financial instruments primarily for balance sheet asset and liability management purposes. Changes in the fair value of a derivative
that is designated and qualifies as a cash flow hedge is reported in OCI, net of taxes, to the extent the hedge is highly effective. The ineffective portion, which is the extent to which the changes
in the fair value of the derivative exceed the changes in the variability of cash flows of the hedged item, is reported in net interest income. Changes in the fair value of a derivative that is
designated and qualifies as a fair value hedge, and that is highly effective, is reported in net interest income, along with the change in the fair value of the hedged item, for the risk hedged. The
changes in fair value of a derivative that does not qualify as a hedge is recognized in earnings.

Hedge
accounting is discontinued prospectively if a) the hedging relationship no longer meets the hedging criterion, b) the derivative expires, is sold or terminated, or
the hedged item no longer exists, or c) the Company removes the hedge designation. When hedge accounting is discontinued under cash flow hedge accounting, the component of OCI related to the
discontinued hedge is amortized to net interest income over the remaining term of the derivative financial instrument. Under fair value hedge accounting, when a hedge is discontinued, the hedged item
is no longer adjusted for changes in fair value and the existing basis adjustment is amortized to net interest income. If cash flow hedge accounting is discontinued due to the probability that the
forecasted transaction will not occur within the specified period, gains and losses accumulated in OCI related to that hedge are recognized immediately in net interest income.

The
Company enters into interest rate derivative contracts that are designated as cash flow hedges of variable-rate liabilities. The unrealized gains or losses related to these contracts
are reported in other assets and other liabilities on the Company's consolidated balance sheet.

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

F-9

---



securities.
The changes in fair value of these fixed price contracts are included as a component of OCI. The unrealized gains and losses are included in other assets and other liabilities on the
Company's consolidated balance sheet.

The
Company enters into foreign exchange contracts with clients and enters into matched or offsetting positions with either another client or a financial institution. These contracts are
subject to market value fluctuations in foreign currencies. Gains and losses from such fluctuations are netted and recorded as an adjustment to asset servicing fees. Unrealized gains 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. Foreign
exchange contracts with the same counterparty are netted in the Company's consolidated balance sheet when 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 liabilities in the consolidated balance sheets. Securities
pledged as collateral under agreements to repurchase are reflected as assets in the accompanying consolidated balance sheets.

Share-based CompensationThe Company measures compensation expense for share-based compensation plans
using the intrinsic value method. The intrinsic value method measures compensation cost as the amount by which the fair market value of the common stock exceeds the option exercise price 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 share-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, except per share data):

December 31,
2004

December 31,
2003

December 31,
2002Net income as reported

$
141,962

$
92,421

$
67,437Deduct: Total share-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects


(15,146
)

(10,467
)

(14,447
)Pro forma net income

$
126,816

$
81,954

$
52,990Earnings per share:Basicas reported

$
2.15

$
1.42

$
1.05Basicpro forma


1.92


1.26


0.82Dilutedas reported

$
2.09

$
1.39

$
1.02Dilutedpro forma


1.87


1.23


0.80


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, 2004, 2003, and 2002, respectively: an average assumed risk-free interest rate of 3.08%, 2.37%, and 2.40%, an expected life of four years, an average expected
volatility of 50.49%, 55.86%, and 56.20%, and average dividend yield of 0.16%, 0.20%, and 0.22%.

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

F-10

---



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.

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

Income

Weighted-Average
Shares

Per Share
AmountDecember 31, 2004Basic EPSIncome available to common stockholders

$
141,962

66,179,286

$
2.15Dilutive effect of common equivalent shares of stock options




1,736,931


(0.06
)Diluted EPS

$
141,962

67,916,217

$
2.09December 31, 2003Basic EPSIncome available to common stockholders

$
92,421

65,098,960

$
1.42Dilutive effect of common equivalent shares of stock options




1,376,502


(0.03
)Diluted EPS

$
92,421

66,475,462

$
1.39December 31, 2002Basic EPSIncome available to common stockholders

$
67,437

64,429,592

$
1.05Dilutive effect of common equivalent shares of stock options




1,942,102


(0.03
)Diluted EPS

$
67,437

66,371,694

$
1.02


For the year ended December 31, 2004, there were 29,451 option shares which were not considered dilutive for earnings per share
calculations. For the year ended December 31, 2003, there were 3,517,655 option shares which were not considered dilutive for earnings per share calculations. For the year ended
December 31, 2002, there were 1,432,575 option shares which were not considered dilutive for earnings per share calculations.

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

F-11

---



initially
recognized in the financial statements. This statement affects the accounting of goodwill, 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, 2004, there was no impairment of goodwill.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004),Share-Based
Payment. SFAS 123R requires that compensation cost relating to share-based payment transactions be recognized in the financial statements, with measurement based upon
the fair value of the equity or liability instruments issued. The Statement is effective as of the beginning of the first interim reporting period that begins after June 15, 2005, and replaces
SFAS No. 123,Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25,Accounting for Stock
Issued to Employees.The Company currently uses the intrinsic-value method to measure compensation cost related to its share-based transactions. The Company will adopt
SFAS 123R in the third quarter of 2005 and is in the process of determining the methodology it will use and the impact on its results of operations and financial condition. The Company does not
anticipate any material impact to its financial condition or results of operations as a result of the adoption of SFAS 123R.

In
March 2004, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on EITF Issue No. 03-1,The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.As originally issued, EITF Issue No. 03-1 was to be effective for all annual or interim financial statements for
periods beginning after June 15, 2004, however, a partial deferral was issued in September 2004. EITF Issue No. 03-1 addresses the identification of other-than-temporarily
impaired investments, and requires that an impairment charge be recognized for other-than-temporarily impaired investments for which there is neither the ability nor intent to hold either until
maturity or until the market value of the investment recovers. The Company continues to monitor the FASB's discussions regarding EITF Issue No. 03-1 and to assess the impact of its application
on the Company's financial condition and results of operations.

F-12

---



3. SECURITIES

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

Held to Maturity

Amortized
Cost

Unrealized
Gains

Unrealized
(Losses)

Fair ValueMortgage-backed securities

$
3,543,961

$
13,269

$
(7,802
)
$
3,549,428Federal agency securities


2,274,665


1,658


(18,443
)

2,257,880State and political subdivisions


124,091


6,090


(27
)

130,154Total

$
5,942,717

$
21,017

$
(26,272
)
$
5,937,462


Available for Sale

Amortized
Cost

Unrealized
Gains

Unrealized
(Losses)

Fair ValueMortgage-backed securities

$
3,848,255

$
21,596

$
(14,951
)
$
3,854,900State and political subdivisions


384,859


20,110


(60
)

404,909Corporate debt


177,201


911


(1,566
)

176,546US Treasury securities


113,843


4,845





118,688Foreign government securities


10,302


160





10,462Total

$
4,534,460

$
47,622

$
(16,577
)
$
4,565,505


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 ValueMortgage-backed securities

$
2,272,030

$
23,089

$
(16,367
)
$
2,278,752Federal agency securities


1,906,554


1,657


(12,800
)

1,895,411State and political subdivisions


127,632


6,890


(107
)

134,415Total

$
4,306,216

$
31,636

$
(29,274
)
$
4,308,578


Available for Sale

Amortized
Cost

Unrealized
Gains

Unrealized
(Losses)

Fair ValueMortgage-backed securities

$
3,593,470

$
28,740

$
(10,230
)
$
3,611,980State and political subdivisions


333,777


22,119


(68
)

355,828Corporate debt


178,394


314


(2,892
)

175,816US Treasury securities


111,305


2,396





113,701Federal agency securities


29,600


9





29,609Foreign government securities


9,644


59





9,703Total

$
4,256,190

$
53,637

$
(13,190
)
$
4,296,637


Nonmarketable equity securities at December 31, 2004 and 2003 consisted of stock of the Federal Home Loan Bank of Boston ("FHLBB"). On
April 19, 2004, the FHLBB implemented a new capital structure mandated for all Federal Home Loan Banks by the Gramm-Leach-Bliley Act of 1999 and regulations that were subsequently promulgated
in 2001 by the FHLBB's regulator, the Federal Housing Finance Board. IBT's capital stock investment in the FHLBB totaled $50 million as of December 31, 2004. The $50 million
capital stock investment includes both a $25 million membership component and a $25 million activity-based component. Under the new capital plan, FHLBB capital stock investments require
a five-year advance notice of withdrawal. The Bank's $50 million capital stock investment in the FHLBB provides a borrowing capacity of approximately $555 million. The amount outstanding
under this arrangement at December 31, 2004 was $250 million. Additional borrowing is available to IBT based on prescribed collateral levels and increased investment in FHLBB capital
stock.

F-13

---



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

December 31, 2004Held to Maturity

Amortized
Cost

Fair ValueDue within one year

$


$
Due from one to five years


35,674


36,152Due five years up to ten years


132,571


133,136Due after ten years


5,774,472


5,768,174Total

$
5,942,717

$
5,937,462


December 31, 2004Available for Sale

Amortized
Cost

Fair ValueDue within one year

$
6,568

$
6,625Due from one to five years


254,457


264,916Due five years up to ten years


279,149


291,558Due after ten years


3,994,286


4,002,406Total

$
4,534,460

$
4,565,505


During
the year ended 2004, the Company sold one security classified as available for sale totaling $25.0 million, using the specific identification method. The book value of the
security was $24.8 million resulting in a gross realized gain of $0.2 million. There were no sales of securities available for sale during the years ended December 31, 2003 and
2002.

The
carrying value of securities pledged amounted to approximately $6.3 billion at December 31, 2004 and $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.

On
a quarterly basis the Company reviews its investment portfolio on a security by security basis for any investment that may be other than temporarily impaired. In its evaluation, the
Company considers the length of time the security has been impaired, the severity of the impairment, the financial
condition and future prospects of the issuer, and the Company's ability and intent to hold the security to maturity or until it recovers in value.

The
unrealized losses related to the Company's investment in mortgage-backed and federal agency securities are attributable to changes in market interest rates. The contractual cash
flows for certain of these securities are guaranteed by agencies of the U.S. government, including government sponsored agencies. As a result, the Company's exposure to the credit risk of these
securities is minimal. At December 31, 2004, there were 590 investment securities that were in unrealized loss positions. The market value decline as a percentage of amortized cost for the
Company's mortgage-backed and Federal agency investment securities portfolio was less than 1% at December 31, 2004. The Company has the intent and ability to hold these securities until
forecasted recovery, which may in some cases be maturity. The Company does not consider these investments to be other than temporarily impaired at December 31, 2004.

Corporate
debt securities include 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. The

F-14

---



unrealized
losses related to the trups portfolio are due to changes in market interest rates. At December 31, 2004, there were five securities that were in unrealized loss positions. The
Company has the intent and ability to hold these securities until forecasted recovery, and does not consider these investments to be other than temporarily impaired at December 31, 2004.

Unrealized
losses related to the Company's investments in state and political securities were due to changes in market interest rates. The Company reviewed the investment securities
credit ratings, which were all Aaa. At December 31, 2004, there were six state and political investment securities in an unrealized loss position. Given the minimal amount of unrealized losses
and the limited amount of credit exposure, the Company does not consider these investments to be other than temporarily impaired at December 31, 2004.

The
following table represents the information about our temporarily impaired investments at December 31, 2004 (Dollars in thousands):

Less than 12 months

12 months or longer

TotalFair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Fair Value

Unrealized
LossesMortgage-backed securities

$
2,518,100

$
15,704

$
545,709

$
7,049

$
3,063,809

$
22,753Federal agency securities


1,446,223


12,332


518,045


6,111


1,964,268


18,443Corporate debt








47,894


1,566


47,894


1,566State and political subdivisions


5,565


15


6,025


72


11,590


87Total temporarily impaired securities:

$
3,969,888

$
28,051

$
1,117,673

$
14,798

$
5,087,561

$
42,849


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

TotalFair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Fair Value

Unrealized
LossesMortgage-backed securities

$
2,216,886

$
26,496

$
8,543

$
101

$
2,225,429

$
26,597Federal agency securities


1,005,518


8,378


600,457


4,422


1,605,975


12,800Corporate debt


25,667


333


46,876


2,559


72,543


2,892State and political subdivisions


9,591


154


154


21


9,745


175Total temporarily impaired securities:

$
3,257,662

$
35,361

$
656,030

$
7,103

$
3,913,692

$
42,464


F-15

---



4. 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, 2004 and 2003. In addition, there have been no loan charge-offs or recoveries during the years ended December 31, 2004, 2003 and 2002.
Loans consisted of the following (Dollars in thousands):

December 31,
2004

December 31,
2003Loans to mutual funds

$
22,520

$
104,954Loans to individuals


69,402


67,641Loans to others


42,708


27,035134,630


199,630Less allowance for loan losses


(100
)

(100
)Total

$
134,530

$
199,530


The
Company had unused commitments to lend of approximately $978.8 million and $759.5 million at December 31, 2004 and 2003, respectively. The terms of these
commitments are similar to the terms of outstanding loans.

5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

December 31,
2004

December 31,
2003Furniture, fixtures and equipment

$
113,204

$
108,278Leasehold improvements


15,696


15,825Total


128,900


124,103Less accumulated depreciation and amortization


(61,017
)

(47,683
)Equipment and leasehold improvements, net

$
67,883

$
76,420


Included
in furniture, fixtures and equipment were capitalized internal software costs of $75.3 million and $61.5 million as of December 31, 2004 and 2003,
respectively. Depreciation expense was $30.1 million, $26.1 million and $14.8 million for the years ended December 31, 2004, 2003 and 2002, respectively. Amortization
expense was $2.0 million, $1.9 million and $1.6 million for the years ended December 31, 2004, 2003 and 2002, respectively.

F-16

---



6. DEPOSITS

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

December 31,
2004

December 31,
2003Interest-bearing deposits:Savings

$
4,362,895

$
3,632,913Time


97,669


Total interest-bearing deposits


4,460,564


3,632,913Noninterest-bearing deposits:Demand


690,308


334,823Savings


85,510


49,382Time


160,000


190,000Total noninterest-bearing deposits


935,818


574,205Total

$
5,396,382

$
4,207,118


Time
deposits with balances greater than $100,000 totaled $257.6 million and $190.0 million at December 31, 2004 and 2003, respectively. All time deposits had a
maturity of less than three months at December 31, 2004 and 2003.

7. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

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

|                                       |  | December 31,
2004 |           | December 31,
2003 |   | December 31,
2002 |  
|-------------------------------------- |  | ----------------- | --------- | ----------------- | - | ----------------- | -
|Outstanding at end of period           |  | $                 | 4,255,497 |                   | $ | 3,258,001         |  
|Maximum outstanding at any month end   |  |                   | 4,749,456 |                   |   | 3,546,131         |  
|Average balance for the year           |  |                   | 4,162,132 |                   |   | 3,278,555         |  
|Weighted-average rate at end of period |  |                   | 1.98      | %                 |   | 1.09              | %
|Weighted-average rate for the period   |  |                   | 1.31      | %                 |   | 0.90              | %

Approximately
$4.3 billion and $3.4 billion of securities were pledged to collateralize repurchase agreements as of December 31, 2004 and 2003, respectively. The
Company has Master Repurchase Agreements in place with various counterparties to make funds available to us at various rates in exchange for collateral consisting of marketable securities. The
aggregate amounts of these borrowing arrangements as of December 31, 2004 and 2003 were $5.6 billion and $3.9 billion, respectively, of which $1.3 billion and
$0.6 billion, respectively, were available at December 31, 2004 and 2003.

F-17

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8. SHORT-TERM AND OTHER BORROWINGS

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

December 31,
2004

December 31,
2003Federal funds purchased

$
344,491

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


200,000


Federal Home Loan Bank of Boston overnight advances





250,000Federal Home Loan Bank of Boston long-term advances


50,000


150,000Treasury, Tax and Loan account


190


232Total

$
594,681

$
1,098,087


For
the years ended December 31, 2004 and 2003, maturities on FHLBB advances ranged from overnight to September 2006. The Company has borrowing arrangements with the FHLBB
and the Federal Reserve Discount Window, which have been utilized on an overnight and long-term basis to satisfy funding requirements. Approximately $1.6 billion and $1.9 billion of
securities were pledged to collateralize these advances as of December 31, 2004 and 2003, respectively. The Company has informal borrowing arrangements with various counterparties to make funds
available to the Company at the Federal Funds overnight rate. The aggregate amounts of these borrowing arrangements at December 31, 2004 and 2003 were $3.2 billion and
$2.4 billion, respectively, of which $2.9 billion and $1.7 billion, respectively, were available at December 31, 2004 and 2003.

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

|                                       |  | December 31,
2004 |         | December 31,
2003 |   | December 31,
2002 |  
|-------------------------------------- |  | ----------------- | ------- | ----------------- | - | ----------------- | -
|Outstanding at end of period           |  | $                 | 344,491 |                   | $ | 697,855           |  
|Maximum outstanding at any month end   |  |                   | 739,038 |                   |   | 697,855           |  
|Average balance for the year           |  |                   | 491,170 |                   |   | 432,490           |  
|Weighted-average rate at end of period |  |                   | 1.94    | %                 |   | 0.99              | %
|Weighted-average rate for the period   |  |                   | 1.45    | %                 |   | 1.14              | %

F-18

---



9. INCOME TAXES

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

December 31,
2004

December 31,
2003

December 31,
2002Current:Federal

$
62,690

$
32,752

$
24,172State


5,892


14,310


532Foreign


1,247


52


6169,829


47,114


24,765Deferred:Federal


3,413


5,989


3,972State


94


(338
)

Foreign


(510
)




2,997


5,651


3,972Total income taxes

$
72,826

$
52,765

$
28,737


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

December 31,
2004

December 31,
2003

December 31,
2002Federal statutory rate

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

1.81

6.25

0.35Tax-exempt income, net of disallowance

(3.61
)
(4.89
)
(6.12
)Other

0.71

(0.01
)
0.66Effective tax rate

33.91
%
36.35
%
29.89
%


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, the Company recorded an additional state tax expense of approximately $7.2 million, net of federal income
tax benefit, in 2003.

F-19

---



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,
2004

December 31,
2003Deferred tax assets:Employee benefit plans

$
3,883

$
3,190Other


1,350


4415,233


3,631Deferred tax liabilities:Unrealized hedging (gain) loss


(2,306
)

4,723Depreciation and amortization


(9,882
)

(8,266
)Undistributed income of foreign subsidiaries


(6,160
)

(2,887
)Pension plan


(1,172
)

(1,462
)Securities available for sale


(10,162
)

(14,469
)(29,682
)

(22,361
)Net deferred tax liability

$
(24,449
)
$
(18,730
)


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

On January 31, 1997, Investors Capital Trust I, ("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 its shareholders. In 2002, the Company repurchased $1.0 million of the Capital Securities.

F-20

---



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 during 2003 that ICTI was not consolidated is considered immaterial.

11. STOCKHOLDERS' EQUITY

As of December 31, 2004, the Company has authorized 1,000,000 shares of Preferred Stock and 175,000,000 shares of Common Stock, all with a par value of
$0.01 per share.

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.

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

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

At
the Annual Meeting of Stockholders of the Company held on April 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, 2004, 3,431,750 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, 2004.

The
terms of the Director Plan provide for the grant of options to non-employee directors to purchase up to a maximum of 800,000 shares of Common Stock. Of the 800,000 shares of Common
Stock authorized for issuance under the plan, 64,995 were available for grant at December 31, 2004.

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.

F-21

---



The
Director Plan provides 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 5,000 shares of the Company's Common Stock. Options granted under the Director Plan will vest in 36 equal monthly
installments beginning on the date of grant, subject to certain restrictions.

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.

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

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 2004 and 2003, the Company cancelled 5,600 and 1,200 options,
respectively, relating to the unvested portion for employees 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 $0.6 million and $1.1 million at December 31, 2004 and 2003, respectively, related to the grants described in the
above three paragraphs. Amortization of deferred compensation was $316,000, $483,000, and $964,000 for the years ended December 31, 2004, 2003, and 2002, respectively.

F-22

---



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

|                                        |  | December 31, 2004 |   | December 31, 2003 |    | December 31, 2002
|--------------------------------------- |  | ----------------- | - | ----------------- | -- | -----------------
|
|Outstanding at beginning of year        |  | 6,547,086         |   | $                 | 24 |                  
|Granted                                 |  | 902,558           |   |                   | 41 |                  
|Exercised                               |  | (1,396,211        | ) |                   | 20 |                  
|Canceled                                |  | (124,081          | ) |                   | 32 |                  
|                                        |  |                   |   |                   |    |                  
|Outstanding at end of year              |  | 5,929,352         |   |                   | 28 |                  
|                                        |  |                   |   |                   |    |                  
|Outstanding and exercisable at year end |  | 4,949,879         |   |                   |    |                  
|                                        |  |                   |   |                   |    |                  

The
following table summarizes information about stock options outstanding at December 31, 2004:

|      |  | Options Outstanding |  |           |  |  
|----- |  | ------------------- |  | --------- |  | -
|
|
|
|$010 |  | 771,898             |  | 3.3 years |  | $
|1020 |  | 790,749             |  | 4.2       |  |  
|2030 |  | 82,072              |  | 6.1       |  |  
|3040 |  | 3,407,757           |  | 6.9       |  |  
|4050 |  | 876,876             |  | 9.3       |  |  
|      |  |                     |  |           |  |  
|      |  | 5,929,352           |  | 6.4       |  |  
|      |  |                     |  |           |  |  

Under
the terms of the 1997 Employee Stock Purchase Plan, the Company may issue up to 1,620,000 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 shares is as follows:

December 31,2004

2003

2002Total shares available under the plan beginning of year

227,504

356,875

500,764Approved increase in shares available

500,000



Issued at June 30

(47,681
)
(70,606
)
(61,193
)Issued at December 31

(43,556
)
(58,765
)
(82,696
)Total shares available under the plan end of year

636,267

227,504

356,875


F-23

---



During
the year ended December 31, 2004, the purchase prices of the stock were $35.00 and $38.75, or 90% of the market value of the Common Stock on the first business day of the
payment periods ending June 30, 2004 and December 31, 2004, respectively.

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.

12. 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, 2004, 2003 and 2002 are as follows (Dollars in thousands):

|                                                         |                            | Pre-tax
Amount |         | Tax (Expense)
Benefit |   | After-tax
Amount |       
|-------------------------------------------------------- | -------------------------- | -------------- | ------- | --------------------- | - | ---------------- | ------
|2004                                                     |                            |                |         |                       |   |                  |       
|Unrealized losses on securities:                         |                            |                |         |                       |   |                  |       
|Unrealized holding losses arising during the period      |                            | $              | (9,402  | )                     | $ | 3,284            |       
|Other                                                    |                            |                | (2,671  | )                     |   | 935              |       
|                                                         |                            |                |         |                       |   |                  |       
|                                                         | Net unrealized losses      |                |         | (12,073               | ) |                  | 4,219 
|Net unrealized derivative instrument gain                |                            |                | 19,958  |                       |   | (6,985           | )     
|Amortization of terminated interest rate swap agreements |                            |                | 89      |                       |   | (31              | )     
|Currency translation adjustment                          |                            |                | 846     |                       |   |                 |       
|                                                         |                            |                |         |                       |   |                  |       
|                                                         | Other comprehensive income |                | $       | 8,820                 |   | $                | (2,797
|                                                         |                            |                |         |                       |   |                  |       
|2003                                                     |                            |                |         |                       |   |                  |       
|Unrealized losses on securities:                         |                            |                |         |                       |   |                  |       
|Unrealized holding losses arising during the period      |                            | $              | (18,006 | )                     | $ | 6,046            |       
|Other                                                    |                            |                | (1,542  | )                     |   | 539              |       
|                                                         |                            |                |         |                       |   |                  |       
|                                                         | Net unrealized losses      |                |         | (19,548               | ) |                  | 6,585 
|Net unrealized derivative instrument gain                |                            |                | 17,663  |                       |   | (5,878           | )     
|Amortization of transition related adjustment            |                            |                | 361     |                       |   | (127             | )     
|Currency translation adjustment                          |                            |                | 577     |                       |   |                 |       
|                                                         |                            |                |         |                       |   |                  |       
|                                                         | Other comprehensive income |                | $       | (947                  | ) | $                | 580   
|                                                         |                            |                |         |                       |   |                  |       
|                                                         |                            |                |         |                       |   |                  |       

F-24

---



|2002                                               |                            |   |         |        |   |         |         |   |         |       
|-------------------------------------------------- | -------------------------- | - | ------- | ------ | - | ------- | ------- | - | ------- | ------
|Unrealized gains on securities:                    |                            |   |         |        |   |         |         |   |         |       
|Unrealized holding gains arising during the period |                            | $ | 49,556  |        | $ | (17,612 | )       | $ | 31,944  |       
|                                                   |                            |   |         |        |   |         |        
|                                                   | Net unrealized gains       |   |         | 49,556 |   |         | (17,612 | ) |         | 31,944
|Net unrealized derivative instrument loss          |                            |   | (17,122 | )      |   | 5,993   |         |   | (11,129 | )     
|Amortization of transition related adjustment      |                            |   | 2,482   |        |   | (869    | )       |   | 1,613   |       
|                                                   |                            |   |         |        |   |         |        
|                                                   | Other comprehensive income |   | $       | 34,916 |   | $       | (12,488 | ) | $       | 22,428
|                                                   |                            |   |         |        |   |         |        

13. EMPLOYEE BENEFIT PLANS

Pension PlanThe Company has a trusteed, noncontributory, qualified defined benefit pension plan
covering substantially all of its employees who were hired before January 1, 1997. The benefits are based on years of service and the employee's compensation during employment. 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, 2002, 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 plan document was also amended in December 2004 to freeze benefit accruals for certain highly compensated
participants as of December 31, 2004. 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-25

---





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, 2004      |        | December 31, 2003 |       
|----------------------------- | --------------------------------------------------- | ---------------------- | ------ | ----------------- | ------
|
|Change in benefit obligation: |                                                     |                        |        |                   |       
|                              | Benefit obligation at beginning of year             |                        | $      | 18,050            |       
|                              | Service cost                                        |                        |        | 927               |       
|                              | Interest cost                                       |                        |        | 1,110             |       
|                              | Actuarial loss                                      |                        |        | 3,282             |       
|                              | Benefits paid                                       |                        |        | (1,228            | )     
|                              |                                                     |                        |        |                   |       
|                              | Projected benefit obligation at the end of the year |                        |        | 22,141            |       
|                              |                                                     |                        |        |                   |       
|Change in plan assets:        |                                                     |                        |        |                   |       
|                              | Assets at the beginning of the year                 |                        |        | 17,246            |       
|                              |                                                     | Employer contributions |        |                   |      
|                              |                                                     | Actual return          |        |                   | 1,167 
|                              |                                                     | Benefits paid          |        |                   | (1,228
|                              |                                                     |                        |        |                   |       
|                              | Assets at the end of the year                       |                        |        | 17,185            |       
|                              |                                                     |                        |        |                   |       
|Funded status                 |                                                     |                        | (4,956 | )                 |       
|                              |                                                     |                        |        |                   |       
|                              | Unrecognized net transition asset                   |                        |        | (67               | )     
|                              | Unrecognized prior service cost                     |                        |        | (296              | )     
|                              | Unrecognized net loss                               |                        |        | 8,668             |       
|                              |                                                     |                        |        |                   |       
|Net amount recognized         |                                                     | $                      | 3,349  |                   | $     
|                              |                                                     |                        |        |                   |       

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

December 31, 2004

December 31, 2003Pension Plan

SERP

Pension Plan

SERPPrepaid benefit cost

$
3,349

$


$
4,176

$
Accrued benefit cost





(14,019
)




(8,285
)Intangible assets





2,454





2,496Accumulated other comprehensive income





3,263





Net amount recognized

$
3,349

$
(8,302
)
$
4,176

$
(5,789
)


The
accumulated benefit obligation for the qualified defined benefit pension plan was $16.0 million and $13.0 million at December 31, 2004 and 2003, respectively.
The accumulated benefit obligation for the supplemental retirement plan was $14.0 million and $8.3 million at December 31, 2004 and 2003, respectively.

F-26

---



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, 2004

December 31, 2003Pension Plan

SERP

Pension Plan

SERPService costbenefits earned/benefit obligations

$
927

$
953

$
834

$
878Interest cost on projected benefit obligations


1,110


969


1,025


898Expected return on plan assets


(1,450
)




(1,085
)

Net amortization and deferral


240


591


248


649Net periodic pension cost

$
827

$
2,513

$
1,022

$
2,425


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, 2004

December 31, 2003Pension Plan

SERP

Pension Plan

SERPDiscount rate

5.80
%
5.80
%
6.25
%
6.25
%Rate of compensation increases

4.00

4.00-10.00

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, 2004

December 31, 2003Pension Plan

SERP

Pension Plan

SERPDiscount rate

6.25
%
6.25
%
6.75
%
6.75
%Rate of compensation increases

3.75

3.75

3.75

3.75Expected rate of return on plan assets

8.50



8.50




The
Company has utilized an expected rate of return on plan assets of 8.5% which is consistent with the weighted-average of the historical return indices for specific portfolio assets.

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

Asset Category

December 31,
2004

December 31,
2003Cash and short-term investments

0.5
%
23.3
%Equity securities

69.2

60.0Debt securities

30.3

16.7Total

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.

F-27

---



Cash
and short-term investments represent money market funds at December 31, 2004 and 2003. 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 diversified with no more than 10% of the portfolio invested in any one particular
industry at December 31, 2004 and 2003. Debt securities offer a source of current income and reduce the variability of the portfolio's total market value. Fixed income investments were limited
to issues by the United States Government and its agencies, and investment grade corporate bonds at December 31, 2004 and 2003. The pension trust was in full compliance with the approved
pension objectives and policies for the years ended December 31, 2004 and 2003. At December 31, 2004 and 2003, the pension did not hold any securities of the Company.

The
Company expects to contribute up to $4 million to its pension plan during 2005.

At
December 31, 2004 and 2003, the SERP plan remained an unfunded plan. The Company does not expect to contribute to the plan during 2005.

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 for the years
ended December 31, 2004, 2003 and 2002.

14. OFF BALANCE SHEET FINANCIAL INSTRUMENTS

Lines of CreditAt December 31, 2004, the Company had commitments to individuals and mutual
funds under collateralized open lines of credit totaling $1.1 billion, against which $89.9 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, 2004 totaled
$4.9 billion while the fair value of the portfolio totaled approximately $4.7 billion. Given that the collateral held was in excess of the value of the securities that the Company would
be required to replace if the borrower defaulted and failed to return such securities, the Company's indemnification obligation was zero and no liability was recorded.

All
securities loans are categorized as overnight loans. The maximum potential amount of future payments that the Company could be required to make would be equal to the market value of
the securities borrowed. Since the securities loans are overcollateralized by 2% (for U.S. dollar-denominated securities) to 5% (for non-U.S. dollar-denominated securities) of the fair market value of

F-28

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

15. 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. As of December 31, 2004, the credit risk related to the Company's interest rate contracts was approximately
$1.8 million.

The
Company enters into pay-fixed/receive-floating interest rate swap agreements. These instruments have been designated as cash flow hedges of variable-rate liabilities. The contractual
or notional amounts of the interest rate swap agreements held by the Company were approximately $1.6 billion and $1.2 billion at December 31, 2004 and 2003, respectively. These
contracts had net fair values of approximately $1.5 million and $(14.9) million at December 31, 2004 and 2003, 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 17 for additional information on the fair value of the interest rate contracts.

For
the year ended December 31, 2004, the Company recognized net pre-tax gains of $4.1 million, which represented the total ineffectiveness for all cash flow hedges. For
the years ended December 31, 2003 and 2002, total ineffectiveness related to cash flow hedges had an insignificant impact on earnings.

As
of December 31, 2004, the Company expects that approximately $3.3 million of deferred net after-tax gains on derivative contracts included in other comprehensive income
will be reclassified to net interest income within the next twelve months. This expectation is based on the net discounted cash flows from derivative instruments hedging short-term variable-rate
liabilities, as well as the amortization of gains from the termination of cash flow hedging derivatives.

Foreign Exchange ContractsForeign exchange contracts involve an agreement to exchange the currency of
one country for the currency of another country at an agreed-upon rate and settlement date. Foreign exchange contracts consist of spot, forward and swap contracts. Spot contracts call for the exchange
of one currency for another and usually settle in two business days. Forward contracts call for the exchange of one currency for another at a date beyond spot. In a currency swap, the holder of a
currency transacts simultaneously both a spot and a forward transaction in that currency for an equivalent amount of another currency to get temporary liquidity in the currency owned. The Company's
risk from foreign exchange contracts results from the possibility that one party may default on its contractual obligation or from movements in exchange rates. Credit risk is limited to the positive
market value of the derivative financial instrument, which is significantly less than the notional value. The notional value of the Company's foreign exchange contracts as of December 31, 2004
and 2003 was

F-29

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$6.9 billion
and $1.6 billion, respectively. As of December 31, 2004, the British Pound foreign exchange contracts represented approximately 43% of the notional value outstanding.
As of December 31, 2003, the Euro foreign exchange contracts represented approximately 31% of the notional value outstanding. 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
$99.6 million and $16.1 million as of December 31, 2004 and 2003, respectively. Unrealized losses in other liabilities were $98.5 million and $15.9 million as of
December 31, 2004 and 2003, respectively. See also Note 17 for additional information on the fair value of our foreign exchange contracts. Foreign exchange contracts with the same
counterparty are netted in the Company's consolidated balance sheet when 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, 2004 and 2003, the Company had $672.2 million and $792.1 million, respectively, of fixed price purchase contracts outstanding to purchase
investment securities. Changes in fair value of these cash flow hedges are included as a component of other comprehensive income.

16. COMMITMENTS AND CONTINGENCIES

Restrictions on Cash BalancesThe Company is required to maintain certain average cash reserve
balances. The average required reserve balance with the Federal Reserve Bank ("FRB") for the two-week period including December 31, 2004 was approximately $30.6 million. In addition, the
Company's other assets category includes deposits totaling $27.1 million, which were pledged to secure clearings with depository institutions.

Lease CommitmentsMinimum future commitments on noncancelable operating leases at December 31,
2004 were as follows (Dollars in thousands):

Fiscal Year Ending

Bank Premises

Equipment

Total2005

$
25,561

$
4,733

$
30,2942006


25,722


2,116


27,8382007


22,485


511


22,9962008


10,491


19


10,5102009 and beyond


31,265


1


31,266Total

$
115,524

$
7,380

$
122,904


Total
rent expense was approximately $33.4 million, $36.1 million and $34.5 million for the years ended December 31, 2004, 2003 and 2002, respectively.

Effective
January 1, 2001, the Company renewed its five-year service agreement with Electronic Data Systems ("EDS"), which 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 $8.3 million,
$7.7 million and $7.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.

In
2004, the Company renewed its agreement with SEI Investments Company ("SEI"), which now expires on December 31, 2009. Under the terms of this agreement, SEI provides data
processing

F-30

---



services
to the Company, which has agreed to pay certain monthly service fees based upon usage. Service expense under this contract was $5.0 million, $4.9 million and $5.2 million
for the years ended December 31, 2004, 2003 and 2002, respectively.

In
2004, the Company signed a service agreement with International Business Machines Corporation ("IBM"). Under the terms of this agreement, IBM provides help desk, identification
administration, network management, deskside services, server monitoring and management, on demand computing services and webhosting to the Company, which has agreed to pay certain monthly services
fees based upon usage. This agreement expires June 30, 2011. Service expense under this contract, which commenced in the summer of 2004, was $9.5 million for the year ended
December 31, 2004.

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 middle office outsourcing, global custody, multicurrency accounting and fund
administration. Value-added services include securities lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment advisory services, lines of
credit 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, 2004 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, 2004, the Company does not expect this matter to have a material adverse effect on its business, financial condition or
results of operations.

F-31

---



17. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

December 31, 2004

December 31, 2003Carrying
Amount

Fair
Value

Carrying
Amount

Fair
ValueFinancial Assets:Cash and due from banks

$
49,059

$
49,059

$
39,689

$
39,689Securities held to maturity


5,942,717


5,937,462


4,306,216


4,308,578Securities available for sale


4,565,505


4,565,505


4,296,637


4,296,637Loans, net of allowance


134,530


134,530


199,530


199,530Interest rate contracts


1,849


1,849


158


158Foreign exchange contracts


99,576


99,576


16,114


16,114Financial Liabilities:Deposits

$
5,396,382

$
5,396,382

$
4,207,118

$
4,207,118Securities sold under repurchase agreements


4,255,497


4,197,590


3,258,001


3,261,227Short-term & other borrowings


594,681


594,411


1,098,087


1,102,449Interest rate contracts


310


310


15,103


15,103Foreign exchange contracts


98,531


98,531


15,901


15,901


The
fair value estimates presented herein are based on pertinent information available to management as of December 31, 2004 and 2003. 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 the 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.

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.

F-32

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18. REGULATORY MATTERS

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

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

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

|                         |                                       | Actual |   | For Capital
Adequacy Purposes: |  | To Be Well
Capitalized Under
Prompt Corrective
Action Provisions: |  
|------------------------ | ------------------------------------- | ------ | - | ------------------------------ |  | ----------------------------------------------------------------- | -
|
|As of December 31, 2004: |                                       |        |   |                                |  |                                                                   |  
|Total Capital            |                                       |        |   |                                |  |                                                                   |  
|                         | (to Risk-Weighted Assetsthe Company) |        | $ | 636,219                        |  | 20.54                                                             | %
|                         | (to Risk-Weighted Assetsthe Bank)    |        | $ | 618,166                        |  | 19.98                                                             | %
|Tier 1 Capital           |                                       |        |   |                                |  |                                                                   |  
|                         | (to Risk-Weighted Assetsthe Company) |        | $ | 636,119                        |  | 20.54                                                             | %
|                         | (to Risk-Weighted Assetsthe Bank)    |        | $ | 618,066                        |  | 19.97                                                             | %
|Tier 1 Capital           |                                       |        |   |                                |  |                                                                   |  
|                         | (to Average Assetsthe Company)       |        | $ | 636,119                        |  | 5.85                                                              | %
|                         | (to Average Assetsthe Bank)          |        | $ | 618,066                        |  | 5.68                                                              | %
|As of December 31, 2003: |                                       |        |   |                                |  |                                                                   |  
|Total Capital            |                                       |        |   |                                |  |                                                                   |  
|                         | (to Risk-Weighted Assetsthe Company) |        | $ | 467,651                        |  | 17.62                                                             | %
|                         | (to Risk-Weighted Assetsthe Bank)    |        | $ | 462,073                        |  | 17.42                                                             | %
|Tier 1 Capital           |                                       |        |   |                                |  |                                                                   |  
|                         | (to Risk-Weighted Assetsthe Company) |        | $ | 467,551                        |  | 17.61                                                             | %
|                         | (to Risk-Weighted Assetsthe Bank)    |        | $ | 461,973                        |  | 17.42                                                             | %
|Tier 1 Capital           |                                       |        |   |                                |  |                                                                   |  
|                         | (to Average Assetsthe Company)       |        | $ | 467,551                        |  | 5.36                                                              | %
|                         | (to Average Assetsthe Bank)          |        | $ | 461,973                        |  | 5.29                                                              | %

F-33

---



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 SEC and the NASD. Management believes, as of December 31, 2004, that Investors Securities Services, Inc. met all requirements to which it is subject.

19. NET INTEREST INCOME

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

|                  |                                                                    | December 31,          
|----------------- | ------------------------------------------------------------------ | ----------------------
|
|Interest income:  |                                                                    |                       
|                  | Federal funds sold and securities sold under repurchase agreements |                       
|                  | Investment securities held to maturity and available for sale      |                       
|                  | Loans                                                              |                       
|                  |                                                                    |                       
|                  |                                                                    | Total interest income 
|                  |                                                                    |                       
|Interest expense: |                                                                    |                       
|                  | Deposits                                                           |                       
|                  | Short-term and other borrowings                                    |                       
|                  |                                                                    |                       
|                  |                                                                    | Total interest expense
|                  |                                                                    |                       
|                  |                                                                    |                       
|                  |                                                                    |                       

F-34

---



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

|Year Ended December 31, 2004 |  | First
Quarter |         | Second
Quarter |   | Third
Quarter |  | Fourth
Quarter
|---------------------------- |  | ------------- | ------- | -------------- | - | ------------- |  | --------------
|Noninterest income           |  | $             | 106,770 |                | $ | 109,741       |  | $             
|Interest income              |  |               | 73,636  |                |   | 69,140        |  |               
|Interest expense             |  |               | 25,215  |                |   | 27,065        |  |               
|Operating expenses           |  |               | 100,134 |                |   | 100,700       |  |               
|Income before income taxes   |  |               | 55,057  |                |   | 51,116        |  |               
|Income taxes                 |  |               | 18,504  |                |   | 17,120        |  |               
|Net income                   |  |               | 36,553  |                |   | 33,996        |  |               
|Basic earnings per share     |  |               | 0.56    |                |   | 0.51          |  |               
|Diluted earnings per share   |  |               | 0.54    |                |   | 0.50          |  |               

|Year Ended December 31, 2003 |  | First
Quarter |        | Second
Quarter |   | Third
Quarter |  | Fourth
Quarter
|---------------------------- |  | ------------- | ------ | -------------- | - | ------------- |  | --------------
|Noninterest income           |  | $             | 74,916 |                | $ | 84,393        |  | $             
|Interest income              |  |               | 61,058 |                |   | 61,054        |  |               
|Interest expense             |  |               | 21,566 |                |   | 23,623        |  |               
|Operating expenses           |  |               | 85,719 |                |   | 90,953        |  |               
|Income before income taxes   |  |               | 28,689 |                |   | 30,871        |  |               
|Income taxes                 |  |               | 22,822 |                |   | 2,947         |  |               
|Net income                   |  |               | 5,867  |                |   | 27,924        |  |               
|Basic earnings per share     |  |               | 0.09   |                |   | 0.43          |  |               
|Diluted earnings per share   |  |               | 0.09   |                |   | 0.42          |  |               

F-35

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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  |  | $                                                      | 579,168 |  | $ | 468,724
|Ireland        |  |                                                        | 28,835  |  |   | 18,601 
|Canada         |  |                                                        | 4,989   |  |   | 2,579  
|Cayman Islands |  |                                                        | 179     |  |   | 203    
|               |  |                                                        |         |  |   |        
|Total          |  | $                                                      | 613,171 |  | $ | 490,107
|               |  |                                                        |         |  |   |        

BGI
accounted for 17%, 16% and 16% of the Company's consolidated net operating revenues for the years ended December 31, 2004, 2003 and 2002, respectively. No client other than
BGI accounted for more than 10% of the Company's consolidated net operating revenues in the years ended December 31, 2004, 2003 and 2002.

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                   |                                        | $                               
|                        |                                        |                                 

F-36

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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, 2004 |         | December 31, 2003 |   | December 31, 2002 |  
|---------------------------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | ----------------- | -
|Equity in undistributed income of bank subsidiary                      |  | $                 | 144,595 |                   | $ | 95,088            |  
|Equity in undistributed income (loss) of nonbank subsidiary            |  |                   |        |                   |   | 278               |  
|Equity in undistributed loss of unconsolidated nonbank subsidiary      |  |                   | (28     | )                 |   | (8                | )
|Dividend income from nonbank subsidiaries                              |  |                   |        |                   |   | 57                |  
|Dividend income from unconsolidated nonbank subsidiary                 |  |                   | 76      |                   |   | 19                |  
|Management fee paid by nonbank subsidiaries                            |  |                   |        |                   |   |                  |  
|Interest expense on junior subordinated deferrable interest debentures |  |                   | (2,420  | )                 |   | (2,420            | )
|Operating expenses                                                     |  |                   | (1,703  | )                 |   | (2,214            | )
|Income tax benefit                                                     |  |                   | 1,442   |                   |   | 1,621             |  
|                                                                       |  |                   |         |                   |   |                   |  
|Net Income                                                             |  | $                 | 141,962 |                   | $ | 92,421            |  
|                                                                       |  |                   |         |                   |   |                   |  

|Balance Sheets                             |                                             | December 31, 2004          |         | December 31, 2003 |        
|------------------------------------------ | ------------------------------------------- | -------------------------- | ------- | ----------------- | -------
|Assets:                                    |                                             |                            |         |                   |        
|                                           | Cash                                        |                            | $       | 14,312            |        
|                                           | Investments in bank subsidiary              |                            |         | 720,501           |        
|                                           | Investments in nonbank subsidiaries         |                            |         | 738               |        
|                                           | Receivable due from bank subsidiary         |                            |         | 2,035             |        
|                                           | Other assets                                |                            |         | 650               |        
|                                           |                                             |                            |         |                   |        
|Total Assets                               |                                             | $                          | 738,236 |                   | $      
|                                           |                                             |                            |         |                   |        
|Liabilities and Stockholders' Equity       |                                             |                            |         |                   |        
|Liabilities:                               |                                             |                            |         |                   |        
|                                           | Accrued expenses                            |                            | $       | 43                |        
|                                           | Payable due to nonbank subsidiary           |                            |         | 1,157             |        
|                                           | Subordinated debt                           |                            |         | 24,774            |        
|                                           |                                             |                            |         |                   |        
|                                           |                                             | Total liabilities          |         |                   | 25,974 
|                                           |                                             |                            |         |                   |        
|Stockholders' Equity:                      |                                             |                            |         |                   |        
|                                           | Common stock                                |                            |         | 667               |        
|                                           | Surplus                                     |                            |         | 272,536           |        
|                                           | Deferred compensation                       |                            |         | (572              | )      
|                                           | Retained earnings                           |                            |         | 418,034           |        
|                                           | Accumulated other comprehensive income, net |                            |         | 23,888            |        
|                                           | Treasury stock                              |                            |         | (2,291            | )      
|                                           |                                             |                            |         |                   |        
|                                           |                                             | Total stockholders' equity |         |                   | 712,262
|                                           |                                             |                            |         |                   |        
|Total Liabilities and Stockholders' Equity |                                             | $                          | 738,236 |                   | $      
|                                           |                                             |                            |         |                   |        

F-37

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|Statements of Cash Flows                                                      |                                                                                                   | December 31,
2004                      |        | December 31,
2003 |      | December 31,
2002 |        
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------- | ------ | ----------------- | ---- | ----------------- | -------
|Cash flows from operating activities:                                         |                                                                                                   |                                        |        |                   |      |                   |        
|                                                                              | Net income                                                                                        |                                        | $      | 141,962           |      | $                 | 92,421 
|Adjustments to reconcile net income to net cash used by operating activities: |                                                                                                   |                                        |        |                   |      |                   |        
|                                                                              | Amortization of deferred compensation                                                             |                                        |        | 316               |      |                   | 483    
|                                                                              | Amortization of premium expense                                                                   |                                        |        | 28                |      |                   | 195    
|                                                                              | Change in assets and liabilities:                                                                 |                                        |        |                   |      |                   |        
|                                                                              |                                                                                                   | Receivable due from bank subsidiary    |        |                   | (376 | )                 |        
|                                                                              |                                                                                                   | Receivable due from nonbank subsidiary |        |                   |     |                   |        
|                                                                              |                                                                                                   | Income tax receivable                  |        |                   | 484  |                   |        
|                                                                              |                                                                                                   | Other assets                           |        |                   | (8   | )                 |        
|                                                                              |                                                                                                   | Payable due to nonbank subsidiary      |        |                   |     |                   |        
|                                                                              |                                                                                                   | Accrued expenses                       |        |                   | (13  | )                 |        
|                                                                              | Equity in undistributed income of bank subsidiary                                                 |                                        |        | (144,595          | )    |                   | (95,088
|                                                                              | Equity in undistributed (income) loss of nonbank subsidiary                                       |                                        |        |                  |      |                   | (278   
|                                                                              | Equity in undistributed loss of unconsolidated nonbank subsidiary                                 |                                        |        | 28                |      |                   | 8      
|                                                                              |                                                                                                   |                                        |        |                   |      |                   |        
|Net cash used in operating activities                                         |                                                                                                   |                                        | (2,174 | )                 |      | (1,493            | )      
|                                                                              |                                                                                                   |                                        |        |                   |      |                   |        
|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                                                           |                                        |        | 16,068            |      |                   | 2,977  
|                                                                              | Proceeds from issuance of common stock                                                            |                                        |        | 3,355             |      |                   | 3,387  
|                                                                              | Common stock repurchased                                                                          |                                        |        | (1,741            | )    |                   | (550   
|                                                                              | Cost of issuance of restricted stock                                                              |                                        |        |                  |      |                   |       
|                                                                              | Repurchase of company-obligated, mandatorily redeemable, preferred securities of subsidiary trust |                                        |        |                  |      |                   |       
|                                                                              | Dividends paid                                                                                    |                                        |        | (4,629            | )    |                   | (3,904 
|                                                                              |                                                                                                   |                                        |        |                   |      |                   |        
|Net cash provided by financing activities                                     |                                                                                                   |                                        | 13,053 |                   |      | 1,910             |        
|                                                                              |                                                                                                   |                                        |        |                   |      |                   |        
|Net increase (decrease) in cash and due from banks                            |                                                                                                   |                                        | 10,879 |                   |      | 417               |        
|Cash and due from banks, beginning of year                                    |                                                                                                   |                                        | 3,433  |                   |      | 3,016             |        
|                                                                              |                                                                                                   |                                        |        |                   |      |                   |        
|Cash and due from banks, end of year                                          |                                                                                                   | $                                      | 14,312 |                   | $    | 3,433             |        
|                                                                              |                                                                                                   |                                        |        |                   |      |                   |        

F-38

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