**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

**FORM 10-K**

| **(Mark One)**                                                | ** **                                                                                                   |
|---------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
| **x**                                                         | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
| **For the  fiscal year ended December 31, 2005**

**OR** |
| **o**                                                         | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transitionperiod from ____________ to ____________**

**Commission FileNumber 0-26996**

**INVESTORSFINANCIAL SERVICES CORP.**

(Exact name of registrant as specified in its charter)

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

 

**Registrant’stelephone number, including area code: (617) 937-6700**

**Securitiesregistered pursuant to Section 12(b) of the Act:**

**None**

**Securitiesregistered pursuant to Section 12(g) of the Act:**

**Common Stock, $.01Par Value**

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes x  No* *o

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Act. Yes* *o  No x  

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No* *o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler” and “large accelerated filer” in Rule 12b-2 of the ExchangeAct.

Largeaccelerated filer   x*     *Accelerated filer* *o      Non-accelerated filer*  *o

Indicateby check mark whether the registrant is a shell company (as defined in ExchangeAct Rule 12b-2). Yes* *o  No x  

Theaggregate market value of common stock held by non-affiliates of the registrantwas $2,431,820,932 based on the last reported sale price of $37.82 on TheNasdaq National Market on June 30, 2005 as reported by Nasdaq.

As ofJanuary 31, 2006, there were 65,332,641 shares of common stockoutstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

The registrant will file adefinitive Proxy Statement pursuant to Regulation 14A within 120 days of theend of the fiscal year ended December 31, 2005. Portions of such ProxyStatement are incorporated by reference in Part III.

 

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**PART I**

**ITEM 1. BUSINESS.**

**General**

*Unless otherwiseindicated or unless the context requires otherwise, all references in thisReport to “Investors Financial,” “we,” “us,” “our,” or similar references meanInvestors Financial Services Corp., together with our subsidiaries. “InvestorsBank” or the “Bank” means our subsidiary, Investors Bank & TrustCompany, alone.*

We provide a broad range of services to financialasset managers, such as mutual fund complexes, investment advisors, familyoffices, banks and insurance companies. We define these services as coreservices and value-added services. Our core services include middle officeoutsourcing, global custody, multicurrency accounting and fund administration. Ourvalue-added services include securities lending, foreign exchange, cashmanagement, performance measurement, institutional transfer agency, investmentadvisory services, lines of credit and brokerage and transition managementservices. At December 31, 2005, we provided services for approximately$1.8 trillion in net assets, including approximately $0.3 trillion offoreign net assets.

Investors FinancialServices Corp. is a bank holding company. We were organized as a Delawarecorporation in 1995. Our primary operating subsidiary is Investors Bank &Trust Company® which was founded in 1969 as a bankingsubsidiary of Eaton Vance Corp., an investment management firm. In 1995, wereorganized as a bank holding company, were spun-off to the stockholders ofEaton Vance and completed our initial public offering. We provide our servicesfrom offices in Boston, New York, Sacramento, Toronto, Dublin, London and theCayman Islands.

**Overviewof the Asset Servicing Industry**

Asset managers invest and manage the financial assetsentrusted to them. They do so using a broad range of financial products,including mutual funds, alternative investment vehicles, unit investmenttrusts, separate accounts, variable annuities and other products that pooltogether money from multiple investors. Asset servicing companies like ours performvarious back and middle office services for asset managers and the pooledfinancial products they sponsor, allowing asset managers to focus on corecompetencies such as product development and distribution. In addition, assetservicing companies like ours provide these back office services such as thethird-party safekeeping of assets and administrative services to give investorsmore confidence in the integrity of their investments. The following discussionsets forth our view of the key drivers in today’s asset servicing industry.

*Historical Financial AssetGrowth.**  *Despite the stockmarket declines of 2000 through 2002, over the past ten years growth infinancial assets under management has remained strong. Factors driving thisgrowth include an aging population, the privatization of retirement systems andthe increased popularity of pooled investment products such as mutual funds. Thetotal amount of U.S. financial assets held in mutual funds, life insurancecompanies, private pension funds and bank personal trust accounts was $17.3trillion at December 31, 2004, up from $7.1 trillion in 1994, a compoundedannual growth rate of approximately 9%. Mutual funds, one of the primarymarkets for our services, hold a large portion of the money invested in pooledinvestment vehicles. The U.S. mutual fund market has grown at a compoundedannual growth rate of approximately 13% since 1994, and held approximately $7.8trillion in assets at December 31, 2004. 

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The following tablepresents U.S. financial assets, including mutual funds (Dollars in billions):

| ** **                        | ** ** | **December 31, 2004** | ** ** | **December 31, 1994** | ** ** | **Compounded  Annual  Growth Rate** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|------------------------------------------|------------|
| **U.S. Financial Assets**         |       |                            |       |                            |       |                                     |       |   |   |   |   |   |   |
| Mutual Funds                      |       |                            | $          | 7,787                           |       |                                     |       | $ | 2,198 |   |   |   | 13 | % |   |
| Life Insurance Companies          |       |                            | 4,160      |                            |       |                                     | 1,863      |   |   |   | 8 |   |   |
| Private Pension Funds             |       |                            | 4,444      |                            |       |                                     | 2,352      |   |   |   | 7 |   |   |
| Bank Personal Trusts and  Estates |       |                            | 925        |                            |       |                                     | 670        |   |   |   | 3 |   |   |
| Total                             |       |                            | $          | 17,316                          |       |                                     |       | $ | 7,083 |   |   |   | 9 | % |   |

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*Source: Federal ReserveBank*

*Consolidationand Outsourcing Trends.**  *Anotherimportant factor affecting the asset servicing industry is the consolidation ofasset servicing providers. Since the early 1990s, a number of small andmid-size asset servicers have consolidated with larger service providers ordivested their asset servicing operations to focus their finite resources ontheir core businesses. Also, numerous service providers have combined theiroperations with other companies. This ongoing consolidation has concentratedthe industry around a smaller number of service providers and presents us withopportunities for growth as clients react to consolidation and review theirrelationships with existing providers. In addition, as consolidated financialinstitutions dispose of businesses that do not fit with their core services, wemay see opportunities to acquire those business lines at a reasonable price.

The unique operational philosophy of a particularasset management organization determines its view of asset servicing. Themajority of asset managers hire third parties to provide custody services. Someuse more than one custodian in an attempt to foster cost reduction throughcompetition. Large asset managers may have enough assets to justify the cost ofproviding in-house facilities to handle accounting, administration and transferagency services. Other asset managers generally hire third parties to provideaccounting, administration and transfer agency services in addition to custodyservices. Keeping abreast of developments like regulatory changes, Internetdata delivery, compressed settlement cycles, and complex investment strategies,structures and instruments has forced significant increases in technologyspending across the financial services industry. We believe that this increasein spending requirements has accelerated the pace at which asset managersoutsource middle and back office operations to asset servicers.

*Technology.**  *Information technology is a driving force in thefinancial services industry. Asset managers are able to create innovativeinvestment products using technological tools including:

·       Accessto data from world markets as a result of more powerful and affordableinformation processing power.

·       Theability to send and receive large volumes of information almost instantlythrough widely dispersed communication networks.

·       Timelyon-line access to electronic information on security positions, prices andprice shifts that facilitate activities, including on-line currency trading,indexing of assets, real time arbitrage and hedging through the use ofderivative securities.

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

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*ComplexInvestment Products.**  *Assetmanagers create different investment structures in an effort to captureefficiencies and appeal to investors with diverse means, risk tolerances,diversification requirements and time horizons. One innovative example of thisis exchange traded funds, or ETFs. ETFs are securities that replicate an indexand are traded on a national securities exchange, such as the New York StockExchange or the American Stock Exchange. Unlike investing in a conventionalindex mutual fund, investing in an ETF allows investors to buy and sell sharesthroughout the trading day at market prices. ETFs also offer potential taxefficiencies. According to an industry source, domestic ETF assets increased31% to approximately $296 billion as of December 31, 2005 from approximately$226 billion as of December 31, 2004.

Alternative investments, including hedge funds,private equity funds, venture capital funds and commodity pools, are anotherexample of complex investment products that have recently experienced dramaticgrowth. According to an industry source, hedge fund assets in particular havegrown at an impressive rate for several years and total approximately $1.3trillion at the end of 2005. Hedge fund assets have increased due to wideninginterest from institutional investors such as pension plans and endowments, aswell as high net worth individuals. These asset pools often featureincreasingly sophisticated trading strategies, financial instruments andproduct structures such as distressed debt, swaps and asset-backed securitiesthat require more specialized operational support than traditional mutualfunds.

In addition, a growing number of mutual funds havebeen structured as multi-class funds or as multi-manager funds in order toaddress the differing requirements and preferences of potential investors. Multi-classarrangements allow an investment company to sell interests in a singleinvestment portfolio to separate classes of stockholders. Multi-manager fundshave two or more investment managers, who may have different investing styles,managing the assets of one fund. Multi-manager funds offer investors diverseinvestment styles with a single investment.

Another product innovation is the master-feederstructure. In the master-feeder structure, one or more investment vehicles (the“feeder funds”) with identical investment objectives pool their assets in thecommon portfolio of a separate investment vehicle (the “master fund”). Thisstructure permits each of the feeder funds to be sold to a separate targetmarket or through a different distribution channel. The feeder fund, if it werea stand-alone fund, might not be large enough to support its operating costs. Thefeeder funds benefit from the economies of scale available to the larger poolof assets invested in the master fund.

*International investing.*   Assetmanagers have also expanded their reach in the global marketplace to capitalizeon cross-border and multi-national marketing opportunities. This creates demandfor asset servicing around the world and particularly for value-added serviceslike foreign exchange. At December 31, 2005, we provided services forapproximately $1.8 trillion in net assets, including approximately $0.3trillion of foreign net assets.

**Our Strategy**

We believe that asset servicing companies operate mostefficiently when bundling core services such as custody and accounting withvalue-added services such as securities lending and foreign exchange. We alsobelieve that efficient integration of these services is critical to bothservice quality and profitability. The following discussion outlines the keycomponents of our growth strategy:

*MaintainOur Technological Expertise.**  *Oneof our core strategies is to commit the necessary capital and resources tomaintain our technological expertise. The asset servicing industry requires thetechnological capability to support a wide range of global security types,currencies and complex portfolio structures. Asset servicers must also maintainthe telecommunications flexibility to support the diversity of global communicationsstandards. Technological change creates opportunities for productdifferentiation and cost reduction.

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Our Fund Accounting and Custody Tracking System, orFACTSTM,is a single integrated technology platform that combines our service offeringsinto one solution for customers and can accommodate rapid growth in net assetsprocessed. FACTS provides the following functions in a single informationsystem:

·       Middleoffice outsourcing

·       Custody

·       Securitiesmovement and control

·       Portfolioaccounting

·       Multicurrencygeneral ledger accounting

·       Pricing

·       Netasset value calculation

·       Multi-classand multi-manager processing

·       ETFprocessing

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

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

The FACTS architecture also enables us to modify thesystem quickly. Rapid modifications allow us to constantly improve processingquality and efficiency and to implement service innovations for our clientsquickly. We believe that the integrated nature of FACTS provides us with acompetitive advantage by allowing us to respond quickly to the continuouslychanging technological demands of the financial services industry. We believethe separate systems used for different tasks by many other asset servicingproviders may not provide the same advantages.

*MaintainOur Expertise in Complex Products.**  *Anotherof our core strategies is to maintain our strength in the rapidly growing areaof complex investment products. We have developed expertise in servicing ETFs,various alternative investment structures, master-feeder funds andmulti-managed funds. Because the design of FACTS allows us to effectmodifications or enhancements quickly, we are able to respond rapidly to thesystems requirements of complex structures.

*DeliverSuperior Service.**  *Westrive to deliver superior and innovative client service. We believe servicequality is the key to maintaining and expanding existing client relationshipsand to attracting new clients. The consolidation of functions available throughFACTS allows us to take an integrated approach to client servicing. We believethis approach is different from that employed by many of our competitors. Wededicate a single operations team to handle all tasks for a particular client.In addition, each client is assigned a client manager, independent of theoperations team, to anticipate the client’s needs, to coordinate servicedelivery and to provide consulting support.

*Cross-Sell Our Services.**  *We believe that our strong client relationshipsprovide opportunities to cross-sell value-added services to broaden ourcustomer relationships. Many of our clients manage multiple pools of assets. Oncean investment manager becomes a client, we believe that this client is morelikely to select us to service more products, provide additional services, orboth. If we are engaged to provide services for only certain pools of assetsmanaged by our clients, we strive to expand the relationship to include more assetpools by providing superior client service. Also, some of our clients engage usto provide core services such as global custody and multicurrency accounting,but do not use us 

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for value-addedservices such as foreign exchange or cash management. We target expanding theserelationships through increasing the number of services provided for eachclient.

**Service Offerings**

Weprovide a broad range of services to financial asset managers, such as mutualfund complexes, investment advisors, family offices, banks and insurancecompanies. We think of these services in two groupings: core services andvalue-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 andexecute their strategies, and evaluate and manage their risks, which we believeprovides them with the opportunity to enhance their returns. We strive tomaximize the use of our value-added services by our client base.

Fees charged for core services vary from client toclient based on the value of assets processed, the number of securities heldand the number of portfolio transactions. Generally, fees are billed to ourclients monthly in arrears and, upon their approval, charged directly to theiraccount. Fees charged for core services reflect the price sensitivity of themarket for such services. Fees charged for value-added services reflect a morefavorable pricing environment for us because we can increase activity in theseareas without a necessarily proportionate increase in personnel or otherresources. We also derive net interest income by investing cash balances thatour clients leave on deposit with us. Our share of earnings from theseinvestments is viewed as part of the total compensation that our clients pay usfor servicing their assets.

The following is adescription of the various services we offer:

***Core Services***

*MiddleOffice Outsourcing.**  *Middleoffice outsourcing services represent the tasks that need to be performed forfinancial asset managers after they have initiated a particular trade to ensureaccurate and timely trade processing and communications to any party affectedby the trades. We perform some or all of the following functions for our middleoffice outsourcing clients: trade operations management, settlements, portfolioand fund accounting, fund administration, cash management, reconciliation,corporate actions, tax reclaims and tax filings, performance measurement,broker performance and vendor data management.

*GlobalCustody.**  *Globalcustody entails the safekeeping of securities for clients and settlement ofportfolio transactions. Our net assets processed have grown from$22 billion at October 31, 1990 to $1.8 trillion at December 31,2005. At December 31, 2005, our foreign net assets processed totaledapproximately $0.3 trillion.

In order to service our clients worldwide, we haveestablished a network of global subcustodians in almost 100 markets. Since wedo not have our own branches in these countries, we are able to operate in theforeign custody arena with minimal fixed costs, while our clients benefit fromthe ability to use a single custodian, Investors Bank, for all of theirinternational investment needs.

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*MulticurrencyAccounting.**  *Multicurrencyaccounting entails the daily recordkeeping for each account or investmentvehicle, including the calculation of net asset value per share. In addition toproviding these services to domestic-based accounts and investment vehicles, wealso provide fund accounting services to clients in Europe and Canada, which wecontinue to view as areas of significant business opportunity.

*Fund Administration.**  *Fund administration services include managementreporting, regulatory reporting, compliance monitoring, tax accounting andreturn preparation, partnership administration and chief compliance officerservices and support. In addition to these ongoing services, we also providefund start-up consulting services, which typically include assistance with productdefinition, service provider selection and fund structuring and registration. Wehave worked with a number of investment advisors to assist them in thedevelopment of new funds and other pooled investment vehicles.

***Value-Added Services***

*SecuritiesLending.**  *Securitieslending involves the lending of clients’ securities to brokers and otherinstitutions for a fee. Receipt of securities lending fees improves a client’sreturn on the underlying securities. We act as agent for our clients for bothinternational and domestic securities lending services.

*ForeignExchange.**  *Weprovide foreign exchange services to facilitate settlement of internationalsecurities transactions for funds and other accounts and to convert incomepayments denominated in a non-base currency to base dollars. By using us ratherthan a third-party foreign exchange bank to perform these functions, clientscan reduce the amount of time spent coordinating currency delivery andmonitoring delivery failures and claims.

*CashManagement.**  *Weprovide a number of investment options for cash balances held by our clients.Typically, we have a standing arrangement to sweep client balances into one ormore investments, including deposit accounts, short-term funds and repurchaseagreements. This allows our clients to conveniently maximize their earnings onidle cash balances.

*InvestmentAdvisory Services.**  *The Bankacts as investment advisor to the Merrimac Master Portfolio, an open-endinvestment management company registered under the Investment Company Act of1940. The portfolio currently consists of a series of six master funds in amaster-feeder structure. The Merrimac Cash Portfolio, the Merrimac PrimePortfolio and the Merrimac U.S. Government Portfolio are subadvised by LincolnCapital Fixed Income Management Company, LLC. The Merrimac Treasury Portfolioand the Merrimac Treasury Plus Portfolio are subadvised by M&I InvestmentManagement Corp. The Merrimac Municipal Portfolio is subadvised by ABN AMROAsset Management (USA) LLC. At December 31, 2005, the total net assets ofthe portfolio approximated $5.2 billion. The portfolio’s master fundsserve as investment vehicles for seven domestic feeder funds and two offshorefeeder funds whose shares are sold to institutional investors.

*PerformanceMeasurement.**  *Performancemeasurement services involve the creation of systems and databases that enableasset managers to construct, manage and analyze their portfolios. Servicesinclude portfolio profile analysis, portfolio return analysis and customizedbenchmark construction. Performance measurement uses data already captured byFACTS to calculate statistics and report them to asset managers in a customizedformat.

*InstitutionalTransfer Agency.**  *Transferagency encompasses shareholder recordkeeping and communications. We providethese services only to institutional clients with a small number of shareholderaccounts or omnibus positions of retail shareholders.

*Linesof Credit.**  *We offercredit lines to our clients for the purpose of leveraging portfolios, coveringovernight cash shortfalls and other borrowing needs. We do not conduct retailbanking operations. At December 31, 2005, we had gross loans outstandingto clients of approximately $402 million, which represented approximately 3% ofour total assets. The interest rates charged on the Bank’s loans are 

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indexed to either thePrime rate or the Federal Funds rate. We have never had a loan loss. All loansare secured, or may be secured, by marketable securities and virtually allloans to individually managed account customers are due on demand.

*Brokerageand Transition Management Services.**  *In 2002, we began offering “introducingbroker-dealer” services to clients by accepting customer orders, whichwe have elected to clear through a clearing broker-dealer. The clearingbroker-dealer processes and settles customer transactions and maintainsdetailed customer records. This arrangement allows us to use the back officeprocessing infrastructure of the clearing broker-dealer while earning acommission on trades executed on behalf of clients. Transition managementservices are designed to assist the process of moving a portfolio from oneasset manager to another in as seamless a manner as possible. Components ofthese 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 marginaccounts, short selling or market making activities.

**Sales, Marketing and Client Support**

We employ a direct sales staff that targets potentialmarket opportunities, including investment management companies, insurancecompanies, family offices, banks and investment advisors. Sales personnel areprimarily based at our headquarters in Boston, and are given geographic areasales responsibility. We also have sales personnel located in Dublin, Torontoand London who are responsible for international markets. Included in the salesstaff are individuals who are dedicated to marketing services to institutionalaccounts. Senior managers from all functional areas are directly involved inobtaining new clients, frequently working as a team with a sales professional.

In order to service existing clients, a separate teamof client management professionals based in our Boston, New York, Toronto,Dublin and London offices provide dedicated client support. Each client isassigned a client manager responsible for the client’s overall satisfaction.The client manager is usually a senior professional with extensive industryexperience who works with the client on designing new products and specificsystems requirements, provides consulting support, anticipates the client’sneeds and coordinates service delivery.

Financial informationregarding our geographic reporting can be found in Note 21 of our Notes toConsolidated Financial Statements included in this Report.

**Significant Clients**

Barclays Global Investors,N.A. (“BGI”) accounted for approximately 18% of our consolidated net operatingrevenues for the year ended December 31, 2005, approximately 17% for theyear ended December 31, 2004 and approximately 16% for the year endedDecember 31, 2003. No client other than BGI accounted for more than 10% ofour net operating revenues for the years ended December 31, 2005, 2004 and2003. See “Risk Factors—A material portion of our revenue is derived from ourrelationship with Barclays Global Investors, N.A. (“BGI”) and relatedentities.”

**Software Systems and Data Center**

Our business requires that we provide daily andperiodic reports of asset accounting and performance, and provide measurementand analytical data to asset managers on-line on a real-time basis. To help usmeet these requirements, our asset servicing operations are supported bysophisticated information technology. We receive vast amounts of informationacross a worldwide computer network. That information covers a wide range ofglobal security types in various currencies and must be processed beforesystem-wide updating and reporting.

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Our proprietary system, FACTS, is multi-tiered. FACTSuses personal computers linked to mainframe processing by means of local andwide area networks. This configuration combines the best features of eachplatform. FACTS uses the power and capacity of the mainframe, the datadistribution capabilities of the network and the independence of personalcomputers. The fully functional microcomputer component of FACTS worksindependently of the mainframe throughout the processing cycle. This minimizesthe amount of system-wide delay inherent in data processing. The FACTSconfiguration also allows for fully distributed processing capabilities withinmultiple geographic locations in an effective and efficient manner.

The integrated nature of the FACTS architecture allowsus to effect modifications and enhancements quickly. Swift modifications andenhancements result in increased processing quality and efficiency for ourclients. These modifications and enhancements also help us quickly implementservice innovations for our clients. This integrated architecture helpsdifferentiate us from our competitors. Technological enhancements and upgradesare an ongoing part of asset servicing that are necessary for assetadministrators to remain competitive and to create information deliverymechanisms that add value to the information available as part of clearing andsettling transactions.

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

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

Our mainframe processing and mainframe disasterrecovery capability is provided by Electronic Data Systems (“EDS”), located inPlano, Texas. In addition, International Business Machines (“IBM”), located inArmonk, New York, provides support for our network and hardware environmentsand our help desk services. By outsourcing these infrastructure support functions,we can focus our resources on systems development and minimize our capitalinvestment in large-scale computer equipment. EDS and IBM offer usstate-of-the-art computer products and services, access to which we could nototherwise afford, while removing the risk of product obsolescence. Due to theirlarge and diverse customer bases, EDS and IBM can invest in the latest computertechnology and spread the related costs over multiple users. We also receivethe benefit of the continuing investment by EDS and IBM in their computerhardware. Under both contracts we are billed monthly for services provided byEDS or IBM on an as-used basis in accordance with a predetermined pricingschedule for specific products and services. Our current agreement with EDS isscheduled to expire on December 31, 2008. Our current agreement with IBMis scheduled to expire on June 30, 2011.

Each year we target spending approximately 18-20%of our consolidated net operating revenue on technology. Because of ourrelationships with EDS and IBM and our system architecture, we are able todevote the majority of our technology investments to development, rather thansupport or infrastructure.

Our trust processing services are provided by SEIInvestments Company (“SEI”), located in Oaks, Pennsylvania. SEI is a globalprovider of asset management and investment technology solutions. We pay 

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SEI certain monthlyservice fees based upon usage. Our current agreement with SEI is scheduled toexpire on December 31, 2009.

Investors Bank maintains acomprehensive Business Continuity Plan (“BCP”). The program has been developedto comply with guidelines issued by various regulatory and industry bodies suchas the Federal Financial Institutions Examination Council (“FFIEC”). Theplanning process begins with a business impact analysis which isolates criticalbusiness processes and determines their recoverability under various disruptionscenarios. In addition to maintaining regional backup facilities for alloffices, our locations are geographically diverse in order to allow recovery ofessential functions at another location in the event of a widespread disruption.In 2005, BCP staff conducted over 100 different tests to ensure that ourtechnology infrastructure, facilities and staff could respond and recover in adisaster.

**Competition**

We operate in a highly competitive environment in allareas of our business. Many of our competitors, including State Street Bank andTrust Company, JP Morgan Chase, The Bank of New York, Citigroup, Mellon andPNC, possess substantially greater financial and marketing resources than we doand process a greater amount of financial assets. Other competitive factorsinclude technological advancement and flexibility, breadth of services providedand quality of service. We believe that we compete favorably in thesecategories.

Competition in the asset servicing industry,especially over the past decade, has impacted both pricing and margins in coreservices such as global custody. Partially offsetting this more competitivepricing environment is the development of new services that have higher margins.Our continuous investment in technology has permitted us to offer value-addedservices to clients, such as middle office outsourcing, performancemeasurement, securities lending and foreign exchange, on a global basis and atcompetitive prices. Technological evolution and service innovation have enabledus to generate additional revenue to offset competitive pricing in maturingservice lines.

We believe that our size,commitment to technology development and enhancement and responsiveness toclient needs provide the asset management industry with a very attractive assetservicing alternative to large money center banks and other asset servicers. Asmany of our competitors grow larger through acquisition, we believe that ourcustomized and highly responsive service offerings become even more attractive.While consolidation within the investment management and asset servicingindustries may adversely affect our ability to retain clients that have beenacquired, it also creates opportunity for us as prospective clients reviewtheir relationships with existing service providers that are affected byacquisitions. In addition, consolidation among large financial institutions mayenable us to acquire, at a reasonable price, asset servicing businesses that donot fit within the core focus of these newly consolidated financialinstitutions.

**Intellectual Property**

Our success is dependentupon our software development methodology and other intellectual propertyrights that we have developed and own, including FACTS. We rely on tradesecret, copyright and trademark laws, and confidentiality agreements withemployees and third parties to protect our proprietary technology, all of whichoffer only limited protection. There can be no assurance that the steps we takein this regard will be adequate to deter misappropriation of our proprietaryinformation or that we will be able to detect unauthorized use. Furthermore,our intellectual property rights may be invalidated or our competitors maydevelop similar technology independently. In addition, effective copyright,trademark, trade secret and other protection may not be available in certaininternational markets that we service.

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**Employees**

On December 31, 2005, we had 3,252 employees. Wemaintain a professional development program for entry level staff. Successfulcompletion of the program is required of most newly hired employees. Thistraining program is supplemented by ongoing education on systems and technologicaldevelopments and innovations, the financial services industry, the regulatoryenvironment and our client base. This program is administered by experiencedfull-time trainers that continually enhance existing courses and develop newprograms to match an evolving business environment.

None of our employees arecovered by collective bargaining agreements and we believe our relations withour employees are good.

**Regulation and Supervision**

Virtually all aspects ofour business and operations are regulated under state and federal law. Inaddition to the laws governing businesses and employers, we are subject tofederal and state laws and regulations applicable to financial institutions andtheir parent companies. The operations of our securities broker affiliate,Investors Securities Services, LLC, are also subject to federal and statesecurities laws, as well as the rules of both the Securities and ExchangeCommission (“SEC”) and the National Association of Securities Dealers, Inc.(“NASD”). The principal objective of state and federal banking laws is themaintenance of the safety and soundness of financial institutions and thefederal deposit insurance system, the protection of consumers or classes ofconsumers and the furtherance of broad public policy goals, rather than thespecific protection of stockholders of a bank or its parent company. Some ofthe significant statutory and regulatory provisions to which we and oursubsidiaries are subject are described below. The description of thesestatutory and regulatory provisions is not complete and is qualified in itsentirety by reference to the particular statutory or regulatory provision. Anychange in applicable law or regulation may have a material effect on ourbusiness, prospects and operations, as well as those of our subsidiaries.

***Investors Financial***

*General.**  *As a registered Bank Holding Company (“BHC”),Investors Financial is subject to regulation under the Bank Holding Company Actof 1956, as amended (“BHCA”), and to inspection, examination and supervision bythe Board of Governors of the Federal Reserve System (“FRB”) and by theMassachusetts Commissioner of Banks (“Commissioner”). We are required to filereports of our operations with, and are subject to examination by, the FRB andthe Commissioner. The FRB has the authority to issue orders to BHCs to ceaseand desist from unsafe or unsound banking practices and violations ofconditions imposed by, or violations of agreements with, the FRB. The FRB isalso empowered to assess civil money penalties against companies or individualswho violate the BHCA or orders or regulations thereunder, to order terminationof nonbanking activities of nonbanking subsidiaries of BHCs and to ordertermination of ownership and control of a nonbanking subsidiary by a BHC.

*BHCA-Activitiesand Other Limitations.**  *TheBHCA prohibits a BHC from acquiring substantially all the assets of a bank oracquiring direct or indirect ownership or control of more than 5% of any classof the voting shares of any bank, BHC or savings association, or increasingsuch ownership or control of any bank, BHC or savings association, or mergingor consolidating with any BHC without prior approval of the FRB. TheRiegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”)permits adequately capitalized and adequately managed BHCs, as determined bythe FRB, to acquire banks located in any state, subject to certainconcentration limits and other conditions. Subject to certain conditions,Riegle-Neal also generally authorizes the interstate mergers of banks and, to alesser extent, interstate branching, so long as the law of the host statespecifically authorizes such action. Massachusetts law imposes certain approvalrequirements with respect to acquisitions by a BHC of certain bankinginstitutions 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 aBHC 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 fromengaging 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 certainactivities the FRB determined to be so closely related to banking or managingand controlling banks as to be a proper incident thereto. Before permitting aBHC to engage in such activities that are closely related to banking or makingan investment in a company engaged in such activities, the FRB is required toweigh the expected benefit to the public, such as greater convenience,increased competition or gains in efficiency, against the possible adverseeffects, such as undue concentration of resources, decreased or unfaircompetition, conflicts of interests or unsound banking practices.

The GLBA permits a BHC that qualifies and elects to betreated as a FHC to engage in a significantly broader range of financialactivities than BHCs, such as Investors Financial, that have not elected FHCstatus. “Financial activities” is broadly defined to include not only banking,insurance and securities activities, but also merchant banking and additionalactivities that the FRB, in consultation with the Secretary of the Treasury,determines to be financial in nature or incidental to such financialactivities, or that the FRB determines to be complementary activities that donot pose a substantial risk to the safety and soundness of depositoryinstitutions or the financial system generally. To elect to become a FHC, aBHC, such as Investors Financial, must meet certain tests and file an electionwith the FRB. To qualify, all of a BHC’s subsidiary banks must bewell-capitalized and well-managed, as measured by regulatory guidelines. Inaddition, each of the BHC’s banks must have been rated “satisfactory” or betterin its most recent federal Community Reinvestment Act (“CRA”) evaluation. A BHCthat elects to be treated as a FHC may face significant consequences if itsbanks fail to maintain the required capital and management ratings, includingentering into an agreement with the FRB which imposes limitations on itsoperations. Investors Financial has not elected to become a FHC.

*CapitalRequirements.**  *The FRBhas adopted capital adequacy guidelines applicable to United States bankingorganizations. The FRB’s capital adequacy guidelines generally require BHCs tomaintain total capital equal to 8% of total risk-adjusted assets andoff-balance sheet items (the “Total Risk-Based Capital Ratio”), with at least50% of that amount consisting of Tier 1, or core capital and the remainingamount consisting of Tier 2, or supplementary capital. Tier 1 capital for BHCsgenerally consists of the sum of common stockholders’ equity and perpetualpreferred stock (subject to certain limitations), less goodwill and othernonqualifying intangible assets. Tier 2 capital generally consists of hybridcapital instruments, perpetual debt and mandatory convertible debt securities;perpetual preferred stock, not included as Tier 1 capital; term subordinateddebt and intermediate-term preferred stock; and, subject to limitations,general allowances for loan and lease losses. Assets are adjusted under therisk-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 1capital to its average total consolidated assets (the “Leverage Ratio”) of 3.0%.Total average consolidated assets for this purpose does not include goodwilland any other intangible assets and investments that the FRB determines shouldbe deducted from Tier 1 capital. The FRB has announced that the 3.0% LeverageRatio requirement is the minimum for the top-rated BHCs. All other BHCs arerequired to maintain a minimum Leverage Ratio of 4.0%. BHCs with supervisory,financial, operational or managerial weaknesses, as well as BHCs that areanticipating or experiencing significant growth, are expected to maintaincapital ratios well above the minimum levels. Because we anticipate significantfuture growth, we will be required to maintain a Leverage Ratio of 4.0% orhigher.

Weare currently in compliance with both the Total Risk-Based Capital Ratio andthe Leverage Ratio requirements, and management expects these ratios to remainin compliance with the FRB’s capital 

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adequacy guidelines. At December 31, 2005, ourTotal Risk-Based Capital Ratio and Leverage Ratio were 18.50% and 5.95%,respectively.

In June 2004,the Basel Committee on Banking Supervision (“Basel Committee”) released thedocument “International Convergence of Capital Measurement and CapitalStandards: A Revised Framework.”  TheFramework, also referred to as Basel II, is designed to secure internationalconvergence on regulations and standards governing the capital adequacy ofinternationally active banking organizations. In September 2005, the FFIEC(U.S. banking and thrift supervisory agencies) revised guidance on the timingand qualification process for U.S. banks that will become subject to Basel II. Thenew rules as applied in the U.S. are expected to become effective on January 1,2009, subject to transitional parallel testing beginning on January 1,2008. Although we are not required to be compliant with the new rules, we arein the process of developing an implementation program to achieve Basel IIcompliance. Ultimately, U.S. implementation of Basel II will depend on, andwill be subject to, final regulations and related policies promulgated by theFFIEC supervisory agencies. We cannot predict the final form of the rules, northeir impact on our risk-based capital.

*Control Acquisitions.**  *The Change in Bank Control Act prohibits a person orgroup of persons from acquiring “control” of a depository institution or adepository institution holding company unless the FRB has been notified and hasnot objected to the proposal. Under a rebuttable presumption established by theFRB, the acquisition of 10% or more of a class of voting securities of adepository institution or depository institution holding company with a classof securities registered under Section 12 of the Securities Exchange Actof 1934, as amended (the “Exchange Act”), would, under the circumstances setforth in the presumption, constitute the acquisition of control of thedepository institution or a depository institution holding company. Inaddition, any company, as that term is broadly defined in the statute, would berequired 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 votingsecurities of a bank or BHC or a savings association, or otherwise obtainingcontrol or a controlling influence over such an institution.

*Massachusetts Law.**  *Investors Financial is also considered a BHC forpurposes of Massachusetts law. Accordingly, we have registered with theCommissioner and are obligated to make reports to the Commissioner. UnderMassachusetts law, any person that proposes to acquire, directly or indirectly,25% or more of any class of voting securities of a company must give priornotice to the Massachusetts Commissioner of Banks, who may disapprove thetransaction. Additionally, any company that is a BHC under Massachusetts lawmust obtain the approval of the Massachusetts Board of Bank Incorporation (“MassachusettsBBI”) before acquiring more than 5% of the voting stock of a company. As ageneral matter, however, the Commissioner does not rule upon or regulatethe activities in which a BHC or its nonbank subsidiaries engage.

*Cash Dividends.*   FRBpolicy provides that a bank or a BHC generally should not maintain its existingrate of cash dividends on common stock unless the organization’s net incomeavailable to common shareholders over the past year has been sufficient tofully fund the dividends and the prospective rate of earnings retention appearsconsistent with the organization’s capital needs, asset quality and overallfinancial condition. FRB policy further provides that a BHC should not maintaina level of cash dividends to its shareholders that places undue pressure on thecapital of bank subsidiaries, or that can be funded only through additionalborrowings or other arrangements that may undermine the BHC’s ability to serveas a source of strength.

*Source of Strength.**  *FRB policy requires BHCs to serve as sources offinancial and managerial strength to their subsidiary banks and, if necessary,to use available resources to provide adequate capital funds to its subsidiarybanks during periods of financial stress or adversity and to maintain thefinancial flexibility and capital-raising capacity to obtain additionalresources for assisting its subsidiary banks in a manner consistent with FRBpolicy. This support may be required at times when the BHC may not have theresources to provide it. Accordingly, Investors Financial is expected to commitresources to the Bank in circumstances where it might not do so absent suchpolicy.

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***Investors Bank***

*General.**  *The Bank is subject to extensive regulation andexamination by the Commissioner and the Federal Deposit Insurance Corporation (“FDIC”),which insures the Bank’s deposits, and to certain requirements established bythe FRB. The federal and state laws and regulations which are applicable tobanks regulate among other things, the scope of their business, theirinvestments, their reserves against deposits, the timing of the availability ofcertain deposited funds and the nature and amount of and collateral for certainloans.

*FDICInsurance Premiums.**  *The Bankcurrently pays deposit insurance premiums to the FDIC based on an assessmentrate established by the FDIC for Bank Insurance Fund (“BIF”)-memberinstitutions. The FDIC has established a risk-based premium system under whichthe FDIC classifies institutions based on their capital ratios and on otherrelevant information and generally assesses higher rates on those institutionsthat tend to pose greater risks to the federal deposit insurance funds. TheFederal Deposit Insurance Act (“FDIA”) does not require the FDIC to charge allbanks deposit insurance premiums when the ratio of deposit insurance reservesto insured deposits is maintained above specified levels. However, as a resultof general economic conditions, it is possible that the ratio of depositinsurance reserves to insured deposits could fall below the minimum ratio thatFDIA requires, which would result in the FDIC setting deposit insuranceassessment rates sufficient to increase deposit insurance reserves to therequired ratio. We cannot predict whether the FDIC will be required to increasedeposit insurance assessments above their current levels.

In February 2006, Congress enacted the FederalDeposit Insurance Reform Act of 2005 (the “FDIR Act”). As a result of thepassage of the FDIR Act, over the course of the next year, among other things: (i) theBIF will be merged with the FDIC’s Savings Association Insurance Fund creatingthe Deposit Insurance Fund (the “DIF”); (ii) the $100,000 per accountinsurance level will be indexed to reflect inflation; (iii) depositinsurance coverage for certain retirement accounts will be increased to$250,000; and (iv) a cap will be placed on the level of the DIF anddividends will be paid to banks once the level of the DIF exceeds the specifiedthreshold.

*CapitalRequirements.**  *The FDIChas promulgated regulations and adopted a statement of policy regarding thecapital adequacy of state-chartered banks, which, like the Bank, are notmembers of the Federal Reserve System. These requirements are substantiallysimilar to those adopted by the FRB regarding BHCs.

The Federal Deposit Insurance Corporation ImprovementAct of 1991 (“FDICIA”), identifies five capital categories for insureddepository institutions (well-capitalized, adequately capitalized, undercapitalized,significantly undercapitalized and critically undercapitalized) and requiresthe federal bank regulatory agencies to implement systems for “promptcorrective action” for insured depository institutions that do not meet minimumcapital requirements within such categories. FDICIA imposes progressively morerestrictive constraints on operations, management and capital distributions,depending on the category in which an institution is classified. Failure tomeet the capital guidelines could also subject a banking institution tocapital-raising requirements. An “undercapitalized” bank must develop a capitalrestoration plan, and its parent holding company must guarantee that bank’scompliance with the plan. The liability of the parent holding company under anysuch guarantee is limited to the lesser of 5% of the bank’s assets at the timeit became “undercapitalized” or the amount needed to comply with the plan. Furthermore,in the event of the bankruptcy of the parent holding company, such guaranteewould take priority over the parent’s general unsecured creditors. In addition,FDICIA requires the various regulatory agencies to prescribe certainnon-capital standards for safety and soundness relating generally to operationsand management, asset quality and executive compensation, and permitsregulatory action against a financial institution that does not meet suchstandards.

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The various regulatory agencies have adoptedsubstantially similar regulations that define the five capital categoriesidentified by FDICIA, using the total risk-based capital, Tier 1 risk-basedcapital and leverage capital ratios as the relevant capital measures. Suchregulations establish various degrees of corrective action to be taken when aninstitution is considered undercapitalized. Under the regulations, a “well-capitalized”institution must have a Tier 1 risk-based capital ratio of at least 6%, a totalrisk-based capital ratio of at least 10% and a leverage ratio of at least5% and not be subject to a capital directive order. Regulators also must takeinto consideration (a) concentrations of credit risk; (b) interestrate risk (when the interest rate sensitivity of an institution’s assets doesnot match the sensitivity of its liabilities or its off-balance-sheetposition); and (c) risks from non-traditional activities, as well as aninstitution’s ability to manage those risks, when determining the adequacy ofan institution’s capital. This evaluation will be made as a part of theinstitution’s regular safety and soundness examination. At December 31,2005, the Bank was deemed to be a well-capitalized institution.

*TheCommunity Reinvestment Act.*   The CommunityReinvestment Act (“CRA”) requires lenders to identify the communities served bythe institution’s offices and other deposit-taking facilities and to make loansand investments and provide services that meet the credit needs of thesecommunities. Regulatory agencies examine each of the banks and rate suchinstitutions’ compliance with CRA as “Outstanding”, “Satisfactory”, “Needs toImprove” or “Substantial Noncompliance”. Failure of an institution to receiveat least a “Satisfactory” rating could inhibit such institution or its holdingcompany from undertaking certain activities, including engaging in activitiesnewly permitted as a financial holding company under the GLBA and acquisitionsof other financial institutions. The FRB and the FDIC must take into accountthe record of performance of banks in meeting the credit needs of the entirecommunity served, including low- and moderate-income neighborhoods, before theyapprove certain bank acquisitions, mergers, branch establishments and other transactionsproposed by banking organizations. Massachusetts has also enacted a similarstatute that requires the Commissioner to evaluate the Bank’s performance inhelping to meet the credit needs of its entire community and to take thatrecord into account in considering certain applications. Management believesthe Bank is currently in compliance with all CRA requirements.

*CustomerInformation Security.**  *TheFDIC and other bank regulatory agencies have established standards forsafeguarding nonpublic personal information about customers that implementprovisions of the GLBA. Specifically, the Information Security Guidelinesestablished by the GLBA require each financial institution, under thesupervision and ongoing oversight of its Board of Directors or an appropriateBoard committee, to develop, implement and maintain a comprehensive writteninformation security program designed to ensure the security andconfidentiality of customer information, to protect against anticipated threatsor hazards to the security or integrity of such information and to protectagainst unauthorized access to or use of such information that could result insubstantial harm or inconvenience to any customer.

*Privacy.*   TheGLBA requires financial institutions to implement policies and proceduresregarding the disclosure of nonpublic personal information about consumers tononaffiliated third parties. In general, the statute requires financialinstitutions to explain to consumers their policies and procedures regardingthe disclosure of such nonpublic personal information, and, unless otherwiserequired or permitted by law, financial institutions are prohibited fromdisclosing such information except as provided in their policies andprocedures.

*USAPatriot Act.**  *The USAPatriot Act of 2001 (the “USA Patriot Act”), designed to deny terrorists andothers the ability to obtain anonymous access to the U.S. financial system, hassignificant implications for depository institutions, broker-dealers and otherbusinesses involved in the transfer of money. The USA Patriot Act, togetherwith the implementing regulations of various federal regulatory agencies,require financial institutions, including the Bank, to adopt and implementpolicies and procedures with respect to, among other things, anti-moneylaundering compliance, suspicious activity and currency transaction reporting,customer identity verification and customer risk analysis. The statute and its 

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underlying regulationsalso permit information sharing for counter-terrorist purposes between federallaw enforcement agencies and financial institutions, as well as among financialinstitutions, subject to certain conditions, and require federal bankingagencies to evaluate the effectiveness of an applicant in combating moneylaundering activities when considering applications filed under Section 3of the BHCA or the Bank Merger Act. Management believes that we are currentlyin compliance with all requirements prescribed by the USA Patriot Act and allapplicable regulations.

*Dividends.**  *The FDIC has the authority to use its enforcementpowers to prohibit a bank from paying dividends if, in its opinion, the paymentof dividends would constitute an unsafe or unsound practice. Federal law alsoprohibits the payment of dividends by a bank that will result in the bankfailing to meet its applicable capital requirements on a pro forma basis. UnderMassachusetts 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 declaredby a trust company in any calendar year would exceed the total of its netprofits for that year combined with its retained net profits for the previoustwo years, less any required transfer to surplus or a fund for the retirementof any preferred stock. These restrictions on the Bank’s ability to declare andto pay dividends may limit Investors Financial’s ability to pay dividends toits stockholders. We cannot predict future dividend payments of the Bank atthis time.

*OtherSecurities Law Issues.**  *TheGLBA requires a bank that acts as investment adviser to a registered investmentcompany to register as an investment adviser or to conduct such advisoryactivities through a separately identifiable department or division of the bankso registered. Accordingly, the Bank furnishes investment advice to registeredinvestment companies through a separately identifiable department or divisionof the Bank that is registered with the SEC as an investment adviser. Federaland state laws impose onerous obligations on registered investment advisers,including fiduciary duties, recordkeeping requirements and disclosureobligations. Currently, management believes that we are in compliance withthese requirements.

*Regulation of InvestmentCompanies.**  *Certainof our mutual fund and unit investment trust clients are regulated as “investmentcompanies” as that term is defined under the Investment Company Act of 1940, asamended (the “ICA”), and are subject to examination and reporting requirementsapplicable to the services we provide. The provisions of the ICA and theregulations promulgated thereunder prescribe the type of institution which mayact as a custodian of investment company assets, as well as the manner in whicha custodian administers the assets in its custody. Because we serve ascustodian for a number of our investment company clients, these regulationsrequire, among other things, that we maintain certain minimum aggregatecapital, surplus, and undivided profits. Additionally, arrangements between usand clearing agencies or other securities depositories must meet ICArequirements for segregation of assets, identification of assets and clientapproval. Currently, management believes we are in compliance with all minimumcapital and securities depository requirements. Investment companies are alsosubject to extensive recordkeeping and reporting requirements. Theserequirements dictate the type, volume and duration of the recordkeeping weundertake, either in our role as custodian for an investment company or as aprovider of administrative services to an investment company. Further, we mustfollow specific ICA guidelines when calculating the net asset value of a clientmutual fund. Consequently, changes in the statutes or regulations governingrecordkeeping and reporting or valuation calculations will affect the manner inwhich we conduct our operations.

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**Availability of Filings**

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

1)              OurAnnual Reports on Form 10-K;

2)              OurQuarterly Reports on Form 10-Q;

3)              OurCurrent Reports on Form 8-K; and

4)              OurProxy Statement.

You may also access, free of charge, copies of the following corporategovernance documents in the Investor Relations section of our web site atwww.ibtco.com:

1)              OurCode of Conduct;

2)              OurCorporate Governance Guidelines;

3)              OurAudit Committee Charter;

4)              OurNominating and Corporate Governance Committee Charter; and

5)              OurCompensation Committee Charter.

Wepost these documents on our web site as soon as reasonably practicable after wefile or furnish them electronically with or to the Securities and ExchangeCommission or, in the case of the corporate governance documents, as soon asreasonably practical after material amendment. The information contained on ourweb site is not incorporated by reference into this document and should not beconsidered a part of this Report. Our web site address is included in thisdocument as an inactive textual reference only.

**Item 1A. Risk Factors.**

*Our operatingresults are subject to fluctuations in interest rates and the securitiesmarkets.*

A significant portion of our fees is based on themarket value of the assets we process. Accordingly, our operating results aresubject to fluctuations in interest rates and securities markets as thesefluctuations affect the market value of assets processed. Our net interestincome is earned by investing depositors’ funds in our investment portfolioand, in small part, by making loans. A rising short-term interest rateenvironment, such as we are now experiencing, generally causes downwardpressure on net interest income. Changes in the relationship between short-termand long-term interest rates, referred to as the yield curve, could alsoadversely affect the market value of, or the earnings produced by, ourinvestment and loan portfolios, and thus could adversely affect our operatingresults. The current flat yield curve, where short-term rates have increasedwhile long-term rates have failed to increase, has resulted in a decrease inour net interest margin that will continue to have a material impact on our netinterest income.

Volatility in the equity markets can have a materialeffect on our asset-based fees. While reductions in asset servicing fees may beoffset by increases in other sources of revenue, a sustained downward movementof the broad equity markets will likely have an adverse impact on our earnings.

Our growth depends in part on the ability of ourclients to generate fund flows by selling their investment products to new andexisting investors. Fluctuations in interest rates or the securities marketscan lead to investors seeking alternatives to the investment offerings of ourclients, which could result in a lesser amount of assets processed andcorrespondingly lower fees. For example, ifthe value of equity or fixed income assets held by our clients were to increaseor decrease by 10% for a sustained period of time, we 

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estimatecurrently that this market movement, by itself, would cause a correspondingchange of less than 5% in our earnings per share.

In addition, we areexperiencing narrower investment portfolio reinvestment spreads, which reducesour net interest income. If reinvestments spreads on the security types wepurchase remain narrow, or become narrower, our net interest income willcontinue to be impacted negatively.

*A material portion of our revenue is derived from ourrelationship with Barclays Global Investors, N.A. (“BGI”) and related entities.*

As a result of our ongoing relationship with BGI’siShares and Master Investment Portfolios, our assumption of the operations ofthe U.S. asset administration unit of BGI in 2001 and our servicing assets forBarclays Global Investors Canada, Ltd., BGI accounted for approximately 18%,17% and 16% of our net operating revenue for the years ended December 31,2005, 2004 and 2003, respectively. We recently renewed our U.S. assetadministration outsourcing agreement with BGI and we expect that BGI willcontinue to account for a significant portion of our net operating revenue. Weprovide services to BGI under long-term contracts that may be terminated beforethe expiration of the contracts under certain circumstances that we havedescribed in filings with the Securities and Exchange Commission (“SEC”), asdescribed below. While we believe that our relationship with BGI is excellent,the loss of BGI’s business would cause our net operating revenue to declinesignificantly and would likely have an adverse effect on our quarterly andannual results.

The outsourcing agreement was renewed pursuant to anamendment (the “Amendment”) to the Custodial, Fund Accounting and ServicesAgreement between the Bank and BGI dated May 1, 2001 (the “CustodialAgreement”). Under the terms of the Amendment, the Custodial Agreement isextended through April 30, 2013. As provided in the Amendment, BGI mayterminate the Custodial Agreement upon sixty days prior written notice:  (i) asto any underlying account if BGI fails to receive any consent required by lawfor the Bank to act as servicing agent for such account; (ii) as to anyunderlying account if the continued provision of services by the Bank to suchaccount would be inconsistent with BGI’s fiduciary duties under applicable law;or (iii) as to the entire Custodial Agreement in the event a conservatoror receiver is appointed for the Bank under applicable federal law. Inaddition, BGI may terminate the Custodial Agreement prior to April 30,2013 if the Bank fails to meet a certain number of service level commitmentsfor four consecutive months in any rolling twelve-month period or if the Bankmaterially breaches a material provision of the Custodial Agreement, in bothcases subject to customary notice and opportunity to cure provisions.

Also, under the terms ofthe Amendment, the parties have agreed to assess the fee schedule andstatus of each party and of the industry 90 days prior to November 1, 2009and to negotiate in good faith any appropriate amendments to the feeschedule arising from that assessment. If the parties are unable to agreeon an amended fee schedule by November 1, 2009, BGI may terminate theCustodial Agreement. The Amendment also provides that the Bank will continue toservice BGI for up to two years, or longer under certain circumstances, afterexpiration or termination by BGI of the Custodial Agreement.

*We may incur lossesdue to operational errors.*

The services that weprovide require complex processes and interaction with numerous third parties. Whilewe maintain sophisticated computer systems and a comprehensive system ofinternal controls, and our operational history has been excellent, from time totime we may make operational errors for which we are responsible to our clients.In addition, even though we maintain appropriate errors and omissions and otherinsurance policies, an operational error could result in a significantliability to us and may have a material adverse effect on our results ofoperations.

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

We are part of anextremely competitive asset servicing industry. Many of our current andpotential competitors have longer operating histories, greater name recognitionand substantially greater financial, marketing and other resources than we do. Thesegreater resources could, for example, allow our competitors to developtechnology superior to our own. In addition, we face the risk that large mutualfund complexes may build in-house asset servicing capabilities and no longeroutsource these services to us. As a result, we may not be able to competeeffectively with current or future competitors, which could result in a loss ofexisting clients or difficulty in gaining new clients.

*We may incursignificant costs defending legal claims.*

We have been named inlawsuits in U.S. District Court in Massachusetts alleging, among other things,violations of securities laws. In addition, we have been named in a lawsuit inMassachusetts state court alleging, among other things, violations of acovenant of good faith and fair dealing in a contract. While we believe theseclaims are without merit, we cannot be sure that we will prevail in the defenseof these claims. We are also party to other litigation and we may becomesubject to other legal claims in the future. Litigation is costly and coulddivert the attention of management. For a more detailed discussion of ourongoing lawsuits, please see Item 3. Legal Proceedings, in Part I of thisreport.

*Our future results depend, in part, on successfulintegration of prior and possible future outsourcing transactions.*

Integration of outsourcingtransactions is complicated and frequently presents unforeseen difficulties andexpenses which can affect whether and when a particular outsourcing transactionwill be accretive to our earnings per share. Any future outsourcingtransactions will present similar challenges. These outsourcing transactionscan also consume a significant amount of management’s time.

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

We have experienced aperiod of rapid growth that has required the dedication of significantmanagement and other resources. Continued growth could place a strain on ourmanagement and other resources. To manage future growth effectively, we mustcontinue to invest in our operational, financial and other internal systems,and our human resources, which could affect our profitability.

*We must hire andretain skilled personnel in order to succeed.*

Qualified personnel, inparticular managers and other senior personnel, are in great demand throughoutthe financial services industry. As a result, we could find it increasinglydifficult to continue to attract and retain sufficient numbers of these highlyskilled employees, which could affect our ability to attract and retainclients.

*We may not be ableto protect our proprietary technology.*

Our proprietary technologyis important to our business. We rely on trade secret, copyright and trademarklaws and confidentiality agreements with employees and third parties to protectour proprietary technology, all of which offer only limited protection. Theseintellectual property rights may be invalidated or our competitors may developsimilar technology independently. Legal proceedings to enforce our intellectualproperty rights may be unsuccessful, and could also be expensive and divertmanagement’s attention.

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*Our quarterly andannual operating results may fluctuate.*

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

·       Thetiming of commencement or termination of client engagements;

·       Changesin interest rates, the relationship between different interest rates or equityvalues;

·       Therate of net inflows and outflows of investor funds in the investment vehiclesoffered by our clients; and

·       Thetiming and magnitude of share repurchases under our share repurchase plan.

Most of our expenses, suchas employee compensation and rent, are relatively fixed. As a result, anyshortfall in revenue relative to our expectations could significantly affectour operating results.

*We are subject toextensive federal and state regulations that impose complex restraints on ourbusiness.*

Federal and statelaws and regulations applicable to financial institutions and their parentcompanies apply to us. Our primary regulators are the Federal Reserve Board (“FRB”),the Federal Deposit Insurance Corporation (“FDIC”), the MassachusettsCommissioner of Banks, the National Association of Securities Dealers, Inc.(“NASD”), and the State of Vermont Department of Banking, Insurance, Securitiesand Health Care Administration (“BISHCA”). Virtually all aspects of ouroperations are subject to specific requirements or restrictions and generalregulatory oversight including the following:

·       TheFRB and the FDIC maintain capital requirements that we must meet. Failure tomeet those requirements could lead to severe regulatory action or evenreceivership. We are currently considered to be “well-capitalized”;

·       UnderMassachusetts law, the Bank may be restricted in its ability to pay dividendsto Investors Financial Services Corp., which may in turn restrict our abilityto pay dividends to our stockholders;

·       TheFRB and the FDIC are empowered to assess monetary penalties against, and toorder termination of activities by, companies or individuals who violate thelaw;

·       TheNASD maintains certain regulatory requirements that our securities brokeraffiliate, Investors Securities Services, LLC, must meet. Failure to meet thoserequirements could lead to severe regulatory action;

·       BISHCAmaintains certain regulatory requirements that our insurance captive affiliate,Investors Vermont Insurance Company, must meet. Failure to meet thoserequirements could lead to regulatory action; and

·       Ourinternational operations are subject to regulatory oversight by regulators inthe jurisdictions in which we operate, including the Office of theSuperintendent of Financial Institutions in Canada, the Irish FinancialServices Regulatory Authority, the Cayman Islands Monetary Authority and theFinancial Services Authority (“FSA”) in the United Kingdom. Failure to complywith applicable international regulatory requirements could result inregulatory action and impact our ability to provide services in thosejurisdictions.

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

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**ITEM 2.**                PROPERTIES.

Thefollowing table provides certain summary information with respect to theprincipal properties that we leased as of December 31, 2005:

| **Location**                            | ** ** | ** **                                         | ** ** | **Function** | ** ** | **Sq. Ft.** | ** ** | **Expiration Date** |
|-----------------------------------------|------------|----------------------------------------------------|------------|--------------|------------|-------------|------------|---------------------|
| 200 Clarendon Street,  Boston, MA       |       | Principal Executive  Offices and Operations Center |       | 387,127      |       | 2014        |
| 100 Huntington Avenue,  Boston, MA      |       | Operations Center                                  |       | 150,269      |       | 2014        |
| 1 Exeter Plaza, Boston,  MA             |       | Training Center                                    |       | 14,870       |       | 2007        |
| 800 Boylston Street,  Boston, MA        |       | Operations Center                                  |       | 24,715       |       | 2014        |
| 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                        |       | 67,183       |       | 2028*       |
| 17 Dominion Street, London              |       | Offshore Processing  Center                        |       | 4,478        |       | 2010        |

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*                    Pursuant to the terms of the contract, this lease canbe terminated in 2013 by paying six months rent as compensation.

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

**ITEM 3.**                LEGALPROCEEDINGS.

On June 27, 2003, we and an individual employeeof ours were named in a lawsuit alleging, among other things, that we breachedan implied covenant of good faith and fair dealing in a subadvisory contractwith Opus Investment Management, Inc. (“Opus”) and that our individualemployee engaged in a breach of fiduciary duties and tortious interference witha contract. Opus had been a subadviser to the Merrimac Funds, for which we actas investment adviser. Upon the expiration of Opus’s contract on June 1,2003, the Merrimac Funds elected not to re-appoint Opus as subadviser. Thelawsuit was filed in Superior Court in Worcester, Massachusetts and seeksunspecified damages. The lawsuit is currently in the discovery phase. Webelieve that the claims are without merit and intend to defend our rightsvigorously. However, we cannot predict the outcome of this lawsuit at thistime, and we can give no assurance that it will not affect our financialcondition or results of operations in a materially adverse way.

In July 2000, two of our Dublin subsidiaries,Investors Trust & Custodial Services (Ireland) Ltd. (“ITC”) andInvestors Fund Services (Ireland) Ltd. (“IFS”), received a plenary summonsin the High Court, Dublin, Ireland. The summons named ITC and IFS as defendantsin an action brought by the FTF ForexConcept Fund Plc (the “Fund”), a formerclient. The summons also named as defendants FTF Forex Trading and Finance,S.A., the Fund’s investment manager, Ernst & Young, LLP, the Fund’sauditors, and Dresdner Bank-Kleinwort Benson (Suisse) S.A., a tradingcounterparty to the Fund. The Fund is an investment vehicle organized in Dublinto invest in foreign exchange contracts. A total of approximately$4.7 million had been invested in the Fund. Most of that money was lostprior 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 astatement of claim by the Fund seeking unspecified damages allegedly arisingfrom breach of contract, misrepresentation and breach of warranty, negligenceand breach of duty of care, and breach of fiduciary duty, among others. We havenotified our insurers and intend to defend this claim vigorously. Based on ourinvestigation through December 31, 2005, we do not expect this matter tohave a material adverse effect on our business, financial condition or resultsof operations.

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Investors Financial Services Corp. and five of itsofficers are named as defendants in three purported class action complaintsthat were filed on or about August 4, 2005, August 15, 2005 and September 30,2005 in the United States District Court for the District of Massachusetts,Boston, Massachusetts. Among other things, the complaints filed on August 4,2005 and August 15, 2005 assert that the defendants violated Sections 10(b) and20(a) of the Securities Exchange Act of 1934 during the period October 15,2003 until July 15, 2005. Among other things, the complaint filed on September 30,2005 asserts that the defendants violated Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934 during the period July 16, 2003 until July 15,2005. The allegations in the complaints predominantly relate to: (1) theCompany’s October 2004 restatement of its financial results, and (2) theCompany’s July 2005 revision of public guidance regarding its futurefinancial performance. The complaints seek unspecified damages, interest, fees,and costs. We strongly believe that the lawsuits lack merit and we intend todefend against the claims vigorously. However, we cannot predict the outcome ofthe lawsuits at this time, and we can give no assurance that they will notmaterially adversely affect our financial condition or results of operations.

Investors Financial Services Corp. and nine of itsofficers and directors are named as defendants in two shareholder derivativecomplaints that were filed on or about September 22, 2005 and October 17,2005 in the United States District Court for the District of Massachusetts,Boston, Massachusetts. Among other things, the complaints assert that thedefendants are liable for breach of fiduciary duty, unjust enrichment, abuse ofcontrol, mismanagement, misappropriation of information, insider trading, andviolation of Section 14(a) of the Securities Exchange Act of 1934. Thecomplaint filed on September 22, 2005 also seeks reimbursement under theSarbanes-Oxley Act of 2002. The allegations in the complaints predominantlyrelate to: (1) the Company’s October 2004 restatement of itsfinancial results, and (2) the Company’s July 2005 revision of publicguidance regarding its future financial performance. The complaints seekunspecified damages, attorneys’ fees, accountant and expert fees, and costs. Westrongly believe that the lawsuits lack merit and we intend to defend againstthe claims vigorously. However, we cannot predict the outcome of the lawsuitsat this time, and we can give no assurance that they will not materiallyadversely affect our financial condition or results of operations.

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**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, AND ISSUER PURCHASE OF EQUITY SECURITIES ANDRELATED STOCKHOLDER MATTERS.

**PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY ANDPOLICY**

Ourcommon stock is quoted on the Nasdaq National Market under the symbol “IFIN”.The following table sets forth, for the calendar periods indicated, the highand low sale prices for the common stock as reported by Nasdaq and dividendsper share paid on the common stock.

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** | **Dividend** | ** ** |
|----------------|------------|----------|------------|---------|------------|--------------|------------|
| **2005**       |       |     |       |    |       |         |       |
| First quarter  |       | $        | 53.44      |    | $          | 45.33        |       | $ | 0.0200 |   |
| Second quarter |       | 51.05    |       | 36.05   |       | 0.0200       |       |
| Third quarter  |       | 42.80    |       | 31.67   |       | 0.0200       |       |
| Fourth quarter |       | 40.98    |       | 30.64   |       | 0.0200       |       |
| **2004**       |       |     |       |    |       |         |       |
| First quarter  |       | $        | 46.15      |    | $          | 37.87        |       | $ | 0.0175 |   |
| Second quarter |       | 44.75    |       | 34.68   |       | 0.0175       |       |
| Third quarter  |       | 48.90    |       | 39.79   |       | 0.0175       |       |
| Fourth quarter |       | 50.40    |       | 35.00   |       | 0.0175       |       |

 

As of January 31, 2006, there were approximately837 stockholders of record.

We currently intend to retain the majority of futureearnings to fund the development and growth of our business. Our ability to paydividends on our common stock may depend on the receipt of dividends fromInvestors Bank. In addition, we may not pay dividends on our common stock if weare in default under certain agreements that we entered into in connection withthe sale of the 9.77% Capital Securities by Investors Capital Trust I. See Note10 of our Notes to Consolidated Financial Statements included with this Report.Any dividend payments by Investors Bank are subject to certain restrictionsimposed by federal law and by the Massachusetts Commissioner of Banks. See “Business—Regulationand Supervision” for additional information. Subject to regulatoryrequirements, we expect to pay an annual dividend to our stockholders,currently estimated to be in an amount equal to $0.09 per share of outstandingcommon stock (approximately $5.9 million based upon 65,052,637 sharesoutstanding as of December 31, 2005). We expect to declare and pay suchdividend ratably on a quarterly basis.

The information requiredunder this item regarding securities authorized for issuance under equitycompensation plans is incorporated herein by reference to the section entitled “StockPlans” contained in our definitive proxy statement pursuant to Regulation 14A,which proxy statement will be filed with the Securities and Exchange Commissionnot later than 120 days after the close of our fiscal year ended December 31,2005.

**Purchasesof Equity Securities by the Issuer and Affiliated Purchasers**

In July 2005, weannounced that our Board of Directors authorized a repurchase plan of up to$150.0 million of our common stock in the open market during the twelve monthsfollowing the announcement. The repurchase plan expires in June 2006. Forthe three months ended December 31, 2005, there was no activity under thisplan.

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**ITEM6.**                SELECTED FINANCIALDATA.

The following tablecontains certain of our consolidated financial and statistical information, andshould be read in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”, our Consolidated FinancialStatements and Notes to Consolidated Financial Statements, and other financialinformation appearing elsewhere in this Report. (Dollars in thousands, exceptper share and employee data):

| ** **                                       | ** ** | **For the Year Ended December 31,** | ** **    |
|--------------------------------------------------|------------|--------------------------------------------------------------|---------------|
| ** **                                       | ** ** | **2005**                                                     | ** **    | **2004** | ** ** | **2003(1)** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Statement of Income Data(2):**                 |       |                                                         |          |   |   |   |   |   |   |   |   |
| Noninterest income                               |       | $                                                            | 525,537       |   | $ | 425,491 |   | $ | 336,193 |   | $ | 298,844 |   | $ | 254,487 |   |
| Net interest  income                             |       | 170,425                                                      |          | 187,680 |   | 153,914 |   | 138,725 |   | 98,355 |   |
| Net operating revenues                           |       | 695,962                                                      |          | 613,171 |   | 490,107 |   | 437,569 |   | 352,842 |   |
| Operating expenses                               |       | 460,109                                                      |          | 398,383 |   | 344,921 |   | 341,395 |   | 289,176 |   |
| Income before  income taxes                      |       | 235,853                                                      |          | 214,788 |   | 145,186 |   | 96,174 |   | 63,666 |   |
| Income taxes                                     |       | 76,035                                                       |          | 72,826 |   | 52,765 |   | 28,737 |   | 18,980 |   |
| Net income                                       |       | $                                                            | 159,818       |   | $ | 141,962 |   | $ | 92,421 |   | $ | 67,437 |   | $ | 44,686 |   |
| **Per Share Data(3):**                           |       |                                                         |          |   |   |   |   |   |   |   |   |
| Basic earnings per  share                        |       | $                                                            | 2.42          |   | $ | 2.15 |   | $ | 1.42 |   | $ | 1.05 |   | $ | 0.71 |   |
| Diluted earnings  per share                      |       | $                                                            | 2.37          |   | $ | 2.09 |   | $ | 1.39 |   | $ | 1.02 |   | $ | 0.68 |   |
| Dividends per  share                             |       | $                                                            | 0.08          |   | $ | 0.07 |   | $ | 0.06 |   | $ | 0.05 |   | $ | 0.04 |   |
| **Balance Sheet Data:**                          |       |                                                         |          |   |   |   |   |   |   |   |   |
| Total assets at  end of period                   |       | $                                                            | 12,096,393    |   | $ | 11,167,825 |   | $ | 9,223,178 |   | $ | 7,214,740 |   | $ | 5,297,913 |   |
| **Average Balance Sheet Data:**                  |       |                                                         |          |   |   |   |   |   |   |   |   |
| Interest-earning  assets                         |       | $                                                            | 11,364,656    |   | $ | 9,770,924 |   | $ | 7,556,061 |   | $ | 5,769,971 |   | $ | 4,376,947 |   |
| Total assets                                     |       | 12,066,523                                                   |          | 10,306,015 |   | 8,139,985 |   | 6,173,187 |   | 4,648,128 |   |
| Total deposits                                   |       | 4,099,305                                                    |          | 4,495,858 |   | 3,153,306 |   | 2,342,247 |   | 2,043,124 |   |
| Junior  subordinated debentures(4)               |       | 24,774                                                       |          | 24,774 |   | 24,194 |   | — |   | — |   |
| Trust preferred  securities(4)                   |       | —                                                       |          | — |   | — |   | 24,667 |   | 25,000 |   |
| Common  stockholders’ equity                |       | 758,552                                                      |          | 625,964 |   | 483,923 |   | 395,101 |   | 307,565 |   |
| **Selected Financial Ratios:**                   |       |                                                         |          |   |   |   |   |   |   |   |   |
| Return on average  equity                        |       | 21.1                                                         | %             | 22.7 | % | 19.1 | % | 17.1 | % | 14.5 | % |
| Return on average  assets                        |       | 1.3                                                          | %             | 1.4 | % | 1.1 | % | 1.1 | % | 1.0 | % |
| Average common equity as a % of average assets   |       | 6.3                                                          | %             | 6.1 | % | 5.9 | % | 6.4 | % | 6.6 | % |
| Dividend payout  ratio(5)                        |       | 3.4                                                          | %             | 3.3 | % | 4.3 | % | 4.9 | % | 5.9 | % |
| Tier 1 capital  ratio(6)                         |       | 18.5                                                         | %             | 20.5 | % | 17.6 | % | 15.3 | % | 16.6 | % |
| Leverage ratio(6)                                |       | 6.0                                                          | %             | 5.9 | % | 5.4 | % | 5.4 | % | 5.8 | % |
| Noninterest income  as % of net operating income |       | 75.5                                                         | %             | 69.4 | % | 68.6 | % | 68.3 | % | 72.1 | % |
| **Other Statistical Data:**                      |       |                                                         |          |   |   |   |   |   |   |   |   |
| Assets processed  at end of period(7)            |       | $                                                            | 1,792,571,911 |   | $ | 1,430,471,217 |   | $ | 1,056,871,924 |   | $ | 785,418,321 |   | $ | 813,605,957 |   |
| Employees at end  of period                      |       | 3,252                                                        |          | 2,778 |   | 2,413 |   | 2,591 |   | 2,618 |   |

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(1)    Effective July 1, 2003, the Companyadopted provisions of SFAS 150, *Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*,which resulted in a reclassification of the trust preferred securities frommezzanine financing to liabilities. As such, interest expense associated withthe trust preferred securities was reclassified to net interest income.

(2)    All numbers shown in this table have been restated toreflect reclassifications related to Emerging Issues Task Force Issue No. 01-14,*Income Statement Characterization of Reimbursements Received for “Out-of-pocket”Expenses Incurred*.

(3)    All numbers shown in this table have been restated toreflect the two-for-one stock split paid June 14, 2002, where applicable.

(4)    Effective October 1, 2003, the Company adopted theprovisions of FASB Interpretation No. 46 (revised December 2003), *Consolidation of Variable Interest Entities*, which resultedin the deconsolidation of Investors Capital Trust I, the trust that holds thetrust preferred securities.

(5)    We intend to retain the majority of future earnings tofund development and growth of our business. We currently expect to pay cash dividendsat an annualized rate of $0.09 per share subject to regulatory requirements. Referto “Liquidity” included in Management’s Discussion and Analysis of FinancialCondition and Results of Operations for further information.

(6)    Refer to “Capital Resources” included within Management’sDiscussion and Analysis of Financial Condition and Results of Operations forfurther information.

(7)    Assetsprocessed is the total dollar value of financial assets on the reported datefor which we provide one or more of the following services: middle officeoutsourcing, global custody, multicurrency accounting, fund administration,securities lending, foreign exchange, cash management, performance measurement,institutional transfer agency, investment advisory services, lines of creditand brokerage and transition management services.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

*You should read the following discussion together withour Consolidated Financial Statements and related Notes to ConsolidatedFinancial Statements, which are included elsewhere in this Report. Thefollowing discussion contains forward-looking statements that reflect plans,estimates and beliefs. Our actual results could differ materially from thosediscussed in the forward-looking statements. See “Certain Factors That May AffectFuture Results” herein.*

**Overview**

We provide asset administration services for thefinancial services industry through our wholly-owned subsidiary, Investors Bank &Trust Company. We provide core services and value-added services to a varietyof financial asset managers, including mutual fund complexes, investmentadvisors, family offices, banks and insurance companies. Core services includemiddle office outsourcing, global custody, multicurrency accounting and fundadministration. Value-added services include securities lending, foreignexchange, cash management, performance measurement, institutional transferagency, investment advisory services, lines of credit and brokerage andtransition management services. We have offices located in the United States,Ireland, Canada, the Cayman Islands and the United Kingdom with a vast globalsubcustodian network established to accommodate the international needs of ourclients. At December 31, 2005, we provided services for approximately $1.8trillion in net assets, including approximately $0.3 trillion in foreign netassets.

We grow our business by selling our services to newclients and by further penetrating our existing clients. We believe that weservice approximately 10% of the assets managed by our existing clients, and wehave traditionally achieved significant success in growing client relationships.Our ability to service new clients and expand our relationships with existingclients depends on our provision of superior client service. Our growth is alsoaffected by conditions in the global securities markets, the interest rateenvironment, the regulatory environment for us and our clients and the successof our clients in marketing their products.

We derive our asset servicing revenue from providingcore and value-added services. We derive our net interest income by investingthe cash balances our clients leave on deposit with us. Since we price ourservice offerings on a bundled basis, our share of earnings from theseinvestments is viewed as part of the total compensation that our clients pay usfor servicing their assets. In establishing a fee structure for a specificclient, we analyze all expected revenue and expenses. We believe net operatingrevenue (net interest income plus noninterest income) and net income are themost meaningful measures of our financial results.

As an asset administration services company, theamount of net operating revenue that we generate is impacted by overall marketconditions, client activity and the prevailing interest rate environment. Asignificant portion of our core services revenue is based upon the amount ofassets we process. As market values of underlying assets fluctuate, so will ourrevenue. We have managed this volatility by offering a tiered pricing structurefor our asset-based fees. As asset values increase, the basis point fee isreduced for the incremental assets. When asset values decrease, revenue is onlyimpacted at the then marginal rate. Many of our value-added services aretransactional based, and we receive a fee for each transaction processed. Wehave continued to experience net interest margin compression during 2005 due toa relatively flat yield curve, lower reinvestment spreads and the liabilitysensitive nature of our balance sheet. Because we are a liability sensitiveinstitution, as overnight interest rates rise, most of our liabilities repricebut our assets take longer to reprice due to the nature of their resetprovisions (i.e., monthly, quarterly and annually). The lower interest ratespreads we experienced in 2005 were also due to the narrowing of market spreadson reinvestment and purchase opportunities for fixed and floating-rateinvestment assets. In 2006, we expect to see short-term rates continue to riseand a continued very flat yield curve.

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We remain focused on our sales efforts, prudentexpense management and increasing our operating efficiency. These goals arecomplicated by the need to build infrastructure to support our growth, the needto maintain state-of-the-art systems and the need to retain and motivate ourworkforce.

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

In our 2003 and 2004earnings releases, we reported non-GAAP operating income and non-GAAP operatingearnings per share information that exclude the effect of the state taxassessment settlement discussed above. We believe that non-GAAP operatingearnings provide a more meaningful presentation of our 2003 results ofoperations because they do not include the one-time tax charge which wasunrelated to our core operations. The following table presents a reconciliationbetween net income and earnings per share presented on the face of ourStatements of Income and the non-GAAP measure of net operating incomereferenced in our earnings releases (Dollars in thousands, except per sharedata):

**GAAP Earnings**

| ** **                  | ** ** | **For the Year Ended** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | **December 31,**                 | ** ** |
| ** **                  | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Income before taxes         |       | $                                     | 235,853    |   | $ | 214,788 |   | $ | 145,186 |   |
| Provision for income  taxes |       | 76,035                                |       | 72,826 |   | 52,765 |   |
| Net Income                  |       | $                                     | 159,818    |   | $ | 141,962 |   | $ | 92,421 |   |
| Earnings per share:         |       |                                  |       |   |   |   |   |
| Basic                       |       | $                                     | 2.42       |   | $ | 2.15 |   | $ | 1.42 |   |
| Diluted                     |       | $                                     | 2.37       |   | $ | 2.09 |   | $ | 1.39 |   |

 

**Non-GAAP OperatingEarnings**

| ** **                  | ** ** | **For the Year Ended** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | **December 31,**                 | ** ** |
| ** **                  | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Income before taxes         |       | $                                     | 235,853    |   | $ | 214,788 |   | $ | 145,186 |   |
| Provision for income  taxes |       | 76,035                                |       | 72,826 |   | 45,565  | (1) |
| Net Income                  |       | $                                     | 159,818    |   | $ | 141,962 |   | $ | 99,621 |   |
| Earnings per share:         |       |                                  |       |   |   |   |   |
| Basic                       |       | $                                     | 2.42       |   | $ | 2.15 |   | $ | 1.53 |   |
| Diluted                     |       | $                                     | 2.37       |   | $ | 2.09 |   | $ | 1.50 |   |

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(1)          Provisionfor income taxes for the year ended December 31, 2003 excludes a $7.2million charge, net of federal income tax benefit, that resulted from aretroactive change in the Commonwealth of Massachusetts tax law enacted in thefirst quarter of 2003 and the Company’s subsequent settlement of the resultingtax assessment with the Massachusetts Department of Revenue. The effect of theexclusions is an increase in basic and diluted earnings per share of $0.11.

**Critical Accounting Policies**

Our consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America, which require us to makeestimates and assumptions. We have 

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identifiedthe following accounting policies that, as a result of the complexities of theunderlying accounting standards and operations involved, could result insignificant changes to our consolidated financial condition or results ofoperations under different conditions or using different assumptions. Seniormanagement has discussed these critical accounting policies with the AuditCommittee.

***Derivative Financial Instruments—******Cash*** flowhedge accounting requires that we measure the changes in fair value ofderivatives designated as hedges as compared to changes in expected cash flowsof the underlying hedged transactions for each reporting period. This processinvolves the estimation of the expected future cash flows of hedgedtransactions. Interest rate swaps are valued using a nationally recognized swapvaluation model. The LIBOR (London InterBank Offered Rate) curve in this modelserves as the basis for computing the market value of the swap portfolio. Ifshort-term interest rates increase, as they did during 2005, we would expectthe swaps to gain in value. Conversely, if short-term interest rates decrease,we would expect there to be a corresponding decline in the market value of theswap portfolio. The measurement of fair value of our derivatives portfolio isbased upon market interest rate curve and spreads.

***Defined BenefitPension Assumptions—******Each*** fiscalyear, we must assess and select the discount rate, compensation increasepercentage and average return on plan assets assumptions in order to determineour net periodic pension cost and to project our benefit obligations under ourdefined benefit plans. The discount rate is based on the weighted-average yieldon high-quality fixed-income investments that are expected to match the plan’sprojected cash flows. The compensation increase percentage is based uponmanagement’s current and expected salary increases. The average return on planassets is based on the expected return on the plan’s current investmentportfolio, which can reflect the historical returns of the various assetclasses.

For the fiscal year ended December 31, 2005, thediscount rate, compensation increase percentage and average return on planassets used to determine net periodic pension cost for our qualified definedbenefit pension plan were 5.80%, 4.00% and 8.50%, respectively. The discountrate was 0.45% lower than the rate at December 31, 2004 due to aretraction of the projected yield curve during the year. The compensationincrease assumption at December 31, 2005 was slightly higher by 0.25% thanat December 31, 2004 and the rate of return on plan assets of 8.50% hasremained consistent with the prior year. Net periodic pension expense for thepension plan for 2005, excluding the effect of curtailment, was $0.8 million,as compared to $0.8 million for the year ended December 31, 2004. Weexpect the net periodic pension expense to be approximately $0.2 million infiscal year 2006.

At December 31, 2005,the discount rate assumption used to project the benefit obligation for ournonqualified, unfunded, supplemental retirement plan, which covers certainemployees, was 5.75%. The compensation increase percentage assumption rangedfrom 4.0% to 10.0% at December 31, 2005, which was consistent with theprior year. The net periodic pension expense for 2005 for the supplementalretirement plan, using a 5.80% discount rate and 4.00% compensation increase,was $4.3 million, as compared to $2.5 million for the year ended December 31,2004. The net periodic pension expense is expected to be approximately $5.3million in fiscal year 2006.

**New Accounting Pronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards 123(revised 2004), *Share-Based Payment*(“SFAS 123R”).SFAS 123R requires that compensation cost relating to share-based paymenttransactions be recognized in the financial statements, with measurement basedupon the fair value of the equity or liability instruments issued. We currentlyuse the intrinsic-value method to measure compensation cost related to ourshare-based transactions. SFAS 123R replaces SFAS 123, *Accountingfor Stock-Based Compensation*, and supersedes APB Opinion No. 25,*Accounting for Stock Issued to Employees.*

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In March 2005, the SEC issued Staff AccountingBulletin No. 107 (“SAB 107”), which expresses the views of the SECregarding the interaction of SFAS 123R and certain SEC regulations and providesthe SEC’s views regarding the valuation of share-based payment arrangements forpublic companies.

In April 2005, the SEC issued Release 2005-57,which delayed the effective date for SFAS 123R to reporting periods in thefirst fiscal year beginning after June 15, 2005. Accordingly, we adoptedSFAS 123R on January 1, 2006, effective for financial periods in 2006. Therewas no impact to our financial condition or results of operations uponadoption.

In May 2005, the FASB issued Statement ofFinancial Accounting Standards No. 154, *AccountingChanges and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3*(“SFAS 154”). SFAS 154 replaces APBOpinion No. 20, *Accounting Changes,*andFASB Statement No. 3, *Reporting AccountingChanges in Interim Financial Statements,*and changes the accountingand reporting requirements for a change in accounting principle. SFAS 154applies to all voluntary changes in an accounting principle, as well as tochanges required by a new accounting pronouncement in the unusual instance thatthe pronouncement does not include specific transition provisions. SFAS 154 iseffective for accounting changes and error corrections made in fiscal yearsbeginning after December 15, 2005 and requires retrospective applicationto prior periods’ financial statements for most voluntary changes in anaccounting principle, unless it is impracticable to do so.  We do not anticipate any material impact toour financial condition or results of operations as a result of the adoption ofSFAS 154.

In February 2006, theFASB issued Statement of Financial Accounting Standards No. 155, *Accounting for Certain Hybrid Instruments—an amendment of FASBStatements No. 133 and 140* (“SFAS 155”). SFAS 155 allowsfinancial instruments that have embedded derivatives to be accounted for as awhole if the holder elects to account for the whole instrument on a fair valuebasis. SFAS 155 eliminates the need to bifurcate the derivative from its host,as previously required under Statement of Financial Accounting Standards No. 133,*Accounting for Derivative Instruments and HedgeAccounting*(“SFAS 133”). SFAS 155 also amends SFAS 133 byestablishing a requirement to evaluate interests in securitized financialassets to determine whether they are free standing derivatives or whether theycontain embedded derivatives that require bifurcation. SFAS 155 is effectivefor all hybrid financial instruments acquired or issued by the Company on orafter January 1, 2007. The Company does not anticipate any material impactto its financial condition or results of operations as a result of the adoptionof SFAS 155.

**CertainFactors That May Affect Future Results**

From time to time,information provided by us, statements made by our employees, or informationincluded in our filings with the SEC (including this Form 10-K) maycontain statements which are not historical facts, so-called “forward-lookingstatements,” which are made under Section 21E of the Securities ExchangeAct of 1934 and which involve risks and uncertainties. These statements relate to future events or our future financialperformance and are identified by words such as “may,” “could,” “should,” “expect,”“plan,” “intend,” “seek,” “anticipate,” “believe,” “estimate,” “potential,” or “continue”or other comparable terms or the negative of those terms. Forward-lookingstatements in this Form 10-K include certain statements regardingliquidity, growth rate, annual dividend payments, interest rate conditions, theshape of the yield curve, interest rate sensitivity, compliance with capitaladequacy guidelines, loss exposure on lines of credit, the timing and effect onearnings of derivative gains and losses and the reclassification of netafter-tax gains on derivative contracts, securities lending revenue, netinterest income, operating expenses, including occupancy expenses and needs,transaction processing services expense, professional fee expense, compensationexpense, travel and sales expense, investments in technology and compensationexpense, pension plan and supplemental pension expense, depreciation expense,effective tax rate, investments in FHLBB capital stock, the effect on earningsof changes in equity values or fixed income, the effects of increasedprepayments and reduced investment opportunities for our net interest income,our ability to execute our stock repurchase plan and the effect of certainlegal claims against us. Our actual future results may differ significantlyfrom those stated in any forward-looking 

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statements.Factors that may cause such differences include, but are not limited to, thefactors discussed in Item 1A of this Form 10-K. Each of thesefactors, and others, are discussed from time to time in our filings with theSEC.

**Statements of Income**

***Comparison of Operating Results for the Years Ended December 31,2005 and 2004.***

Net income for the yearended December 31, 2005 was $159.8 million, up 13% from $142.0 million forthe same period in 2004. The principal factors contributing to our net incomegrowth were growth in asset servicing fees of 20% and increased gain on sale ofinvestments. Net income growth was partially offset by a 15% increase inoperating expenses (largely due to new business wins, additional headcount andtechnology requirements) and a 9% decrease in net interest income.

*Fees and OtherRevenue*

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

| ** **                    | ** ** | **For the Year Ended** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **December 31,**                 | ** ** |
| ** **                    | ** ** | **2005**                              | ** ** | **2004** | ** ** | **Change** | ** ** |
| Total asset  servicing fees   |       | $                                     | 509,059    |   | $ | 423,200 |   |   | 20 | % |   |
| Gain on sale of  investments  |       | 12,397                                |       | 234 |   |   | * |   |   |
| Other operating  income       |       | 4,081                                 |       | 2,057 |   |   | 98 | % |   |
| Total fees and other  revenue |       | $                                     | 525,537    |   | $ | 425,491 |   |   | 24 | % |   |

----

****                    Percentageis not considered meaningful.*

The largest components of asset servicing fees arecustody, multicurrency accounting and fund administration, which increased 20%to $375.6 million for the year ended December 31, 2005 from $314.3 millionfor the same period in 2004. Custody, multicurrency accounting and fundadministration fees are based in part on the value of assets processed. Assetsprocessed is the total dollar value of financial assets on the reported datefor which we provide one or more of thefollowing services: middle office outsourcing, global custody, multicurrencyaccounting, fund administration, securities lending, foreign exchange, cashmanagement, performance measurement, institutional transfer agency, investmentadvisory services, lines of credit and brokerage and transition managementservices.

Thechange in net assets processed includes the following components (Dollars inbillions):

| ** **                                 | ** ** | **For the Year Ended** | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                 | ** ** | **December 31, 2005**       | ** ** | **December 31, 2005**                    | ** ** |
| Net assets  processed, beginning of period |       |                                  | $          | 1,430                                              |       |   |   | $ | 1,734 |   |   |
| Change in net assets  processed:           |       |                                  |       |                                               |       |   |   |   |   |
| Sales to new clients                       |       |                                  | 159        |                                               |       |   | — |   |   |
| Further penetration of existing clients    |       |                                  | 42         |                                               |       |   | 4 |   |   |
| Lost clients                               |       |                                  | (11        | )                                                  |       |   | — |   |   |
| Fund flows and market gain                 |       |                                  | 173        |                                               |       |   | 55 |   |   |
| Total change in net assets processed       |       |                                  | 363        |                                               |       |   | 59 |   |   |
| Net assets  processed, end of period       |       |                                  | $          | 1,793                                              |       |   |   | $ | 1,793 |   |   |

 

The majority of the increase inassets processed was due to sales to new and existing clients, theability of our clients to develop and sell product, which generates fund flowsthat have a direct, positive impact on our business, and slightly higher assetvalues compared to a year ago. As indicatedin the “Overview” section, our core services fees are generated by charging afee 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 

29

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minimumand flat fees, allow us to manage this volatility to a certain extent. As assetvalues increase, the basis point fee typically lowers. When asset valuesdecrease, revenue is only impacted by the asset decline at the then marginalrate.

If the value of equity or fixed income assets held byour clients were to increase or decrease by 10% for a sustained period of time,we estimate currently that this market movement, by itself, would cause acorresponding change of less than 5% in our earnings per share. Earnings pershare do not track precisely to the value of the equity and fixed-incomemarkets because conditions present in a market increase or decrease maygenerate offsetting increases or decreases in other revenue and expense itemsthat are influenced by the value of the assets we administer. For example,increased market volatility often results in higher transaction fee revenue. Also,market value declines may result in increased interest income and sweep feeincome as clients move larger amounts of assets into the cash managementvehicles that we offer. In addition, our tiered pricing structure reduces theimpact of volatility in asset values to a certain extent. However, there can beno assurance that any of these offsetting revenue and expense movements willoccur during any future upturn or downturn in the equity or fixed-incomemarkets, or that our tiered pricing structure will reduce the impact on us of asustained change in asset values.

Transaction-drivenincome includes our value-added services, such as foreign exchange, cashmanagement, securities lending and investment advisory services.

·       Foreignexchange fees were $62.1 million for the year ended December 31, 2005, up14% from the same period in 2004. The increase in foreign exchange fees isattributable to new business, increased volume of client activity andvolatility in currency markets. Future foreign exchange income is dependent onthe volume of new and existing client activity and overall volatility in thecurrencies traded.

·       Cashmanagement fees, which consist of sweep fees, were $37.6 million for the yearended December 31, 2005, up 42% from the same period in 2004. The increaseis primarily due to higher balances placed by our clients in the cashmanagement products we offer. Cash management revenue will continue to dependon the level of client balances maintained in the cash management products weoffer. If our clients’ investment products continue to maintain higher cashbalances than they did in comparable periods, we expect our cash managementrevenue to be positively impacted.

·       Securities lending feeswere $22.5 million for the year ended December 31, 2005, up 117% from the same period in 2004, primarily due to newbusiness, higher volumes and improved market conditions. Securitieslending transaction volume is positively affected by the market value of thesecurities on loan, merger and acquisitionactivity, increased IPO activity and a steeper short-end of the yield curve.If the capital markets continue to experience the aforementionedcharacteristics, it is likely that our securities lending revenue will continueto be positively impacted. If we experience a reduction in our securitieslending portfolio, lower market values or compression of the spreads earned onour securities lending activity, our securities lending revenue will likely benegatively impacted.

·       Investment advisory feeswere $8.4 million for the year ended December 31, 2005, down 44% from thesame period in 2004. The decrease in investment advisory fees is attributableto lower asset values in our proprietary Merrimac money market funds combinedwith advisory fee waivers on certain of the funds. Future investment advisoryfee income is dependent upon the asset levels within the Merrimac money marketfunds, which are driven by overall market conditions, client activity and transaction volumes. We discontinuedadvisory fee waivers in the second quarter of 2005.

·       Other service fees for theyear ended December 31, 2005 were $2.8 million, up 5% from the same periodin 2004. Other service fees include income earned on compliance advisory,brokerage and transition management services. The increase in 2005 was due toan increase in compliance and brokerage services.

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·       Otheroperating income for the year ended December 31, 2005 was $4.1 million, up98% from the same period in 2004. The increase is primarily due to an increasein the dividend rate on our holding of FHLBB stock.

During the year ended December 31,2005 we sold municipal securities and U.S. Treasury securities held in ouravailable for sale portfolio, resulting in the recognition of $12.4 million ingains. We sold these securities as part of a strategy to improve the after-taxyield of our municipal securities portfolio by replacing the sold municipalsecurities with those that offer a more attractive after-tax yield, as well asto capitalize on strong market conditions.

*Net Interest Income*

Thefollowing table presents the components of net interest income (Dollars inthousands):

| ** **                 | ** ** | **For the Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------------------------|------------|
| ** **                 | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **Change** | ** ** |
| Interest income            |       | $                                                            | 447,705    |   | $ | 313,149 |   |   | 43 | % |   |
| Interest expense           |       | 277,280                                                      |       | 125,469 |   |   | 121 | % |   |
| Total net interest  income |       | $                                                            | 170,425    |   | $ | 187,680 |   |   | (9 | )% |   |

 

Net interest income is affectedby the volume and mix of assets and liabilities and the movement and level of interest rates. The decrease in our netinterest income was primarily driven by lower interest rate spreads,which was partially offset by growth in our investment portfolio. Lowerinterest rate spreads were due to increasing short-term interest rates withouta concurrent increase in longer-term rates, which resulted in a relatively flatyield curve. Consequently, our interest-bearing liabilities, of which themajority is priced based on overnight floating rates, have repriced at higherrates faster than our interest-earning assets have repriced, resulting in alower net interest margin. In addition, reinvestment and purchase spreads onfixed and floating-rate assets were lower than expected due to higher marketdemand, especially for shorter-term and floating-rate fixed income investments.Average investment security balances were up approximately $1.5 billion for theyear ended December 31, 2005 compared to the same period in 2004.

Thetable below presents the changes in net interest income resulting from changesin the volume of interest-earning assets or interest-bearing liabilities andchanges in interest rates for the year ended December 31, 2005 compared tothe year ended December 31, 2004. Changes attributed to both volume andrate have been allocated based on the proportion of change in each category(Dollars in thousands):

| ** **                                                           | ** ** | **For the Year Ended  December 31, 2005 vs. December 31, 2004** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **Change Due  to Volume**                                                                          | ** ** | **Change Due  To Rate** | ** ** | **Net** | ** ** |
| **Interest-earning assets**                                          |       |                                                                                                         |       |   |   |   |   |   |   |   |   |
| Federal Funds  sold and securities purchased under resale agreements |       |                                                                                                         | $          | 226 |   |   |   | $ | 1,357 |   |   | $ | 1,583 |   |
| Investment  securities                                               |       |                                                                                                         | 53,222     |   |   |   | 75,076 |   |   | 128,298 |   |
| Loans                                                                |       |                                                                                                         | 2,281      |   |   |   | 2,394 |   |   | 4,675 |   |
| Total  interest-earning assets                                       |       |                                                                                                         | $          | 55,729 |   |   |   | $ | 78,827 |   |   | $ | 134,556 |   |
| **Interest-bearing  liabilities**                                    |       |                                                                                                         |       |   |   |   |   |   |   |   |   |
| Deposits                                                             |       |                                                                                                         | $          | (6,879 | ) |   |   | $ | 33,864 |   |   | $ | 26,985 |   |
| Borrowings                                                           |       |                                                                                                         | 38,994     |   |   |   | 85,832 |   |   | 124,826 |   |
| Total  interest-bearing liabilities                                  |       |                                                                                                         | $          | 32,115 |   |   |   | $ | 119,696 |   |   | $ | 151,811 |   |
| Change in net interest  income                                       |       |                                                                                                         | $          | 23,614 |   |   |   | $ | (40,869 | ) |   | $ | (17,255 | ) |

 

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Amortization and accretion of debt securitiespurchased at a premium or discount are amortized or accreted into income usinga method which approximates the constant effective yield method. We applyStatement of Financial Accounting Standard No. 91, *Accountingfor Nonrefundable Fees and Costs Associated with Originating or Acquiring Loansand Initial Direct Costs of Leases* (“SFAS 91”) for the amortizationof premiums and accretion of discounts. In calculating the effective yield forsecurities that represent holdings of large numbers of similar loans for whichprepayments are probable and the timing and amount of prepayments can bereasonably estimated, prepayments are anticipated using our actual three-monthprepayment experience.

The amount of amortization or accretion to recognizein income is driven by the calculation of the constant effective yield. Whencalculating this yield, we assume that prepayments will continue from theanalysis date to the date of the security’s expected maturity at our most recentthree-month prepayment rate. The prepayment rate is updated monthly based onour previous three-month actual prepayment experience.

We utilize three-month prepayment rates to anticipateprepayments because such rates are based on our own actual prepaymentexperience and because we believe three-month rates are a better estimate offuture experience than either one-month or six-month or longer rates. In theopinion of management, a one-month rate does not capture enough experience topredict future prepayment behavior and may create undue volatility in interestincome due to one-time fluctuations in prepayment activity. Conversely, in theopinion of management, a six-month or longer rate would not capture enoughvolatility to predict future prepayment behavior.

If a difference arises between our estimatedprepayments and our actual prepayments received, the constant effective yieldis recalculated based on our actual payments to date and anticipated futurepayments. This monthly recalculation results in the carrying value of thesecurity being adjusted to the amount that would have existed had the neweffective yield been applied since the purchase date, and a correspondingcharge or credit is recognized to interest income.

For securities that do not represent holdings of largenumbers of similar loans for which prepayments are probable and the timing andamount of prepayments can be reasonably estimated, the associated premiums anddiscounts are amortized or accreted over their contractual term using the constanteffective yield. Actual prepayment experience for such securities is reviewedmonthly and a proportionate amount of premium or discount is recognized inincome at that time such that the effective yield on the remaining portion ofthe securities continues unchanged.

As of and for the years ended December 31, 2005,2004, and 2003, we anticipated prepayments on our mortgage-backed securities. Allother securities, including Federal agency securities, state and politicalsubdivisions, corporate debt, U.S. Treasury securities, and foreign governmentsecurities do not meet the SFAS 91 criteria for anticipating prepayments. Accordingly,no prepayments were anticipated for these securities.

In addition to investingin both variable and fixed-rate securities, we use derivative instruments tomanage our exposure to interest rate risks. See the “Market Risk” section formore detailed information.

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*Operating Expenses*

Totaloperating expenses were $460.1 million in 2005, up 15% from 2004. The increasein total operating expenses was primarily due to increased compensation andbenefits, technology and telecommunications, transaction processing services,travel and sales promotion, loss and loss adjustment expenses and otheroperating expenses, as detailed below. The components of operating expenseswere as follows (Dollars in thousands):

| ** **                         | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **Change** | ** ** |
| Compensation and  benefits         |       | $                                                            | 250,459    |   | $ | 205,728 |   |   | 22 | % |   |
| Technology and  telecommunications |       | 54,732                                                       |       | 49,816 |   |   | 10 | % |   |
| Transaction  processing services   |       | 49,873                                                       |       | 42,159 |   |   | 18 | % |   |
| Depreciation and  amortization     |       | 31,578                                                       |       | 32,124 |   |   | (2 | )% |   |
| Occupancy                          |       | 26,490                                                       |       | 29,032 |   |   | (9 | )% |   |
| Professional fees                  |       | 13,380                                                       |       | 15,346 |   |   | (13 | )% |   |
| Travel and sales  promotion        |       | 6,825                                                        |       | 5,470 |   |   | 25 | % |   |
| Loss and loss  adjustment expenses |       | 5,837                                                        |       | 924 |   |   | * |   |   |
| Insurance                          |       | 4,219                                                        |       | 4,625 |   |   | (9 | )% |   |
| Other operating  expenses          |       | 16,716                                                       |       | 13,159 |   |   | 27 | % |   |
| Total operating expenses           |       | $                                                            | 460,109    |   | $ | 398,383 |   |   | 15 | % |   |

----

****                    Percentageis not considered meaningful*

Compensation and benefits increased 22% from 2004 dueto higher headcount and annual salary increases. Further increases incompensation expense in 2006 will be primarily dependant upon sales to new andexisting clients, the full year impact of staff additions made in 2005 relatedto the overall growth of our business, annual salary increases and the fullyear effect of the adoption of SFAS 123R.

Technology and telecommunications expense increased10% from 2004 as a result of increased infrastructure investments in 2005. Theincrease is also due to our outsourcing agreement with IBM, which we enteredinto in July of 2004. A portion of the increase is offset by lowercompensation costs due to employees transferring to IBM. Also, increases in ourprocessing volumes drove higher technology and telecommunications expense. Generally,we expect technology reinvestment to equal approximately 18-20% of netoperating revenue each year, including related compensation costs.

Transaction processing services expense increased 18%from 2004 as a result of higher global asset values and transactions with oursubcustodians. Future transaction processing servicing expense will bedependent on asset levels and the volume of client transaction activity.

Professional fees expense decreased 13% from 2004, primarilydue to lower subadvisory expense associated with our Merrimac money marketfunds, resulting from lower average fund balances. Future professional fees aredependent upon changes in the value of the Merrimac portfolios and upon otherbusiness needs for outside professional services.

Travel and sales promotion expense increased 25% from2004. Travel and sales promotion expense consists of expenses incurred by thesales force, client management staff and other employees in connection withsales calls on potential clients, as wellas traveling to existing client sites and our foreign offices. The increasesresulted from a higher level of travel to client sites, a higher level of salescalls to potential clients, attendance at industry conferences, and travelrelated to the establishment of our new European offices. Travel and salesexpense may increase in 2006, dependent upon new business leads and otherclient and business needs.

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The increase in loss and loss adjustment expenses from2004 to 2005 is due to a processing error identified during the fourth quarterof 2005.

Other operating expenseincreased 27% from 2004 primarily as a result of higher recruiting and staffingexpense. We expect other operating expense to increase in 2006 due to staffingand recruiting costs as a result of the growth of our business.

*Income Taxes*

Income taxes were $76.0 million for the year ended December 31,2005, up 4% from the same period in 2004. The increase in income taxes and theeffective tax rate (excluding the effect of Accounting Principles Board OpinionNo. 23, *Accounting for Income Taxes—SpecialArea*s (“APB 23”)) is primarily attributable to increased pretaxearnings as well as a decrease in the percentage of tax-exempt income to pretaxincome. The increase in income taxes was partially offset by the reversal of adeferred income tax liability related to the undistributed earnings of ourIrish subsidiaries. During the second quarter of 2005, we recognized theindefinite reversal provision of APB 23, which specifies that U.S. income taxesshould not be recorded on the undistributed earnings of a foreign subsidiary ifthose undistributed earnings have been or will be invested indefinitely in thatsubsidiary. We have determined that the undistributed earnings of our Irishsubsidiaries will be permanently invested in our Irish operations to supportcontinued growth.

In 2006, we expect thatour effective tax rate will approximate 34.5% of pretax income.

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

Net income for the yearended December 31, 2004 was $142.0 million, up 54% from $92.4 million forthe same period in 2003. The principal factors contributing to our net incomegrowth were growth in asset servicing fees of 27% in addition to a 22% increasein net interest income. Net income growth was partially offset by a 16%increase in operating expenses, largely due to new business, additionalheadcount 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 itslater partial reversal resulting from our settlement with the MassachusettsDepartment of Revenue. Absent the effects of this tax matter, net income forthe year ended December 31, 2004 increased 43% from net operating incomefor the same period in 2003. We provide a full reconciliation of this non-GAAPmeasure in the Overview of this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

*Fees and OtherRevenue*

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

| ** **                    | ** ** | **For the Year Ended  December 31,** | ** ** |
|-------------------------------|------------|----------------------------------------------------------|------------|
| ** **                    | ** ** | **2004**                                                 | ** ** | **2003** | ** ** | **Change** | ** ** |
| Total asset  servicing fees   |       | $                                                        | 423,200    |   | $ | 333,586 |   |   | 27 | % |   |
| Other operating  income       |       | 2,057                                                    |       | 2,607 |   |   | (21 | )% |   |
| Gain on sale of  investment   |       | 234                                                      |       | — |   |   | * |   |   |
| Total fees and other  revenue |       | $                                                        | 425,491    |   | $ | 336,193 |   |   | 27 | % |   |

----

****                    Percentageis not considered meaningful*

The largest components of asset servicing fees arecustody, multicurrency accounting and fund administration, which increased 24%to $314.3 million for the year ended December 31, 2004 from $254.2 millionfor the same period in 2003.

34

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Thechange in net assets processed includes the following components (Dollars inbillions):

| ** **                                 | ** ** | **For the Year Ended  December 31, 2004** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Net assets  processed, beginning of period |       |                                                               | $          | 1,057 |   |   |
| Change in net  assets processed:           |       |                                                               |       |   |   |
| Sales to new clients                       |       |                                                               | 54         |   |   |
| Further penetration of existing clients    |       |                                                               | 37         |   |   |
| Lost clients                               |       |                                                               | (3         | ) |   |
| Fund flows and market gain                 |       |                                                               | 285        |   |   |
| Total change in net assets processed       |       |                                                               | 373        |   |   |
| Net assets  processed, end of period       |       |                                                               | $          | 1,430 |   |   |

 

Themajority of the increase in assets processed was due to sales to new andexisting clients, the ability of our clients to develop and sell product, whichgenerates fund flows that have a direct, positive impact on our business, andhigher asset values compared to a year ago.

·       Foreignexchange fees were $54.5 million for the year ended December 31, 2004, up49% from the same period in 2003. The increase in foreign exchange fees isattributable to new business, increased volume of client activity andvolatility in currency markets.

·       Cashmanagement fees were $26.4 million for the year ended December 31, 2004,up 26% from the same period in 2003. The increase is primarily due to higher balancesplaced by our clients in the cash management products we offer.

·       Investment advisory feeswere $15.0 million for the year ended December 31, 2004, up 28% from thesame period in 2003. The increase in investment advisory fees is attributableto increased average asset values of the Merrimac money market funds, aninvestment company for which we act as advisor, and where a portion of excessclient cash balances are invested.

·       Securities lending feeswere $10.4 million for the year ended December 31, 2004, up 17% from thesame period in 2003, primarily due to improved spreads and volumes.

*Net Interest Income*

Thefollowing table presents the components of net interest income (Dollars inthousands):

| ** **                 | ** ** | **For the Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------------------------|------------|
| ** **                 | ** ** | **2004**                                                     | ** ** | **2003** | ** ** | **Change** | ** ** |
| Interest income            |       | $                                                            | 313,149    |   | $ | 247,094 |   |   | 27 | % |   |
| Interest expense           |       | 125,469                                                      |       | 93,180 |   |   | 35 | % |   |
| Total net interest  income |       | $                                                            | 187,680    |   | $ | 153,914 |   |   | 22 | % |   |

 

The improvement in our net interest income wasprimarily due to balance sheet growth, driven by healthy client funding,partially offset by lower investment spreads.

During 2004 we employed a strategy of prepayinghigh-rate borrowings and replacing them with lower cost term funding in orderto maintain our net interest margin. Prepayment fees incurred during 2004 were$6.8 million, compared to $3.1 million during 2003. This strategy combined witha rising interest rate environment during the second half of 2004 resulted in a5 basis point increase in the average rate paid on interest-bearing liabilitiesto 1.39% for the year ended December 31, 2004 from 1.34% for the sameperiod in 2003.

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Thetable below presents the changes in net interest income resulting from changesin the volume of interest-earning assets or interest-bearing liabilities andchanges in interest rates for the year ended December 31, 2004 compared tothe year ended December 31, 2003. Changes attributed to both volume andrate 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 ** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **Change Due  to Volume **                                                                          | ** ** | **Change Due  To Rate ** | ** ** | **Net ** | ** ** |
| **Interest-earning assets**                                      |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Fed funds sold  and securities purchased under resale agreements |       |                                                                                                               | $          | 275 |   |   |   | $ | 66 |   |   | $ | 341 |   |
| Investment  securities                                           |       |                                                                                                               | 69,525     |   |   |   | (4,821 | ) |   | 64,704 |   |
| Loans                                                            |       |                                                                                                               | 1,057      |   |   |   | (47 | ) |   | 1,010 |   |
| Total  interest-earning assets                                   |       |                                                                                                               | $          | 70,857 |   |   |   | $ | (4,802 | ) |   | $ | 66,055 |   |
| **Interest-bearing  liabilities**                                |       |                                                                                                               |       |   |   |   |   |   |   |   |   |
| Deposits                                                         |       |                                                                                                               | $          | 17,767 |   |   |   | $ | (6,865 | ) |   | $ | 10,902 |   |
| Borrowings                                                       |       |                                                                                                               | 5,311      |   |   |   | 16,076 |   |   | 21,387 |   |
| Total  interest-bearing liabilities                              |       |                                                                                                               | $          | 23,078 |   |   |   | $ | 9,211 |   |   | $ | 32,289 |   |
| Change in net interest  income                                   |       |                                                                                                               | $          | 47,779 |   |   |   | $ | (14,013 | ) |   | $ | 33,766 |   |

 

*Operating Expenses*

Totaloperating expenses were $398.4 million in 2004, up 16% from 2003. The growth inour cost structure was largely driven by the new business that we won during2004, which required us to invest in headcount and technology. The componentsof operating expenses were as follows (Dollars in thousands):

| ** **                         | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                                     | ** ** | **2003** | ** ** | **Change** | ** ** |
| Compensation and  benefits         |       | $                                                            | 205,728    |   | $ | 186,932 |   |   | 10 | % |   |
| Technology and  telecommunications |       | 49,816                                                       |       | 38,914 |   |   | 28 | % |   |
| Transaction  processing services   |       | 42,159                                                       |       | 33,299 |   |   | 27 | % |   |
| Depreciation and  amortization     |       | 32,124                                                       |       | 27,971 |   |   | 15 | % |   |
| Occupancy                          |       | 29,032                                                       |       | 29,218 |   |   | (1 | )% |   |
| Professional fees                  |       | 15,346                                                       |       | 11,189 |   |   | 37 | % |   |
| Travel and sales  promotion        |       | 5,470                                                        |       | 4,822 |   |   | 13 | % |   |
| Loss and loss  adjustment expenses |       | 924                                                          |       | 799 |   |   | 16 | % |   |
| Insurance                          |       | 4,625                                                        |       | 3,203 |   |   | 44 | % |   |
| Other operating  expenses          |       | 13,159                                                       |       | 8,574 |   |   | 53 | % |   |
| Total operating expenses           |       | $                                                            | 398,383    |   | $ | 344,921 |   |   | 16 | % |   |

 

Compensation and benefits increased $18.8 million, or10%, from 2003. Salaries increased due to higher headcount and annual meritraises. These increases were partially offset by employee costs that shifted totechnology and telecommunications expense as part of our outsourcingarrangement with IBM that we initiated in the summer of 2004.

Technology and telecommunications expense increased$10.9 million, or 28%, from 2003 as a result of increased infrastructureinvestments in 2004. As mentioned previously, we entered into an agreement withIBM in the summer of 2004 to outsource certain technical infrastructureservices. Service expense under this agreement was $9.5 million during 2004,which included initial start-up costs. The costs of these 

36

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services were partiallyoffset by decreases in other technology and telecommunications expenses, as theservices were previously performed internally or by other service providers.

Transaction processing services expense increased 27%from 2003 as a result of higher global asset values and transactions with oursubcustodians.

Depreciation and amortization expense increased 15%from 2003. This increase resulted from the completion of capitalized softwareprojects in late 2003 and early 2004 and their placement into service. Thisincrease was partially offset by fully depreciated equipment from our 2001assumption of BGI’s North American asset administration unit.

Professional fees expense increased 37% from 2003,primarily due to increased fees associated with the Merrimac money market funds.The Merrimac fees are asset based and grew along with the assets of theportfolios during 2004. Also in 2004, we incurred additional technicalconsulting fees as we hired external consultants to assist with technologyinitiatives.

Travel and sales promotion expense increased 13% from2003.

Insurance expense was up 44% from 2003. In May 2003,our five-year fixed-rate insurance policy expired, resulting in increasedpremiums.

Other operating expenseincreased 53% from 2003. The primary contributors to the increase includedhigher regulatory assessments due to higher deposit liabilities, higherrecruiting expense due to increased staffing needs, increased advertisingexpense and increased miscellaneous office expense due to the overall growth ofour business.

*Income Taxes*

Income taxes were $72.8 million for the year ended December 31,2004, up 38% from the same period in 2003. This increase is attributable to a48% increase in pretax earnings for the year ended December 31, 2004 fromthe same period in 2003.

37

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The following tablespresent average balances, interest income and expense, and yields earned orpaid on the major categories of assets and liabilities for the periodsindicated (Dollars in thousands):

| ** **                                                           | ** ** | **Year Ended December 31, 2005** | ** ** | **Year Ended December 31, 2004** | ** ** | **Year Ended December 31, 2003** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                           | ** ** | **Average  Balance**                                 | ** ** | **Interest**                                         | ** ** | **Average  Yield/Cost**                              | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/Cost** | ** ** |
| **Interest-earning assets**                                          |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal Funds sold  and securities purchased under resale agreements |       | $                                                    | 66,926     |                                                 | $          | 2,250                                                |       |   | 3.36 | % |   | $ | 52,544 |   | $ | 667 |   |   | 1.27 | % |   | $ | 30,236 |   | $ | 326 |   |   | 1.08 | % |   |
| Investment securities:(1)                                            |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities                                          |       | 8,034,870                                            |       | 315,845                                              |       |                                                 | 3.93       |   |   | 6,677,678 |   | 221,248 |   |   | 3.31 |   |   | 5,065,472 |   | 170,700 |   |   | 3.37 |   |   |
| Federal agency  securities                                           |       | 2,333,005                                            |       | 89,864                                               |       |                                                 | 3.85       |   |   | 2,084,988 |   | 53,977 |   |   | 2.59 |   |   | 1,675,520 |   | 46,455 |   |   | 2.77 |   |   |
| State and  political   securities                                    |       | 465,451                                              |       | 21,217                                               |       |                                                 | 4.56       |   |   | 490,621 |   | 22,300 |   |   | 4.55 |   |   | 437,182 |   | 20,477 |   |   | 4.68 |   |   |
| Other securities                                                     |       | 230,832                                              |       | 9,267                                                |       |                                                 | 4.01       |   |   | 299,529 |   | 10,370 |   |   | 3.46 |   |   | 220,199 |   | 5,559 |   |   | 2.52 |   |   |
| Total investment  securities                                         |       | 11,064,158                                           |       | 436,193                                              |       |                                                 | 3.94       |   |   | 9,552,816 |   | 307,895 |   |   | 3.22 |   |   | 7,398,373 |   | 243,191 |   |   | 3.29 |   |   |
| Loans(2)                                                             |       | 233,572                                              |       | 9,262                                                |       |                                                 | 3.97       |   |   | 165,564 |   | 4,587 |   |   | 2.77 |   |   | 127,452 |   | 3,577 |   |   | 2.81 |   |   |
| Total  interest-earning assets                                       |       | 11,364,656                                           |       | 447,705                                              |       |                                                 | 3.94       |   |   | 9,770,924 |   | 313,149 |   |   | 3.20 |   |   | 7,556,061 |   | 247,094 |   |   | 3.27 |   |   |
| Allowance for loan  losses                                           |       | (100                                                 | )          |                                                 |       |                                                 |       |   |   | (100 | ) |   |   |   |   |   |   | (100 | ) |   |   |   |   |   |   |
| Noninterest-earning  assets(4)                                       |       | 701,967                                              |       |                                                 |       |                                                 |       |   |   | 535,191 |   |   |   |   |   |   |   | 584,024 |   |   |   |   |   |   |   |
| Total assets                                                         |       | $                                                    | 12,066,523 |                                                 |       |                                                 |       |   |   |   | $ | 10,306,015 |   |   |   |   |   |   |   | $ | 8,139,985 |   |   |   |   |   |   |   |
| **Interest-bearing liabilities**                                     |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                            |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand                                                               |       | $                                                    | 24,470     |                                                 | $          | 866                                                  |       |   | 3.54 | % |   | $ | — |   | $ | — |   |   | 0.00 | % |   | $ | — |   | $ | — |   |   | 0.00 | % |   |
| Savings                                                              |       | 3,428,223                                            |       | 74,391                                               |       |                                                 | 2.17       |   |   | 3,947,865 |   | 49,622 |   |   | 1.26 |   |   | 2,667,034 |   | 39,809 |   |   | 1.49 |   |   |
| Time                                                                 |       | 80,729                                               |       | 2,449                                                |       |                                                 | 3.03       |   |   | 68,594 |   | 1,099 |   |   | 1.60 |   |   | 1,356 |   | 10 |   |   | 0.74 |   |   |
| Securities sold  under repurchase agreements(3)                      |       | 5,244,614                                            |       | 142,681                                              |       |                                                 | 2.72       |   |   | 4,162,132 |   | 54,376 |   |   | 1.31 |   |   | 3,278,555 |   | 29,371 |   |   | 0.90 |   |   |
| Junior  subordinated debentures(4)/ trust preferred securities       |       | 24,774                                               |       | 2,420                                                |       |                                                 | 9.77       |   |   | 24,774 |   | 2,420 |   |   | 9.77 |   |   | 24,194 |   | 2,364 |   |   | 9.77 |   |   |
| Other borrowings(5)                                                  |       | 1,643,948                                            |       | 54,473                                               |       |                                                 | 3.31       |   |   | 841,708 |   | 17,952 |   |   | 2.13 |   |   | 1,008,036 |   | 21,626 |   |   | 2.15 |   |   |
| Total interest-bearing liabilities                              |       | 10,446,758                                           |       | 277,280                                              |       |                                                 | 2.65       |   |   | 9,045,073 |   | 125,469 |   |   | 1.39 |   |   | 6,979,175 |   | 93,180 |   |   | 1.34 |   |   |
| Noninterest-bearing  liabilities:                                    |       |                                                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                      |       | 305,289                                              |       |                                                 |       |                                                 |       |   |   | 252,246 |   |   |   |   |   |   |   | 241,594 |   |   |   |   |   |   |   |
| Savings                                                              |       | 61,745                                               |       |                                                 |       |                                                 |       |   |   | 72,536 |   |   |   |   |   |   |   | 130,747 |   |   |   |   |   |   |   |
| Noninterest-bearing  time deposits                                   |       | 198,849                                              |       |                                                 |       |                                                 |       |   |   | 154,617 |   |   |   |   |   |   |   | 112,575 |   |   |   |   |   |   |   |
| Other liabilities                                                    |       | 295,330                                              |       |                                                 |       |                                                 |       |   |   | 155,579 |   |   |   |   |   |   |   | 191,971 |   |   |   |   |   |   |   |
| Total liabilities                                                    |       | 11,307,971                                           |       |                                                 |       |                                                 |       |   |   | 9,680,051 |   |   |   |   |   |   |   | 7,656,062 |   |   |   |   |   |   |   |
| Equity                                                               |       | 758,552                                              |       |                                                 |       |                                                 |       |   |   | 625,964 |   |   |   |   |   |   |   | 483,923 |   |   |   |   |   |   |   |
| Total liabilities  and equity                                        |       | $                                                    | 12,066,523 |                                                 |       |                                                 |       |   |   |   | $ | 10,306,015 |   |   |   |   |   |   |   | $ | 8,139,985 |   |   |   |   |   |   |   |
| Net interest  income                                                 |       |                                                 |       | $                                                    | 170,425    |                                                 |       |   |   |   |   |   | $ | 187,680 |   |   |   |   |   |   |   | $ | 153,914 |   |   |   |   |   |
| Net interest  margin(6)                                              |       |                                                 |       |                                                 |       |                                                 | 1.50       | % |   |   |   |   |   |   | 1.92 | % |   |   |   |   |   |   | 2.04 | % |   |
| Average interest rate spread(7)                                 |       |                                                 |       |                                                 |       |                                                 | 1.29       | % |   |   |   |   |   |   | 1.81 | % |   |   |   |   |   |   | 1.93 | % |   |
| Ratio of  interest-earning   assets to interest-bearing liabilities  |       |                                                 |       |                                                 |       |                                                 | 108.79     | % |   |   |   |   |   |   | 108.02 | % |   |   |   |   |   |   | 108.27 | % |   |

----

(1)             Average yield/cost on available for salesecurities is based on amortized cost.

(2)             Average yield/cost on demand loansincludes only performing loan balances. During the years endedDecember 31, 2005, 2004 and 2003 there were no non-performing loan balances.

(3)             Interest expense includes penalties of$2.9 million in 2004 for prepayment of two term repurchase agreements.

(4)             Effective October 1, 2003, theCompany adopted the provisions of FIN 46 (revised December 2003), whichresulted in the deconsolidation of Investors Capital Trust I, the trust thatholds the trust preferred securities.

(5)             Interest expense includes contractualprepayment penalties of $3.9 million and $3.1 million in 2004 and 2003, respectively,for prepayment of certain FHLBB borrowings.

(6)             Net interest income divided by totalinterest-earning assets.

(7)             Yield on interest-earning assets less ratepaid on interest-bearing liabilities.

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**Financial Condition**

At December 31, 2005,our total assets were $12.1 billion, up 8% from December 31, 2004. Averageinterest-earning assets increased $1.6 billion, or 16%, for the year ended December 31,2005 compared to the same period last year. Our asset growth was primarilyfunded by increases in average external borrowings, including repurchaseagreements, of approximately $1.6 billion for the year ended December 31,2005.

*InvestmentPortfolio*

Theincome we derive from our investment portfolio is generated primarily byinvesting client cash balances and is a component of our asset processingbusiness. In addition, we use the investment portfolio to secure open positionsat securities clearing institutions in connection with our custody services. Thefollowing table summarizes our investment portfolio as of the dates indicated(Dollars in thousands):

| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Securities held to maturity:**     |       |                  |       |   |   |   |   |
| Mortgage-backed  securities          |       | $                     | 4,342,254  |   | $ | 3,543,961 |   | $ | 2,272,030 |   |
| Federal agency  securities           |       | 2,305,331             |       | 2,274,665 |   | 1,906,554 |   |
| State and  political subdivisions    |       | 114,345               |       | 124,091 |   | 127,632 |   |
| Total securities  held to maturity   |       | $                     | 6,761,930  |   | $ | 5,942,717 |   | $ | 4,306,216 |   |
| **Securities  available for sale:**  |       |                  |       |   |   |   |   |
| Mortgage-backed  securities          |       | $                     | 3,766,101  |   | $ | 3,854,900 |   | $ | 3,611,980 |   |
| State and  political subdivisions    |       | 392,391               |       | 404,909 |   | 355,828 |   |
| Corporate debt                       |       | 200,692               |       | 176,546 |   | 175,816 |   |
| US Treasury  securities              |       | —                |       | 118,688 |   | 113,701 |   |
| Federal agency  securities           |       | —                |       | — |   | 29,609 |   |
| Foreign government  securities       |       | 10,536                |       | 10,462 |   | 9,703 |   |
| Total securities  available for sale |       | $                     | 4,369,720  |   | $ | 4,565,505 |   | $ | 4,296,637 |   |

 

The $0.8 billion, or 14%, increase in our held tomaturity securities portfolio from December 31, 2004 to December 31,2005 is primarily due to investment security purchases allowing us to utilizeour capital, while maintaining an acceptable risk profile. Our investmentsecurity purchases primarily consisted of floating interest ratemortgage-backed securities which offer an attractive yield and reprice asinterest rates increase. Our held to maturity portfolio securities arepurchased with the intent and ability to hold to maturity and are not viewed asour primary source of funds to satisfy liquidity needs.

Our available for sale securities portfolio decreased$0.2 billion, or 4% from December 31, 2004 to December 31, 2005. Thedecrease was mainly due to sales of U.S. Treasuries and municipal securitiesduring 2005 and investment security maturities and prepayments, partiallyoffset by purchases of investment securities. Our investment security purchasesprimarily included mortgage-backed securities and municipal securities. Webelieve that purchasing these securities allows us to take advantage ofattractive yields and cash flows which aligns with our asset and liabilitystrategy. Refer to the gap analysis under the “Market Risk” section foradditional details regarding the matching of our interest-earning assets andinterest-bearing liabilities.

The average balance of our investment securities forthe year ended December 31, 2005 was $11.1 billion, with an average yieldof 3.94%, compared to an average balance of $9.6 billion with an average yieldof 3.22% during the same period in 2004. The increase in yield is primarily dueto our variable-rate securities repricing at higher interest rates. Anticipatingprepayments in calculating the constant effective yield for mortgage-backedsecurities may result in more monthly earnings volatility due to the impact of 

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changing interest ratesand the resulting adjustments to the amount of amortization. A rising rateenvironment will generally decrease the rate of prepayments, which may have theeffect of lengthening the expected maturity of mortgage-backed securities. Accordingly,the amount of amortization recognized each period will decline, but the sametotal net premium will be spread over a longer time horizon, thereby increasingnet income in the then current period. In a decreasing rate environment, therate of prepayments generally increases, which may have the effect ofshortening the expected maturity of the mortgage-backed securities andtherefore increasing the amount of amortization, thereby decreasing net incomein the then current period. We do not expect changes to our amount ofamortization resulting from anticipating prepayments to have a material effecton our future reported financial results or financial condition.

Prepayment cash flow levels on our Federal agencysecurities increased in 2005, which we believe were attributable to the expirationof borrower prepayment penalties, increased refinancing and loan payoffactivity. Mortgaged-backed security prepayment cash flow levels also increasedfor most of 2005, primarily attributable to increased refinancingopportunities.

We invest in mortgage-backed securities and Federalagency securities to increase the total return of the investment portfolio. Mortgage-backedsecurities and Federal agency bonds generally have a higher yield than U.S.Treasury securities due to credit and prepayment risk. Credit risk results fromthe possibility that a loss may occur if a counterparty, such as the Federalagency issuing the securities, is unable to meet the terms of the contract. Creditrisk related to mortgage-backed securities and Federal agency bonds issubstantially reduced by payment guarantees and credit enhancements. Prepaymentrisk results from the possibility that changes in interest rates and othereconomic factors will result in investment securities being paid off earlierthan the scheduled maturity date. Refer to the “Market Risk” section foradditional details regarding our net interest income simulation model, whichincludes the impact of changes in interest rates, and therefore prepaymentrisk, on our net interest income.

We invest in AAA rated, insured municipal securitiesto generate stable, tax advantaged income. Municipal securities generally havelower stated yields than Federal agency and U.S. Treasury securities, but theirafter-tax yields are comparable. Municipal securities are subject to call risk.Call risk is similar to prepayment risk and results from the possibility thatfluctuating interest rates and other factors may result in the exercise of thecall option by the issuing municipality prior to the maturity date of the bond.

Thecarrying value, weighted-average yield, and contractual maturity of oursecurities held to maturity at December 31, 2005 are reflected in thefollowing table (Dollars in thousands):

| ** **                               | ** ** | **Years**        | ** ** |
|------------------------------------------|------------|------------------|------------|
| ** **                               | ** ** | **Under 1** | ** ** | **1 to 5** | ** ** | **5 to 10** | ** ** | **Over 10** | ** ** |
| ** **                               | ** ** | **Amount**       | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| Mortgage-backed securities               |       |             | $          | 118 |   |   |   | 6.31 | % |   |   | $ | 21,127 |   |   |   | 4.90 | % |   | $ | 3,993 |   |   | 6.23 | % |   | $ | 4,317,016 |   |   | 4.80 | % |   |
| Federal agency securities                |       |             | —     |   |   |   | — |   |   |   | 3,814 |   |   |   | 4.90 |   |   | 237,101 |   |   | 4.78 |   |   | 2,064,416 |   |   | 4.48 |   |   |
| State and political subdivisions         |       |             | 3,754      |   |   |   | 6.33 |   |   |   | 3,844 |   |   |   | 5.33 |   |   | 13,286 |   |   | 4.82 |   |   | 93,461 |   |   | 4.97 |   |   |
| Total securities held  to maturity  |       |             | $          | 3,872 |   |   |   | 6.33 | % |   |   | $ | 28,785 |   |   |   | 4.96 | % |   | $ | 254,380 |   |   | 4.81 | % |   | $ | 6,474,893 |   |   | 4.70 | % |   |

 

Thecarrying value, weighted-average yield, and contractual maturity of oursecurities available for sale at December 31, 2005 are reflected in thefollowing table (Dollars in thousands):

| ** **                           | ** ** | **Years**        | ** ** |                 |
|--------------------------------------|------------|------------------|------------|----------------------|
| ** **                           | ** ** | **Under 1** | ** ** | **1 to 5** | ** ** | **5 to 10** | ** ** | **Over 10** | ** ** |   |
| ** **                           | ** ** | **Amount**       | ** ** | **Yield**            | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| Mortgage-backed securities           |       |             | $          | —               |   |   |   | 0.00 | % |   | $ | 56,861 |   |   | 4.90 | % |   | $ | 486 |   |   | 6.23 | % |   | $ | 3,708,754 |   |   | 4.34 | % |   |   |
| State and political subdivisions     |       |             | 498        |                 |   |   | 4.45 |   |   | 66,697 |   |   | 4.71 |   |   | 102,365 |   |   | 4.05 |   |   | 222,831 |   |   | 3.78 |   |   |   |
| Corporate debt                       |       |             | —     |                 |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | 200,692 |   |   | 5.10 |   |   |   |
| Foreign government                   |       |             | —     |                 |   |   | — |   |   | 10,536 |   |   | 3.82 |   |   | — |   |   | — |   |   | — |   |   | — |   |   |   |
| Total securities  available for sale |       |             | $          | 498                  |   |   |   | 4.45 | % |   | $ | 134,094 |   |   | 4.72 | % |   | $ | 102,851 |   |   | 4.06 | % |   | $ | 4,132,277 |   |   | 4.35 | % |   |   |

 

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

*Loan Portfolio*

Our loan portfolio increased $267.8 million, or 199%,from 2004 to 2005 primarily due to an increase in loans to mutual funds.

Thefollowing table summarizes our loan portfolio for the dates indicated (Dollarsin thousands):

| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Loans to mutual  funds           |       | $                     | 286,144    |   | $ | 22,520 |   | $ | 104,954 |   | $ | 49,372 |   | $ | 50,359 |   |
| Loans to  individuals            |       | 81,392                |       | 69,402 |   | 67,641 |   | 76,263 |   | 164,443 |   |
| Loans to others                  |       | 34,934                |       | 42,708 |   | 27,035 |   | 18,202 |   | 17,411 |   |
|                             |       | 402,470               |       | 134,630 |   | 199,630 |   | 143,837 |   | 232,213 |   |
| Less: allowance  for loan losses |       | (100                  | )          | (100 | ) | (100 | ) | (100 | ) | (100 | ) |
| Net loans                        |       | $                     | 402,370    |   | $ | 134,530 |   | $ | 199,530 |   | $ | 143,737 |   | $ | 232,113 |   |
| Floating rate                    |       | $                     | 402,458    |   | $ | 134,618 |   | $ | 199,618 |   | $ | 143,825 |   | $ | 232,189 |   |
| Fixed rate                       |       | 12                    |       | 12 |   | 12 |   | 12 |   | 24 |   |
| Gross loans                      |       | $                     | 402,470    |   | $ | 134,630 |   | $ | 199,630 |   | $ | 143,837 |   | $ | 232,213 |   |

 

We make loans to individually managed accountcustomers and to mutual funds and other pooled product clients. We offeroverdraft protection and lines of credit to our clients for the purpose offunding redemptions, covering overnight cash shortfalls, leveraging portfoliosand meeting other client borrowing needs. The majority of loans to individuallymanaged account customers are written on a demand basis, bear variable interestrates tied to the Prime rate or the Federal Funds rate and are fully secured byliquid collateral, primarily freely tradable securities held in custody by usfor the borrower. We monitor the value of collateral daily to ensure the amountof collateral held by us exceeds the loan balance by a certain threshold. Loansto mutual funds and other pooled product clients include unsecured lines ofcredit that may, in the event of default, be collateralized at our option bysecurities held in custody by us for those clients. Loans to individuallymanaged account customers, mutual funds and other pooled product clients alsoinclude advances that we make to certain clients pursuant to the terms of ourcustody agreements with those clients to facilitate securities transactions andredemptions.

At December 31, 2005, our only lendingconcentrations that exceeded 10% of total loan balances were the lines ofcredit to mutual fund clients discussed above. These loans were made in theordinary course of business on the same terms and conditions prevailing at thetime for comparable transactions.

We periodically issue lines of credit and advances toour mutual fund clients to help those clients with security transactions. ThePresident of one of our clients is a related party to James M. Oates, a memberof our Board of Directors. At December 31, 2005, we had total contractualagreements for $150.0 million of committed lines of credit with two mutualfunds within the related party complex (the “mutual funds”). The primary sourceof repayment of the loans is the proceeds from the sale of investments in thenormal course of the mutual funds’ business. As part of the agreement, themutual funds are required to segregate and maintain specific collateral for usequal to 200% of the lines of credit. At December 31, 2005, loans due fromthe mutual funds totaled $125.0 million. There were no loans outstanding fromany related party mutual fund complex at December 31, 2004.

In January 2006, we entered into a $30.0 millioncommitted line of credit agreement with a series of trusts (“the trusts”). EdwardF. Hines, a member of our Board of Directors, is a trustee of the trusts and isa partner in the firm that manages the assets held in the trusts. The line ofcredit is secured by assets of the 

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trusts, which assets areheld by Investors Bank as custodian. The primary source of repayment of theloans is the proceeds from the sale of investments in the normal course of thetrusts’ business.

The terms and conditions of our contractual agreementswith the mutual funds and trusts discussed above, including collateralrequirements, lending limits and fees, are consistent with other lendingclients that have similar composition, size and overall business relationshipswith us. Also, Mr. Oates and Mr. Hines abstain from voting on anyboard matter involving the proposed transactions with the mutual funds andtrusts, respectively, discussed above.

Our loan portfolio creditperformance has been excellent. There have been no loan charge-offs in thehistory of our Company. It is our policy to place a loan on nonaccrual statuswhen either principal or interest becomes 60 days past due and the loan’scollateral is not sufficient to cover both principal and accrued interest. Asof December 31, 2005, there were no loans on nonaccrual status, no loansgreater than 90 days past due, and no troubled debt restructurings. Althoughvirtually all of our loans are fully collateralized with freely tradablesecurities, management recognizes some credit risk inherent in the loanportfolio, and has an allowance for loan losses of $0.1 million at December 31,2005, a level which has remained consistent for the past five years. Thisamount is not allocated to any particular loan, but is intended to absorb anyrisk of loss inherent in the loan portfolio. Management actively monitors theloan portfolio and the underlying collateral and regularly assesses theadequacy of the allowance for loan losses.

*Deposits*

Total deposits were $5.0 billion at December 31,2005, down 7% from December 31, 2004. The decrease in our deposit balancesis a result of our clients being more fully invested in the equity and fixedincome markets.

Time deposits withbalances greater than $100,000 totaled $230.1 million and $257.6 million at December 31,2005 and 2004, respectively. All time deposits had a maturity of less thanthree months at December 31, 2005 and 2004.

*RepurchaseAgreements and Short-Term and Other Borrowings*

Asset growth was funded in part by increasedsecurities sold under repurchase agreements. Repurchase agreements increased$0.5 billion, or 13%, from December 31, 2004 to December 31, 2005. Themajority of our repurchase agreements are with clients who prefer a morecollateralized form of deposit. Repurchase agreements provide for the sale ofsecurities for cash coupled with the obligation to repurchase those securities ona set date or on demand. We use repurchase agreements, including clientrepurchase agreements, because they provide a lower cost source of funding thanother short-term borrowings and allow our clients the extra benefit ofcollateralization of their deposits. The average balance of securities soldunder repurchase agreements for the year ended December 31, 2005 was $5.2billion with an average cost of approximately 2.72%, compared to an averagebalance of $4.2 billion and an average cost of approximately 1.31% for the sameperiod in 2004. The increase in the average cost of repurchase agreements wasdue to higher short-term interest rates in 2005 compared to 2004. The averagecost of securities sold under repurchase agreements for the year ended December 31,2004 included penalties of $2.9 million for the prepayment of two termrepurchase agreements. These penalties were incurred to employ an asset andliability strategy in which we replaced high rate borrowings with lower costterm funding. There were no prepayment penalties for the year ended December 31,2005.

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Thefollowing table represents information regarding our securities sold underrepurchase agreements (Dollars in thousands):

| ** **                              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| Outstanding at  end of period           |       |                  | $          | 4,797,868             |       |                  |       | $ | 4,255,497 |   |   |   | $ | 3,258,001 |   |   |
| Maximum  outstanding at any month end   |       |                  | 5,972,855  |                  |       |                  | 4,749,456  |   |   |   | 3,546,131 |   |   |
| Average balance  for the year           |       |                  | 5,244,614  |                  |       |                  | 4,162,132  |   |   |   | 3,278,555 |   |   |
| Weighted-average  rate at end of period |       |                  | 3.55       | %                     |       |                  | 1.98       | % |   |   | 1.09 | % |   |
| Weighted-average rate  for the period   |       |                  | 2.72       | %                     |       |                  | 1.31       | % |   |   | 0.90 | % |   |

 

Short-term and otherborrowings increased $0.8 billion, or 128%, from December 31, 2004 toDecember 31, 2005. We use short-term and other borrowings to offset thevariability of deposit flow. The average balance of short-term and otherborrowings for the year ended December 31, 2005 was $1.6 billion with anaverage cost of approximately 3.31%, compared to an average balance of $0.8billion and an average cost of approximately 2.13% for the same period in 2004.  The increase in the average cost ofshort-term and other borrowings was due to an increase in short-term ratesduring 2005 compared to 2004. The average cost of borrowings for the year endedDecember 31, 2004 included penalties of $3.9 million for the prepayment ofcertain FHLBB borrowings. As discussed above, these penalties were incurred toemploy an asset and liability strategy in which we replaced high rateborrowings with lower cost term funding. There were no prepayment penalties forthe year ended December 31, 2005.

Thefollowing table represents information regarding our Federal Funds purchased(Dollars in thousands):

| ** **                              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| Outstanding at  end of period           |       |                  | $          | 810,511               |       |                  |       | $ | 344,491 |   |   |   | $ | 697,855 |   |   |
| Maximum  outstanding at any month end   |       |                  | 1,603,757  |                  |       |                  | 739,038    |   |   |   | 697,855 |   |   |
| Average balance  for the year           |       |                  | 1,298,684  |                  |       |                  | 491,170    |   |   |   | 432,490 |   |   |
| Weighted-average  rate at end of period |       |                  | 4.25       | %                     |       |                  | 1.94       | % |   |   | 0.99 | % |   |
| Weighted-average  rate for the period   |       |                  | 3.33       | %                     |       |                  | 1.45       | % |   |   | 1.14 | % |   |

 

**Market Risk**

Our clients, in the course of their financial assetmanagement, maintain cash balances, which they can deposit with us on ashort-term basis in interest-bearing accounts or client repurchase agreements. Weeither directly invest these cash balances to earn interest income, or placethese deposits in third-party vehicles and remit a portion of the earnings onthese investments to our clients after deducting a fee as our compensation forinvesting clients’ funds in these investment vehicles. In the conduct of theseactivities, we are subject to market risk.

Market risk is the risk of an adverse financial impactfrom changes in market prices and interest rates. The level of risk we assumeis a function of our overall strategic objectives and liquidity needs, clientrequirements and market volatility. The active management of market risk isintegral to our operations. The objective of interest rate sensitivitymanagement is to provide sustainable net interest income under various economicconditions.

Our balance sheet is primarily subject to interestrate risk, which is the risk of loss due to movements in interest rates. Prepaymentrisk, which is the risk that changes in interest rates and other economicfactors will result in investment securities being paid off earlier than thescheduled maturity date, is inherent in our investment securities, mainly ourmortgage-backed securities and Federal agency bond portfolios. Prepaymentlevels for mortgage-backed securities are primarily driven by changes ininterest 

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rates. Prepayment levelsfor Federal agency securities are driven by a number of factors, includingexpiration of prepayment penalty provisions, the economic condition of theborrower, borrower refinancing alternatives, and interest rates.

Our Board of Directors has set asset and liabilitymanagement policies that define the overall framework for managing interestrate sensitivity, including accountabilities and controls over investmentactivities. These policies delineate investment limits and strategies that areappropriate, given our liquidity and regulatory requirements. For example, wehave established a policy limit stating that projected net interest income overthe next twelve months will not be impacted by more than 10% given a change ininterest rates of up to 200 basis points (+ or -) over twelve months. Eachquarter, our Board of Directors reviews our asset and liability positions,including simulations of the effect of various interest rate scenarios on ourcapital.

The day-to-day responsibility for oversight of theAsset and Liability Management function has been delegated by our Board ofDirectors to our Asset and Liability Committee (“ALCO”). ALCO is a seniormanagement committee consisting of the Chief Executive Officer, the President,the Chief Financial Officer, the Chief Risk Officer and members of the Treasuryfunction. ALCO meets twice monthly. Our primary tool in managing interest ratesensitivity is an income simulation model. Key assumptions in the simulationmodel include the timing of cash flows, which include forecasted prepaymentspeeds that are based on market and industry data, maturities and repricing offinancial instruments, changes in market conditions, capital planning anddeposit sensitivity. The model assumes that the composition of ourinterest-sensitive assets and liabilities will change over the period beingmeasured. The model also assumes that the change in interest rates is aparallel shift of the yield curve across all maturities. These assumptions areinherently uncertain, and as a result, the model cannot precisely predict theeffect of changes in interest rates on our net interest income. Actual resultsmay differ from simulated results due to the timing, magnitude and frequency ofinterest rate changes and changes in market conditions and managementstrategies.

The results of the income simulation model as of both December 31,2005 and 2004 indicated that an upward shift of interest rates by 200 basispoints over a twelve-month period would result in a reduction in projected netinterest income of  approximately 7%,which is within our 10% policy limit. We also simulate a 200 basis point ratereduction over a twelve-month period. This modified simulation would result inan increase in projected net interest income of approximately 1% at December 31,2005 and would have approximately 0% impact at December 31, 2004, bothwithin our 10% policy limit.

We also use gap analysis as a secondary tool to manageour interest rate sensitivity. Gap analysis involves measurement of thedifference in asset and liability repricing on a cumulative basis within aspecified time frame. A positive gap indicates that more interest-earningassets than interest-bearing liabilities mature in a time frame, and a negativegap indicates the opposite. By seeking to minimize the net amount of assets andliabilities that could reprice in the same time frame, we attempt to reduce therisk of significant adverse effects on net interest income caused by interestrate changes. As shown in the cumulative gap position in the table presentedbelow, at December 31, 2005, interest-bearing liabilities repriced fasterthan interest-earning assets in the short term. Generally speaking, during aperiod of falling interest rates, net interest income would be higher than itwould have been until interest rates stabilize. During a period of risinginterest rates, net interest income would be lower than it would have beenuntil interest rates stabilize. Other important determinants of net interestincome are the shape of the yield curve, general rate levels, reinvestmentspreads, balance sheet growth and mix, and interest rate spreads. We continueto run a closely matched balance sheet by investing the majority of our assetsin short duration, variable-rate securities and adding interest rate swapsagainst client liabilities, including client repurchase agreements.

We manage the structure of interest-earning assets andinterest-bearing liabilities by adjusting their mix, yield, maturity and/orrepricing characteristics based on market conditions. Client deposits and 

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repurchase agreements,which are predominantly short term, are our primary sources of funds. Short-termwholesale funding is used to replace temporary deposit outflows and supportbalance sheet growth. We also use term borrowings and interest rate swapagreements to augment our management of interest rate risk. The effect of theswap agreements is to lengthen both a forecasted series of fixed-rate overnightliabilities incurred at different daily fixed rates and short-termvariable-rate liabilities into longer-term fixed-rate liabilities. Theweighted-average fixed-payment rates were 3.51% and 3.09% at December 31,2005 and 2004, respectively. Variable-interest payments received are currentlyindexed to the overnight Federal Funds rate. At December 31, 2005 and2004, the weighted-average rate of variable market-indexed interest paymentobligations to the Company were 4.00% and 2.22%, respectively. The remainingterms of swaps range from 0 to 30 months. These contracts had net fair valuesof approximately $24.2 million and $1.5 million at December 31, 2005 and2004, respectively.

Thefollowing table presents the repricing schedule for our interest-earning assetsand interest-bearing liabilities at December 31, 2005 (Dollars inthousands):

| ** **                                                                             | ** ** | **Within** | ** ** | **Three**       | ** ** | **Six**            | ** ** | **One**                | ** ** | ** **         | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|--------------------|------------|------------------------|------------|--------------------|------------|------------|------------|
| ** **                                                                             | ** ** | **Three**  | ** ** | **To Six** | ** ** | **To Twelve** | ** ** | **Year to**       | ** ** | **Over Five** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **Months** | ** ** | **Months**      | ** ** | **Months**         | ** ** | **Five Years**    | ** ** | **Years**          | ** ** | **Total**  | ** ** |
| Interest-earning assets(1):                                                            |       |       |       |            |       |               |       |                   |       |               |       |       |       |
| Investment securities(2,3)                                                             |       | $          | 6,422,257  |            | $          | 605,630            |       | $                      | 948,944    |               | $          | 2,706,315  |       | $ | 469,115 |   | $ | 11,152,261 |   |
| Loans—variable-rate                                                               |       | 394,158    |       | 8,300           |       | —             |       | —                 |       | —             |       | 402,458    |       |
| Loans—fixed rate                                                                  |       | —     |       | 12              |       | —             |       | —                 |       | —             |       | 12         |       |
| Total interest-earning  assets                                                    |       | 6,816,415  |       | 613,942         |       | 948,944            |       | 2,706,315              |       | 469,115            |       | 11,554,731 |       |
| Interest-bearing liabilities:                                                          |       |       |       |            |       |               |       |                   |       |               |       |       |       |
| Demand deposit accounts                                                                |       | 85,157     |       | —          |       | —             |       | —                 |       | —             |       | 85,157     |       |
| Savings accounts                                                                       |       | 4,137,272  |       | —          |       | —             |       | 58,214                 |       | —             |       | 4,195,486  |       |
| Time deposits                                                                          |       | 55,124     |       | —          |       | —             |       | —                 |       | —             |       | 55,124     |       |
| Interest rate contracts                                                                |       | (1,735,000 | )          | 120,000         |       | 265,000            |       | 1,350,000              |       | —             |       | —     |       |
| Securities sold under  repurchase agreements                                      |       | 4,047,868  |       | 100,000         |       | 150,000            |       | 500,000                |       | —             |       | 4,797,868  |       |
| Short-term and other  borrowings                                                       |       | 1,306,649  |       | —          |       | 50,000             |       | —                 |       | —             |       | 1,356,649  |       |
| Junior subordinated  debentures                                                        |       | —     |       | —          |       | —             |       | 24,774                 |       | —             |       | 24,774     |       |
| Total interest-bearing  liabilities                                                    |       | 7,897,070  |       | 220,000         |       | 465,000            |       | 1,932,988              |       | —             |       | 10,515,058 |       |
| Net interest-sensitivity  gap during the period                                   |       | $          | (1,080,655 | )               | $          | 393,942            |       |  

$ 483,944 |       | $                  | 773,327    |       | $          | 469,115 |   | $ | 1,039,673 |   |
| Cumulative gap                                                                         |       | $          | (1,080,655 | )               | $          | (686,713           | )          | $                      | (202,769   | )                  | $          | 570,558    |       | $ | 1,039,673 |   |   |   |
| Interest-sensitive assets  as a percent of interest-sensitive liabilities (cumulative) |       | 86.32      | %          | 91.54           | %          | 97.64              | %          | 105.43                 | %          | 109.89             | %          |       |       |
| Interest-sensitive assets  as a percent of total assets (cumulative)                   |       | 56.35      | %          | 61.43           | %          | 69.27              | %          | 91.64                  | %          | 95.52              | %          |       |       |
| Net interest-sensitivity  gap as a percent of total assets                             |       | (8.93      | )%         | 3.26            | %          | 4.00               | %          | 6.39                   | %          | 3.88               | %          |       |       |
| Cumulative gap as a  percent of total assets                                           |       | (8.93      | )%         | (5.68           | )%         | (1.68              | )%         | 4.72                   | %          | 8.59               | %          |       |       |

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(1)    Adjustable rate assets are included in the period inwhich interest rates are next scheduled to adjust rather than in the period inwhich they are due. Fixed-rate loans are included in the period in which theyare scheduled to be repaid.

(2)    Mortgage-backed securities are included in the pricingcategory that corresponds with the earlier of their first repricing date orprincipal paydown schedule generated from industry sourced prepaymentprojections. 

(3)    Excludes $21.3 million of unsettled securitiespurchases and $41.9 million of net unrealized losses as of December 31,2005.

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**Liquidity**

Liquidity represents the ability of an institution tomeet present and future financial obligations through either runoff due toprepayments, asset sales, maturity of existing assets or the acquisition ofadditional funds through liability management. For a financial institution suchas ours, these obligations arise from the withdrawals of deposits, the paymentof operating expenses, and the inclusion of capital expenditures for fixedassets and leasehold improvements.

Our primary sources of liquidity include cash and cashequivalents, Federal Funds sold, new deposits, short-term borrowings, interestand principal payments on securities held to maturity and available for sale,fees collected from asset administration clients, FHLBB borrowings and FederalReserve Discount Window borrowings. As a result of our management of liquidassets and our ability to generate liquidity through liability funds,management believes that we maintain overall liquidity sufficient to meet ourdepositors’ needs, to satisfy our operating requirements and to fund thepayment of an anticipated annual cash dividend of $0.09 per share ofoutstanding common stock for 2006 (approximately $5.9 million based upon65,052,637 shares outstanding as of December 31, 2005).

Our ability to pay dividends on common stock maydepend on the receipt of dividends from the Bank. Any dividend payments by theBank are subject to certain restrictions imposed by the MassachusettsCommissioner of Banks. During all periods presented in this report, the Companydid not require dividends from the Bank in order to fund the Company’s owndividends. In addition, we may not pay dividends on our common stock if we arein default under certain agreements entered into in connection with the sale ofour Capital Securities. The Capital Securities were issued in 1997 by InvestorsCapital Trust I, a Delaware statutory business trust sponsored by us, andqualify as Tier 1 capital under the capital guidelines of the Federal Reserve.

In July 2005, we announced that our Board ofDirectors authorized us to repurchase up to $150.0 million of our common stockin the open market over the next twelve months. The purchase of our commonstock has been funded primarily by a dividend from the Bank to the Company. Wedo not expect the stock purchase program to have a material impact on ourliquidity position, our risk-based capital ratios, including our leveragecapital ratio, or our ability to pay dividends on our common stock. As of December 31,2005, we have repurchased $70.7 million of our common stock.

We have informal borrowing arrangements with variouscounterparties. Each counterparty has agreed to make funds available to us atthe Federal Funds overnight rate. Each counterparty may terminate itsarrangement at any time and is under no contractual obligation to provide uswith requested funding. Our borrowings under these arrangements are typicallyon a short-term basis. We cannot be certain, however, that such funding will beavailable. Lack of availability of liquid funds could have a material adverseimpact on our operations.

We also have Master Repurchase Agreements in placewith various counterparties. Each counterparty has agreed on an uncommittedbasis to make funds available to us at various rates in exchange for collateralconsisting of marketable securities.

On April 19, 2004, the FHLBB implemented a newcapital structure mandated for all Federal Home Loan Banks subject to theGramm-Leach-Bliley Act of 1999 and regulations that were subsequentlypromulgated in 2001 by the FHLBB’s regulator, the Federal Housing Finance Board.The Bank’s capital stock investment in the FHLBB totaled $50.0 million as of December 31,2005. The $50.0 million capital stock investment includes both a $25.0 millionmembership component and a $25.0 million activity-based component. Under thenew capital plan, FHLBB capital stock investments require a five-year advancenotice of withdrawal. Recent changes to the FHLBB capital plan have resulted inan increased borrowing capacity. The Bank’s $50.0 million capital stockinvestment in the FHLBB provides an overnight borrowing capacity of up to$833.0 million. The amount outstanding under this arrangement at December 31,2005 

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was $546.0 million. Additionalborrowing is available to the Bank based on prescribed collateral levels andincreased investment in FHLBB capital stock. The Bank currently has no plans toincrease its investment in FHLBB capital stock.

Thefollowing table details our contractual obligations as of December 31,2005 (Dollars in thousands):

| ** **                        | ** ** | **Payments due by period** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | ** **                                | ** ** | **Less than 1** | ** ** | **1-3** | ** ** | **4-5** | ** ** | **More than** | ** ** |
| ** **                        | ** ** | **Total**                                 | ** ** | **year** | ** ** | **years** | ** ** | **years** | ** ** | **5 years** | ** ** |
| **Contractual  obligations**      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Debt obligations(1)               |       | $                                         | 1,356,649  |   | $ | 1,356,649 |   | $ | — |   | $ | — |   |   | $ | — |   |   |
| Repurchase agreements             |       | 4,797,868                                 |       | 4,297,868 |   | 500,000 |   | — |   |   | — |   |   |
| Junior subordinated debentures(2) |       | 24,000                                    |       | — |   | 24,000 |   | — |   |   | — |   |   |
| Operating lease obligations       |       | 218,542                                   |       | 32,186 |   | 54,048 |   | 45,876 |   |   | 86,432 |   |   |
| Total                             |       | $                                         | 6,397,059  |   | $ | 5,686,703 |   | $ | 578,048 |   | $ | 45,876 |   |   | $ | 86,432 |   |   |

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(1)          Debt obligations presentedare variable in nature and do not include interest amounts.

(2)          Thesesecurities ultimately mature in 2027, however; we have the right to redeem thesecurities as early as 2007.

| ** **                     | ** ** | **Payments due by period** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | ** **                                | ** ** | **Less than 1** | ** ** | **1-3** | ** ** | **4-5** | ** ** | **More than** | ** ** |
| ** **                     | ** ** | **Total**                                 | ** ** | **year** | ** ** | **years** | ** ** | **years** | ** ** | **5 years** | ** ** |
| **Other  commitments**         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Unused commitments to lend     |       | $                                         | 898,879    |   | $ | 892,179 |   | $ | — |   | $ | 6,700 |   |   | $ | — |   |   |
| Fixed price purchase contracts |       | 97,539                                    |       | 97,539 |   | — |   | — |   |   | — |   |   |
| Other                          |       | 147,994                                   |       | 30,800 |   | 61,288 |   | 47,016 |   |   | 8,890 |   |   |
| Total                          |       | $                                         | 1,144,412  |   | $ | 1,020,518 |   | $ | 61,288 |   | $ | 53,716 |   |   | $ | 8,890 |   |   |

 

Included in the Othercommitments line presented above are contracts in which we are obligated toutilize the data processing services of Electronic Data Systems through December 31,2008, SEI Investments Company through December 31, 2009 and InternationalBusiness Machines Corporation through June 30, 2011. The commitments topay for these services are based upon transaction volumes and includeinflationary price clauses.

**Capital Resources**

Historically, we have financed our operationsprincipally through internally generated cash flows. We incur capitalexpenditures for furniture, fixtures, capitalized software and miscellaneousequipment needs. We lease office space and computing equipment throughoperating leases. Capital expenditures have been incurred and leases enteredinto on an as-required basis, primarily to meet our growing operating needs. Asa result, our capital expenditures were $33.1 million and $23.6 million for theyear ended December 31, 2005 and 2004, respectively. For the year ended December 31,2005, capital expenditures were comprised of approximately $19.0 million incapitalized software and projects in process, $13.6 million in fixed assets and$0.5 million in leasehold improvements. For the year ended December 31,2004, capital expenditures were comprised of approximately $15.4 million incapitalized software and projects in process, $7.9 million in fixed assets and$0.3 million in leasehold improvements.

Stockholders’ equity at December 31, 2005 was$772.9 million, up 9% from 2004, primarily due to net income earned, net of ourstock repurchase program. The ratio of average stockholders’ equity to averageassets remained constant at approximately 6% for December 31, 2005 and2004.

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In July 2005, we announced that our Board ofDirectors has authorized us to repurchase up to $150.0 million of our commonstock in the open market over the next twelve months. We do not expect ourstock purchase program to have a material impact on our capital resources, suchas maintaining risk-based capital ratios in excess of capital adequacyguidelines and our ability to pay dividends on our common stock. As of December 31,2005, we have repurchased $70.7 million of our common stock.

The FRB has adopted capital adequacy guidelinesapplicable to United States banking organizations. The FRB’s capital adequacyguidelines generally require bank holding companies (“BHCs”) to maintain totalcapital 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 amountconsisting of Tier 1, or core capital, and the remaining amount consisting ofTier 2, or supplementary capital. Tier 1 capital for BHCs generally consists ofthe sum of common stockholders’ equity and perpetual preferred stock (subjectto certain limitations), less goodwill and other nonqualifying intangibleassets. Tier 2 capital generally consists of hybrid capital instruments,perpetual debt and mandatory convertible debt securities; perpetual preferredstock, not included as Tier 1 capital; term subordinated debt andintermediate-term preferred stock; and, subject to limitations, generalallowances for loan and lease losses. Assets are adjusted under the risk-based guidelinesto 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 1capital to its average total consolidated assets (the “Leverage Ratio”) of 3.0%.Total average consolidated assets for this purpose does not include goodwilland any other intangible assets and investments that the FRB determines shouldbe deducted from Tier 1 capital. The FRB has announced that the 3.0% LeverageRatio requirement is the minimum for the top-rated BHCs. All other BHCs arerequired to maintain a minimum Leverage Ratio of 4.0%. BHCs with supervisory,financial, operational or managerial weaknesses, as well as BHCs that areanticipating or experiencing significant growth, are expected to maintaincapital ratios well above the minimum levels. Because we anticipate significantfuture growth, we will be required to maintain a Leverage Ratio of 4.0% orhigher.

We are currently incompliance with both the Total Risk-Based Capital Ratio and the Leverage Ratiorequirements, and management expects these ratios to remain in compliance withthe FRB’s capital adequacy guidelines. At December 31, 2005, our TotalRisk-Based Capital Ratio and Leverage Ratio were 18.50% and 5.95%,respectively.

**Off Balance Sheet Arrangements**

***Lines of Credit—***AtDecember 31, 2005, we had commitments to mutual funds and individualsunder collateralized open lines of credit totaling $1.1 billion, against which$240.3 million in loans were drawn. The credit risk involved in issuinglines of credit is essentially the same as that involved in extending demandloans. We do not anticipate any loss as a result of these lines of credit.

***Securities Lending—***Onbehalf of our clients, we lend securities to creditworthy broker-dealers. Incertain circumstances, we may indemnify our clients for the fair market valueof those securities against a failure of the borrower to return such securities.We require the borrowers to provide collateral in an amount equal to, or inexcess of, 102% of the fair market value of U.S. dollar-denominated securitiesborrowed and 105% of the fair market value of non-U.S. dollar-denominatedsecurities borrowed. The borrowed securities are revalued daily to determinewhether additional collateral is necessary. As guarantor, we are required torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligation undertaken in issuing the guarantee. We measure the fair valueof our indemnification obligation by marking our securities lending portfolioto market on a daily basis and comparing the value of the portfolio to thecollateral holdings position. The fair value of the indemnification obligationto be recorded would be the deficiency of collateral as compared to the valueof the securities out on loan.

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With respect to the indemnified securities lendingportfolio, the cash and U.S. government securities held by us as collateral at December 31,2005 totaled $7.7 billion while the fair value of the portfolio totaledapproximately $7.4 billion. Given that the value of the collateral heldwas in excess of the value of the securities that we would be required toreplace if the borrower defaulted and failed to return such securities, ourindemnification obligation was zero and no liability was recorded.

All securities loans arecategorized as overnight loans. The maximum potential amount of future paymentsthat we could be required to make would be equal to the market value of thesecurities borrowed. Since the securities loans are overcollateralized by 2%(for U.S. dollar denominated securities) to 5% (for non-U.S. dollar-denominatedsecurities) of the fair market value of the loan made, the collateral held byus would be used to satisfy the obligation. In addition, each borrowingagreement includes “set-off” language that allows us to use any excesscollateral on other loans to that borrower to cover any collateral shortfall ofthat borrower. However, there is a potential risk that the collateral would notbe sufficient to cover such an obligation if the security on loan increased invalue between the time the borrower defaulted and the time the security is “bought-in.”  In those instances, we would “buy-in” thesecurity using all available collateral and a loss would result from thedifference between the value of the security “bought-in” and the value of thecollateral held. We have never experienced a broker default.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information requiredby this item is contained in the “Market Risk” section in the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” aspart of this Report.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.

The information requiredby this item is contained in the financial statements and schedules set forthin Item 15(a) under the captions “Consolidated Financial Statements” and “FinancialStatement Schedules” as a part of this Report.

**ITEM 9A.**        CONTROLSAND PROCEDURES.

**Evaluationof Disclosure Controls and Procedures**

As of December 31, 2005, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures. Our disclosure controls and procedures are the controls and otherprocedures that we designed to ensure that we record, process, summarize andreport in a timely manner the information we must disclose in reports that wefile or submit to the Securities and Exchange Commission and that theinformation required to be disclosed is accumulated and communicated to ourprincipal executive and principal financial officers as appropriate to allowtimely decisions regarding required disclosure. Kevin J. Sheehan, our Chairmanand Chief Executive Officer, and John N. Spinney, Jr., our Senior VicePresident and Chief Financial Officer, reviewed and participated in thisevaluation. Based on this evaluation, Messrs. Sheehan and Spinneyconcluded that, as of December 31, 2005, our disclosure controls andprocedures were effective.

49

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**REPORTOF MANAGEMENT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS**

March 2, 2006

To the Board of Directorsand Stockholders:

**Internal Control**

Management is responsible for establishing andmaintaining effective internal control over financial reporting, includingsafeguarding of assets, for financial statements in conformity with accountingprinciples generally accepted in the United States of America. The internalcontrol contains monitoring mechanisms, and actions are taken to correctdeficiencies identified. There are inherent limitations in the effectiveness ofany internal control, including the possibility of human error and thecircumvention or overriding of controls. Accordingly, even effective internalcontrol can provide only reasonable assurance with respect to financialstatement preparation. Further, because of changes in conditions, theeffectiveness of internal control may vary over time.

Management has made a comprehensive review, evaluationand assessment of the Company’s internal control over financial reporting,including safeguarding of assets, for financial presentations in conformitywith accounting principles generally accepted in the United States of Americaas of December 31, 2005, including controls over the preparation byInvestors Bank & Trust Company (a wholly-owned banking subsidiary of theCompany) of the schedules equivalent to the basic financial statements inaccordance with the Federal Financial Institutions Examination CouncilInstructions for Consolidated Reports of Condition and Income for Schedules RC,RI and RI-A (the “Call Report Instructions”). This assessment was based oncriteria for effective internal control over financial reporting, includingsafeguarding of assets, described in “*Internal Control—IntegratedFramework”* issued by the Committee of Sponsoring Organizations ofthe Treadway Commission. Based on this assessment, management has concludedthat the Company maintained effective internal control over financialreporting, including safeguarding of assets, presented in conformity withaccounting principles generally accepted in the United States of America as of December 31,2005.

The Audit Committee of the Board of Directors iscomprised entirely of outside directors who are independent of the Company’smanagement; it includes members with banking or related management experience,has access to its own outside counsel, and does not include representatives ofany large customers of the institution. The Audit Committee is responsible forrecommending to the Board of Directors the selection of independent auditors. Itmeets periodically with management, the independent auditors, and the internalauditors to ensure that they are carrying out their responsibilities. The AuditCommittee is also responsible for performing an oversight role by reviewing andmonitoring the financial, accounting and auditing procedures of the Company inaddition to reviewing the Company’s financial reports. The independent auditorsand the internal auditors have full and free access to the Audit Committee,with or without the presence of management, to discuss the adequacy of internalcontrol over financial reporting and any other matters which they believeshould be brought to the attention of the Audit Committee.

Deloitte &Touche, LLP, an Independent Registered Public Accounting Firm, which hasaudited and reported on the consolidated financial statements contained in thisForm 10-K, has issued their report dated March 2, 2006 onmanagement’s assessment with respect to the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2005.

50

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**ComplianceWith Laws and Regulations**

Management is also responsible for ensuring compliancewith the federal laws and regulations concerning loans to insiders and thefederal and state laws and regulations concerning dividend restrictions, bothof which are designated by the Federal Deposit Insurance Corporation (“FDIC”)as safety and soundness laws and regulations.

Management assessed itscompliance with the designated safety and soundness laws and regulations andhas maintained records of its determinations and assessments as required by theFDIC. Based on this assessment, management believes that the Bank has complied,in all material respects, with the designated safety and soundness laws andregulations for the year ended December 31, 2005.
| /s/ KEVIN J. SHEEHAN                                |   |
|-----------------------------------------------------|--------|
| Kevin J. Sheehan                                    |   |
| *Chairman and Chief Executive Officer*              |   |
| /s/ JOHN N.  SPINNEY, JR.                      |   |
| John N. Spinney, Jr.                           |   |
| *Senior Vice President and Chief Financial Officer* |   |

 

51

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Stockholders ofInvestors Financial Services Corp.

We have audited management's assessment, included inthe accompanying Report of Management, that Investors Financial Services Corp.and subsidiaries (the “Company”) maintained effective internal control overfinancial reporting as of December 31, 2005, based on criteria established in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Because management's assessment and our audit were conducted to meet thereporting requirements of Section 112 of the Federal Deposit InsuranceCorporation Improvement Act (FDICIA), management's assessment and our audit ofthe Company's internal control over financial reporting included controls overthe preparation by Investors Bank & Trust Company (a wholly owned bankingsubsidiary of the Company) of the schedules equivalent to the basic financialstatements in accordance with the Federal Financial Institutions ExaminationCouncil Instructions for Consolidated Reports of Condition and Income forSchedules RC, RI and RI-A (the “Call Report Instructions”).  The Company's management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financialreporting.  Our responsibility is to express an opinion on management'sassessment and an opinion on the effectiveness of the Company's internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects.  Our auditincluded obtaining an understanding of internal control over financialreporting, evaluating management's assessment, testing, and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances.  Webelieve that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reportingis a process designed by, or under the supervision of, the company's principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company's board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  Acompany's internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company's assets that could have a material effect on the financialstatements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis.  Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that theCompany maintained effective internal control over financial reporting as ofDecember 31, 2005, is fairly stated, in all material respects, based on thecriteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.  Also, in our opinion, theCompany maintained, in all 

52

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material respects,effective internal control over financial reporting as of December 31, 2005,based on the criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. 

We have not examined and, accordingly, we do notexpress an opinion or any other form of assurance on management's statementreferring to compliance with laws and regulations.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as of and for the yearended December 31, 2005 of the Company and our report dated March 2, 2006expressed an unqualified opinion on those financial statements.

DELOITTE & TOUCHE LLP

Boston, MassachusettsMarch 2, 2006

 

53

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**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information requiredunder this item is incorporated herein by reference to the information in thesections entitled “Directors and Executive Officers,” “Election of Directors”and “Compensation and Other Information Concerning Directors and ExecutiveOfficers” contained in our definitive proxy statement pursuant to Regulation14A, which proxy statement will be filed with the Securities and ExchangeCommission not later than 120 days after the close of our fiscal year ended December 31,2005.

**ITEM 11.**         EXECUTIVECOMPENSATION.

The information requiredunder this item is incorporated herein by reference to the information in thesection entitled “Compensation and Other Information Concerning Directors andOfficers” contained in our definitive proxy statement pursuant to Regulation14A, which proxy statement will be filed with the Securities and ExchangeCommission not later than 120 days after the close of our fiscal year ended December 31,2005.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.

The information requiredunder this item is incorporated herein by reference to the information in thesection entitled “Management and Principal Holders of Voting Securities”contained in our definitive proxy statement pursuant to Regulation 14A, whichproxy statement will be filed with the Securities and Exchange Commission notlater than 120 days after the close of our fiscal year ended December 31,2005.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.

The information requiredunder this item is incorporated herein by reference to the information in thesection entitled “Certain Relationships and Related Transactions” contained inour definitive proxy statement pursuant to Regulation 14A, which proxystatement will be filed with the Securities and Exchange Commission not laterthan 120 days after the close of our fiscal year ended December 31, 2005.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES.

The information requiredunder this item is incorporated herein by reference to the information in thesection entitled “Ratification of Selection of Independent Registered PublicAccounting Firm” contained in our definitive proxy statement pursuant toRegulation 14A, which proxy statement will be filed with the Securities andExchange Commission not later than 120 days after the close of our fiscal yearended December 31, 2005.

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**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES.

**(a)****         1.      Consolidated Financial Statements.**

For the following consolidated financial informationincluded herein, see Index on Page F-1:

Report of IndependentRegistered Public Accounting Firm.

Consolidated BalanceSheets as of December 31, 2005 and December 31, 2004.

Consolidated Statements ofIncome and Comprehensive Income for the Years Ended December 31, 2005,2004 and 2003.

Consolidated Statements ofStockholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003.

Consolidated Statements ofCash Flows for the Years Ended December 31, 2005, 2004 and 2003.

Notes to Consolidated Financial Statements.

**2.****                 FinancialStatement Schedules.**

None.

**3.****                 Listof Exhibits.**

| Exhibit No.   | ** ** | ** **                                                                                                                                                                                       | ** ** | **Description** |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
|   3.1(6) |       | Certificate of  Incorporation of the Company                                                                                                                                                     |
|   3.2(3) |       | Certificate of  Amendment of Certificate of Incorporation of the Company                                                                                                                         |
|   3.3(5) |       | Certificate of  Amendment of Certificate of Incorporation of the Company                                                                                                                         |
|   3.4(8) |       | Certificate of  Amendment of Certificate of Incorporation of the Company                                                                                                                         |
|   3.5(9) |       | Certificate of  Amendment of Certificate of Incorporation of the Company                                                                                                                         |
|   3.6(6) |       | Amended and  Restated Bylaws of the Company                                                                                                                                                      |
|   4.1(6) |       | Specimen  certificate representing the common stock of the Company                                                                                                                               |
| 10.1(7)*           |       | Amended and  Restated 1995 Stock Plan                                                                                                                                                            |
| 10.2(7)*           |       | Amended and  Restated 1995 Non-Employee Director Stock Option Plan                                                                                                                               |
| 10.3(11)*          |       | 2005 Equity  Compensation Plan                                                                                                                                                                   |
| 10.4(6)            |       | Information  Technology Services Contract between the Company and Electronic Data  Systems, Inc., dated September 20, 1995                                                             |
| 10.5(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     |
| 10.6(11)           |       | Amendment to  Lease between Investors Financial Services Corp. and 100 & 200  Clarendon LLC (successors to the John Hancock Mutual Life Insurance Company),  dated January 1, 2005 |
| 10.7(9)*           |       | 1997 Employee  Stock Purchase Plan, as amended                                                                                                                                                   |
| 10.8(2)            |       | Amended and  Restated Declaration of Trust among the Company and the Trustees named  therein, dated January 31, 1997                                                                        |
| 10.9(2)            |       | Indenture between  the Company and The Bank of New York, dated January 31, 1997                                                                                                             |
| 10.10(2)           |       | Common Securities  Guarantee Agreement by the Company as Guarantor, dated January 31, 1997                                                                                                  |

55

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| 10.11(2)   |   | Capital  Securities Guarantee Agreement between the Company as Guarantor and The Bank  of New York as Capital Securities Guarantee Trustee, dated January 31,  1997                |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12(4)   |   | First Amendment,  effective January 1, 2000 to Information Technology Services Contract  between the Company and Electronic Data Systems, Inc. dated  September 20, 1995 |
| 10.13(4)*  |   | Amended and  Restated Employment Agreement between the Company and Kevin Sheehan                                                                                                        |
| 10.14(4)*  |   | Change of Control  Employment Agreement between the Company and Kevin Sheehan                                                                                                           |
| 10.15(4)*  |   | Amended and  Restated Employment Agreement between the Company and Michael Rogers                                                                                                       |
| 10.16(4)*  |   | Change of Control  Employment Agreement between the Company and Michael Rogers                                                                                                          |
| 10.17(4)*  |   | Amended and  Restated Employment Agreement between the Company and Edmund Maroney                                                                                                       |
| 10.18(4)*  |   | Change of Control  Employment Agreement between the Company and Edmund Maroney                                                                                                          |
| 10.19(4)*  |   | Amended and  Restated Employment Agreement between the Company and Robert Mancuso                                                                                                       |
| 10.20(4)*  |   | Change of Control  Employment Agreement between the Company and Robert Mancuso                                                                                                          |
| 10.21(4)*  |   | Amended and  Restated Employment Agreement between the Company and John Henry                                                                                                           |
| 10.22(4)*  |   | Change of Control  Employment Agreement between the Company and John Henry                                                                                                              |
| 10.23(6)*  |   | Change of Control  Employment Agreement between the Company and John N. Spinney, Jr.                                                                                               |
| 10.24(7)*  |   | Employment  Agreement between the Company and John N. Spinney, Jr.                                                                                                                 |
| 10.25(9)   |   | Information  Technology Services Agreement dated July 1, 2004 between the Company and  International Business Machines Corporation.                                                |
| 10.26(10)  |   | Stock Option  Agreement dated November 15, 2004 between the Company and Kevin J.  Sheehan                                                                                          |
| 10.27(10)* |   | Stock Option  Agreement dated November 15, 2004 between the Company and Kevin J.  Sheehan                                                                                          |
| 10.28(10)* |   | Stock Option  Agreement dated November 15, 2004 between the Company and Michael F.  Rogers                                                                                         |
| 10.29(10)* |   | Stock Option  Agreement dated November 15, 2004 between the Company and Michael F.  Rogers                                                                                         |
| 10.30(10)* |   | Stock Option  Agreement dated November 15, 2004 between the Company and Edmund J.  Maroney                                                                                         |
| 10.31(10)* |   | Stock Option  Agreement dated November 15, 2004 between the Company and Edmund J.  Maroney                                                                                         |
| 10.32(10)* |   | Stock Option  Agreement dated November 15, 2004 between the Company and John N.  Spinney, Jr.                                                                                 |
| 10.33(10)* |   | Stock Option  Agreement dated November 15, 2004 between the Company and Robert D.  Mancuso                                                                                         |
| 10.34**    |   | Amended and  Restated Trust 3000 Service Agreement between the Company and SEI Investments  Company dated July 1, 2004.                                                            |

56

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| 10.35 |   | Lease agreement  between the Company and Copley Place Associates, LLC dated August 2,  1999, as amended.                                                                                                                               |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 21.1  |   | Subsidiaries of  the Company                                                                                                                                                                                                                |
| 23.1  |   | Consent of  Deloitte & Touche LLP                                                                                                                                                                                                  |
| 24.1  |   | Power of Attorney  (see Power of Attorney and Signature Page of this Report).                                                                                                                                                          |
| 31.1  |   | Certificate of  Kevin J. Sheehan, Chief Executive Officer                                                                                                                                                                                   |
| 31.2  |   | Certificate of  John N. Spinney, Jr., Chief Financial Officer                                                                                                                                                                          |
| 32.1  |   | Certification of  Kevin J. Sheehan, Chief Executive Officer, and John N. Spinney, Jr.,  Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted,  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

----

(1)          Previously filed as anexhibit to Form 10-K for the fiscal year ended October 31,1995.

(2)          Previously filed as anexhibit to Form 10-K for the fiscal year ended December 31,1996 (File No. 000-26996).

(3)          Previously filed as anexhibit to Form 10-Q for the fiscal quarter ended March 31,2000.

(4)          Previously filed as anexhibit to Form 10-K for the fiscal year ended December 31,2000.

(5)          Previously filed as anexhibit to the Company’s Registration Statement on Form S-8 filedwith the Commission on November 5, 2001 (File No. 333-72786).

(6)          Previously filed as anexhibit to Form 10-K for the fiscal year ended December 31,2001.

(7)          Previously filed as anexhibit to Form 10-K for the fiscal year ended December 31,2002.

(8)          Previously filed as anexhibit to Form 10-Q for the fiscal quarter ended June 30,2003.

(9)          Previously filed as anexhibit to Form 10-Q for the fiscal quarter ended June 30,2004.

(10)   Previously filed as an exhibitto Form 10-K for the fiscal year ended December 31, 2004.

(11)   Previously filed as an exhibitto Form 10-Q for the fiscal quarter ended March 31, 2005.

*                    Indicates amanagement contract or a compensatory plan, contract or arrangement.

**             Confidentialtreatment requested pursuant to rule 24b-2 promulgated under the SecuritiesExchange Act of 1934.

**(b)****         Exhibits.**

The Company herebyfiles 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 copiedat the public reference facilities maintained by the Securities and ExchangeCommission, 450 Fifth Street, N.W., Room 1024, Washington, D.C.

**(c)****          FinancialStatement Schedules.**

None.

57

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in Boston, Massachusettson the 2nd day of March, 2006.

|        |   | INVESTORS FINANCIAL SERVICES  CORP. |
|--------|--------|-------------------------------------|
|   |   | By:                                 | /s/ KEVIN J. SHEEHAN |
|   |   |                                | Kevin J. Sheehan |
|   |   |                                | *Chief Executive Officer and Chairman of the Board* |

 

**POWER OF ATTORNEY AND SIGNATURES**

We, the undersigned officers and directors ofInvestors Financial Services Corp., hereby severally constitute and appointKevin J. Sheehan and Michael F. Rogers, and each of them singly, our true andlawful attorneys, with full power to them and each of them singly, to sign forus in our names in the capacities indicated below, all amendments to thisreport, and generally to do all things in our names and on our behalf in suchcapacities to enable Investors Financial Services Corp. to comply with theprovisions of the Securities Exchange Act of 1934, as amended, and allrequirements of the Securities and Exchange Commission.

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, thisreport has been signed by the following persons in the capacities indicated onthe 2nd day of March, 2006.

|                                | **Signature** | ** **                                                      | ** ** |  | **Title(s)** | ** ** |
|--------------------------------|---------------|-----------------------------------------------------------------|------------|--|--------------|------------|
| /s/ KEVIN J.  SHEEHAN          |          | Chief Executive  Officer and Chairman of the Board              |
| Kevin  J. Sheehan              |          | (Principal Executive Officer); Director                         |
| /s/ MICHAEL F.  ROGERS         |          | President                                                       |
| Michael  F. Rogers             |          |                                                            |
| /s/ JOHN N.  SPINNEY, JR. |          | Senior Vice  President and Chief Financial Officer              |
| John  N. Spinney, Jr      |          | (Principal Financial Officer and Principal  Accounting Officer) |
| /s/ RICHARD P.  BOYATZI        |          | Director                                                        |
| Richard  P. Boyatzi            |          |                                                            |
| /s/ FRANK B.  CONDON, JR. |          | Director                                                        |
| Frank  B. Condon, Jr.     |          |                                                            |
| /s/ ROBERT B.  FRASER          |          | Director                                                        |
| Robert  B. Fraser              |          |                                                            |

58

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| /s/  EDWARD F. HINES     |   | Director |
|--------------------------|--------|----------|
| Edward  F. Hines         |   |     |
| /s/ THOMAS P.  MCDERMOTT |   | Director |
| Thomas  P. McDermott     |   |     |
| /s/ JAMES M.  OATES      |   | Director |
| James  M. Oates          |   |     |
| /s/ JOHN I.  SNOW III    |   | Director |
| John  I. Snow III        |   |     |
| /s/ PHYLLIS S.  SWERSKY  |   | Director |
| Phyllis  S. Swersky      |   |     |

 

 

59

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**INVESTORSFINANCIAL SERVICES CORP.**

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                       | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                                              |       |     | F-2        |   |   |
| Consolidated Balance Sheets as of December 31,  2005 and December 31, 2004                                  |       |     | F-3        |   |   |
| Consolidated Statements of Income and Comprehensive  Income for the Years Ended December 31, 2005, 2004 and 2003 |       |     | F-4        |   |   |
| Consolidated Statements of Stockholders’ Equity for  the Years Ended December 31, 2005, 2004 and 2003       |       |     | F-5        |   |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2005, 2004 and 2003                      |       |     | F-6        |   |   |
| Notes to  Consolidated Financial Statements                                                                           |       |     | F-7        |   |   |

 

F-1

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have audited the accompanying consolidated balancesheets of Investors Financial ServicesCorp. and subsidiaries (collectively, the “Company”) as of December 31,2005 and 2004, and the related consolidated statements of income andcomprehensive income, stockholders’ equity, and cash flows for each of thethree years in the period ended December 31, 2005. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyat December 31, 2005 and 2004, and the results of its operations and itscash flows for each of the three years in the period ended December 31,2005, in conformity with accounting principles generally accepted in the UnitedStates of America.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as of December 31,2005, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 2,2006 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

DELOITTE & TOUCHE LLP

Boston, MassachusettsMarch 2, 2006

F-2

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**INVESTORS FINANCIALSERVICES CORP.CONSOLIDATED BALANCE SHEETSDecember 31, 2005 and 2004 (Dollars in thousands, except per share data)**

| ** **                                                                                                                                                                                                                                                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                  | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| **Assets**                                                                                                                                                                                                                                                  |       |                  |       |                  |       |   |   |   |   |
| Cash and due from banks                                                                                                                                                                                                                                     |       |                  | $          | 79,637                |       |   |   | $ | 49,059 |   |   |
| Securities held to maturity (including securities  pledged of $4,529,421 and $4,021,625 at December 31, 2005 and 2004,  respectively) (approximate fair value of $6,725,729 and $5,937,462 at  December 31, 2005 and 2004, respectively) (Note 3) |       |                  | 6,761,930  |                  |       |   | 5,942,717 |   |   |
| Securities available for sale (including securities  pledged of $2,997,958 and $2,312,410 at December 31, 2005 and 2004,  respectively) (Note 3)                                                                                                       |       |                  | 4,369,720  |                  |       |   | 4,565,505 |   |   |
| Nonmarketable equity securities (Note 3)                                                                                                                                                                                                                    |       |                  | 50,000     |                  |       |   | 50,000 |   |   |
| Loans, less allowance for loan losses of $100 at  December 31, 2005 and 2004  (Note 4)                                                                                                                                                                 |       |                  | 402,370    |                  |       |   | 134,530 |   |   |
| Accrued interest and fees receivable                                                                                                                                                                                                                        |       |                  | 119,583    |                  |       |   | 89,292 |   |   |
| Equipment and leasehold improvements, less  accumulated depreciation of $59,156 and $61,017 at December 31, 2005 and  2004, respectively (Note 5)                                                                                                      |       |                  | 69,401     |                  |       |   | 67,883 |   |   |
| Goodwill                                                                                                                                                                                                                                                    |       |                  | 79,969     |                  |       |   | 79,969 |   |   |
| Other assets                                                                                                                                                                                                                                                |       |                  | 163,783    |                  |       |   | 188,870 |   |   |
| **Total Assets**                                                                                                                                                                                                                                            |       |                  | $          | 12,096,393            |       |   |   | $ | 11,167,825 |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                                              |       |                  |       |                  |       |   |   |   |   |
| **Liabilities:**                                                                                                                                                                                                                                            |       |                  |       |                  |       |   |   |   |   |
| Deposits (Note 6):                                                                                                                                                                                                                                          |       |                  |       |                  |       |   |   |   |   |
| Demand                                                                                                                                                                                                                                                      |       |                  | $          | 537,558               |       |   |   | $ | 690,308 |   |   |
| Savings                                                                                                                                                                                                                                                     |       |                  | 4,224,908  |                  |       |   | 4,448,405 |   |   |
| Time                                                                                                                                                                                                                                                        |       |                  | 230,124    |                  |       |   | 257,669 |   |   |
| Total deposits                                                                                                                                                                                                                                              |       |                  | 4,992,590  |                  |       |   | 5,396,382 |   |   |
| Securities sold under repurchase agreements (Note 7)                                                                                                                                                                                                        |       |                  | 4,797,868  |                  |       |   | 4,255,497 |   |   |
| Short-term and other borrowings (Note 8)                                                                                                                                                                                                                    |       |                  | 1,356,649  |                  |       |   | 594,681 |   |   |
| Due to brokers for open trades payable                                                                                                                                                                                                                      |       |                  | 21,293     |                  |       |   | 5,475 |   |   |
| Junior subordinated deferrable interest debentures  (Note 10)                                                                                                                                                                                               |       |                  | 24,774     |                  |       |   | 24,774 |   |   |
| Accrued taxes and other expenses                                                                                                                                                                                                                            |       |                  | 45,077     |                  |       |   | 54,967 |   |   |
| Other liabilities                                                                                                                                                                                                                                           |       |                  | 85,284     |                  |       |   | 123,787 |   |   |
| Total liabilities                                                                                                                                                                                                                                           |       |                  | 11,323,535 |                  |       |   | 10,455,563 |   |   |
| Commitments and contingencies (Note 16)                                                                                                                                                                                                                     |       |                  | —     |                  |       |   | — |   |   |
| **Stockholders’  Equity:**                                                                                                                                                                                                                             |       |                  |       |                  |       |   |   |   |   |
| Preferred stock, par value $0.01 (shares authorized:  1,000,000; issued: none in 2005 and 2004)                                                                                                                                                             |       |                  | —     |                  |       |   | — |   |   |
| Common stock, par value $0.01 (shares authorized:  175,000,000; issued: 65,052,637 and 66,595,349 in 2005 and 2004,  respectively)                                                                                                                          |       |                  | 672        |                  |       |   | 667 |   |   |
| Surplus                                                                                                                                                                                                                                                     |       |                  | 286,265    |                  |       |   | 272,536 |   |   |
| Deferred compensation                                                                                                                                                                                                                                       |       |                  | (311       | )                     |       |   | (572 | ) |   |
| Retained earnings                                                                                                                                                                                                                                           |       |                  | 572,549    |                  |       |   | 418,034 |   |   |
| Accumulated other comprehensive (loss) income, net                                                                                                                                                                                                          |       |                  | (13,369    | )                     |       |   | 23,888 |   |   |
| Treasury stock, at cost (2,124,669 and 73,235 shares  in 2005 and 2004, respectively)                                                                                                                                                                       |       |                  | (72,948    | )                     |       |   | (2,291 | ) |   |
| Total stockholders’ equity                                                                                                                                                                                                                             |       |                  | 772,858    |                  |       |   | 712,262 |   |   |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                                                                                                                        |       |                  | $          | 12,096,393            |       |   |   | $ | 11,167,825 |   |   |

 

See Notes to Consolidated Financial Statements.

F-3

----

**INVESTORS FINANCIALSERVICES CORP.CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMEYears Ended December 31, 2005, 2004 and 2003 (Dollars in thousands, exceptper share data)**

| ** **                                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| **Fees and Other Revenue:**                   | ** ** |                  | ** ** | ** **            |       |                  | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Asset servicing fees:                         |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Core service fees                             |       |                  | $          | 375,596               |       |                  |       | $ | 314,272 |   |   |   | $ | 254,225 |   |   |
| Value-added service fees                      |       |                  | 133,463    |                  |       |                  | 108,928    |   |   |   | 79,361 |   |   |
| Total asset servicing fees                    |       |                  | 509,059    |                  |       |                  | 423,200    |   |   |   | 333,586 |   |   |
| Gain on sale of investments                   |       |                  | 12,397     |                  |       |                  | 234        |   |   |   | — |   |   |
| Other operating income                        |       |                  | 4,081      |                  |       |                  | 2,057      |   |   |   | 2,607 |   |   |
| Total fees and other revenue                  |       |                  | 525,537    |                  |       |                  | 425,491    |   |   |   | 336,193 |   |   |
| Interest income                               |       |                  | 447,705    |                  |       |                  | 313,149    |   |   |   | 247,094 |   |   |
| Interest expense                              |       |                  | 277,280    |                  |       |                  | 125,469    |   |   |   | 93,180 |   |   |
| Net interest income                           |       |                  | 170,425    |                  |       |                  | 187,680    |   |   |   | 153,914 |   |   |
| Net operating revenue                         |       |                  | 695,962    |                  |       |                  | 613,171    |   |   |   | 490,107 |   |   |
| **Operating Expenses:**                       |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Compensation and benefits                     |       |                  | 250,459    |                  |       |                  | 205,728    |   |   |   | 186,932 |   |   |
| Technology and telecommunications             |       |                  | 54,732     |                  |       |                  | 49,816     |   |   |   | 38,914 |   |   |
| Transaction processing services               |       |                  | 49,873     |                  |       |                  | 42,159     |   |   |   | 33,299 |   |   |
| Depreciation and amortization                 |       |                  | 31,578     |                  |       |                  | 32,124     |   |   |   | 27,971 |   |   |
| Occupancy                                     |       |                  | 26,490     |                  |       |                  | 29,032     |   |   |   | 29,218 |   |   |
| Professional fees                             |       |                  | 13,380     |                  |       |                  | 15,346     |   |   |   | 11,189 |   |   |
| Travel and sales promotion                    |       |                  | 6,825      |                  |       |                  | 5,470      |   |   |   | 4,822 |   |   |
| Losses and loss adjustment expenses           |       |                  | 5,837      |                  |       |                  | 924        |   |   |   | 799 |   |   |
| Insurance                                     |       |                  | 4,219      |                  |       |                  | 4,625      |   |   |   | 3,203 |   |   |
| Other operating expenses                      |       |                  | 16,716     |                  |       |                  | 13,159     |   |   |   | 8,574 |   |   |
| Total operating expenses                      |       |                  | 460,109    |                  |       |                  | 398,383    |   |   |   | 344,921 |   |   |
| **Income Before Income Taxes**                |       |                  | 235,853    |                  |       |                  | 214,788    |   |   |   | 145,186 |   |   |
| Provision for income taxes (Note 9)           |       |                  | 76,035     |                  |       |                  | 72,826     |   |   |   | 52,765 |   |   |
| **Net Income**                                |       |                  | $          | 159,818               |       |                  |       | $ | 141,962 |   |   |   | $ | 92,421 |   |   |
| **Basic Earnings Per Share**                  |       |                  | $          | 2.42                  |       |                  |       | $ | 2.15 |   |   |   | $ | 1.42 |   |   |
| **Diluted Earnings Per Share**                |       |                  | $          | 2.37                  |       |                  |       | $ | 2.09 |   |   |   | $ | 1.39 |   |   |
| **Weighted-Average Basic Shares**             |       |                  | 66,139,323 |                  |       |                  | 66,179,286 |   |   |   | 65,098,960 |   |   |
| **Weighted-Average Diluted Shares**           |       |                  | 67,473,804 |                  |       |                  | 67,916,217 |   |   |   | 66,475,462 |   |   |
| **Comprehensive  Income:**                    |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Net income                                    |       |                  | $          | 159,818               |       |                  |       | $ | 141,962 |   |   |   | $ | 92,421 |   |   |
| Other comprehensive  (loss) income (Note 12): |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Net unrealized investment loss                |       |                  | (46,054    | )                     |       |                  | (7,854     | ) |   |   | (12,963 | ) |   |
| Net unrealized derivative instrument gain     |       |                  | 8,745      |                  |       |                  | 13,031     |   |   |   | 12,019 |   |   |
| Cumulative translation adjustment             |       |                  | 52         |                  |       |                  | 846        |   |   |   | 577 |   |   |
| Other comprehensive (loss) income             |       |                  | (37,257    | )                     |       |                  | 6,023      |   |   |   | (367 | ) |   |
| Comprehensive  income                         |       |                  | $          | 122,561               |       |                  |       | $ | 147,985 |   |   |   | $ | 92,054 |   |   |

 

See Notes to Consolidated Financial Statements.

F-4

----

**INVESTORS FINANCIALSERVICES CORP.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYYears Ended December 31, 2005, 2004, and 2003 (Dollars in thousands,except per share data)**

| ** **                                                                                                                                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                  | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| **Common shares**                                                                                                                           | ** ** |                  | ** ** | ** **            |       |                  | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Balance, beginning of year                                                                                                                  |       |                  | 66,595,349 |                  |       |                  | 65,436,788 |   |   |   | 64,775,042 |   |   |
| Exercise of stock options                                                                                                                   |       |                  | 394,018    |                  |       |                  | 1,114,051  |   |   |   | 548,069 |   |   |
| Common stock issuance                                                                                                                       |       |                  | 114,704    |                  |       |                  | 91,237     |   |   |   | 129,371 |   |   |
| Common stock repurchased                                                                                                                    |       |                  | (2,051,434 | )                     |       |                  | (46,727    | ) |   |   | (15,694 | ) |   |
| Balance, end of year                                                                                                                        |       |                  | 65,052,637 |                  |       |                  | 66,595,349 |   |   |   | 65,436,788 |   |   |
| **Treasury  shares**                                                                                                                        |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Balance, beginning of year                                                                                                                  |       |                  | 73,235     |                  |       |                  | 26,508     |   |   |   | 10,814 |   |   |
| Common stock repurchased                                                                                                                    |       |                  | 2,051,434  |                  |       |                  | 46,727     |   |   |   | 15,694 |   |   |
| Balance, end of year                                                                                                                        |       |                  | 2,124,669  |                  |       |                  | 73,235     |   |   |   | 26,508 |   |   |
| **Common  stock**                                                                                                                           |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Balance, beginning of year                                                                                                                  |       |                  | $          | 667                   |       |                  |       | $ | 655 |   |   |   | $ | 648 |   |   |
| Exercise of stock options                                                                                                                   |       |                  | 4          |                  |       |                  | 12         |   |   |   | 6 |   |   |
| Common stock issuance                                                                                                                       |       |                  | 1          |                  |       |                  | —     |   |   |   | 1 |   |   |
| Balance, end of year                                                                                                                        |       |                  | $          | 672                   |       |                  |       | $ | 667 |   |   |   | $ | 655 |   |   |
| **Surplus**                                                                                                                                 |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Balance, beginning of year                                                                                                                  |       |                  | $          | 272,536               |       |                  |       | $ | 242,662 |   |   |   | $ | 233,337 |   |   |
| Exercise of stock options                                                                                                                   |       |                  | 7,775      |                  |       |                  | 16,056     |   |   |   | 2,971 |   |   |
| Tax benefit from stock options                                                                                                              |       |                  | 2,087      |                  |       |                  | 10,651     |   |   |   | 3,008 |   |   |
| Common stock issuance                                                                                                                       |       |                  | 3,867      |                  |       |                  | 3,355      |   |   |   | 3,386 |   |   |
| Stock option forfeiture                                                                                                                     |       |                  | —     |                  |       |                  | (188       | ) |   |   | (40 | ) |   |
| Balance, end of year                                                                                                                        |       |                  | $          | 286,265               |       |                  |       | $ | 272,536 |   |   |   | $ | 242,662 |   |   |
| **Deferred  compensation**                                                                                                                  |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Balance, beginning of year                                                                                                                  |       |                  | $          | (572                  | )          |                  |       | $ | (1,076 | ) |   |   | $ | (1,599 | ) |   |
| Stock option forfeiture                                                                                                                     |       |                  | —     |                  |       |                  | 188        |   |   |   | 40 |   |   |
| Amortization of deferred compensation                                                                                                       |       |                  | 261        |                  |       |                  | 316        |   |   |   | 483 |   |   |
| Balance, end of year                                                                                                                        |       |                  | $          | (311                  | )          |                  |       | $ | (572 | ) |   |   | $ | (1,076 | ) |   |
| **Retained  earnings**                                                                                                                      |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Balance, beginning of year                                                                                                                  |       |                  | $          | 418,034               |       |                  |       | $ | 280,701 |   |   |   | $ | 192,184 |   |   |
| Net income                                                                                                                                  |       |                  | 159,818    |                  |       |                  | 141,962    |   |   |   | 92,421 |   |   |
| Cash dividend, $0.08, $0.07 and $0.06 per share in  the years ended December 31, 2005, 2004 and 2003, respectively                     |       |                  | (5,303     | )                     |       |                  | (4,629     | ) |   |   | (3,904 | ) |   |
| Balance, end of year                                                                                                                        |       |                  | $          | 572,549               |       |                  |       | $ | 418,034 |   |   |   | $ | 280,701 |   |   |
| **Accumulated  other comprehensive (loss) income, net**                                                                                     |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Balance, beginning of year                                                                                                                  |       |                  | $          | 23,888                |       |                  |       | $ | 17,865 |   |   |   | $ | 18,232 |   |   |
| Net unrealized investment loss                                                                                                              |       |                  | (46,054    | )                     |       |                  | (7,854     | ) |   |   | (12,963 | ) |   |
| Net unrealized derivative instrument gain                                                                                                   |       |                  | 10,473     |                  |       |                  | 12,990     |   |   |   | 11,785 |   |   |
| Amortization of transition-related adjustment                                                                                               |       |                  | —     |                  |       |                  | —     |   |   |   | 234 |   |   |
| Amortization of terminated interest rate swap  agreements                                                                                   |       |                  | (1,728     | )                     |       |                  | 41         |   |   |   | — |   |   |
| Cumulative translation adjustment                                                                                                           |       |                  | 52         |                  |       |                  | 846        |   |   |   | 577 |   |   |
| Balance, end of year                                                                                                                        |       |                  | $          | (13,369               | )          |                  |       | $ | 23,888 |   |   |   | $ | 17,865 |   |   |
| **Treasury  stock**                                                                                                                         |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Balance, beginning of year                                                                                                                  |       |                  | $          | (2,291                | )          |                  |       | $ | (550 | ) |   |   | $ | — |   |   |
| Common stock repurchased (2,051,434 shares at an  average price of $34.44 in 2005 and 46,727 shares at an average price of  $37.24 in 2004) |       |                  | (70,657    | )                     |       |                  | (1,741     | ) |   |   | (550 | ) |   |
| Balance, end of year                                                                                                                        |       |                  | $          | (72,948               | )          |                  |       | $ | (2,291 | ) |   |   | $ | (550 | ) |   |
| **Total  Stockholders’ Equity**                                                                                                        |       |                  | $          | 772,858               |       |                  |       | $ | 712,262 |   |   |   | $ | 540,257 |   |   |

 

See Notes to Consolidated Financial Statements.

F-5

----

**INVESTORS FINANCIALSERVICES CORP.CONSOLIDATED STATEMENTS OF CASH FLOWSYears Ended December 31, 2005, 2004 and 2003 (Dollars in thousands)**

| ** **                                                                         | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| **Cash Flows From Operating Activities:**                      | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** |
| Net income                                                                         |       |                  | $          | 159,818               |       |                  |       | $ | 141,962 |   |   |   | $ | 92,421 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Equity in undistributed loss of unconsolidated  subsidiary                         |       |                  | 28         |                  |       |                  | 28         |   |   |   | 8 |   |   |
| Depreciation and amortization                                                      |       |                  | 31,578     |                  |       |                  | 32,124     |   |   |   | 27,971 |   |   |
| Amortization of deferred compensation                                              |       |                  | 261        |                  |       |                  | 316        |   |   |   | 483 |   |   |
| Amortization of premiums on securities, net of  accretion of discounts             |       |                  | 49,578     |                  |       |                  | 40,743     |   |   |   | 39,200 |   |   |
| Gain on sale of investments                                                        |       |                  | (12,397    | )                     |       |                  | (234       | ) |   |   | — |   |   |
| Deferred income taxes                                                              |       |                  | (6,944     | )                     |       |                  | 2,997      |   |   |   | 5,651 |   |   |
| Changes in assets and  liabilities:                                                |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Accrued interest and fees receivable                                               |       |                  | (30,291    | )                     |       |                  | (16,476    | ) |   |   | (5,555 | ) |   |
| Other assets                                                                       |       |                  | 25,409     |                  |       |                  | (89,667    | ) |   |   | (29,878 | ) |   |
| Accrued taxes and other expenses                                                   |       |                  | (9,890     | )                     |       |                  | 2,745      |   |   |   | 21,465 |   |   |
| Other liabilities                                                                  |       |                  | 5,833      |                  |       |                  | 106,795    |   |   |   | 6,221 |   |   |
| Net cash provided by operating activities                                          |       |                  | 212,983    |                  |       |                  | 221,333    |   |   |   | 157,987 |   |   |
| **Cash  Flows From Investing Activities:**                                         |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Proceeds from paydowns/maturities of securities  available for sale                |       |                  | 1,400,359  |                  |       |                  | 1,392,295  |   |   |   | 1,608,656 |   |   |
| Proceeds from paydowns/maturities of securities held  to maturity                  |       |                  | 1,628,989  |                  |       |                  | 1,410,133  |   |   |   | 1,902,187 |   |   |
| Proceeds from sale of securities available for sale                                |       |                  | 376,143    |                  |       |                  | 25,041     |   |   |   | — |   |   |
| Purchases of securities available for sale                                         |       |                  | (1,649,167 | )                     |       |                  | (1,704,293 | ) |   |   | (2,666,066 | ) |   |
| Purchases of securities held to maturity                                           |       |                  | (2,489,882 | )                     |       |                  | (3,078,456 | ) |   |   | (2,794,414 | ) |   |
| Net increase (decrease) in due to brokers for open  trades payable                 |       |                  | 15,818     |                  |       |                  | 5,475      |   |   |   | (286,843 | ) |   |
| Net (increase) decrease in loans                                                   |       |                  | (267,840   | )                     |       |                  | 65,000     |   |   |   | (55,793 | ) |   |
| Purchases of equipment, leasehold improvements and  software                       |       |                  | (33,068    | )                     |       |                  | (23,559    | ) |   |   | (29,495 | ) |   |
| Net cash used in investing activities                                              |       |                  | (1,018,648 | )                     |       |                  | (1,908,364 | ) |   |   | (2,321,768 | ) |   |
| **Cash  Flows From Financing Activities:**                                         |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Net (decrease) increase in demand deposits                                         |       |                  | (152,750   | )                     |       |                  | 355,485    |   |   |   | (49,638 | ) |   |
| Net (decrease) increase in time and savings deposits                               |       |                  | (251,042   | )                     |       |                  | 833,779    |   |   |   | 923,838 |   |   |
| Net increase in securities sold under repurchase  agreements                       |       |                  | 542,371    |                  |       |                  | 997,496    |   |   |   | 956,027 |   |   |
| Net increase (decrease) in short-term and other  borrowings                        |       |                  | 761,968    |                  |       |                  | (503,406   | ) |   |   | 356,980 |   |   |
| Proceeds from exercise of stock options                                            |       |                  | 7,779      |                  |       |                  | 16,068     |   |   |   | 2,977 |   |   |
| Proceeds from issuance of common stock                                             |       |                  | 3,868      |                  |       |                  | 3,355      |   |   |   | 3,387 |   |   |
| Common stock repurchase                                                            |       |                  | (70,657    | )                     |       |                  | (1,741     | ) |   |   | (550 | ) |   |
| Dividends paid to stockholders                                                     |       |                  | (5,303     | )                     |       |                  | (4,629     | ) |   |   | (3,904 | ) |   |
| Net cash provided by financing activities                                          |       |                  | 836,234    |                  |       |                  | 1,696,407  |   |   |   | 2,189,117 |   |   |
| **Effect of exchange rates on changes in cash**                                    |       |                  | 9          |                  |       |                  | (6         | ) |   |   | (215 | ) |   |
| **Net Increase In Cash and Due From Banks**                                        |       |                  | 30,578     |                  |       |                  | 9,370      |   |   |   | 25,121 |   |   |
| **Cash and Due From Banks, Beginning of Year**                                     |       |                  | 49,059     |                  |       |                  | 39,689     |   |   |   | 14,568 |   |   |
| **Cash and Due From Banks, End of Year**                                           |       |                  | $          | 79,637                |       |                  |       | $ | 49,059 |   |   |   | $ | 39,689 |   |   |
| **Supplemental  Disclosure of Cash Flow Information:**                             |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Cash paid for interest                                                             |       |                  | $          | 270,121               |       |                  |       | $ | 121,542 |   |   |   | $ | 91,858 |   |   |
| Cash paid for  income taxes                                                        |       |                  | $          | 68,664                |       |                  |       | $ | 77,819 |   |   |   | $ | 39,859 |   |   |

 

See Notes to Consolidated Financial Statements.

F-6

----

**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2005, 2004 and 2003**

**1. Description ofBusiness**

Investors FinancialServices Corp. (‘IFSC’) provides asset administration services for thefinancial 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 foreignsubsidiaries. 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 andinsurance companies. Core services include middle office outsourcing, globalcustody, multicurrency accounting and fund administration. Value-added servicesinclude securities lending, foreign exchange, cash management, performancemeasurement, institutional transfer agency, investment advisory services, linesof credit and brokerage and transition management services. The Companyis subject to regulation by the Federal Deposit Insurance Corporation (‘FDIC’),the Federal Reserve Board of Governors (‘FRB’), the Office of the Commissionerof Banks of the Commonwealth of Massachusetts (‘Commissioner’), the Securitiesand 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, the State of VermontDepartment of Banking, Insurance, Securities & Health CareAdministration and the Financial Services Authority (‘FSA’) in the United Kingdom.

**2. Summary of Significant Accounting Policies**

***Basis ofPresentation******—The***consolidatedfinancial statements include the accounts of the Company and its domestic andforeign subsidiaries. All significant intercompany accounts and transactionshave been eliminated.

The preparation of the consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

Certain amounts in theprior years’ financial statements have been reclassified to conform to thecurrent year’s presentation.

***Revenue Recognition***

Asset servicing revenue***—***The Companyrecognizes revenue from asset servicing and investment advisory services basedon contractual terms signed by the Company’s clients. Generally, revenue isaccrued by multiplying average or month-end net assets by contracted rates. Assetservicing revenue is considered earned daily as transactions are processed orservices are provided.

Value-added services***—***The Companyrecognizes revenue from its value-added services, such as foreign exchange,securities lending and cash management services, based on the specific type oftransaction processed. Value-added services revenue is considered earned dailyas transactions are processed or services are provided.

Interest income***—***The Companyrecognizes and accrues income on its interest-earning assets as earned using amethod which approximates the constant effective yield method.

F-7

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**2. Summaryof Significant Accounting Policies (Continued)**

***Cash and CashEquivalents******—For***purposesof reporting cash flows, the Company defines cash and cash equivalents toinclude cash, due from banks, and interest-bearing deposits.

***Securities******—The***Companyclassifies all equity securities that have readily determinable fair values andall investments in debt securities into one of three categories. Debtsecurities that the Company has the positive intent and ability to hold tomaturity are classified as held to maturity and carried at amortized cost. Debtand equity securities that are bought and held principally for the purpose ofselling them in the near term are classified as trading securities and carriedat fair value, with unrealized gains and losses included in earnings. All otherdebt and equity securities not classified as either held to maturity or tradingare classified as available for sale and carried at fair value, with unrealizedgains and losses excluded from earnings and reported in other comprehensiveincome.

Nonmarketable securitiesconsist of stock of the Federal Home Loan Bank of Boston (‘FHLBB’) and arecarried at cost and redeemable at par value. The Company is required to holdthis stock under its borrowing arrangement withthe FHLBB.

An investment isconsidered impaired if the fair value of the investment is less than its cost. TheCompany recognizes an impairment charge if, based on the facts andcircumstances, management determines the impairment to be other than temporary.For example, the Company will record an other than temporary impairment chargeon a debt security if it is determined that it is probable that the Companywill be unable to recover all amounts due under the contractual obligations ofthe security.

Amortization and accretionof debt securities purchased at a premium or discount are amortized or accretedinto income using a method which approximates the constant effective yieldmethod. The Company applies Statement of Financial Accounting Standard No. 91,*Accounting for Nonrefundable Fees and CostsAssociated with Originating or Acquiring Loans and Initial Direct Costs ofLeases* (‘SFAS 91’) for the amortization of premiums and accretion ofdiscounts. In calculating the effective yield for securities that representholdings of large numbers of similar loans for which prepayments are probableand the timing and amount of prepayments can be reasonably estimated,prepayments are anticipated using the Company’s actual three-month prepaymentexperience.

The amount of amortizationor accretion to recognize in income is driven by the calculation of theconstant effective yield. When calculating this yield, the Company assumes thatprepayments will continue from the analysis date to the date of the security’sexpected maturity at its most recent three-month prepayment rate. Theprepayment rate is updated monthly based on the Company’s previous three-monthactual prepayment experience.

The Company utilizesthree-month prepayment rates to anticipate prepayments because such rates arebased on its own actual prepayment experience and because the Company believesthree-month rates are a better estimate of future experience than eitherone-month or six-month or longer rates. In the opinion of management, aone-month rate does not capture enough experience to predict future prepaymentbehavior and may create undue volatility in interest income due to one-timefluctuations in prepayment activity. Conversely, in the opinion of management,a six-month or longer rate would not capture enough volatility to predictfuture prepayment behavior.

If a difference arisesbetween the Company’s estimated prepayments and its actual prepaymentsreceived, the constant effective yield is recalculated based on the Company’sactual payments to date and 

F-8

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**2. Summaryof Significant Accounting Policies (Continued)**

anticipatedfuture payments. This monthly recalculation results in the carrying value ofthe security being adjusted to the amount that would have existed had the neweffective yield been applied since the purchase date, and a correspondingcharge or credit is recognized to interest income.

For securities that do notrepresent holdings of large numbers of similar loans for which prepayments areprobable and the timing and amount of prepayments can be reasonably estimated,the associated premiums and discounts are amortized or accreted over theircontractual term using the constant effective yield. Actual prepaymentexperience for such securities is reviewed monthly and a proportionate amountof premium or discount is recognized in income at that time such that theeffective yield on the remaining portion of the securities continues unchanged.

As of and for the yearsended December 31, 2005, 2004, and 2003, the Company anticipatedprepayments on its mortgage-backed securities. All other securities, including Federalagency securities, state and political subdivisions, corporate debt, U.S.Treasury securities and foreign government securities, do not meet the SFAS 91criteria for anticipating prepayments. Accordingly, no prepayments wereanticipated for these securities.

***Loans******—Interest on loans is credited toincome as earned using a method which approximates the effective yield method,and interest is only accrued if deemed collectible. Accrual of interest onloans is discontinued when management determines that collection of interest isnot probable, or when a loan is both greater than 60 days delinquent and theloan’s collateral is not sufficient to cover both principal and accruedinterest. Interest income on impaired loans is recognized after all past dueprincipal and interest has been repaid and the Company expects repayment of theremaining contractual principal and interest, or when an improvement in thecondition of the loan has occurred that would warrant resumption of interestaccruals. Other loan fees and charges, including service costs for theprepayment of loans, delinquent charges and other miscellaneous loan services,are recorded as income when collected.***

***Equipment, Leasehold Improvements and CapitalizedSoftware Costs******—Equipment***andleasehold improvements are stated at cost, less accumulated depreciation andamortization. Depreciation and amortization are provided using the straight-linemethod over the estimated useful lives of the assets which range from three toseven years, and for leasehold improvements over the lesser of the useful lifeor the life of the lease. For costs incurred to develop computer software forinternal use, the Company capitalizes costs incurred during the application anddevelopment stage, which includes costs to design the software configurationand interfaces, coding, installation and testing. Costs incurred during thepreliminary and post-implementation stages are expensed as incurred. Capitalizedsoftware costs are amortized over the estimated useful life of the project,which can range from three to five years.

***Long-Lived Assets******—Long-lived***assetsto be held and used by the Company are reviewed on a quarterly basis todetermine whether any events or changes in circumstances indicate that thecarrying amount of the asset may not be recoverable. For long-lived assets tobe held and used, the Company bases its evaluation on such impairmentindicators as the nature of the assets, the further economic benefit of theassets, any historical or future profitability measurements, as well as otherexternal market conditions or factors that may be present. During the yearsended December 31, 2005 and 2004, the Company’s analysis indicated therewere no material impairments of its long-lived assets.

F-9

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**2. Summaryof Significant Accounting Policies (Continued)**

***Income Taxes******—Income***taxexpense is based on estimated taxes payable or refundable on a tax return basisfor the current year and the changes in deferred tax assets and liabilitiesduring the year. Deferred tax assets and liabilities are established fortemporary differences between the accounting bases and the tax bases of theCompany’s assets and liabilities at enacted tax rates expected to be in effectwhen the amounts related to such temporary differences are realized or settled.If the Company determines that it is “more likely than not” that some portionor all of a deferred tax asset will not be realized, the Company records avaluation allowance in accordance with the provisions of Statement of FinancialAccounting Standard No. 109, *Accountingfor Income Taxes*(‘SFAS 109’).

The Company recorded aone-time benefit of approximately $7 million in the second quarter of 2005related to the recognition of the indefinite reversal provision of AccountingPrinciples Board Opinion No. 23, *Accountingfor Income Taxes—Special Areas*(‘APB 23’). The indefinite reversalprovision of APB 23 specifies that U.S. income taxes should not be accrued onthe undistributed earnings of a foreign subsidiary if those earnings have beenor will be invested indefinitely in that subsidiary’s operations. The Companyhad previously accrued U.S. income taxes on the undistributed earnings of itsIrish subsidiaries. In the second quarter of 2005, the Company recognized theindefinite reversal provision of APB 23 due to the projected capital needs ofits Irish subsidiaries necessary to support continued growth. As such, theCompany will no longer record U.S. income taxes on the undistributed earningsof its Irish subsidiaries.

***Translation of Foreign Currencies******—The***Companytranslates the financial statements of its foreign operations into U.S. dollars.Where the functional currency is not the U.S. dollar, assets and liabilitiesare translated into U.S. dollars at period-end exchange rates, while income andexpenses are translated using average rates for the period. The resultingtranslation adjustments are recorded as a component of accumulated othercomprehensive income (‘OCI’) in stockholders’ equity.

For foreign operationswhere the functional currency is the U.S. dollar, the local currency financialstatements are remeasured into U.S. dollars using period-end exchange rates formonetary assets and liabilities, exchange rates in effect on the date ofacquisition for non-monetary assets and liabilities (such as premises andequipment and the related depreciation), and the average exchange rates duringthe period for income and expenses. The resulting exchange gains or losses arerecorded in current period income.

***Derivative Financial Instruments******—***Derivativefinancial instruments are recorded in the Company’s balance sheets at fairvalue as other assets or other liabilities, depending on the rights andobligations under the contracts. The Company utilizes derivative financialinstruments primarily for balance sheet asset and liability management purposes.Changes in the fair value of a derivative that is designated and qualifies as acash flow hedge are reported in OCI, net of taxes, to the extent the hedge ishighly effective. The ineffective portion, which is the extent to which thechanges in the fair value of the derivative exceed the changes in the variabilityof the expected future cash flows of the hedged item (on an absolute basis), isreported in net interest income. Changes in the fair value of a derivative thatis designated and qualifies as a fair value hedge are reported in net interestincome, along with the change in the fair value of the hedged item attributableto the risk hedged. The changes in fair value of a derivative that do notqualify as a hedge are recognized in earnings.

F-10

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**2. Summaryof Significant Accounting Policies (Continued)**

Hedge accounting isdiscontinued prospectively if a) the hedging relationship no longer meets thehedging criteria, b) the derivative expires, is sold or terminated, or thehedged item no longer exists, or c) the Company removes the hedge designation. Whenhedge accounting is discontinued under cash flow hedge accounting, thecomponent of OCI related to the discontinued hedge is amortized to net interestincome over the remaining term of the derivative financial instrument. Underfair value hedge accounting,  when ahedge is discontinued, the hedged item is no longer adjusted for changes infair value and the existing basis adjustment is amortized to net interestincome. If cash flow hedge accounting is discontinued due to the probabilitythat the forecasted transaction will not occur within the specified period,gains and losses accumulated in OCI related to that hedge are recognizedimmediately in net interest income.

The Company enters intointerest rate derivative contracts that are designated as cash flow hedges ofvariable-rate liabilities. The unrealized gains or losses related to thesecontracts are reported in other assets and other liabilities on the Company’sconsolidated balance sheets.

The Company also enters intofixed price purchase contracts that are designed to hedge the variability ofthe consideration to be paid for the purchase of investment securities. Byentering into these contracts, the Company is fixing the price to be paid at afuture date for certain investment securities. The changes in fair value ofthese fixed price contracts are included as a component of OCI. The unrealizedgains and losses are included in other assets and other liabilities on theCompany’s consolidated balance sheets.

The Company enters intoforeign exchange contracts with clients and enters into matched or offsettingpositions with either another client or a financial institution. Thesecontracts are subject to market value fluctuations in foreign currencies. Gainsand losses from such fluctuations are netted and recorded as an adjustment toasset servicing fees in the Company’s consolidated statements of income. Unrealizedgains or losses resulting from purchases and sales of foreign exchangecontracts are included within the respective other assets and other liabilitiescategories on the Company’s consolidated balance sheets. Foreign exchangecontracts with the same counterparty are netted in the Company’s consolidatedbalance sheets when a master netting agreement exists.

***Securities Sold Under Repurchase Agreements******—The***Companyenters into sales of securities under agreements to repurchase as a low costsource of funding for its operations. These agreements are treated as securedborrowings, and the obligations to repurchase securities sold are reflected asliabilities in the consolidated balance sheets. Securities pledged ascollateral under agreements to repurchase are reflected as assets in theaccompanying consolidated balance sheets.

F-11

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**2. Summaryof Significant Accounting Policies (Continued)**

***Share-basedCompensation******—***The Companymeasures compensation expense for share-based compensation plans using theintrinsic value method. The intrinsic value method measures compensation cost asthe amount by which the fair market value of the Company’s common stock exceedsthe option exercise price on the measurement date, which is typically the dateof grant. Generally, options granted have an exercise price equivalent to thefair market value of the common stock at the measurement date. Accordingly, nocompensation cost has been recorded. If share-based compensation were recognizedusing the fair value method, stock options would be valued at grant date usingthe Black-Scholes valuation model and the resulting compensation costs wouldhave decreased net income as indicated below (Dollars in thousands, except pershare data):

| ** **                                                                                                                              | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Net income as  reported                                                                                                                 |       |                        | $          | 159,818                     |       |                        |       | $ | 141,962 |   |   |   | $ | 92,421 |   |   |
| Deduct: Total  share-based employee compensation expense determined under fair value method  for all awards, net of related tax effects |       |                        | (19,832    | )                           |       |                        | (15,146    | ) |   |   | (10,467 | ) |   |
| Pro forma net  income                                                                                                                   |       |                        | $          | 139,986                     |       |                        |       | $ | 126,816 |   |   |   | $ | 81,954 |   |   |
| Earnings per share:                                                                                                                     |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Basic-as reported                                                                                                                       |       |                        | $          | 2.42                        |       |                        |       | $ | 2.15 |   |   |   | $ | 1.42 |   |   |
| Basic-pro forma                                                                                                                         |       |                        | 2.12       |                        |       |                        | 1.92       |   |   |   | 1.26 |   |   |
| Diluted-as reported                                                                                                                     |       |                        | $          | 2.37                        |       |                        |       | $ | 2.09 |   |   |   | $ | 1.39 |   |   |
| Diluted-pro forma                                                                                                                       |       |                        | 2.07       |                        |       |                        | 1.87       |   |   |   | 1.23 |   |   |

 

The fair value of eachoption grant was estimated on the date of grant using the Black-Scholesvaluation model with the following weighted-average assumptions for optionsgranted in the years ended December 31, 2005, 2004 and 2003, respectively:an average assumed risk-free interest rate of 4.55%, 3.08% and 2.37%, anexpected life of four years, an average expected volatility of 41.04%, 50.49%and 55.86%, and average dividend yield of 0.20%, 0.16% and 0.20%.

***Earnings Per Share******—Basic***earningsper share (“EPS”) is computed by dividing net income available to commonstockholders by the weighted-average number of common shares outstanding duringthe year. Diluted EPS adjusts Basic EPS to reflect the potential dilution thatcould occur if contracts to issue common stock (such as employee stock options)were exercised into common stock that then shared in the earnings of theCompany.

F-12

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**2. Summaryof Significant Accounting Policies (Continued)**

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

| ** **                                                    | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** | **Per Share** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                    | ** ** | **Income** | ** ** | **Shares**           | ** ** | **Amount**         | ** ** |
| **December 31, 2005**                                    |       |       |       |                 |       |               |       |   |   |   |   |
| *Basic EPS*                                                   |       |       |       |                 |       |               |       |   |   |   |   |
| Income available  to common stockholders                      |       | $          | 159,818    |                 |       | 66,139,323         |       |   |   | $ | 2.42 |   |   |
| Dilutive effect  of common equivalent shares of stock options |       | —     |       |                 | 1,334,481  |               |       |   | (0.05 | ) |   |
| *Diluted  EPS*                                                |       | $          | 159,818    |                 |       | 67,473,804         |       |   |   | $ | 2.37 |   |   |
| **December 31, 2004**                                    |       |       |       |                 |       |               |       |   |   |   |   |
| *Basic EPS*                                                   |       |       |       |                 |       |               |       |   |   |   |   |
| Income available  to common stockholders                      |       | $          | 141,962    |                 |       | 66,179,286         |       |   |   | $ | 2.15 |   |   |
| Dilutive effect  of common equivalent shares of stock options |       | —     |       |                 | 1,736,931  |               |       |   | (0.06 | ) |   |
| *Diluted  EPS*                                                |       | $          | 141,962    |                 |       | 67,916,217         |       |   |   | $ | 2.09 |   |   |
| **December 31, 2003**                                    |       |       |       |                 |       |               |       |   |   |   |   |
| *Basic EPS*                                                   |       |       |       |                 |       |               |       |   |   |   |   |
| Income available  to common stockholders                      |       | $          | 92,421     |                 |       | 65,098,960         |       |   |   | $ | 1.42 |   |   |
| Dilutive effect  of common equivalent shares of stock options |       | —     |       |                 | 1,376,502  |               |       |   | (0.03 | ) |   |
| *Diluted EPS*                                                 |       | $          | 92,421     |                 |       | 66,475,462         |       |   |   | $ | 1.39 |   |   |

 

For the years ended December 31, 2005, 2004 and2003, there were 733,015 options, 29,451 options, and 3,517,655 options whichwere not considered dilutive for EPS calculations, respectively.

F-13

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003.**

**2. Summary of Significant Accounting Policies(Continued)**

***Guarantees***—Onbehalf of its clients, the Company lends securities to creditworthybroker-dealers. In certain circumstances, the Company may indemnify its clientsfor the fair market value of those securities against a failure of the borrowerto return such securities. The Company requires the borrowers to providecollateral in an amount equal to, or in excess of, 102% of the fair marketvalue of U.S. dollar-denominated securities borrowed and 105% of the fairmarket value of non-U.S. dollar-denominated securities borrowed. The borrowedsecurities are revalued daily to determine whether additional collateral isnecessary. As guarantor, the Company is required to recognize, at the inceptionof a guarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee. The Company measures the fair value of itsindemnification obligation by marking its securities lending portfolio tomarket on a daily basis and comparing the value of the portfolio to thecollateral holdings position. The fair value of the indemnification obligationto be recorded would be the deficiency of collateral as compared to the valueof the securities out on loan.

***Goodwill***—***In*********accordance with Statement ofFinancial Accounting Standards No. 142, *Goodwill andOther Intangible Assets*(‘SFAS 142’), the Company ceasedamortization of goodwill effective January 1, 2002. The Company reviewsgoodwill for impairment on an annual basis, or if events or changes in circumstancesindicate it would be more likely than not that the fair value of the goodwillwould be reduced below its carrying value. As of December 31, 2005, therewas no impairment of goodwill.

***New Accounting Pronouncements***

In December 2004, the Financial AccountingStandards Board (‘FASB’) issued Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment*(‘SFAS 123R’).SFAS 123R requires that compensation cost relating to share-based paymenttransactions be recognized in the financial statements, with measurement basedupon the fair value of the equity or liability instruments issued. The Companycurrently uses the intrinsic-value method to measure compensation cost relatedto its share-based transactions. SFAS 123R replaces SFAS 123, *Accounting for Stock-Based Compensation*, and supersedes APBOpinion No. 25, *Accounting for StockIssued to Employees.*

In March 2005, the SEC issued Staff AccountingBulletin No. 107 (‘SAB 107’), which expresses the views of the SECregarding the interaction of SFAS 123R and certain SEC regulations and providesthe SEC’s views regarding the valuation of share-based payment arrangements forpublic companies.

In April 2005, the SEC issued Release 2005-57,which delayed the effective date for SFAS 123R to reporting periods in thefirst fiscal year beginning after June 15, 2005. Accordingly, the Companyadopted SFAS 123R on January 1, 2006, effective for financial periods in2006. There was no impact to the financial condition or results of operationsof the Company upon adoption.

In May 2005, the FASB issued Statement ofFinancial Accounting Standards No. 154, *AccountingChanges and Error Corrections-a replacement of APB Opinion No. 20 and FASBStatement No. 3*(‘SFAS 154’). SFAS 154 replaces APB Opinion No. 20,*Accounting Changes,*and FASB Statement No. 3,*Reporting Accounting Changes in Interim FinancialStatements,*and changes the accounting and reporting requirementsfor a change in accounting principle. SFAS 154 applies to all voluntary changesin an accounting principle, as well as to changes required by a new accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions. SFAS 154 is effective for 

F-14

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003.**

**2. Summaryof Significant Accounting Policies (Continued)**

accounting changes anderror corrections made in fiscal years beginning after December 15, 2005and requires retrospective application to prior periods’ financial statementsfor most voluntary changes in an accounting principle, unless it isimpracticable to do so. The Company does not anticipate any material impact toits financial condition or results of operations as a result of the adoption ofSFAS 154.

In February 2006, theFASB issued Statement of Financial Accounting Standards No. 155, *Accounting for Certain Hybrid Instruments-an amendment of FASBStatements No. 133 and 140* (‘SFAS 155’). SFAS 155 allowsfinancial instruments that have embedded derivatives to be accounted for as awhole if the holder elects to account for the whole instrument on a fair valuebasis. SFAS 155 eliminates the need to bifurcate the derivative from its host,as previously required under Statement of Financial Accounting Standards No. 133,*Accounting for Derivative Instruments and HedgeAccounting*(‘SFAS 133’). SFAS 155 also amends SFAS 133 byestablishing a requirement to evaluate interests in securitized financialassets to determine whether they are free standing derivatives or whether theycontain embedded derivatives that require bifurcation. SFAS 155 is effectivefor all hybrid financial instruments acquired or issued by the Company on orafter January 1, 2007. The Company does not anticipate any material impactto its financial condition or results of operations as a result of the adoptionof SFAS 155.

**3. Securities**

Amortizedcost amounts and fair values of securities are summarized as follows as of December 31,2005 (Dollars in thousands):

| **Held to Maturity**    | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Fair Value** | ** ** |
|-----------------------------------|------------|---------------------|------------|-----------------------|------------|--------------------------|------------|---------------------|------------|
| Mortgage-backed  securities       |       | $                   | 4,342,254  |                  |       | $                        | 11,420     |                |       |   | $ | (29,818 | ) |   | $ | 4,323,856 |   |
| Federal agency  securities        |       | 2,305,331           |       |                  | 1,560      |                     |       |                | (23,914    | ) |   | 2,282,977 |   |
| State and  political subdivisions |       | 114,345             |       |                  | 4,646      |                     |       |                | (95        | ) |   | 118,896 |   |
| Total                             |       | $                   | 6,761,930  |                  |       | $                        | 17,626     |                |       |   | $ | (53,827 | ) |   | $ | 6,725,729 |   |

 

| **Available for Sale**  | ** ** | **Amortized  Cost** | ** ** | **Unrealized   Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Fair Value** | ** ** |
|-----------------------------------|------------|---------------------|------------|-----------------------------|------------|--------------------------|------------|---------------------|------------|
| Mortgage-backed  securities       |       | $                   | 3,810,797  |                        |       | $                        | 3,882      |                |       |   | $ | (48,578 | ) |   | $ | 3,766,101 |   |
| State and  political subdivisions |       | 388,789             |       |                        | 5,515      |                     |       |                | (1,913     | ) |   | 392,391 |   |
| Corporate debt                    |       | 201,499             |       |                        | 736        |                     |       |                | (1,543     | ) |   | 200,692 |   |
| Foreign  government securities    |       | 10,539              |       |                        | —     |                     |       |                | (3         | ) |   | 10,536 |   |
| Total                             |       | $                   | 4,411,624  |                        |       | $                        | 10,133     |                |       |   | $ | (52,037 | ) |   | $ | 4,369,720 |   |

 

F-15

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003.**

**3. Securities(Continued)**

Amortized cost amounts andfair 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 Value** | ** ** |
|-----------------------------------|------------|---------------------|------------|-----------------------|------------|--------------------------|------------|---------------------|------------|
| Mortgage-backed  securities       |       | $                   | 3,543,961  |                  |       | $                        | 13,269     |                |       |   | $ | (7,802 | ) |   | $ | 3,549,428 |   |
| Federal agency  securities        |       | 2,274,665           |       |                  | 1,658      |                     |       |                | (18,443    | ) |   | 2,257,880 |   |
| State and  political subdivisions |       | 124,091             |       |                  | 6,090      |                     |       |                | (27        | ) |   | 130,154 |   |
| Total                             |       | $                   | 5,942,717  |                  |       | $                        | 21,017     |                |       |   | $ | (26,272 | ) |   | $ | 5,937,462 |   |

 

| **Available for Sale**  | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Fair Value** | ** ** |
|-----------------------------------|------------|---------------------|------------|-----------------------|------------|--------------------------|------------|---------------------|------------|
| Mortgage-backed  securities       |       | $                   | 3,848,255  |                  |       | $                        | 21,596     |                |       |   | $ | (14,951 | ) |   | $ | 3,854,900 |   |
| State and  political subdivisions |       | 384,859             |       |                  | 20,110     |                     |       |                | (60        | ) |   | 404,909 |   |
| Corporate debt                    |       | 177,201             |       |                  | 911        |                     |       |                | (1,566     | ) |   | 176,546 |   |
| US Treasury  securities           |       | 113,843             |       |                  | 4,845      |                     |       |                | —     |   |   | 118,688 |   |
| Foreign  government securities    |       | 10,302              |       |                  | 160        |                     |       |                | —     |   |   | 10,462 |   |
| Total                             |       | $                   | 4,534,460  |                  |       | $                        | 47,622     |                |       |   | $ | (16,577 | ) |   | $ | 4,565,505 |   |

 

Excluded from the abovetables are nonmarketable equity securities, which consisted of stock of theFHLBB at December 31, 2005 and 2004. OnApril 19, 2004, the FHLBB implemented a new capital structure mandated forall Federal Home Loan Banks subject to the Gramm-Leach-Bliley Act of 1999 andregulations that were subsequently promulgated in 2001 by the FHLBB’sregulator, the Federal Housing Finance Board. The Bank’s capital stockinvestment in the FHLBB totaled $50.0 million as of December 31, 2005. The$50.0 million capital stock investment includes both a $25.0 million membershipcomponent and a $25.0 million activity-based component. Under the newcapital plan, FHLBB capital stock investments require a five-year advancenotice of withdrawal. Recent changes to theFHLBB capital plan have resulted in an increased borrowing capacity. The Bank’s$50.0 million capital stock investment in the FHLBB provides an overnightborrowing capacity of up to $833.0 million. The amount outstanding underthis arrangement at December 31, 2005 was $546.0 million. Additionalborrowing is available to the Bank based on prescribed collateral levels andincreased investment in FHLBB capital stock. The Bank currently has no plans toincrease its investment in FHLBB capital stock.

Theamortized cost amounts and fair values of securities by contractual maturityare as follows (Dollars in thousands):

| ** **                      | ** ** | **December 31, 2005** | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| **Held to Maturity**  | ** ** | **Amortized  Cost**             | ** ** | **Fair Value** | ** ** |
| Due within one  year            |       |                            | $          | 3,872 |   |   | $ | 3,938 |   |
| Due from one to  five years     |       |                            | 28,785     |   |   | 28,806 |   |
| Due five years up  to ten years |       |                            | 254,380    |   |   | 254,656 |   |
| Due after ten  years            |       |                            | 6,474,893  |   |   | 6,438,329 |   |
| Total                           |       |                            | $          | 6,761,930 |   |   | $ | 6,725,729 |   |

** **

F-16

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003.**

**3. Securities(Continued)**

 

| ** **                       | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| **Available for Sale** | ** ** | **Amortized  Cost**             | ** ** | **Fair Value** | ** ** |
| Due within one  year             |       |                            | $          | 492 |   |   | $ | 498 |   |
| Due from one to  five years      |       |                            | 132,358    |   |   | 134,094 |   |
| Due five years up  to ten years  |       |                            | 101,183    |   |   | 102,851 |   |
| Due after ten  years             |       |                            | 4,177,591  |   |   | 4,132,277 |   |
| Total                            |       |                            | $          | 4,411,624 |   |   | $ | 4,369,720 |   |

 

During the year ended 2005, the Company soldeighty-five securities classified as available for sale totaling $376.1million, using the specific identification method. The total book value of thesecurities sold were $363.7 million, resulting in gross realized gains of $12.4million. During the year ended December 31, 2004, the Company sold onesecurity classified as available for sale totaling $25.0 million, using thespecific identification method. The book value of the security was $24.8million resulting in a gross realized gain of $0.2 million. There were no salesof securities during the year ended December 31, 2003.

The carrying value of securities pledged amounted toapproximately $7.5 billion at December 31, 2005 and $6.3 billion at December 31,2004. Securities are pledged primarily to secure clearings with otherdepository institutions, secure repurchase agreements and secure outstandingFHLBB borrowings.

On a quarterly basis the Company reviews itsinvestment portfolio on a security by security basis for any investment thatmay be other than temporarily impaired. In its evaluation, the Companyconsiders the length of time the security has been impaired, the severity ofthe impairment, the financial condition and future prospects of the issuer, andthe Company’s ability and intent to hold the security to maturity or until itrecovers in value.

The unrealized losses related to the Company’sinvestment in mortgage-backed and Federal agency securities are attributable tochanges in market interest rates. The contractual cash flows of thesesecurities are guaranteed by agencies of the U.S. government, includinggovernment sponsored agencies. As a result, the Company’s exposure to thecredit risk of these securities is minimal. At December 31, 2005, therewere 320 mortgage-backed and Federal agency securities that were in unrealizedloss positions. The market value decline as a percentage of amortized cost forthe Company’s mortgage-backed and Federal agency securities portfolio was lessthan 2% at December 31, 2005. The Company has the intent and ability tohold these securities until forecasted recovery, which may in some cases bematurity. The Company does not consider these investments to be other thantemporarily impaired at December 31, 2005.

Corporate debt securities include trust preferredsecurities (‘trups’) issued by reputable financial institutions. The creditratings of the underlying issuers range from A1 to Aa3 ratings. The Companyholds senior tranches of these issuances and believes that it will recover allcontractual payments. The unrealized losses related to the trups portfolio aredue to changes in credit spreads. At December 31, 2005, there were fivecorporate debt securities that were in unrealized loss positions. The Companyhas the intent and ability to hold these securities until forecasted recovery,and does not consider these investments to be other than temporarily impairedat December 31, 2005.

F-17

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003.**

**3. Securities(Continued)**

Unrealized losses related to the Company’s investmentsin state and political subdivisions securities were due to changes in marketinterest rates. The Company reviewed the investment securities credit ratings,which were all Aaa. At December 31, 2005, there were five state and politicalsubdivisions investment securities in an unrealized loss position. Given theminimal amount of unrealized losses and the limited amount of credit exposure,the Company does not consider these investments to be other than temporarilyimpaired at December 31, 2005.

Thefollowing table represents the information about the Company’s temporarilyimpaired investments at December 31, 2005 (Dollars in thousands): 

| ** **                            | ** ** | **Less than 12 months** | ** ** | **12 months or longer** | ** ** | **Total**           | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|---------------------|------------|
| ** **                            | ** ** | **Fair Value**                    | ** ** | **Unrealized  Losses**                 | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Mortgage-backed  securities           |       | $                                      | 4,566,743  |                                   |       | $                   | 43,821     |   |   | $ | 1,486,521 |   |   | $ | 34,575 |   |   | $ | 6,053,264 |   |   | $ | 78,396 |   |   |
| Federal agency  securities            |       | 1,443,951                              |       |                                   | 10,809     |                |       | 883,807 |   |   | 13,105 |   |   | 2,327,758 |   |   | 23,914 |   |   |
| Corporate debt                        |       | —                                 |       |                                   | —     |                |       | 47,911 |   |   | 1,543 |   |   | 47,911 |   |   | 1,543 |   |   |
| State and  political subdivisions     |       | 146,147                                |       |                                   | 1,856      |                |       | 8,173 |   |   | 152 |   |   | 154,320 |   |   | 2,008 |   |   |
| Foreign                               |       | 10,536                                 |       |                                   | 3          |                |       | — |   |   | — |   |   | 10,536 |   |   | 3 |   |   |
| Total temporarily impaired securities |       | $                                      | 6,167,377  |                                   |       | $                   | 56,489     |   |   | $ | 2,426,412 |   |   | $ | 49,375 |   |   | $ | 8,593,789 |   |   | $ | 105,864 |   |   |

 

Thefollowing table represents the information about the Company’s temporarilyimpaired investments at December 31, 2004 (Dollars in thousands): 

| ** **                             | ** ** | **Less than 12 months** | ** ** | **12 months or longer** | ** ** | **Total**           | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|---------------------|------------|
| ** **                             | ** ** | **Fair Value**                    | ** ** | **Unrealized  Losses**                 | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Mortgage-backed  securities       |       | $                                      | 2,518,100  |                                   |       | $                   | 15,704     |   |   | $ | 545,709 |   |   | $ | 7,049 |   |   | $ | 3,063,809 |   |   | $ | 22,753 |   |   |
| Federal agency  securities             |       | 1,446,223                              |       |                                   | 12,332     |                |       | 518,045 |   |   | 6,111 |   |   | 1,964,268 |   |   | 18,443 |   |   |
| Corporate debt                         |       | —                                 |       |                                   | —     |                |       | 47,894 |   |   | 1,566 |   |   | 47,894 |   |   | 1,566 |   |   |
| State and  political subdivisions      |       | 5,565                                  |       |                                   | 15         |                |       | 6,025 |   |   | 72 |   |   | 11,590 |   |   | 87 |   |   |
| Total temporarily  impaired securities |       | $                                      | 3,969,888  |                                   |       | $                   | 28,051     |   |   | $ | 1,117,673 |   |   | $ | 14,798 |   |   | $ | 5,087,561 |   |   | $ | 42,849 |   |   |

 

F-18

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003.**

**4. Loans**

Loans consist of demandloans to custody clients of the Company, including individuals, not-for-profitinstitutions and mutual fund clients. The loans to mutual funds and otherpooled product clients include lines of credit and advances pursuant to theterms of the custody agreements between the Company and those clients tofacilitate securities transactions and redemptions. Almost all of the Company’scommitments to fund loans are at variable rates. Generally, the loans are, ormay be, in the event of default, collateralized with marketable securities heldby the Company as custodian. Althoughvirtually all of our loans are fully collateralized with freely tradablesecurities, management recognizes some credit risk inherent in the loanportfolio, and has an allowance for loan losses of $0.1 million at December 31,2005, a level which has remained consistent for the past five years. Thisamount is not allocated to any particular loan, but is intended to absorb anyrisk of loss inherent in the loan portfolio. Management actively monitors theloan portfolio and the underlying collateral and regularly assesses theadequacy of the allowance for loan losses. There were no impaired loans,non-performing loans, or loans on nonaccrual status at December 31, 2005 and2004. In addition, there were no loan charge-offs or recoveries during theyears ended December 31, 2005, 2004 and 2003. Loans are summarized asfollows (Dollars in thousands):

| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Loans to mutual  funds          |       |                  | $          | 286,144               |       |   |   | $ | 22,520 |   |   |
| Loans to  individuals           |       |                  | 81,392     |                  |       |   | 69,402 |   |   |
| Loans to others                 |       |                  | 34,934     |                  |       |   | 42,708 |   |   |
|                            |       |                  | 402,470    |                  |       |   | 134,630 |   |   |
| Less allowance  for loan losses |       |                  | (100       | )                     |       |   | (100 | ) |   |
| Total                           |       |                  | $          | 402,370               |       |   |   | $ | 134,530 |   |   |

 

The Company had unused commitments to lend ofapproximately $898.9 million and $978.8 million at December 31, 2005 and2004, respectively. The terms of these commitments are similar to the terms ofoutstanding loans.

The Company periodically issues lines of credit andadvances to its mutual fund clients to help those clients with securitytransactions. The President of one of those clients is a related party to JamesM. Oates, a member of the Company’s Board of Directors. As of December 31,2005, the Company had total contractual agreements for $150.0 million ofcommitted lines of credit with two mutual funds within the related partycomplex (the “mutual funds”). The primary source of repayment of the loans isthe proceeds from the sale of investments in the normal course of the mutualfunds’ business. As part of the agreement, the mutual funds are required tosegregate and maintain specific collateral for the Company equal to 200% of thelines of credit. At December 31, 2005, loans due from the mutual fundstotaled $125.0 million. There were no loans outstanding from any related partymutual fund complex at December 31, 2004. Total interest and commitmentfee revenue from the mutual funds for the years ended December 31, 2005and 2004 was $2.7 million and $0.4 million, respectively. There was no interestor commitment fee revenue on any related party loans for the year ended December 31,2003.

In January 2006, the Company entered into a $30.0million committed line of credit agreement with a series of trusts (“the trusts”).Edward F. Hines, a member of the Company’s Board of Directors, is a trustee ofthe trusts and is a partner in the firm that manages the assets held in thetrusts. The line of credit 

F-19

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003.**

**4. Loans(Continued)**

is secured by assets ofthe trusts, which assets are held by Investors Bank as custodian. The primarysource of repayment of the loans is the proceeds from the sale of investmentsin the normal course of the trusts’ business.

The terms and conditionsof the Company’s contractual agreements with the mutual funds and trustsdiscussed above, including collateral requirements, lending limits and fees,are consistent with other lending clients that have similar composition, sizeand overall business relationships with the Company. Also, Mr. Oates and Mr. Hinesabstain from voting on any board matter involving the proposed transactionswith the mutual funds and trusts, respectively, discussed above.

**5. Equipment and LeaseholdImprovements**

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

| ** **                                      | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Furniture,  fixtures and equipment              |       |                        | $          | 112,310                     |       |   |   | $ | 113,204 |   |   |
| Leasehold  improvements                         |       |                        | 16,247     |                        |       |   | 15,696 |   |   |
| Total                                           |       |                        | 128,557    |                        |       |   | 128,900 |   |   |
| Less accumulated  depreciation and amortization |       |                        | (59,156    | )                           |       |   | (61,017 | ) |   |
| Equipment and leasehold  improvements, net      |       |                        | $          | 69,401                      |       |   |   | $ | 67,883 |   |   |

 

Included in furniture, fixtures and equipment werecapitalized internal software costs of $73.3 million and $75.3 million at December 31,2005 and 2004, respectively. Depreciation expense was $29.4 million, $30.1million and $26.1 million for the years ended December 31, 2005, 2004 and2003, respectively. Amortization expense was $2.2 million, $2.0 million and$1.9 million for the years ended December 31, 2005, 2004 and 2003,respectively.

F-20

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**6. Deposits**

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

| ** **                         | ** ** | **December 31,  2005** | ** ** | **December 31,   2004** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| Interest-bearing  deposits:        |       |                        |       |                              |       |   |   |   |   |
| Demand                             |       |                        | $          | 85,157                            |       |   |   | $ | — |   |   |
| Savings                            |       |                        | 4,195,486  |                              |       |   | 4,362,895 |   |   |
| Time                               |       |                        | 55,124     |                              |       |   | 97,669 |   |   |
| Total  interest-bearing deposits   |       |                        | 4,335,767  |                              |       |   | 4,460,564 |   |   |
| Noninterest-bearing  deposits:     |       |                        |       |                              |       |   |   |   |   |
| Demand                             |       |                        | 452,401    |                              |       |   | 690,308 |   |   |
| Savings                            |       |                        | 29,422     |                              |       |   | 85,510 |   |   |
| Time                               |       |                        | 175,000    |                              |       |   | 160,000 |   |   |
| Total noninterest-bearing deposits |       |                        | 656,823    |                              |       |   | 935,818 |   |   |
| Total                              |       |                        | $          | 4,992,590                         |       |   |   | $ | 5,396,382 |   |   |

 

Time deposits withbalances greater than $100,000 totaled $230.1 million and $257.6 million at December 31,2005 and 2004, respectively. All time deposits had a maturity of less thanthree months at December 31, 2005 and 2004. The aggregate amounts ofoverdraft deposits that have been reclassified as loan balances were $162.2million and $41.6 million at December 31, 2005 and 2004, respectively.

**7. SecuritiesSold Under Repurchase Agreements**

Informationon the Company’s repurchase agreements and the corresponding securities pledgedas collateral is as follows (Dollars in thousands):

| ** **                          | ** ** | **Mortgage-backed securities** | ** ** | **Federal agency securities** | ** ** | **Repurchase Agreements** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **Amortized Cost**             | ** ** | **Fair Value**                     | ** ** | **Amortized Cost**        | ** ** | **Fair Value** | ** ** | **Amortized Cost** | ** ** | **Rate** | ** ** |
| Maturity of Repurchase  Agreements: |       |                                |       |                                    |       |                           |       |   |   | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |
| Overnight                           |       |                                | $          | 1,739,883                               |       |                           | $          | 1,733,766 |   |   | $ | 1,456,234 |   |   | $ | 1,440,022 |   |   | $ | 3,024,835 | ** ** |   | 3.40 | % |
| 2 to 30 days                        |       |                                | 754,483    |                                    |       | 741,199                        |       |   | — |   |   | — |   |   | 734,967 | ** ** |   | 4.21 | % |
| 30 to 90 days                       |       |                                | 262,471    |                                    |       | 260,189                        |       |   | — |   |   | — |   |   | 195,530 | ** ** |   | 4.40 | % |
| Over 90 days                        |       |                                | 769,395    |                                    |       | 761,467                        |       |   | — |   |   | — |   |   | 842,536 | ** ** |   | 3.34 | % |
| **Total**                           |       |                                | $          | 3,526,232                               |       |                           | $          | 3,496,621 |   |   | $ | 1,456,234 |   |   | $ | 1,440,022 |   |   | $ | 4,797,868 | ** ** |   |   |   |

 

Approximately$4.9 billion and $4.3 billion of securities were pledged tocollateralize repurchase agreements as of December 31, 2005 and 2004,respectively. The weighted-average interest rate paid on repurchase agreementswas 2.72% and 1.31% for the years ended December 31, 2005 and 2004,respectively.

F-21

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**8. Short-term and Other Borrowings**

   Thecomponents of short-term and other borrowings are as follows (Dollars inthousands):

| ** **                                            | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Federal Funds  purchased                              |       |                        | $          | 810,511                     |       |   |   | $ | 344,491 |   |   |
| Federal Home Loan  Bank of Boston overnight advances  |       |                        | 400,000    |                        |       |   | — |   |   |
| Federal Home Loan  Bank of Boston short-term advances |       |                        | 146,000    |                        |       |   | 200,000 |   |   |
| Federal Home Loan  Bank of Boston long-term advances  |       |                        | —     |                        |       |   | 50,000 |   |   |
| Treasury, Tax and  Loan account                       |       |                        | 138        |                        |       |   | 190 |   |   |
| Total                                                 |       |                        | $          | 1,356,649                   |       |   |   | $ | 594,681 |   |   |

 

For the years ended December 31,2005 and 2004, maturities on FHLBB advances ranged from overnight to September 2006.The Company has borrowing arrangements with the FHLBB, which have been utilizedon an overnight, short-term and long-term basis to satisfy funding requirements.The aggregate amounts of these borrowing arrangements at December 31, 2005and 2004 were $0.8 billion and $0.6 billion, respectively, of which $0.5billion and $0.3 billion, respectively, were utilized at December 31, 2005and 2004. Approximately $2.4 billion and $1.6 billion of securities werepledged to collateralize these advances as of December 31, 2005 and 2004,respectively. The weighted-average interest rate paid on short-term and otherborrowings was 3.31% and 2.13% for the years ended December 31, 2005 and2004, respectively.

**9. Income Taxes**

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

| ** **         | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Current:           |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Federal            |       |                        | $          | 76,533                      |       |                        |       | $ | 62,690 |   |   |   | $ | 32,752 |   |   |
| State              |       |                        | 5,420      |                        |       |                        | 5,892      |   |   |   | 14,310 |   |   |
| Foreign            |       |                        | 1,026      |                        |       |                        | 1,247      |   |   |   | 52 |   |   |
| Total current      |       |                        | 82,979     |                        |       |                        | 69,829     |   |   |   | 47,114 |   |   |
| Deferred:          |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Federal            |       |                        | (9,543     | )                           |       |                        | 3,413      |   |   |   | 5,989 |   |   |
| State              |       |                        | 1,788      |                        |       |                        | 94         |   |   |   | (338 | ) |   |
| Foreign            |       |                        | 811        |                        |       |                        | (510       | ) |   |   | — |   |   |
| Total deferred     |       |                        | (6,944     | )                           |       |                        | 2,997      |   |   |   | 5,651 |   |   |
| Total income taxes |       |                        | $          | 76,035                      |       |                        |       | $ | 72,826 |   |   |   | $ | 52,765 |   |   |

 

F-22

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**9. IncomeTaxes (Continued)**

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

| ** **                                     | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Federal statutory  rate                        |       |                        | 35.00      | %                           |       |                        | 35.00      | % |   |   | 35.00 | % |   |
| State income tax  rate, net of federal benefit |       |                        | 2.00       |                        |       |                        | 1.81       |   |   |   | 6.25 |   |   |
| Tax-exempt  income, net of disallowance        |       |                        | (2.89      | )                           |       |                        | (3.61      | ) |   |   | (4.89 | ) |   |
| Foreign taxes                                  |       |                        | 0.83       |                        |       |                        | —     |   |   |   | — |   |   |
| Undistributed  foreign earnings                |       |                        | (4.12      | )                           |       |                        | —     |   |   |   | — |   |   |
| Other                                          |       |                        | 1.41       |                        |       |                        | 0.71       |   |   |   | (0.01 | ) |   |
| Effective tax rate                             |       |                        | 32.23      | %                           |       |                        | 33.91      | % |   |   | 36.35 | % |   |

 

At December 31, 2005, the Company had a foreign non-capitalloss carryforward of approximately $1.6 million, which begins to expire in 2009.In accordance with the provisions of SFAS 109, the Company believes that it ismore likely than not that the deferred tax asset of $0.6 million will not berealized. As a result, a valuation allowance for the entire deferred tax assetamount has been recorded.

The Company provides U.S. federal income taxes on theunremitted earnings of foreign subsidiaries, except to the extent that suchearnings are permanently reinvested outside the United States. At December 31,2005, there were accumulated unremitted earnings of certain foreignsubsidiaries of $27.7 million. Pursuant to the provisions of APB 23, theCompany has not provided for U.S. federal income taxes or foreign withholdingtaxes on these earnings since it is the Company’s current intention topermanently reinvest those earnings outside of the U.S. If the capital in thesesubsidiaries had been temporarily invested, a U.S. deferred tax liability of$6.9 million would have been recorded.

In March 2003, a retroactive change in theCommonwealth of Massachusetts tax law disallowed a dividends received deductiontaken by the Bank on dividends it had received since 1999 from a wholly-ownedreal estate investment trust. During the second quarter of 2003, the Companysettled this disputed tax assessment with the Massachusetts Department ofRevenue, agreeing to pay approximately 50% of the liability. As a result ofthis retroactive change in tax law, the Company recorded an additional statetax expense of approximately $7.2 million, net of federal income tax benefit,in 2003.

F-23

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**9. IncomeTaxes (Continued)**

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

| ** **                                   | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deferred tax assets:                         | ** ** |                        | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Securities available for sale                |       |                        | $          | 16,622                      |       |   |   | $ | — |   |   |
| Employee benefit plans                       |       |                        | 7,094      |                        |       |   | 3,883 |   |   |
| Other                                        |       |                        | 3,691      |                        |       |   | 1,350 |   |   |
| Deferred tax  assets                         |       |                        | 27,407     |                        |       |   | 5,233 |   |   |
| Valuation allowance                          |       |                        | (565       | )                           |       |   | — |   |   |
| Total deferred  tax assets                   |       |                        | 26,842     |                        |       |   | 5,233 |   |   |
| Deferred tax  liabilities:                   |       |                        |       |                        |       |   |   |   |   |
| Unrealized hedging gain                      |       |                        | (13,224    | )                           |       |   | (2,306 | ) |   |
| Depreciation and amortization                |       |                        | (10,698    | )                           |       |   | (9,882 | ) |   |
| Undistributed income of foreign subsidiaries |       |                        | (69        | )                           |       |   | (6,160 | ) |   |
| Pension plan                                 |       |                        | (1,196     | )                           |       |   | (1,172 | ) |   |
| Securities available for sale                |       |                        | —     |                        |       |   | (10,162 | ) |   |
| Total deferred  tax liabilities              |       |                        | (25,187    | )                           |       |   | (29,682 | ) |   |
| Net deferred tax asset  (liability)          |       |                        | $          | 1,655                       |       |   |   | $ | (24,449 | ) |   |

 

**10. CompanyObligated Mandatorily Redeemable Preferred Securities of Subsidiary TrustHolding Junior  Subordinated DeferrableInterest 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 whichwere invested by the trust in the same aggregate principal amount of the Company’snewly issued 9.77% Junior Subordinated Deferrable Interest Debentures due February 1,2027 (the “Junior Subordinated Debentures”). The Capital Securities have a calldate of February 1, 2007. The $25 million aggregate principal amount ofthe Junior Subordinated Debentures represents the sole asset of ICTI. TheCompany has guaranteed, on a subordinated basis, distributions and otherpayments due on the Capital Securities (the “Guarantee”). The Guarantee, whentaken together with the Company’s obligations under (i) the JuniorSubordinated Debentures; (ii) the indenture pursuant to which the JuniorSubordinated Debentures were issued; and (iii) the Amended and RestatedDeclaration of Trust governing ICTI, constitutes a full and unconditionalguarantee of ICTI’s obligations under the Capital Securities. No othersubsidiary of the Company guarantees these Capital Securities. Certain of theCompany’s subsidiaries may require prior approval of the Commissioner of Banksof the Commonwealth of Massachusetts if the total dividends for a calendar yearwould exceed net profits for the year combined with retained net profits forthe previous two years. These restrictions on the ability to pay dividends tothe Company may restrict the Company’s ability to pay dividends to itsshareholders.

Effective October 1,2003, the Company adopted provisions of FASB Interpretation No. 46(revised December 2003), *Consolidation of VariableInterest Entities*(“FIN 46”)*.*As a resultof the adoption of FIN 46, the Company was required to deconsolidate ICTI,the wholly-owned trust that issued the Capital 

F-24

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**10. Company Obligated Mandatorily RedeemablePreferred Securities of Subsidiary Trust Holding Junior  Subordinated Deferrable Interest Debentures ofthe Company (Continued)**

Securities.Therefore, the Company presents in its consolidated financial statements juniorsubordinated debentures as a liability and its investment in ICTI as acomponent of other assets. The income for the three months during 2003 thatICTI was not consolidated is considered immaterial.

**11. Stockholders’ Equity**

As of December 31, 2005, the Company’s capitalstock consisted of authorized 1,000,000 shares of preferred stock and175,000,000 shares of common stock, all with a par value of $0.01 per share.

At the Annual Meeting of Stockholders of the Companyheld on April 13, 2004, stockholders approved an increase in the number ofauthorized shares of common stock from 100,000,000 to 175,000,000. On May 5, 2004, the Company amended its Certificate ofIncorporation to increase the number of authorized shares of common stock to175,000,000. These shares are available for issuance for general corporatepurposes as determined by the Company’s Board of Directors.

The Company has four equity incentive plans: theAmended and Restated 1995 Stock Plan (“Stock Plan”), the Amended and Restated1995 Non-Employee Director Stock Option Plan (“Director Plan”), the 1997Employee Stock Purchase Plan (“ESPP”) and the 2005 Equity Incentive Plan, whichwas approved by the stockholders on April 14, 2005 (the “2005 Plan”). The2005 Plan supersedes both the Stock Plan and the Director Plan, both of whichcontinue in effect only with regard to options outstanding under those plans. Pursuantto the terms of the 2005 Plan, awards under the 2005 Plan may include incentivestock options, nonstatutory stock options, stock appreciation rights,restricted stock, restricted stock units and performance units, qualifiedperformance-based awards, and stock grants. There were no amendments to anyplans during the year ended December 31, 2005.

Effective with the start of the 2005 Plan, 45,703shares of the Director Plan and 3,439,197 shares of the Stock Plan weretransferred to the 2005 Plan. On April 14, 2005, the shareholdersauthorized an additional 2,000,000 shares of common stock for issuance underthe 2005 Plan.

Of the shares authorized for issuance under the 2005Plan at December 31, 2005, 4,104,013 were available for grant as of thatdate. No options were granted to consultants during the years ended December 31,2005, 2004 and 2003.

At the Annual Meeting of Stockholders of the Companyheld on April 13, 2004, stockholders approved an amendment to the Company’sESPP to increase the number of shares of common stock that may be issuedthereunder from 1,120,000 to 1,620,000.

The Company has recorded deferred compensation of $0.3million and $0.6 million at December 31, 2005 and 2004, respectively. Amortizationof deferred compensation was $0.3 million, $0.3 million and $0.5 millionfor the years ended December 31, 2005, 2004 and 2003, respectively.

F-25

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**11. Stockholders’Equity (Continued)**

A summary of optionactivity under the Director Plan, Stock Plan and 2005 Plan are as follows:

| ** **                               | ** ** | **December 31, 2005** | ** ** | **December 31, 2004**         | ** ** | **December 31, 2003** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **Shares**                      | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares**                      | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of year        |       |                            | 5,929,352  |                                    |       |                            | $          | 28 |   |   |   | 6,547,086 |   |   |   | $ | 24 |   |   |   | 6,621,157 |   |   |   | $ | 22 |   |   |
| Granted                                  |       |                            | 1,518,580  |                                    |       |                            | 39         |   |   |   | 902,558 |   |   |   | 41 |   |   |   | 737,399 |   |   |   | 34 |   |   |
| Exercised                                |       |                            | (454,146   | )                                       |       |                            | 22         |   |   |   | (1,396,211 | ) |   |   | 20 |   |   |   | (654,230 | ) |   |   | 9 |   |   |
| Canceled                                 |       |                            | (74,470    | )                                       |       |                            | 35         |   |   |   | (124,081 | ) |   |   | 32 |   |   |   | (157,240 | ) |   |   | 32 |   |   |
| Outstanding at  end of year              |       |                            | 6,919,316  |                                    |       |                            | 31         |   |   |   | 5,929,352 |   |   |   | 28 |   |   |   | 6,547,086 |   |   |   | 24 |   |   |
| Outstanding and  exercisable at year end |       |                            | 6,510,182  |                                    |       |                            |       |   |   |   | 4,949,879 |   |   |   |   |   |   |   | 4,712,586 |   |   |   |   |   |   |

 

Thefollowing table summarizes information about stock options outstanding at December 31,2005:

| ** **                          | ** ** | **Options Outstanding**                             | ** ** | **Options  Exercisable**                             | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Range of  Exercise  Prices** | ** ** | **Number  Outstanding at  December 31,  2005** | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  Exercisable at  December 31,  2005** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                | $          | 0-10                                                     |       |                                                 |       | 669,684 |   |   |   | 2.4 years |   |   |   | $ | 6 |   |   |   | 669,684 |   |   |   | $ | 6 |   |   |
|                                | 10-20      |                                                     |       |                                                 | 692,239    |   |   |   | 3.2 |   |   |   | 11 |   |   |   | 692,239 |   |   |   | 11 |   |   |
|                                | 20-30      |                                                     |       |                                                 | 68,620     |   |   |   | 4.9 |   |   |   | 25 |   |   |   | 65,530 |   |   |   | 25 |   |   |
|                                | 30-40      |                                                     |       |                                                 | 4,588,428  |   |   |   | 7.2 |   |   |   | 35 |   |   |   | 4,259,461 |   |   |   | 35 |   |   |
|                                | 40-50      |                                                     |       |                                                 | 893,932    |   |   |   | 8.3 |   |   |   | 41 |   |   |   | 816,855 |   |   |   | 41 |   |   |
|                                | 50-60      |                                                     |       |                                                 | 6,413      |   |   |   | 5.2 |   |   |   | 51 |   |   |   | 6,413 |   |   |   | 51 |   |   |
|                                |       |                                                     |       |                                                 | 6,919,316  |   |   |   | 6.5 |   |   |   | 31 |   |   |   | 6,510,182 |   |   |   | 30 |   |   |
|                                |       |                                                     |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

Under the terms of the ESPP, the Company may issue upto 1,620,000 shares of common stock pursuant to the exercise of nontransferableoptions granted to participating employees. The ESPP permits eligible employeesto purchase up to 8,000 shares of common stock per payment period, subject tolimitations provided by Section 423(b) of the Internal Revenue Code,through accumulated payroll deductions. The purchases are made twice a year ata price equal to the lesser of (i) 90% of the market value of the commonstock on the first business day of the payment period (rounded to the nextquarter-dollar), or (ii) 90% of the market value of the common stock onthe last business day of the payment 

F-26

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**11. Stockholders’Equity (Continued)**

period (rounded to thenext quarter-dollar). The payment periods consist of two six-month periods, January 1through June 30 and July 1 through December 31.

Asummary of the ESPP shares is as follows:

| ** **                                                      | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Total shares  available under the Plan, beginning of year  |       | 636,267               |       | 227,504 |   | 356,875 |   |
| Approved increase  in shares available                          |       | —                |       | 500,000 |   | — |   |
| Issued at  June 30                                         |       | (54,862               | )          | (47,681 | ) | (70,606 | ) |
| Issued at  December 31                                     |       | (59,842               | )          | (43,556 | ) | (58,765 | ) |
| Total shares available  under the plan, end of year             |       | 521,563               |       | 636,267 |   | 227,504 |   |

 

During the year ended December 31, 2005, thepurchase prices of the stock were $34.25 and $33.25, or 90% of the market valueof the common stock on the last business day of the payment period ending June 30,2005 and December 31, 2005, respectively.

During the year ended December 31, 2004, thepurchase prices of the stock were $35.00 and $38.75, or 90% of the market valueof 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, thepurchase prices of the stock were $25.50 and $27.00, or 90% of the market valueof the common stock on the first business day of the payment periods ending June 30,2003 and December 31, 2003, respectively.

In July 2005, the Company announced that itsBoard of Directors authorized a repurchase plan of up to $150.0 million ofthe Company’s common stock in the open market over the twelve months followingthe announcement. The plan expires in June 2006. During the year ended December 31,2005, the Company repurchased $70.7 million of its common stock.

F-27

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**12. Comprehensive Income**

Comprehensiveincome represents the change in equity of the Company during a period fromtransactions and other events and circumstances from non-shareholder sources. Itincludes all changes in equity during a period except those resulting frominvestments by shareholders and distributions to shareholders. The Company’sother comprehensive income and related tax effects for the years ended December 31,2005, 2004 and 2003 are as follows (Dollars in thousands):

| ** **                                                          | ** ** | **Pre-tax** | ** ** | **Tax (Expense)** | ** ** | **After-tax** | ** ** |
|---------------------------------------------------------------------|------------|-------------|------------|------------------------|------------|---------------|------------|
| ** **                                                          | ** ** | **Amount**  | ** ** | **Benefit**            | ** ** | **Amount**    | ** ** |
| *2005*                                                              |       |        |       |                   |       |          |       |   |   |
| Unrealized losses on  securities:                                   |       |        |       |                   |       |          |       |   |   |
| Unrealized  holding losses arising during the period                |       | $           | (60,552    | )                      |       | $             | 21,481     |   |   | $ | (39,071 | ) |
| Less:  reclassification adjustment for gains included in net income |       | 12,397      |       |                   | (5,185     | )             |       | 7,212 |   |
| Net unrealized holding losses arising during the  period            |       | (72,949     | )          |                   | 26,666     |          |       | (46,283 | ) |
| Other                                                               |       | 394         |       |                   | (165       | )             |       | 229 |   |
| Net unrealized losses                                               |       | (72,555     | )          |                   | 26,501     |          |       | (46,054 | ) |
| Net unrealized  derivative instrument gain                          |       | 18,002      |       |                   | (7,529     | )             |       | 10,473 |   |
| Amortization of  terminated interest rate swap agreements           |       | (2,970      | )          |                   | 1,242      |          |       | (1,728 | ) |
| Currency  translation adjustment                                    |       | 52          |       |                   | —     |          |       | 52 |   |
| Other comprehensive income                                          |       | $           | (57,471    | )                      |       | $             | 20,214     |   |   | $ | (37,257 | ) |
| *2004*                                                              |       |        |       |                   |       |          |       |   |   |
| Unrealized losses on  securities:                                   |       |        |       |                   |       |          |       |   |   |
| Unrealized  holding losses arising during the period                |       | $           | (9,168     | )                      |       | $             | 3,202      |   |   | $ | (5,966 | ) |
| Less:  reclassification adjustment for gains included in net income |       | 234         |       |                   | (82        | )             |       | 152 |   |
| Net unrealized holding losses arising during the  period            |       | (9,402      | )          |                   | 3,284      |          |       | (6,118 | ) |
| Other                                                               |       | (2,671      | )          |                   | 935        |          |       | (1,736 | ) |
| Net unrealized losses                                               |       | (12,073     | )          |                   | 4,219      |          |       | (7,854 | ) |
| Net unrealized  derivative instrument gain                          |       | 19,984      |       |                   | (6,994     | )             |       | 12,990 |   |
| Amortization of  terminated interest rate swap agreements           |       | 63          |       |                   | (22        | )             |       | 41 |   |
| Currency  translation adjustment                                    |       | 846         |       |                   | —     |          |       | 846 |   |
| Other comprehensive income                                          |       | $           | 8,820      |                   |       | $             | (2,797     | ) |   | $ | 6,023 |   |
| *2003*                                                              |       |        |       |                   |       |          |       |   |   |
| Unrealized losses on  securities:                                   |       |        |       |                   |       |          |       |   |   |
| Unrealized  holding losses arising during the period                |       | $           | (18,006    | )                      |       | $             | 6,046      |   |   | $ | (11,960 | ) |
| Other                                                               |       | (1,542      | )          |                   | 539        |          |       | (1,003 | ) |
| Net unrealized losses                                               |       | (19,548     | )          |                   | 6,585      |          |       | (12,963 | ) |
| Net unrealized  derivative instrument gain                          |       | 17,663      |       |                   | (5,878     | )             |       | 11,785 |   |
| Amortization of  transition-related adjustment                      |       | 361         |       |                   | (127       | )             |       | 234 |   |
| Currency translation  adjustment                                    |       | 577         |       |                   | —     |          |       | 577 |   |
| Other  comprehensive income                                         |       | $           | (947       | )                      |       | $             | 580        |   |   | $ | (367 | ) |

 

F-28

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**13. Employee Benefit Plans**

***Pension Plan******—***The Company has a trusteed,noncontributory, qualified defined benefit pension plan (‘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’scompensation during employment. Generally, the Company’s funding policy is tocontribute annually the maximum amount that can be deducted for federal incometax purposes. Contributions are intended to provide not only for benefitsattributed to  service to date, but alsofor benefits expected to be earned in the future. The plan document was amendedin December 2001 and December 2004 to freeze benefit accruals forcertain highly compensated participants. Effective January 1, 2006, nofurther Pension Plan benefit will accrue on behalf of any Pension Planparticipant, and effective December 31, 2005, all Pension Plan participant’saccounts were frozen. The Company uses a December 31 measurement date forthis plan.

***SupplementalRetirement Plan******—***TheCompany also has a nonqualified, unfunded, supplemental retirement plan (‘SERP’)which was established in 1994 and covers certain employees and pays benefitsthat supplement any benefits paid under the Pension Plan. Benefits under theSERP are generally based on compensation not includable in the calculation ofbenefits to be paid under the Pension Plan. The plan document was amended in April 2000to eliminate the compensation cap and include bonuses and commissions ofcertain employees. The Company uses a December 31 measurement date forthis plan.

Thefollowing table sets forth the status of the Company’s Pension Plan and SERP(Dollars in thousands):

| ** **                                          | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **Pension Plan**           | ** ** | **SERP**                        | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
| Change in benefit  obligation:                      |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Benefit obligation at beginning of year             |       |                            | $          | 22,141                          |       |   | $ | 23,543 |   |   | $ | 18,050 |   |   | $ | 15,500 |   |
| Service cost                                        |       |                            | 744        |                            |       | 1,788 |   |   | 927 |   |   | 953 |   |
| Interest cost                                       |       |                            | 1,143      |                            |       | 1,475 |   |   | 1,110 |   |   | 969 |   |
| Actuarial loss                                      |       |                            | 249        |                            |       | 1,057 |   |   | 3,282 |   |   | 6,121 |   |
| Benefits paid                                       |       |                            | (1,100     | )                               |       | (287 | ) |   | (1,228 | ) |   | — |   |
| Curtailments                                        |       |                            | (6,360     | )                               |       | — |   |   | — |   |   | — |   |
| Projected benefit obligation at the end of the year |       |                            | 16,817     |                            |       | 27,576 |   |   | 22,141 |   |   | 23,543 |   |
| Change in plan  assets:                             |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Assets at the beginning of the year                 |       |                            | 17,185     |                            |       | — |   |   | 17,246 |   |   | — |   |
| Employer contributions                              |       |                            | —     |                            |       | 287 |   |   | — |   |   | — |   |
| Actual return                                       |       |                            | 803        |                            |       | — |   |   | 1,167 |   |   | — |   |
| Benefits paid                                       |       |                            | (1,100     | )                               |       | (287 | ) |   | (1,228 | ) |   | — |   |
| Assets at the end of the year                       |       |                            | 16,888     |                            |       | — |   |   | 17,185 |   |   | — |   |
| Funded status                                       |       |                            | 71         |                            |       | (27,576 | ) |   | (4,956 | ) |   | (23,543 | ) |
| Unrecognized net transition (asset) obligation      |       |                            | (28        | )                               |       | 10 |   |   | (67 | ) |   | 15 |   |
| Unrecognized prior service cost                     |       |                            | —     |                            |       | 2,294 |   |   | (296 | ) |   | 2,439 |   |
| Unrecognized net loss                               |       |                            | 2,817      |                            |       | 12,902 |   |   | 8,668 |   |   | 12,787 |   |
| Net amount  recognized                              |       |                            | $          | 2,860                           |       |   | $ | (12,370 | ) |   | $ | 3,349 |   |   | $ | (8,302 | ) |

 

F-29

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**13.Employee Benefit Plans (Continued)**

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

| ** **                              | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Pension Plan**           | ** ** | **SERP**                        | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
| Prepaid benefit  cost                   |       |                            | $          | 2,860                           |       |   | $ | — |   |   | $ | 3,349 |   |   | $ | — |   |
| Accrued benefit  cost                   |       |                            | —     |                            |       | (18,074 | ) |   | — |   |   | (14,019 | ) |
| Intangible assets                       |       |                            | —     |                            |       | 2,304 |   |   | — |   |   | 2,454 |   |
| Accumulated other  comprehensive income |       |                            | —     |                            |       | 3,400 |   |   | — |   |   | 3,263 |   |
| Net amount recognized                   |       |                            | $          | 2,860                           |       |   | $ | (12,370 | ) |   | $ | 3,349 |   |   | $ | (8,302 | ) |

 

The accumulated benefit obligation for the PensionPlan was $16.8 million and $16.0 million at December 31, 2005 and 2004,respectively. The accumulated benefit obligation for the SERP was $18.1 millionand $14.0 million at December 31, 2005 and 2004, respectively.

Netperiodic pension cost for the Company’s Pension Plan and SERP included thefollowing components (Dollars in thousands):

| ** **                                               | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | **Pension Plan**           | ** ** | **SERP**                        | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
| Service  cost—benefits earned / benefit obligations |       |                            | $          | 744                             |       |   | $ | 1,788 |   |   | $ | 927 |   |   | $ | 953 |   |
| Interest cost on  projected benefit obligations          |       |                            | 1,143      |                            |       | 1,475 |   |   | 1,110 |   |   | 969 |   |
| Expected return  on plan assets                          |       |                            | (1,435     | )                               |       | — |   |   | (1,450 | ) |   | — |   |
| Curtailment gain                                         |       |                            | (275       | )                               |       | — |   |   | — |   |   | — |   |
| Net amortization  and deferral                           |       |                            | 313        |                            |       | 1,092 |   |   | 240 |   |   | 591 |   |
| Net periodic pension  cost                               |       |                            | $          | 490                             |       |   | $ | 4,355 |   |   | $ | 827 |   |   | $ | 2,513 |   |

 

Theweighted-average discount rate and the rate of increase in future compensationlevels used in determining the actuarial present value of the projected benefitobligations were as follows:

| ** **                      | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **Pension Plan**           | ** ** | **SERP**                        | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
| Discount rate                   |       |                            | 5.75       | %                               |       | 5.75 | % |   | 5.80 | % |   | 5.80 | % |
| Rate of compensation  increases |       |                            | 4.00       |                            |       | 4.00-10.00 |   |   | 4.00 |   |   | 4.00-10.00 |   |

 

Theweighted-average discount rate, rate of increase in future compensation levelsand expected rate of return on plan assets used in determining the net periodicpension cost were as follows:

| ** **                              | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Pension Plan**           | ** ** | **SERP**                        | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
| Discount rate                           |       |                            | 5.80       | %                               |       |   | 5.80 | % |   |   | 6.25 | % |   |   | 6.25 | % |   |
| Rate of  compensation increases         |       |                            | 4.00       |                            |       |   | 4.00 |   |   |   | 3.75 |   |   |   | 3.75 |   |   |
| Expected rate of return  on plan assets |       |                            | 8.50       |                            |       |   | — |   |   |   | 8.50 |   |   |   | — |   |   |

 

The Company has utilized an expected rate of return onplan assets of 8.50%, which is consistent with the weighted-average of thehistorical return indices for specific portfolio assets.

F-30

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**13.Employee Benefit Plans (Continued)**

The Company’s Pension Planallocation by asset category is as follows:

| **Asset Category**               | ** ** | ** ** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------|------------|------------|------------|---------------------------------|------------|---------------------------------|------------|
| Cash and short-term  investments |       |       | 1.3        | %                               |       |                            | 0.5        | % |   |
| Equity securities                |       |       | 68.4       |                            |       |                            | 69.2       |   |   |
| Debt securities                  |       |       | 30.3       |                            |       |                            | 30.3       |   |   |
| Total                            |       |       | 100.0      | %                               |       |                            | 100.0      | % |   |

 

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

Cash and short-terminvestments represent money market funds at December 31, 2005 and 2004. Equitysecurities supply current income and growth through market appreciation. TheCompany invests in quality companies with securities that are readilymarketable. The equity securities portfolio is diversified with no more than10% of the portfolio invested in any one particular industry at December 31,2005 and 2004. Debt securities offer a source of current income and reduce thevariability of the portfolio’s total market value. Fixed income investmentswere limited to issues by the United States Government and its agencies, andinvestment grade corporate bonds at December 31, 2005 and 2004. ThePension Plan was in full compliance with the approved pension objectives andpolicies for the years ended December 31, 2005 and 2004. At December 31,2005 and 2004, the pension did not hold any securities of the Company.

The Company does notexpect to contribute to its Pension Plan during 2006.

At December 31, 2005and 2004, the SERP remained an unfunded plan. The Company does not expect tocontribute to the SERP during 2006.

Thefollowing table shows the expected future benefit payments for the next tenyears (Dollars in thousands):

| ** **  | ** ** | **Pension Plan** | ** ** | **SERP** | ** ** |
|-------------|------------|-----------------------|------------|----------|------------|
| 2006        |       |                  | $          | 244      |       |   | $ | 167 |   |
| 2007        |       |                  | 290        |     |       | 171 |   |
| 2008        |       |                  | 315        |     |       | 175 |   |
| 2009        |       |                  | 376        |     |       | 180 |   |
| 2010        |       |                  | 407        |     |       | 188 |   |
| 2011 - 2015 |       |                  | 3,003      |     |       | 1,410 |   |
|             |            |                       |            |          |            |  |  |  |  |

*** ***

***Employee Savings Plan******—***The Company sponsors a qualifieddefined 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 $3.7 million for the year ended December 31,2005 and $3.2 million for the years ended December 31, 2004 and 2003.

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**14. OffBalance Sheet Financial Instruments**

***Lines of Credit******—***At December 31, 2005, theCompany had commitments to mutual funds and individuals under collateralizedopen lines of credit totaling $1.1 billion, against which $240.3 millionin loans were drawn. The credit risk involved in issuing lines of credit isessentially the same as that involved in extending demand loans. The Companydoes not anticipate any loss as a result of these lines of credit.

***Securities Lending******—***On behalf of its clients, theCompany lends securities to creditworthy broker-dealers. In certaincircumstances, the Company may indemnify its clients for the fair market valueof 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-denominatedsecurities borrowed and 105% of the fair market value of non-U.S.dollar-denominated securities borrowed. The borrowed securities are revalueddaily to determine whether additional collateral is necessary. As guarantor,the Company is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee. The Company measures the fair value of its indemnificationobligation by marking its securities lending portfolio to market on a dailybasis and comparing the value of the portfolio to the collateral holdingsposition. The fair value of the indemnification obligation to be recorded wouldbe the deficiency of collateral as compared to the value of the securities outon loan.

With respect to theindemnified securities lending portfolio, the cash and U.S. governmentsecurities held by the Company as collateral at December 31, 2005 totaled$7.7 billion, while the fair value of the portfolio totaled approximately$7.4 billion. Given that the collateral held was in excess of the value ofthe securities that the Company would be required to replace if the borrowerdefaulted and failed to return such securities, the Company’s indemnificationobligation was zero and no liability was recorded.

All securities loans arecategorized as overnight loans. The maximum potential amount of future paymentsthat the Company could be required to make would be equal to the market valueof the securities borrowed. Since the securities loans are overcollateralizedby 2% (for U.S. dollar- denominated securities) to 5% (for non-U.S.dollar-denominated securities) of the fair market value of the loan made, thecollateral held by the Company would be used to satisfy the obligation. Inaddition, each borrowing agreement includes “set-off” language that allows theCompany to use any excess collateral on other loans to that borrower to coverany collateral shortfall of that borrower. However, there is a potential riskthat the collateral would not be sufficient to cover such an obligation if thesecurity on loan increased in value between the time the borrower defaulted andthe time the security is “bought-in.”  Inthose instances, the Company would “buy-in” the security using all availablecollateral and a loss would result from the difference between the value of thesecurity “bought-in” and the value of the collateral held. The Company hasnever experienced a broker default.

**15. DerivativeFinancial Instruments**

***Interest Rate Contracts******—***Interest rate contracts involve anagreement with a counterparty to exchange cash flows based on an underlyinginterest rate index. A swap agreement involves the exchange of a series ofinterest payments, either at a fixed or variable-rate, based upon the notionalamount without the exchange of the underlying principal amount. The Company’sexposure from these interest rate contracts results from the possibility thatone party may default on its contractual obligation when the contracts are in again position. The Company has experienced no terminations by counterparties ofinterest rate swaps. Credit risk is limited to the positive fair value of thederivative financial instrument, which is significantly 

F-32

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**15.Derivative Financial Instruments (Continued)**

less than thenotional value. As of December 31, 2005, the positive fair value relatedto the Company’s interest rate contracts was approximately $24.3 million.

The Company enters intopay-fixed/receive-floating interest rate swap agreements. These instrumentshave been designated as cash flow hedges of variable-rate liabilities and aforecasted series of fixed-rate overnight liabilities incurred at differentdaily fixed rates (thereby resulting in a variable interest expense pattern). Thecontractual or notional amounts of the interest rate swap agreements held bythe Company were approximately $1.9 billion and $1.6 billion at December 31,2005 and 2004, respectively. These contracts had net fair values ofapproximately $24.2 million and $1.5 million at December 31, 2005 and2004, respectively. These fair values are included in the respective otherassets and other liabilities categories on the Company’s consolidated balancesheets. See also Note 17 for additional information on the fair value of theinterest rate contracts.

For the years ended December 31,2005 and 2004, the Company recognized net pre-tax gains of $3.5 million and$4.1 million, respectively, which represented the total ineffectiveness for allcash flow hedges. For the year ended December 31, 2003, totalineffectiveness related to cash flow hedges had an insignificant impact onearnings.

As of December 31, 2005, the Company expects thatapproximately $9.3 million of deferred net after-tax gains on derivativecontracts included in other comprehensive income will be reclassified to netinterest income within the next twelve months. This expectation is based on thenet discounted cash flows from existing cash flow hedging derivatives, as wellas the amortization of gains from the terminated cash flow hedging derivatives.

***Foreign ExchangeContracts—******Foreign***exchangecontracts involve an agreement to exchange the currency of one country for thecurrency of another country at an agreed-upon rate and settlement date. Foreignexchange contracts consist of spot, forward and swap contracts. Spot contractscall for the exchange of one currency for another and usually settle in twobusiness days. Forward contracts call for the exchange of one currency foranother at a date beyond spot. In a currency swap, the holder of a currencytransacts simultaneously both a spot and a forward transaction in that currencyfor an equivalent amount of another currency to get temporary liquidity in thecurrency owned. The Company’s risk from foreign exchange contracts results fromthe possibility that one party may default on its contractual obligation orfrom movements in exchange rates. Credit risk is limited to the positive marketvalue of the derivative financial instrument, which is significantly less thanthe notional value. The notional value of the Company’s foreign exchangecontracts at December 31, 2005 and 2004 was $6.3 billion and $6.9 billion,respectively. As of December 31, 2005, the Euro foreign exchange contractsrepresented approximately 57% of the of the notional value outstanding. As of December 31,2004, the British Pound foreign exchange contracts represented approximately43% of the notional value outstanding. Unrealized gains or losses resultingfrom purchases and sales of foreign exchange contracts are included within therespective other assets and other liabilities categories on the Company’sconsolidated balance sheets. Unrealized gains in other assets were $20.8million and $99.6 million at December 31, 2005 and 2004, respectively. Unrealizedlosses in other liabilities were $19.7 million and $98.5 million at December 31,2005 and 2004, respectively. See also Note 17 for additional information on thefair value of the Company’s foreign exchange contracts. Foreign exchangecontracts with the same counterparty are netted in the Company’s consolidatedbalance sheets when a master netting agreement exists. These contracts have notbeen designated as hedging instruments; therefore, all changes in fair valueare included in asset servicing fees.

F-33

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**15. Derivative Financial Instruments (Continued)**

***Other******—***The Company also enters into fixed price purchasecontracts that are designed to hedge the variability of the consideration to bepaid 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 certaininvestment securities. At December 31, 2005 and 2004, the Company had$97.5 million and $672.2 million, respectively, of fixed price purchasecontracts outstanding to purchase investment securities. Changes in fair valueof these cash flow hedges are included as a component of other comprehensiveincome.

**16. Commitments and Contingencies**

***Restrictions onCash Balances******—***The Companyis required to maintain certain average cash reserve balances. The averagerequired reserve balance with the Federal Reserve Bank (‘FRB’) for the two-weekperiod including December 31, 2005 was approximately $51.9 million. Inaddition, the Company’s balance sheet includes deposits totaling $43.9 million,which were pledged to secure clearings with depository institutions at December 31,2005.

***Lease Commitments******—***Minimumfuture commitments on noncancelable operating leases at December 31, 2005were as follows (Dollars in thousands):

| **Fiscal Year Ending** | ** ** | ** ** | ** ** | **Bank Premises** | ** ** | **Equipment** | ** ** | **Total** | ** ** |
|----------------------------------|------------|------------|------------|------------------------|------------|---------------|------------|-----------|------------|
| 2006                             |       |       | $          | 28,502                 |       |          |       | $         | 3,684      |   |   | $ | 32,186 |   |
| 2007                             |       |       | 27,734     |                   |       |          | 1,847      |      |       | 29,581 |   |
| 2008                             |       |       | 23,959     |                   |       |          | 508        |      |       | 24,467 |   |
| 2009                             |       |       | 22,935     |                   |       |          | 5          |      |       | 22,940 |   |
| 2010                             |       |       | 22,935     |                   |       |          | 1          |      |       | 22,936 |   |
| 2011 and beyond                  |       |       | 86,432     |                   |       |          | —     |      |       | 86,432 |   |
| Total                            |       |       | $          | 212,497                |       |          |       | $         | 6,045      |   |   | $ | 218,542 |   |

 

Total rent expense was approximately $29.2 million,$33.4 million and $36.1 million for the years ended December 31, 2005,2004 and 2003, respectively.

In December 2005, the Company renewed itsfive-year service agreement with Electronic Data Systems (‘EDS’), which nowexpires December 31, 2008. Under the terms of the agreement, EDS providesdata processing services to the Company, which has agreed to pay certainmonthly service fees based on usage. Service expense under this contract was$7.3 million, $8.3 million and $7.7 million for the years ended December 31,2005, 2004 and 2003, respectively.

In 2004, the Company renewed its agreement with SEIInvestments Company (‘SEI’), which now expires on December 31, 2009. Underthe terms of this agreement, SEI provides data processing services to theCompany, which has agreed to pay certain monthly service fees based upon usage.Service expense under this contract was $5.3 million, $5.0 million and $4.9million for the years ended December 31, 2005, 2004 and 2003,respectively.

In 2004, the Company signed a service agreement withInternational Business Machines Corporation (‘IBM’). Under the terms of thisagreement, IBM provides support for our network and hardware environments andour help desk services. We have agreed to pay certain monthly services feesbased upon 

F-34

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**16. Commitmentsand Contingencies (Continued)**

usage. This agreementexpires June 30, 2011. Service expense under this contract was $13.7million and $9.5 million for the years ended December 31, 2005 and 2004,respectively.

***Contingencies******—***Assets heldby the Company in a fiduciary capacity are not included in the consolidatedbalance sheets since these items are not assets of the Company. Managementconducts regular reviews of its fiduciary responsibilities and considers theresults in preparing its consolidated financial statements. In the opinion ofmanagement, there were no contingent liabilities at December 31, 2005 thatwere material to the consolidated financial position or results of operationsof the Company.

On June 27, 2003, the Company and an individualemployee of the Company were named in a lawsuit alleging, among other things,that the Company breached an implied covenant of good faith and fair dealing ina subadvisory contract with Opus Investment Management, Inc. (‘Opus’), andthat the individual employee of the Company engaged in a breach of fiduciaryduties and tortious interference with a contract. Opus had been a subadviser tothe Merrimac Funds, for which the Company acts as investment adviser. Upon theexpiration of Opus’s contract on June 1, 2003, the Merrimac Funds electednot to re-appoint Opus as subadviser. The lawsuit was filed in Superior Courtin Worcester, Massachusetts and seeks unspecified damages. The lawsuit iscurrently in the discovery phase. The Company believes that the claims arewithout merit and intends to vigorously defend the rights of the Company. However,the Company cannot predict the outcome of this lawsuit at this time, and theCompany can give no assurance that it will not affect the Company’s financialcondition or results of operations in a materially adverse way.

In July 2000, two of the Company’s Dublinsubsidiaries, Investors Trust & Custodial Services (Ireland) Ltd.(‘ITC’) and Investors Fund Services (Ireland) Ltd. (‘IFS’), received aplenary summons in the High Court, Dublin, Ireland. The summons named ITC andIFS 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 andFinance, S.A., the Fund’s investment manager, Ernst & Young, LLP, theFund’s auditors, and Dresdner Bank-Kleinwort Benson (Suisse) S.A., a tradingcounterparty to the Fund. The Fund is an investment vehicle organized in Dublinto invest in foreign exchange contracts. A total of approximately$4.7 million had been invested in the Fund. Most of that money was lostprior to the Fund’s closing to subscriptions in June 1999.

In January 2001, ITC, IFS and the otherdefendants named in the plenary summons received a statement of claim by theFund seeking unspecified damages allegedly arising from breach of contract,misrepresentation and breach of warranty, negligence and breach of duty ofcare, and breach of fiduciary duty, among others. The Company has notified itsinsurers and intends to defend this claim vigorously. Based on itsinvestigation through December 31, 2005, the Company does not expect thismatter to have a material adverse effect on its business, financial conditionor results of operations.

Investors Financial Services Corp. and five of itsofficers are named as defendants in three purported class action complaintsthat were filed on or about August 4, 2005, August 15, 2005, and September 30,2005 in the United States District Court for the District of Massachusetts,Boston, Massachusetts. Among other things, the complaints filed on August 4,2005 and August 15, 2005 assert that the defendants violated Sections 10(b) and20(a) of the Securities Exchange Act of 1934 during the period October 15,2003 until July 15, 2005. Among other things, the complaint filed on September 30,2005 asserts that the defendants violated Sections 10(b) and 20(a) ofthe Securities Exchange Act of 1934 during the period 

F-35

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**16. Commitmentsand Contingencies (Continued)**

July 16, 2003 until July 15,2005. The allegations in the complaints predominantly relate to: (1) theCompany’s October 2004 restatement of its financial results, and (2) theCompany’s July 2005 revision of public guidance regarding its futurefinancial performance. The complaints seek unspecified damages, interest, fees,and costs. We strongly believe that the lawsuits lack merit and we intend todefend against the claims vigorously. However, we cannot predict the outcome ofthe lawsuits at this time, and we can give no assurance that they will notmaterially adversely affect our financial condition or results of operations.

Investors FinancialServices Corp. and nine of its officers and directors are named as defendantsin two shareholder derivative complaints that were filed on or about September 22,2005 and October 17, 2005 in the United States District Court for the Districtof Massachusetts, Boston, Massachusetts. Among other things, the complaintsassert that the defendants are liable for breach of fiduciary duty, unjustenrichment, abuse of control, mismanagement, misappropriation of information,insider trading, and violation of Section 14(a) of the SecuritiesExchange Act of 1934. The complaint filed on September 22, 2005 also seeksreimbursement under the Sarbanes-Oxley Act of 2002. The allegations in thecomplaints predominantly relate to: (1) the Company’s October 2004restatement of its financial results, and (2) the Company’s July 2005revision of public guidance regarding its future financial performance. Thecomplaints seek unspecified damages, attorneys’ fees, accountant and expertfees, and costs. We strongly believe that the lawsuits lack merit and we intendto defend against the claims vigorously. However, we cannot predict the outcomeof the lawsuits at this time, and we can give no assurance that they will notmaterially adversely affect our financial condition or results of operations.

**17. Fair Value of Financial Instruments**

Thecarrying amount and estimated fair value of financial instruments are asfollows (Dollars in thousands):

| ** **                                  | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **Carrying  Amount**            | ** ** | **Fair  Value**                 | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| **Financial Assets:**                       |       |                            |       |                            |       |   |   |   |   |
| Cash and due from banks                     |       | $                               | 79,637     |                            | $          | 79,637 |   | $ | 49,059 |   | $ | 49,059 |   |
| Securities held to maturity                 |       | 6,761,930                       |       | 6,725,729                       |       | 5,942,717 |   | 5,937,462 |   |
| Securities available for sale               |       | 4,369,720                       |       | 4,369,720                       |       | 4,565,505 |   | 4,565,505 |   |
| Loans, net of allowance                     |       | 402,370                         |       | 402,370                         |       | 134,530 |   | 134,530 |   |
| Interest rate contracts                     |       | 24,251                          |       | 24,251                          |       | 1,849 |   | 1,849 |   |
| Foreign exchange contracts                  |       | 20,805                          |       | 20,805                          |       | 99,576 |   | 99,576 |   |
| **Financial  Liabilities:**                 |       |                            |       |                            |       |   |   |   |   |
| Deposits                                    |       | $                               | 4,992,590  |                            | $          | 4,992,590 |   | $ | 5,396,382 |   | $ | 5,396,382 |   |
| Securities sold under repurchase agreements |       | 4,797,868                       |       | 4,736,958                       |       | 4,255,497 |   | 4,197,590 |   |
| Short-term and other borrowings             |       | 1,356,649                       |       | 1,356,649                       |       | 594,681 |   | 594,411 |   |
| Interest rate contracts                     |       | 101                             |       | 101                             |       | 310 |   | 310 |   |
| Foreign exchange  contracts                 |       | 19,665                          |       | 19,665                          |       | 98,531 |   | 98,531 |   |

 

F-36

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**17. Fair Valueof Financial Instruments (Continued)**

The fair value estimates presented herein are based onpertinent information available to management at December 31, 2005 and2004. Although management is not aware of any factors that would significantlyaffect the estimated fair value amounts, such amounts have not beensignificantly revalued for the purposes of these consolidated financial statementssince those dates and, therefore, current estimates of fair value may differsignificantly from the amounts presented herein.

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

***Short-termfinancial assets and liabilities******—***Forfinancial instruments with a short or no stated maturity, prevailing marketrates and limited credit risk, carrying amounts approximate fair value. Thosefinancial instruments include cash and due from banks, loans and deposits.

***Securities,available for sale and held to maturity******—***Fair valueswere based on prices obtained from an independent nationally recognized pricingservice, or in the absence of such, prices were obtained directly from selectedbroker-dealers.

***Securities soldunder repurchase agreements and short-term and other borrowings******—***Fair valuesof the Company’s long-term borrowings and long-term repurchase agreements werebased on quoted market prices, when available, and prevailing market rates forborrowings of similar terms. Carrying amounts for short-term borrowings andshort-term repurchase agreements approximate fair value due to the short-termnature of these instruments.

***Interest ratecontracts******—***Fair valueswere based on the estimated amount that the Company would receive or pay toterminate the swap agreements, taking into account the current interest ratesand the creditworthiness of the swap counterparties.

***Foreign exchange contracts******—***Fair valueswere based on quoted market prices of comparable instruments. Foreign exchangecontracts have been reduced by offsetting balances with the same counterpartywhere a master netting agreement exists.

**18. Regulatory Matters**

The Company and the Bank are subject to variousregulatory capital requirements administered by the federal banking agencies. Failureto meet minimum capital requirements can initiate certain mandatory andpossibly additional discretionary actions by regulators that, if undertaken,could have a direct material effect on the Company’s and the Bank’s financialstatements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, the Bank must meet specific capital guidelines thatinvolve quantitative measures of the Bank’s assets, liabilities, and certainoff-balance sheet items as calculated under regulatory accounting practices. TheCompany’s and the Bank’s capital amounts and classification are also subject toqualitative judgments by the regulators about components, risk weightings, andother factors.

Quantitative measures established by regulation toensure capital adequacy require the Company and the Bank to maintain minimumamounts 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 ofTier 1 capital (as defined) 

F-37

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**18. RegulatoryMatters (Continued)**

to average assets (asdefined). Management believes, as of December 31, 2005, that the Companyand the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2005, the most recentnotification from the Federal Deposit Insurance Corporation categorized theCompany and the Bank as well-capitalized under the regulatory framework forprompt corrective action. To be categorized as well-capitalized, the Companyand the Bank must maintain minimum Total risk-based, Tier 1 risk-based, andTier 1 leverage ratios as set forth in the table. There are no conditions orevents since that notification that management believes have changed theCompany’s or the Bank’s category.

Thefollowing table presents the capital ratios for the Company and the Bank(Dollars in thousands):

| ** **                            | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To Be Well-**  | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                            | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                            | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| ** **                            | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** |
| **As of December 31, 2005:**     |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| Total Capital                         |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Risk-Weighted Assets-the Company) |       | $          | 731,833    |                       | 18.50      | %                          | $          | 316,553                    |       |                       | 8.00       | % |   | N/A |   | N/A |   |
| Total Capital                         |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Risk-Weighted Assets-the Bank)    |       | $          | 720,113    |                       | 18.21      | %                          | $          | 316,349                    |       |                       | 8.00       | % |   | $ | 395,436 |   | 10.00 | % |
| Tier 1 Capital                        |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Risk-Weighted Assets-the Company) |       | $          | 731,733    |                       | 18.49      | %                          | $          | 158,276                    |       |                       | 4.00       | % |   | N/A |   | N/A |   |
| Tier 1 Capital                        |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Risk-Weighted Assets-the Bank)    |       | $          | 720,013    |                       | 18.21      | %                          | $          | 158,174                    |       |                       | 4.00       | % |   | $ | 237,262 |   | 6.00 | % |
| Tier 1 Capital                        |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Average Assets-the Company)       |       | $          | 731,733    |                       | 5.95       | %                          | $          | 491,685                    |       |                       | 4.00       | % |   | N/A |   | N/A |   |
| Tier 1 Capital                        |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Average Assets-the Bank)          |       | $          | 720,013    |                       | 5.86       | %                          | $          | 491,549                    |       |                       | 4.00       | % |   | $ | 614,437 |   | 5.00 | % |
| **As of  December 31, 2004:**    |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| Total Capital                         |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Risk-Weighted Assets-the Company) |       | $          | 636,219    |                       | 20.54      | %                          | $          | 247,782                    |       |                       | 8.00       | % |   | N/A |   | N/A |   |
| Total Capital                         |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Risk-Weighted Assets-the Bank)    |       | $          | 618,166    |                       | 19.98      | %                          | $          | 247,572                    |       |                       | 8.00       | % |   | $ | 309,465 |   | 10.00 | % |
| Tier 1 Capital                        |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Risk-Weighted Assets-the Company) |       | $          | 636,119    |                       | 20.54      | %                          | $          | 123,891                    |       |                       | 4.00       | % |   | N/A |   | N/A |   |
| Tier 1 Capital                        |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Risk-Weighted Assets-the Bank)    |       | $          | 618,066    |                       | 19.97      | %                          | $          | 123,786                    |       |                       | 4.00       | % |   | $ | 185,679 |   | 6.00 | % |
| Tier 1 Capital                        |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Average Assets-the Company)       |       | $          | 636,119    |                       | 5.85       | %                          | $          | 435,080                    |       |                       | 4.00       | % |   | N/A |   | N/A |   |
| Tier 1 Capital                        |       |       |       |                       |       |                       |       |                       |       |                       |       |   |   |   |   |
| (to Average  Assets-the Bank)         |       | $          | 618,066    |                       | 5.68       | %                          | $          | 435,017                    |       |                       | 4.00       | % |   | $ | 543,772 |   | 5.00 | % |

 

F-38

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003.**

**18. Regulatory Matters(Continued)**

Under Massachusetts law, trust companies such as theBank, like national banks, may pay dividends no more often than quarterly, andonly out of net profits and to the extent that such payments will not impairthe Bank’s capital stock and surplus account. Moreover, prior Commissionerapproval is required if the total dividends for a calendar year would exceednet profits for that year combined with retained net profits for the previoustwo years. These restrictions on the ability of the Bank to pay dividends tothe Company may restrict the ability of the Company to pay dividends to itsstockholders.

The operations of the Company’s securities brokeraffiliate, Investors Securities Services, LLC (‘ISS’), are subject to federaland state securities laws, as well as the rules of both the SEC and theNASD. Management believes, as of December 31, 2005, that ISS is inmaterial compliance with all of the foregoing requirements to which it issubject.

The operations of the Company’s captive insuranceaffiliate, Investors Vermont Insurance Company (‘IVIC’), are subject to thelaws and regulations of the State of Vermont Department of Banking, Insurance,Securities and Health Care Administration. Management believes, as of December 31,2005, that IVIC is in material compliance with all of the foregoingrequirements to which it is subject.

In June 2004, theBasel Committee on Banking Supervision (‘Basel Committee’) released thedocument “International Convergence of Capital Measurement and CapitalStandards: A Revised Framework”. The Framework, also referred to as Basel II,is designed to secure international convergence on regulations and standardsgoverning the capital adequacy of internationally active banking organizations.In September 2005, the FFIEC (U.S. banking and thrift supervisoryagencies) revised guidance on the timing and qualification process for U.S.banks that will become subject to Basel II. The new rules as applied inthe U.S. are expected to become effective on January 1, 2009, subject totransitional parallel testing beginning on January 1, 2008. Although theCompany is not required to be compliant with the new rules, the Company is in theprocess of developing an implementation program to achieve Basel II compliance.Ultimately, U.S. implementation of Basel II will depend on, and will be subjectto, final regulations and related policies promulgated by the FFIEC supervisoryagencies. The Company cannot predict the final form of the rules, nor theirimpact on the Company’s risk-based capital.

F-39

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003.**

**19. Net Interest Income**

Thecomponents of interest income and interest expense are as follows (Dollars inthousands):

| ** **                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Interest income:**                                                |       |                  |       |   |   |   |   |
| Federal Funds sold and securities sold under  repurchase agreements |       | $                     | 2,250      |   | $ | 667 |   | $ | 326 |   |
| Investment securities held to maturity and available  for sale      |       | 436,193               |       | 307,895 |   | 243,191 |   |
| Loans                                                               |       | 9,262                 |       | 4,587 |   | 3,577 |   |
| Total interest income                                               |       | $                     | 447,705    |   | $ | 313,149 |   | $ | 247,094 |   |
| **Interest  expense:**                                              |       |                  |       |   |   |   |   |
| Deposits                                                            |       | $                     | 77,706     |   | $ | 50,721 |   | $ | 39,819 |   |
| Securities sold under repurchase agreements                         |       | 142,681               |       | 54,376 |   | 29,371 |   |
| Short-term and other borrowings                                     |       | 54,473                |       | 17,952 |   | 21,626 |   |
| Junior subordinated debentures                                      |       | 2,420                 |       | 2,420 |   | 2,364 |   |
| Total interest expense                                              |       | $                     | 277,280    |   | $ | 125,469 |   | $ | 93,180 |   |
| Net interest  income                                                |       | $                     | 170,425    |   | $ | 187,680 |   | $ | 153,914 |   |

 

**20. SelectedQuarterly Financial Data (unaudited) (Dollars in thousands, except per sharedata):**

| ** **                                       | ** ** | **First**  | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|--------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Year  Ended December 31, 2005** | ** ** | ** ** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Noninterest  income                              |       | $          | 120,176    |        | $          | 128,676     |       | $           | 131,215    |   | $ | 145,470 |   |
| Interest income                                  |       | 98,055     |       | 108,103     |       | 114,512     |       | 127,035     |       |
| Interest expense                                 |       | 50,442     |       | 66,057      |       | 76,471      |       | 84,310      |       |
| Operating  expenses                              |       | 104,792    |       | 113,237     |       | 116,130     |       | 125,950     |       |
| Income before  income taxes                      |       | 62,997     |       | 57,485      |       | 53,126      |       | 62,245      |       |
| Income taxes                                     |       | 22,049     |       | 13,358      |       | 17,894      |       | 22,734      |       |
| Net income                                       |       | 40,948     |       | 44,127      |       | 35,232      |       | 39,511      |       |
| Basic earnings  per share                        |       | 0.61       |       | 0.66        |       | 0.54        |       | 0.61        |       |
| Diluted earnings per  share                      |       | 0.60       |       | 0.64        |       | 0.53        |       | 0.60        |       |
|                                                  |            |            |            |             |            |             |            |             |            |  |  |  |  |  |  |

 

| ** **                                           | ** ** | ** ** | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Year Ended December 31, 2004** | ** ** | ** ** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Noninterest  income                                  |       | $          | 106,770    |        | $          | 109,741     |       | $           | 100,572    |        | $          | 108,408 |   |
| Interest income                                      |       | 73,636     |       | 69,140      |       | 80,474      |       | 89,899      |       |
| Interest expense                                     |       | 25,215     |       | 27,065      |       | 32,207      |       | 40,982      |       |
| Operating  expenses                                  |       | 100,134    |       | 100,700     |       | 94,491      |       | 103,058     |       |
| Income before  income taxes                          |       | 55,057     |       | 51,116      |       | 54,348      |       | 54,267      |       |
| Income taxes                                         |       | 18,504     |       | 17,120      |       | 18,214      |       | 18,988      |       |
| Net income                                           |       | 36,553     |       | 33,996      |       | 36,134      |       | 35,279      |       |
| Basic earnings  per share                            |       | 0.56       |       | 0.51        |       | 0.54        |       | 0.54        |       |
| Diluted earnings per  share                          |       | 0.54       |       | 0.50        |       | 0.53        |       | 0.52        |       |
|                                                      |            |            |            |             |            |             |            |             |            |             |            |  |  |  |  |

 

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003.**

**21. Geographic Reporting and Service Lines**

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

| ** **                      | ** ** | **Net Operating Revenue**                           | ** ** | **Long-Lived Assets** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **For the Years Ended December 31,** | ** ** | **December 31**       | ** ** | **December 31** | ** ** |
| **Geographic Information** | ** ** | ** **                                                    | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States                   |       | $                                                             | 653,305    |                       | $          | 579,168 |   | $ | 468,724 |   |   | $ | 141,810 |   |   |   | $ | 141,801 |   |   |
| Ireland                         |       | 37,061                                                        |       | 28,835                     |       | 18,601 |   |   | 6,325 |   |   |   | 5,930 |   |   |
| Canada                          |       | 5,427                                                         |       | 4,989                      |       | 2,579 |   |   | 385 |   |   |   | 121 |   |   |
| Cayman Islands                  |       | 166                                                           |       | 179                        |       | 203 |   |   | — |   |   |   | — |   |   |
| United Kingdom                  |       | 3                                                             |       | —                     |       | — |   |   | 850 |   |   |   | — |   |   |
| Total                           |       | $                                                             | 695,962    |                       | $          | 613,171 |   | $ | 490,107 |   |   | $ | 149,370 |   |   |   | $ | 147,852 |   |   |
|                                 |            |                                                               |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Barclays Global Investors, N.A. (‘BGI’) accounted for18%, 17% and 16% of the Company’s consolidated net operating revenues for theyears ended December 31, 2005, 2004 and 2003, respectively. No clientother than BGI accounted for more than 10% of the Company’s consolidated netoperating revenues in the years ended December 31, 2005, 2004 and 2003.

The following representsthe Company’s asset servicing fees by service line (Dollars in thousands):

| ** **                                                          | ** ** | **For the Years Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                          | ** ** | **December 31,**                  | ** ** |
| **Asset servicing fees by service lines:** | ** ** | ** **                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Core service fees:                                                  |       |                                   |       |   |   |   |   |
| Custody, multicurrency accounting and fund  administration          |       | $                                      | 375,596    |   | $ | 314,272 |   | $ | 254,225 |   |
| Value-added  service fees:                                          |       |                                   |       |   |   |   |   |
| Foreign exchange                                                    |       | 62,107                                 |       | 54,466 |   | 36,501 |   |
| Cash management                                                     |       | 37,592                                 |       | 26,396 |   | 20,884 |   |
| Securities lending                                                  |       | 22,536                                 |       | 10,385 |   | 8,903 |   |
| Investment advisory                                                 |       | 8,442                                  |       | 15,020 |   | 11,777 |   |
| Other service fees                                                  |       | 2,786                                  |       | 2,661 |   | 1,296 |   |
| Total value-added service fees                                      |       | 133,463                                |       | 108,928 |   | 79,361 |   |
| Total                                                               |       | $                                      | 509,059    |   | $ | 423,200 |   | $ | 333,586 |   |
|                                                                     |            |                                        |            |  |  |  |  |  |  |  |  |  |

 

F-41

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**22. Financial Statementsof Investors Financial Services Corp. (Parent Only)**

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

| **Statements of Income**                                      | ** ** | **December 31,   2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Equity in  undistributed income of bank subsidiary                      |       |                              | $          | 99,809                      |       |                        |       | $ | 144,595 |   |   |   | $ | 95,088 |   |   |
| Equity in  undistributed income of nonbank subsidiary                   |       |                              | —     |                        |       |                        | —     |   |   |   | 278 |   |   |
| Equity in  undistributed loss of unconsolidated nonbank subsidiary      |       |                              | (28        | )                           |       |                        | (28        | ) |   |   | (8 | ) |   |
| Dividend income  from bank subsidiary                                   |       |                              | 63,000     |                        |       |                        | —     |   |   |   | — |   |   |
| Dividend income  from nonbank subsidiaries                              |       |                              | —     |                        |       |                        | —     |   |   |   | 57 |   |   |
| Dividend income  from unconsolidated nonbank subsidiary                 |       |                              | 76         |                        |       |                        | 76         |   |   |   | 19 |   |   |
| Interest expense  on junior subordinated deferrable interest debentures |       |                              | (2,420     | )                           |       |                        | (2,420     | ) |   |   | (2,420 | ) |   |
| Operating  expenses                                                     |       |                              | (2,254     | )                           |       |                        | (1,703     | ) |   |   | (2,214 | ) |   |
| Income tax  benefit                                                     |       |                              | 1,635      |                        |       |                        | 1,442      |   |   |   | 1,621 |   |   |
| Net Income                                                              |       |                              | $          | 159,818                     |       |                        |       | $ | 141,962 |   |   |   | $ | 92,421 |   |   |

 

F-42

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**22. FinancialStatements of Investors Financial Services Corp. (Parent Only)(Continued)**

| **Balance Sheets**                            | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Assets:                                            |       |                        |       |                        |       |   |   |   |   |
| Cash                                               |       |                        | $          | 10,303                      |       |   |   | $ | 14,312 |   |   |
| Investments in bank subsidiary                     |       |                        | 785,138    |                        |       |   | 720,501 |   |   |
| Investments in nonbank subsidiaries                |       |                        | 710        |                        |       |   | 738 |   |   |
| Receivable due from bank subsidiary                |       |                        | 1,991      |                        |       |   | 2,035 |   |   |
| Other assets                                       |       |                        | 709        |                        |       |   | 650 |   |   |
| Total Assets                                       |       |                        | $          | 798,851                     |       |   |   | $ | 738,236 |   |   |
| Liabilities and  Stockholders’ Equity:        |       |                        |       |                        |       |   |   |   |   |
| Liabilities:                                       |       |                        |       |                        |       |   |   |   |   |
| Accrued expenses                                   |       |                        | $          | 62                          |       |   |   | $ | 43 |   |   |
| Payable due to nonbank subsidiary                  |       |                        | 1,157      |                        |       |   | 1,157 |   |   |
| Subordinated debt                                  |       |                        | 24,774     |                        |       |   | 24,774 |   |   |
| Total liabilities                                  |       |                        | 25,993     |                        |       |   | 25,974 |   |   |
| Stockholders’ Equity:                         |       |                        |       |                        |       |   |   |   |   |
| Common stock                                       |       |                        | 672        |                        |       |   | 667 |   |   |
| Surplus                                            |       |                        | 286,265    |                        |       |   | 272,536 |   |   |
| Deferred compensation                              |       |                        | (311       | )                           |       |   | (572 | ) |   |
| Retained earnings                                  |       |                        | 572,549    |                        |       |   | 418,034 |   |   |
| Accumulated other comprehensive (loss) income, net |       |                        | (13,369    | )                           |       |   | 23,888 |   |   |
| Treasury stock                                     |       |                        | (72,948    | )                           |       |   | (2,291 | ) |   |
| Total stockholders’ equity                    |       |                        | 772,858    |                        |       |   | 712,262 |   |   |
| Total Liabilities and  Stockholders’ Equity   |       |                        | $          | 798,851                     |       |   |   | $ | 738,236 |   |   |

 

F-43

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**INVESTORS FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years Ended December 31, 2005, 2004 and 2003**

**22. FinancialStatements of Investors Financial Services Corp. (Parent Only) (Continued)**

| **Statements of  Cash Flows**                                                  | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Cash flows from  operating activities:                                         |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Net income                                                                     |       |                        | $          | 159,818                     |       |                        |       | $ | 141,962 |   |   |   | $ | 92,421 |   |   |
| Adjustments to reconcile net income to net cash used  by operating activities: |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Amortization of deferred compensation                                          |       |                        | 261        |                        |       |                        | 316        |   |   |   | 483 |   |   |
| Amortization of premium expense                                                |       |                        | 28         |                        |       |                        | 28         |   |   |   | 195 |   |   |
| Change in assets and liabilities:                                              |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Receivable due from bank subsidiary                                            |       |                        | 44         |                        |       |                        | (376       | ) |   |   | 942 |   |   |
| Income tax receivable                                                          |       |                        | (98        | )                           |       |                        | 484        |   |   |   | (484 | ) |   |
| Other assets                                                                   |       |                        | 13         |                        |       |                        | (8         | ) |   |   | (861 | ) |   |
| Payable due to nonbank subsidiary                                              |       |                        | —     |                        |       |                        | —     |   |   |   | 1,155 |   |   |
| Accrued expenses                                                               |       |                        | 19         |                        |       |                        | (13        | ) |   |   | 14 |   |   |
| Equity in undistributed income of bank subsidiary                              |       |                        | (99,809    | )                           |       |                        | (144,595   | ) |   |   | (95,088 | ) |   |
| Equity in undistributed income of nonbank subsidiary                           |       |                        | —     |                        |       |                        | —     |   |   |   | (278 | ) |   |
| Equity in undistributed loss of unconsolidated nonbank  subsidiary             |       |                        | 28         |                        |       |                        | 28         |   |   |   | 8 |   |   |
| Net cash provided  by operating activities                                     |       |                        | 60,304     |                        |       |                        | (2,174     | ) |   |   | (1,493 | ) |   |
| Cash flows from financing activities:                                          |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Proceeds from exercise of stock options                                        |       |                        | 7,779      |                        |       |                        | 16,068     |   |   |   | 2,977 |   |   |
| Proceeds from issuance of common stock                                         |       |                        | 3,868      |                        |       |                        | 3,355      |   |   |   | 3,387 |   |   |
| Common stock repurchased                                                       |       |                        | (70,657    | )                           |       |                        | (1,741     | ) |   |   | (550 | ) |   |
| Dividends paid                                                                 |       |                        | (5,303     | )                           |       |                        | (4,629     | ) |   |   | (3,904 | ) |   |
| Net cash used in  financing activities                                         |       |                        | (64,313    | )                           |       |                        | 13,053     |   |   |   | 1,910 |   |   |
| Net (decrease) increase in cash and due from banks                             |       |                        | (4,009     | )                           |       |                        | 10,879     |   |   |   | 417 |   |   |
| Cash and due from banks, beginning of year                                     |       |                        | 14,312     |                        |       |                        | 3,433      |   |   |   | 3,016 |   |   |
| Cash and due from  banks, end of year                                          |       |                        | $          | 10,303                      |       |                        |       | $ | 14,312 |   |   |   | $ | 3,433 |   |   |

 

F-44

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