<PAGE>
                                   FORM 10-K
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
(Mark One)
 
/X/    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                         ACT OF 1934 [NO FEE REQUIRED]
 
                For the fiscal year ended December 31, 1997 

                                       OR
/ /    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
 
              FOR THE TRANSITION PERIOD FROM_________ TO__________
 
                        Commission File Number 0-26996
 
                              INVESTORS FINANCIAL
                                 SERVICES CORP.
            (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                     <C>
               Delaware                            04-3279817
    (State or other jurisdiction of     (IRS Employer Identification No.)
     incorporation or organization
                            
         200 Clarendon Street 
            P.O. Box 9130 
         Boston, Massachusetts                       02116
(Address of principal executive offices)           (Zip Code)
      
</TABLE>
 
       Registrant's telephone number, including area code: (617) 330-6700

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

                                     None 

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

                          Common Stock, $.01 Par Value
                Series A Junior Preferred Stock Purchase Rights
 
    Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days. Yes  X    No         
                                                  -----    -----
    Indicate by check mark if disclosure of delinquent filers pursuant to 
Item 405 of Regulation S-K is not contained herein, and will not be 
contained, to the best of registrant's knowledge, in definitive proxy or 
information statements incorporated by reference in Part III of this Form 
10-K or any amendment to this Form 10-K. / /
 
    The aggregate market value of Common Stock held by non-affiliates of the 
registrant was $265,287,358 based on the last reported sale price of $44.0625 
on The Nasdaq National Market on February 17, 1998 as reported by Nasdaq.
 
    As of February 17, 1998, there were 6,472,188 shares of Common Stock 
outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
    The registrant intends to file a definitive Proxy Statement pursuant to 
Regulation 14A within 120 days of the end of the fiscal year ended December 
31, 1997. Portions of such Proxy Statement are incorporated by reference in 
Part III.

<PAGE>
 
ITEM 1. BUSINESS
 
GENERAL
 
    Investors Financial Services Corp. (the "Company"), based in Boston, 
Massachusetts, provides asset administration services for the financial 
services industry through its wholly-owned subsidiary, Investors Bank & Trust 
Company-Registered Trademark-. The Company provides global custody, 
multicurrency accounting, institutional transfer agency, performance 
measurement, foreign exchange, securities lending, mutual fund administration 
and investment advisory services to a variety of financial asset managers, 
including mutual fund complexes, investment advisors, banks and insurance 
companies. The Company provides financial asset administration services for 
assets that totaled approximately $139 billion at December 31, 1997, 
including assets managed by 53 mutual fund complexes and insurance companies 
and approximately $9 billion of foreign assets. The Company also engages in 
private banking transactions, including secured lending and deposit accounts.
 
    The Company operated as a subsidiary of Eaton Vance Corp. ("Eaton 
Vance"), an investment management firm conducting business through 
subsidiaries, from its formation in 1969 through November 1995. In 1995, the 
boards of directors of the Company and Eaton Vance determined to separate the 
business operations of the Company from those of Eaton Vance by means of a 
tax free, pro rata distribution of Eaton Vance's ownership interest in the 
Company to the stockholders of Eaton Vance (the "Spin-Off Transaction"). The 
principal reasons for the Spin-Off Transaction were to eliminate certain 
regulatory restrictions to which the Company was subject under the 
Competitive Equality Banking Act of 1987 ("CEBA"), and to enable the Company 
to pursue its business goals independent of Eaton Vance. In order to avoid 
being regulated as a bank holding company under the Bank Holding Company Act 
of 1956, Eaton Vance had operated Investors Bank & Trust Company under 
certain growth and activity restrictions. The elimination of the CEBA growth 
and activity restrictions enabled the Company to expand its current business 
activities and participate in certain additional business activities. The 
Spin-Off Transaction was completed on November 10, 1995, prior to the 
completion of an initial public offering of 2,300,000 shares of the Company's 
Common Stock, $.01 par value, (the "Common Stock") on November 14, 1995 (the 
"Offering"). As used herein, the defined term "Company" shall mean Investors 
Financial Services Corp. from and after June 29, 1995, the date of 
organization of Investors Financial Services Corp., and shall mean Investors 
Bank & Trust Company prior to that date, unless the context otherwise 
indicates. Investors Bank & Trust Company is sometimes referred to herein as 
the "Bank."
 
    Prior to the completion of the Spin-Off Transaction, the Company's fiscal 
year end was October 31, the fiscal year end observed by Eaton Vance. The 
Company filed an annual report on Form 10-K with the Securities and Exchange 
Commission for the year ended October 31, 1995. In December 1995, the Company 
elected to change its fiscal year end from October 31 to December 31 in order 
to align its fiscal year end with its regulatory, tax and budget reporting 
period. The Company filed a Transition Report on Form 10-K for the two-month 
period from November 1, 1995 through December 31, 1995 (the "Transition 
Period").
 
OVERVIEW OF THE FINANCIAL SERVICES INDUSTRY
 
    In the financial services industry, asset managers, whether independent 
or affiliated with investment management companies, banks or insurance 
companies, manage and invest financial assets entrusted to them. Asset 
managers utilize a broad range of pooled investment products such as mutual 
funds, unit investment trusts, separate accounts and variable annuities to 
achieve their clients' investment goals. Asset administration companies, such 
as the Company, perform various services for the asset managers and the 
pooled products they sponsor, including global custody, multicurrency 
accounting, transfer agency, portfolio performance measurement, foreign 
exchange, securities lending, administration and investment advisory services.
 
    The Company believes that the rapid pace of financial asset creation 
through the flow of assets into pooled products and other investment products 
and the related asset administration of those products is the key to revenue 
growth for asset administration companies. As shown in the chart on the next 
page, total financial assets managed by mutual fund companies, insurance 
companies, private pension funds and banks have grown at an average annual 
rate of over 13% since 1990. Mutual funds, such as those serviced by the 
Company, make up a large part of the financial assets in pooled investment 
vehicles. The U.S. mutual fund market has grown at an average annual rate of 
more than 20% since 1990, with over $4 trillion in assets at September 30, 
1997. According to the International Mutual Funds Survey, worldwide fund 
assets were over $7 trillion in September 1997, an increase of $5 trillion in 
approximately six years.


                                       2

<PAGE>
 
<TABLE>
<CAPTION>
TOTAL U.S. FINANCIAL ASSETS                                                        DECEMBER 31,  SEPTEMBER 30,   GROWTH
(IN BILLIONS)                                                                          1990          1997         RATE
---------------------------------------------------------------------------------  ------------  -------------  -----------
<S>                                                                                <C>          <C>          <C>
Mutual Funds.....................................................................     1,154.6        4,132.2       20.79%
Life Insurance Companies.........................................................     1,367.4        2,510.4        9.42
Private Pension Funds............................................................     1,610.9        3,523.5       12.30
Bank Personal Trusts and Estates.................................................       522.1          999.2       10.09
                                                                                   ------------  -------------       
Total............................................................................     4,655.0       11,165.3       13.84%
                                                                                   ------------  -------------       
                                                                                   ------------  -------------       
</TABLE>
 
Source: Federal Reserve Bank
 
    The asset administration environment differs by asset management 
organization and operational philosophy. Most asset managers outsource 
custody services. In many cases, they use multiple custodians to foster cost 
reduction through competition. Large asset managers may have the critical 
mass necessary to justify the cost of in-house facilities to handle 
accounting, administration and transfer agency services, while smaller asset 
managers outsource these services as well. The Company believes that asset 
administration companies such as the Company operate most efficiently when 
bundling core services such as custody and accounting with value-added 
services such as securities lending and foreign exchange. The Fund Accounting 
and Custody Tracking System ("FACTS"), the software system developed and 
owned by the Company, supports these services with its integrated 
functionality, so that information input once is entered into various 
administrative subsystems without manual intervention.
 
    Providing asset administration services offshore is a growing activity in 
the financial services industry. While the tax laws requiring funds based 
outside the U.S. to conduct certain processing from an offshore location were 
repealed in 1997, offshore locations are still serving as distribution 
channels for offshore funds. In July 1993, the Company opened a subsidiary in 
Toronto, Canada to service the offshore mutual fund market. In July 1994, the 
Company opened an office in Dublin, Ireland to service investment managers 
distributing to European clients. In February 1996, the Company opened an 
administration site in the Cayman Islands to service Caribbean-based funds.
 
    Another driving force in the financial services industry is information 
technology. Asset managers are able to create innovative investment products 
using data from world markets as a result of more powerful and affordable 
information processing power, coupled with the ability to send large volumes 
of information instantly through widely dispersed communication networks. 
Timely on-line access to electronic information on security positions, prices 
and price shifts facilitate on-line currency trading, indexation of assets, 
real time arbitrage, and hedging through the use of derivative securities. 
Asset administration providers use technology as a competitive tool to 
deliver precise and functional information to the asset managers, and to 
increase value-added services. Value-added services include performance 
measurement and analytical tools for asset managers, such as reports showing 
time-weighted return, performance by sector, and time-weighted return by 
sector. Other factors, such as the reduction in settlement times in world 
markets, have created greater demand for asset administration service 
providers to have on-line, real-time systems. The Company believes that the 
integrated nature of FACTS, compared with the disparate systems used for 
different tasks by many other financial service providers, provides the 
Company with a competitive advantage and positions the Company well to 
respond to the changing technological demands of the financial services 
industry.
 
    Competition in the asset administration industry has reduced pricing in 
almost all business segments, particularly with respect to custody services 
and trustee services. Partially offsetting this trend is the development of 
new services that have higher margins. The Company's continuous investment in 
technology has permitted it to offer new value-added services to clients, 
such as offshore custody and fund accounting, securities lending and foreign 
exchange at competitive prices around the globe. Technological evolution and 
new service innovation enable the Company to generate additional revenues to 
offset price pressure in maturing service lines.
 
    Asset managers create different investment structures in an effort to 
capture the efficiencies of larger pools of assets. One example of this 
innovation is the master-feeder structure. In the master-feeder structure, 
one or more investment vehicles (the "feeder funds") with identical 
investment objectives pool their assets in a common portfolio held by a 
separate investment vehicle (the "master fund"). This structure permits each 
of the feeder funds to be sold to a separate target market and through a 
different distribution channel even if the feeder fund, on a stand alone 
basis, would not be large enough to support its operating costs. The feeder 
funds benefit from economies of scale available to the larger pool of funds 
invested in the master fund. A patented variation of the master-feeder 
structure, Hub and Spoke-Registered Trademark-, is marketed by Signature 
Financial Group, Inc. At December 31, 1997, the Company processed over $40 
billion of assets in the master-feeder structures, including $37 billion of 
assets processed in the Hub and Spoke structure.
 
    In addition, a growing number of mutual funds have been structured as 
multiple class funds in order to address the differing requirements and 
preferences of potential investors. In the typical multiple class 
environment, investors have the 


                                       3

<PAGE>

option of purchasing fund shares with the sales load structure that best 
meets their short-term and long-term investment strategy. Multiple class 
arrangements allow an investment company to sell interests in a single 
investment portfolio to separate classes of stockholders. Multiple class 
funds, due to the increased complexity of their structure, present new 
opportunities for asset administration companies.
 
    The financial asset administration service industry continues to 
experience a consolidation among service providers. The Company believes that 
its size and its responsiveness to client needs provide the financial 
services industry with an asset administration alternative to superregional 
and money center banks and other administration providers. While 
consolidation within the industry may adversely affect the Company's ability 
to retain clients that have been acquired, consolidation also creates 
opportunity for the Company as prospective clients review their relationships 
with existing service providers. The Company's client management, sales and 
marketing groups actively monitor these situations as they develop.
 
COMPANY STRATEGY
 
    Global custody and multicurrency accounting are the principal asset 
administration services provided to the Company's clients. The Company's 
securities lending, foreign exchange, transfer agency, mutual fund 
administration and investment advisory services are value-added services 
utilized by clients based on their particular needs. The Company's objective 
is to provide a broad range of services to all clients, maximize the use of 
its value-added services and increase the size of its client base. To achieve 
this objective, the Company has adopted the following strategy:
 
    -   Deliver superior service and expand client relationships. Service 
        quality in asset administration relationships is a key to maintaining 
        existing business and attracting new clients. The Company takes an 
        integrated approach to asset administration rather than the 
        functional approach of some of its competitors. Instead of separate 
        departments managing components of the custody and accounting task 
        (e.g., trade settlement, income collection, corporate actions, 
        general ledger accounting, portfolio accounting and pricing), the 
        Company has integrated these custody and accounting functions and 
        dedicates a single operations team to handle all work for a 
        particular account or fund. In addition, each client is assigned a 
        Client Manager, independent of the operations team, to anticipate the 
        client's needs, to coordinate service delivery, and to provide 
        consulting support. The Company believes that its strong client 
        relationships create continuing opportunities to provide additional 
        services to existing customers.
 
    -   Maintain technological expertise. The asset administration industry 
        requires the technological capability to support a wide range of 
        global security types and complex portfolio structures in both local 
        and base currencies, as well as the telecommunications flexibility to 
        support the diversity of global communications standards. FACTS was 
        developed in the mid-1980s to support the Company's integrated 
        approach to the provision of services to its clients. From a 
        technological standpoint, FACTS is an integrated computerized 
        information system that provides custody, securities movement and 
        control, portfolio accounting, general ledger accounting, pricing, 
        net asset value calculation, and Hub and Spoke or master-feeder 
        processing into a single information system. By consolidating these 
        functions, the Company has eliminated redundancy in data capture and 
        reduced the opportunity for clerical error. The FACTS architecture 
        enables the Company to modify the system quickly, resulting in 
        increased processing quality and efficiency for its clients. The 
        Company believes that this integrated architecture helps to 
        differentiate the Company from its competitors.
 
        Technological enhancements and upgrades are an ongoing part of asset 
        administration, both to remain competitive and to create information 
        delivery mechanisms that add value to the information available as 
        part of clearing and settling transactions. Over the past few years, 
        the Company developed standardized data extracts and automated 
        interfaces that allow its clients to connect electronically with the 
        Company's host computer and access data collected from clearance and 
        settlement transactions in multiple currencies on a real-time basis. 
        Through these information-sharing tools, the Company is better 
        equipped to expand its custody and accounting services with foreign 
        exchange services and asset and transaction reporting and monitoring 
        services. This electronic linkage also positions the Company to 
        respond quickly to client requests.
 
        The Company's technology professionals have developed expertise in 
        various advanced technologies, including graphical user interfaces, 
        relational database management systems, distributed processing and 
        imaging technology. The Company intends to continue to utilize these 
        technologies to provide the responsiveness necessary to keep pace 
        with the rapidly changing requirements of the industry and the needs 
        of its clients.
 
    -   Expand offshore processing capabilities. In July 1994, the Company 
        opened an office in Dublin, Ireland to service the growing European 
        client base. Assets processed by the Dublin subsidiary increased from 
        $27 


                                       4

<PAGE>

        million at December 31, 1996 to over $1.1 billion at December 31, 
        1997. The technology requirements of the offshore fund accounting 
        operations are facilitated by the architecture of FACTS. FACTS allows 
        microcomputers located at offshore processing centers to use the 
        FACTS software system to perform the components of processing on-site 
        in compliance with local jurisdiction requirements for offshore 
        investment funds, while utilizing the Company's existing U.S.-based 
        mainframe processing, storage and archive capabilities. In contrast, 
        other fund accounting providers typically utilize entirely separate 
        systems for domestic and offshore processing.
 
SERVICE OFFERINGS
 
    The Company provides a broad range of asset administration services to 
the financial services industry, including global custody, multicurrency 
accounting, securities lending, foreign exchange, mutual fund administration, 
institutional transfer agency, performance measurement, private banking and 
investment advisory services. Global custody and multicurrency accounting are 
the principal asset administration services provided to the Company's 
clients. Fees charged for these services reflect the highly competitive 
nature and price-sensitivity of the market for custody and multicurrency 
accounting services. Securities lending and foreign exchange services provide 
a more favorable pricing environment for the Company and increased activity 
by the Company in these areas would not involve a proportionate increase in 
personnel or other resources. Mutual fund administration and institutional 
transfer agency services provide additional revenue-generating opportunities, 
but require a corresponding increase in personnel and processing resources.
 
    Fees charged vary from client to client based on the volume of assets 
under custody, the number of securities held and portfolio transactions, 
income collected, and whether other value-added services such as foreign 
exchange and performance measurement are needed. Generally, fees are billed 
to the client monthly in arrears and, upon their approval, charged directly 
to their account.
 
    The Company takes an integrated approach to asset administration rather 
than the functional approach of some of its competitors. The Company has 
integrated the components of the custody and accounting task (e.g., trade 
settlement, income collection, corporate actions, general ledger accounting, 
portfolio accounting and pricing) and dedicates a single operations team to 
handle all work for a particular account or fund, instead of using separate 
departments to manage these custody and accounting functions. In addition, 
each client is assigned a Client Manager, independent of the operations team, 
to anticipate the client's needs, to coordinate service delivery, and to 
provide consulting support. The Company's accounting control group 
independently checks and verifies transfer agency, custody and administrative 
operations each day.
 
    The following is a description of the various services offered by the 
Company.
 
    GLOBAL CUSTODY.  Global custody entails overseeing the safekeeping of 
domestic and cross border securities for clients and settlement of portfolio 
transactions. The Company's domestic assets under custody have grown from $22 
billion at October 31, 1990 to $126 billion at December 31, 1997. Examples of 
the safekeeping of cross-border securities for clients include the 
safekeeping of Hong Kong stocks for a Dutch mutual fund or German bonds held 
for a U.S. bank-sponsored mutual fund. At December 31, 1997, the Company's 
foreign assets under custody totaled approximately $9 billion.
 
    Custody functions are fully integrated with security movement and 
control, portfolio accounting, general ledger accounting, and pricing and 
evaluation through FACTS. Custody functions include:
 
    - Settlement of purchases and sales of securities.
    - Safekeeping of securities and cash.
    - Tracking and collection of income and receivables, such as dividends and
      distributions.
    - Reconciliation of cash and security positions.
    - Disbursement of expenses.
    - Calculation and reporting of cash availability to asset managers.
    - Reporting and processing of corporate actions, such as stock splits and
      bond calls.
    - Initiation of settlement inquiries, including reclaims for foreign tax
      withholding.
    - Periodic reporting of holdings, transactions, income, corporate actions
      and cash flow.
 
    The Company entered the foreign custody marketplace in 1988, when the 
nature of foreign custody began to change dramatically. In the 1970s, foreign 
custody was a series of manual, labor-intensive exchanges; settlement was a 
slow process where most securities were re-registered and vaulted in the U.S. 
and the volume of assets was relatively small. Major developed countries 
throughout the world have evolved to highly automated environments, and the 
transition in developing countries is proceeding rapidly.

                                       5


<PAGE>

    Given the evolution of information technology and the industry's 
acceptance of computer technology as the preferred vehicle to support foreign 
custody, the Company established a worldwide network of global subcustodians. 
In countries with centralized clearing houses such as Euroclear, the Company 
establishes a subcustodian relationship with the clearing house and is able 
to receive information from the subcustodian in electronic format directly 
onto FACTS. In nations without automated environments, subcustodians hold 
physical securities in their own vaults and provide reporting in hard copy 
format to the Company for input onto FACTS. Today, the Company has custody 
agreements in 77 countries, typically with regional providers of custody 
services. Since the Company does not have its own branches in these 
countries, it is able to operate in the foreign custody arena with minimal 
fixed costs, while the Company's clients benefit from the ability to use only 
one custodian, the Company, for their international investment needs.
 
    MULTICURRENCY ACCOUNTING.  Multicurrency accounting entails the daily 
recordkeeping for each account or investment vehicle, including calculations 
of net asset value per share, dividend rates per share, and the maintenance 
of all books, records and financial reports required by the Securities and 
Exchange Commission and other regulatory agencies. Due to the growth in 
international investments by asset managers, traditional fund accounting 
tasks must be reconciled across multiple currencies. The primary approach of 
the Company is to bundle the sale of fund accounting and custody services in 
order to work within the natural efficiencies and control mechanisms of its 
integrated custody/fund accounting system and operational philosophy. 
Multicurrency accounting functions include: 

    - Maintenance of the books and records of a fund in accordance with the
      Investment Company Act of 1940. 
    - Tracking of investment transactions for use in the calculation of tax 
      gains and losses. 
    - Calculation and accrual of expenses.
    - Booking of purchases, redemptions and transfers of fund shares as 
      directed by the transfer agent. 
    - Calculation of gains and losses by security and currency.
    - Determination of net income. 
    - Calculation of daily yield in accordance with Securities and Exchange 
      Commission formula requirements. 
    - Preparation of statements of assets and liabilities and statements of 
      operations. 
    - Computation of the market value of the account. 
    - Calculation of the daily Net Asset Value of the account and reporting of 
      this value to the National Association of Securities Dealers for 
      publication in newspapers.
 
    In addition to providing the above services to domestic-based accounts 
and investment vehicles, the Company also provides offshore fund accounting. 
The Company views the offshore market as a significant business opportunity 
and will continue to invest in expansion to support client demand. The 
Company's Toronto operations, conducted by the Company's wholly-owned 
Canadian subsidiary, currently provide offshore services to 47 portfolios. As 
of December 31, 1997, the Canadian subsidiary processed over $16 billion in 
assets requiring the calculation of 105 daily net asset values. The Company's 
Dublin operations provide offshore services to 36 portfolios. As of December 
31, 1997, the Dublin subsidiary processed over $1.1 billion in assets 
requiring the calculation of 25 daily net asset values and 11 weekly net 
asset values. In February 1996, the Company opened an administration site in 
the Cayman Islands for Caribbean-based funds.
 
    The technology requirements of the offshore fund accounting operations 
are facilitated by the architecture of FACTS. FACTS allows microcomputers 
located at offshore processing centers to use the FACTS software system to 
perform the components of account processing on-site in compliance with local 
jurisdiction requirements for off-shore investment funds, while utilizing the 
Company's mainframe processing, storage and archive capabilities. In 
contrast, other fund accounting providers typically utilize entirely separate 
systems for domestic and offshore processing.
 
    MUTUAL FUND ADMINISTRATION.  The Company provides mutual fund 
administration services, including management reporting, regulatory 
reporting, and tax and accounting reporting. Management reporting consists of 
information and reporting which is of primary interest to the fund's asset 
managers and its board of trustees and includes:
 
    - Preparation of detailed quarterly financial information for presentation
      to fund management and its board of trustees.
    - Monitoring the reporting of net asset value, settlement of trades, and
      processing of stockholder transactions.
    - Monitoring compliance with investment portfolio restrictions.
    - Calculation of fund dividends to be declared in accordance with management
      guidelines.
    - Preparation and monitoring of a fund's expense budget.


                                       6

<PAGE>
 
    Regulatory reporting is the reporting and accumulation of information 
required of the fund by the Securities and Exchange Commission and state 
securities regulators and includes:
 
    - Coordination of preparation and filing of Securities and Exchange
      Commission reports.
    - Maintenance of effective "blue sky" registrations in jurisdictions
      selected for fund sales.
    - Coordination of the preparation and printing of stockholder reports.
    - Preparation of prospectus update and proxy material.
    - Coordination of on-going "blue sky" compliance.

    Tax and accounting reporting is required either by the fund's auditors or 
by Internal Revenue Service rules and regulations and includes:
 
    - Performing portfolio compliance testing to establish qualification as a
      regulated investment company.
    - Preparation of income and excise tax returns.
    - Preparation of audit package for use by independent public accountants.
    - Coordination of review of income, capital gains, and distribution
      information.
 
    The Company also provides mutual fund start-up services in addition to 
ongoing services. The Company has worked with a number of investment advisors 
to assist them in the development of new mutual funds and other pooled 
investment vehicles. Its services typically include assistance with product 
definition, service provider selection, and fund structuring and 
registration. The Company's Administration Group is staffed by 81 accounting 
and legal professionals who have prior experience in either mutual fund 
complexes or mutual fund servicing organizations.
 
    INVESTMENT ADVISORY.  The Bank acts as investment advisor to the Merrimac 
Master Portfolio and the Merrimac Funds, master-feeder investment companies 
(the "Funds"). Currently, the Funds have two operating master funds, the 
Merrimac Cash Portfolio and the Merrimac Treasury Portfolio, and three 
operating feeder funds, the Merrimac Cash Fund, the Merrimac Global Cash 
Fund, and the Merrimac Treasury Fund, with assets totaling over $1.4 billion 
at December 31, 1997. The Company has engaged The Bank of New York to act as 
sub-advisor to manage the investments of the Merrimac Cash Portfolio and has 
engaged Aeltus Investment Management, Inc. to act as sub-advisor to manage 
the investments of the Merrimac Treasury Portfolio. In addition to acting as 
advisor to the Funds, the Bank has entered into agreements to provide 
custody, fund accounting, administration, transfer agency and certain other 
related services to the Funds. The Merrimac feeder funds offer shares only to 
institutions and other "accredited investors" (as that term is defined in 
Rule 501(a) under the Securities Act of 1933) and invest all of their assets 
in the Merrimac master funds. The Funds may add additional feeder funds 
and/or master funds in the future.
 
    FOREIGN EXCHANGE.  The Company offers foreign exchange services to 
facilitate settlement of international securities transactions for U.S. 
dollar denominated mutual funds and other accounts and to convert income 
payments denominated in a non-U.S. currency to U.S. dollars. By using the 
Company rather than a third party foreign exchange bank to perform these 
functions, clients reduce the amount of time spent coordinating currency 
delivery and monitoring delivery failures and claims. The Company, as 
principal, enters into a foreign exchange contract with a client and 
simultaneously enters into a matched trade with another financial 
institution. The current volume of trades processed by the Company is 
approximately 34,000 trades per year, which vary in size. The Company 
initiates foreign exchange transactions only in response to a client's 
request and engages in no foreign exchange trading transactions for its own 
account. Foreign exchange fee revenue totaled $1,044,000, $237,000, 
$2,106,000, and $4,427,000 for the year ended October 31, 1995, for the 
Transition Period, and for the years ended December 31, 1996 and 1997, 
respectively.
 
    SECURITIES LENDING.  Securities lending involves the lending of clients' 
securities to brokers and other institutions for a fee, which improves a 
client's return on the underlying securities. The Company acts as agent for 
its clients for both international and domestic securities lending services. 
Currently, lending services are provided to seven clients, and the current 
loan portfolio aggregates approximately $1.8 billion. The Company retains as 
compensation a portion of the lending fee due to the client as owner of the 
borrowed asset. Securities lending fee revenue totaled $1,142,000, $157,000, 
$1,947,000, and $2,865,000 for the year ended October 31, 1995, for the 
Transition Period, and for the years ended December 31, 1996 and 1997, 
respectively.
 
    Through a network of broker/dealers, the Company places the securities 
out on loan pursuant to client instruction, delivers the subject securities 
and performs the necessary loan accounting. Accounting entails monitoring 
each security out on loan by broker, allocating the loans to each fund, 
tracking the fixed or variable rebate due the broker, updating the daily 
investments, applying the earnings to each security loan and preparing daily 
and monthly earnings statements for each fund and all the brokers.
 
    All loans are fully collateralized with cash, government securities or a 
letter of credit. This collateral is reinvested according to each client's 
instructions. The Company monitors all outstanding loans on a daily basis by 
reviewing exposure 


                                       7

<PAGE>

by broker, performing asset reconciliations, and marking each security to 
market to ensure that proper collateral levels are maintained.
 
    INSTITUTIONAL TRANSFER AGENCY.  Transfer agency encompasses mutual fund 
shareholder recordkeeping and communications. Services include tracking 
capital shares, fulfilling purchase, transfer, and redemption requests, and 
sending account statements, tax reporting information and distributions to 
shareholders. The Company provides mutual fund shareholder servicing and 
recordkeeping for clients representing approximately 24,000 shareholder 
accounts. These services are generally provided only to institutional clients 
with smaller numbers of outstanding shareholders or omnibus positions of 
retail shareholders.
 
    PERFORMANCE MEASUREMENT.  Performance measurement services involve the 
creation of systems and databases that enable asset managers to construct, 
manage, and analyze their portfolios. Services include portfolio profile 
analysis, portfolio return analysis, and customized benchmark construction. 
Performance measurement uses data already captured by FACTS to calculate 
statistics and report them to asset managers. The Company provides this 
service for an aggregate of over $23 billion in assets managed by 46 
investment advisors.

    PRIVATE BANKING SERVICES.  The Company offers private banking services to 
individuals, family groups, trusts, endowments and foundations, and 
retirement plans. The Company develops this client base by forming 
relationships with investment advisors and working with the advisors to 
service mutual clients. The Company services individually managed trust and 
custody accounts that numbered approximately 5,900 at December 31, 1997. The 
Company does not conduct consumer banking operations.
 
    Acting as a fiduciary, the Company provides trust administration and 
estate settlement services. These services include on-going fiduciary review 
of the trust instrument, collection and safekeeping of assets, distribution 
of income, appropriate reporting for court and tax purposes, preparation of 
tax returns, and distribution of assets as required. The Company does not 
provide investment advice, but works closely with third-party investment 
advisors chosen by each client to carry out the investment of assets. Custody 
services, such as the safekeeping of securities and the settlement of 
securities transactions, are also provided to these clients. Custody service 
fees are determined based on assets under custody and number of transactions 
in each account.
 
    At December 31, 1997, the Company had gross loans outstanding to 
individuals and non-profit institutions of approximately $56 million, which 
represented 4% of the Company's total assets. The interest rates charged on 
the Bank's loans are indexed to either the prime rate or the rate paid on 
90-day Treasury bills. The Company has never had a loan loss, and has no 
delinquent loans. Other than a loan made to a non-profit association for 
purposes of the Community Reinvestment Act, all loans are secured by 
marketable securities and are due on demand.
 
    COMMERCIAL BANKING SERVICES.  As a result of the Spin-Off Transaction, 
the Company is now able to offer commercial banking services. The Company 
offers credit lines to its clients for the purpose of leveraging portfolios 
and covering overnight cash shortfalls. Since the Spin-Off Transaction, the 
Company has entered into agreements to provide up to an aggregate of $40 
million under secured lines of credit to mutual fund clients. Additionally, 
the Company's clients, which consist mainly of managers of mutual funds, unit 
investment trusts and other pooled asset products, typically generate large 
cash balances from securities sales and other transactions which they wish to 
invest on a short-term basis. Because the Company was subject to a 7% annual 
asset growth cap under CEBA, it was not able to accept those deposits and 
directed those deposits to other financial institutions. The Company directed 
an average of approximately $1.2 billion of such deposits daily to other 
financial institutions in fiscal year 1995. Since the completion of the 
Spin-Off Transaction and the Offering, the Company has redirected an average 
of approximately $854 million daily of these balances into its own deposit 
products and may now offer these deposit services directly to existing and 
potential clients.
 
SALES, MARKETING AND CLIENT SUPPORT
 
    The Company employs a direct sales staff of five employees that targets 
potential market areas, including investment management companies, insurance 
companies, banks and investment advisors. Sales personnel are primarily based 
at the Company's headquarters in Boston and are given geographic area sales 
responsibility. Additionally, the Company provides the sales staff with 
market data and presentation materials. Senior managers from all functional 
areas are directly involved in obtaining new clients, frequently working as a 
team with a sales professional.
 
    New client contacts are generated by a variety of methods, including 
client referrals, personal sales calls, direct mailing to targeted clients, 
attendance at trade shows and seminars, and advertising in trade publications.
 
    In order to service existing clients, a client management staff of 
approximately 12 professionals based in the Company's Boston office provides 
client support. Each client is assigned a Client Manager responsible for the 
overall 


                                       8

<PAGE>

satisfaction of the client. The Client Manager is usually a senior 
professional with extensive industry experience and works with the client on 
contracts, new products and specific systems requirements.
 
SIGNIFICANT CLIENTS
 
    The Company presently provides services to approximately 53 mutual fund 
complexes and insurance companies. The Company's largest current client, 
Eaton Vance, accounted for 14%, 11%, 10% and 10% of the Company's net 
operating revenues for the year ended October 31, 1995, for the Transition 
Period, and for the years ended December 31, 1996 and 1997, respectively. A 
former client of the Company, Merrill Lynch, accounted for 5% of the 
Company's net operating revenues for the year end October 31, 1995. Merrill 
Lynch paid the Company to assign the Company's servicing rights to The Bank 
of New York effective March 1, 1995, and therefore accounted for no net 
operating revenue in the Transition Period or in the years ended December 31, 
1996 and 1997. The percentages of consolidated revenues attributable to Eaton 
Vance and Merrill Lynch for the periods referenced above were substantially 
the same as the percentages of net operating revenues described above. Eaton 
Vance accounted for 10% of the Company's consolidated revenues for the 
Transition Period. No single client represented more than 10% of the 
Company's consolidated revenues for the years ended December 31, 1996 and 
1997. No other single client of the Company represented more than 10% of net 
operating revenues or consolidated revenues for the periods discussed above. 
Eaton Vance has been a client of the Company since 1975. The Company's 
agreements with mutual funds managed by Eaton Vance, pursuant to which the 
Company provides custody and fund accounting services, extend through August 
2000 and continue thereafter until terminated by either party upon sixty days 
prior notice. If a majority of non-interested trustees of a fund determines 
that the performance of the Company under any such agreement has been 
unsatisfactory or adverse to the interests of the fund's shareholders, or 
that the terms of the agreement are no longer consistent with publicly 
available industry standards, the Company has 60 days after receipt of 
written notice to such effect to (i) correct its performance or (ii) 
renegotiate such terms. If the corrective action or renegotiation is not 
satisfactory to the trustees, the agreement may be terminated on sixty days 
prior notice. The Company has long-term contracts with 11 other clients with 
terms ranging from three to five years. Total assets processed under 
long-term contracts at December 31, 1997 were over $42 billion. All other 
client engagements are, and in the future may be, terminable upon 60 days 
notice.
 
SOFTWARE SYSTEMS AND DATA CENTER
 
    The Company's asset administration operations are supported by 
sophisticated computer technology. The Company receives vast amounts of 
information across a world-wide computer network. That information, which 
covers a wide range of global security types and complex portfolio structures 
in various currencies, must then be processed, resulting in system-wide 
updating and reporting. The Company must have the capability to provide not 
only daily and periodic reports of asset accounting and performance, but also 
to provide measurement and analytical data to asset managers on-line on a 
real time basis. These technology requirements call for powerful and 
sophisticated computer hardware and software systems operated in a cost 
effective manner.
 
    The primary software system used by the Company is FACTS.  The system was 
developed over a four-year period by the Bank of New England, and was put 
into operation in 1986. It was acquired by the Company in 1990 in connection 
with the acquisition by the Company of the Financial Products Services 
Division of the Bank of New England.
 
    FACTS utilizes microcomputers networked to servers networked to a 
mainframe computer system. The microcomputers can be located in any location 
with the requisite telecommunications network for the automated interface to 
the mainframe, enabling the Company to provide geographically dispersed 
processing services effectively and efficiently. This configuration also 
provides redundant processing capability; if the mainframe fails, FACTS is 
able to process independently on the microcomputers.
 
    FACTS emphasizes efficiency and accuracy because it integrates custody, 
securities movement and control, portfolio accounting, general ledger 
accounting, pricing, net asset value calculation, and master/ feeder 
processing into a single system. The traditional industry approach is to have 
separate applications for each of these functions and to interconnect the 
component applications with manual intervention at various points in the 
process.
 
    The integrated and automated nature of FACTS is best reflected in 
following a transaction through the system. For example, a purchase of a 
security is entered on a client trading system and the transaction 
information is electronically transmitted to FACTS. The receipt of the trade 
information by FACTS will trigger the following activities with no manual 
intervention by the Company:
 
    - Creation of a Securities Movement and Control transaction to track and
      control the trade for the entire settlement cycle (e.g., confirmation,
      affirmation, settlement).
    - Updating of the portfolio position for the security being purchased.
    - Immediate updating of all required general ledger accounts.


                                       9

<PAGE>
 
    - Creation of a pricing record to enable pricing of the security and
      inclusion in the total market value and net asset value determination.
    - Affirmation and settlement of the trade upon notification from the
      counterparty with associated transaction and general ledger updates
      occurring simultaneously.
    - Accounting for all income for the holding period of the security.
 
    FACTS also complies with current industry standards such as the 
requirement that mandates a three business day settlement cycle for public 
securities transactions rather than the traditional five business day cycle. 
The enhancements made to FACTS to address this change included enabling FACTS 
to interact with the Depository Trust Company via its new Interactive 
Institutional Delivery System, which allows institutions to confirm trades 
earlier in the trade life cycle.
 
    The integrated nature of the FACTS architecture allows the Company to 
affect modifications and enhancements quickly, resulting in increased 
processing quality and efficiency for the Company's clients. This integrated 
architecture helps differentiate the Company from its competitors. System 
enhancements and upgrades are an ongoing part of asset administration, both 
to keep ahead of the competition and to create information delivery 
mechanisms that add value to the information available as part of clearing 
and settling transactions. Over the past few years, the Company has developed 
standardized data extracts and automated interfaces that allow its clients to 
connect electronically with the Company's host computer and access data 
collected from clearance and settlement transactions in multiple currencies 
on a real-time basis. This electronic linkage also positions the Company to 
respond quickly to client requests.
 
    A substantial portion of the Company's electronic transaction processing 
services depends upon mainframe computer hardware, owned and operated by 
Electronic Data Systems ("EDS"), contained in the EDS Information Processing 
Center ("IPC") in Plano, Texas. Processing and networking functions and 
equipment are located at the IPC, and in the Boston, Camp Hill, and Detroit 
metropolitan areas. By outsourcing data processing, the Company can focus its 
resources on its core line of business and minimize its capital investment in 
computer equipment. EDS is able to offer the Company up to date computer 
products and services to which it would not otherwise have access, while 
removing the risk of product obsolescence. Due to its diverse customer base, 
EDS can invest in the latest computer technology and spread the costs over 
multiple users. In addition, the defined pricing provided by EDS for products 
and services allows the Company to match its data processing cost with the 
related revenue stream. The use of EDS as a hardware provider allows the 
Company to dedicate its efforts to the ongoing enhancement of its software 
systems while receiving the benefit of the continuing investment by EDS in 
its computer hardware.
 
    EDS provides mainframe disaster recovery services. EDS maintains 
additional processing equipment at the Plano IPC and at a designated 
alternate IPC which may be used in the event of equipment failure. The Plano 
facility is also supported by an uninterruptable power supply and diesel 
generators which can supply power to continue operations for an extended 
period of time. Critical software and data files are backed-up daily and 
stored off-site. Disaster recovery plans are tested through simulations 
conducted by the Company twice a year. Notwithstanding these precautions, 
there can be no assurance that a fire or other natural disaster affecting the 
data center would not disable the host computer system.
 
    The current agreement between the Company and EDS obligates EDS to 
provide the Company with comprehensive data processing services and obligates 
the Company to utilize EDS's services for substantially all of its data 
processing requirements. The Company is billed for these services monthly on 
an as-used basis as determined by a pricing schedule for specific products 
and services. EDS began providing services to the Company in December 1990 
and the current agreement is scheduled to expire on December 31, 2000.
 
COMPETITION
 
    The market for asset administration services is highly competitive. The 
Company's most significant competitors are State Street Bank & Trust Company, 
The Bank of New York, Chase Manhattan Corp., Brown Brothers Harriman & Co., 
and PNC Bank. These competitors possess substantially greater financial, 
sales and marketing resources than the Company and process a greater amount 
of financial assets than the Company. In addition, the Company also 
encounters competition in the sale of fund accounting services from large 
in-house accounting departments of mutual fund complexes, insurance companies 
and banks offering proprietary mutual funds. Competitive factors include 
technological advancement and flexibility, breadth of services provided and 
quality of service. The Company believes that it competes favorably in these 
categories.
 
INTELLECTUAL PROPERTY
 
    The Company's success is dependent upon its software development 
methodology and other intellectual property rights developed and owned by the 
Company, including FACTS. The Company relies on a combination of trade 
secret, nondisclosure and other contractual arrangements and technical 
measures, and copyright and trademark laws to protect its proprietary rights. 
The Company generally enters into confidentiality agreements with its 
employees and consultants, and 


                                       10

<PAGE>

limits access to and distribution of its proprietary information. There can 
be no assurance that the steps taken by the Company in this regard will be 
adequate to deter misappropriation of its proprietary information or that the 
Company will be able to detect unauthorized use and take appropriate steps to 
enforce its intellectual property rights. Furthermore, such protections may 
not preclude competitors from developing products and services with 
functionality or features similar to those of the Company. In addition, 
effective copyright, trademark and other trade protection may not be 
available in certain international markets serviced by the Company. Finally, 
there can be no assurance that intellectual property protection will be 
available in certain foreign countries. The registration of the service mark 
Investors Bank & Trust Company will remain in force until 2006, at which time 
it may be renewed.
 
    Although the Company believes that its services do not infringe on the 
intellectual property rights of others, there can be no assurance that such a 
claim will not be asserted against the Company in the future.
 
EMPLOYEES AND TRAINING
 
    As of December 31, 1997, the Company had 1,009 full-time employees, 
including six in senior management, 18 in marketing and client management, 
837 in operations and 148 in general and administration. None of the 
Company's employees are represented by a union. The Company believes that its 
relations with its employees are good.
 
    The Company has developed a five-week professional development program 
for entry level staff. Successful completion of the program is required of 
most newly hired employees. Topics covered during the program include an 
overview of the financial services industry and pooled asset vehicles, 
principles of mutual fund accounting and custody, instruction in control 
procedures, manual performance of fund accounting tasks and intensive 
training on FACTS. This training program is supplemented by ongoing education 
on the industry and client base.
 
    The Company's business is labor-intensive, and its success depends to a 
significant extent upon a number of key management employees and skilled 
technical, managerial and marketing personnel, few of which are bound by 
employment agreements. From October 31, 1990 to December 31, 1997, the 
Company's staff increased from 463 to 1,009 employees.
 
REGULATION AND SUPERVISION
 
    In addition to the generally applicable state and federal laws governing 
businesses and employers, the Company and the Bank are further regulated by 
federal and state laws and regulations applicable only to financial 
institutions and their parent companies. Virtually all aspects of the 
Company's and the Bank's operations are subject to specific requirements or 
restrictions and general regulatory oversight. State and federal banking laws 
have as their principal objective either the maintenance of the safety and 
soundness of financial institutions and the federal deposit insurance system 
or the protection of consumers or classes of consumers, rather than the 
specific protection of stockholders of a bank or its parent company. To the 
extent the following material describes statutory or regulatory provisions, 
it is qualified in its entirety by reference to the particular statute or 
regulation.
 
THE COMPANY
 
    GENERAL. The Company, as a bank holding company, is subject to regulation 
and supervision by the Federal Reserve Board (the "FRB") and by the 
Massachusetts Commissioner of Banks (the "Commissioner"). The Company is 
required to file annually a report of its operations with, and is subject to 
examination by, the FRB and the Commissioner. The FRB has the authority to 
issue orders to bank holding companies to cease and desist from unsound 
banking practices and violations of conditions imposed by, or violations of 
agreements with, the FRB. The FRB is also empowered to assess civil monetary 
penalties against companies or individuals who violate the Bank Holding 
Company Act of 1956, as amended, (the "BHCA") or orders or regulations 
thereunder, to order termination of non-banking activities of non-banking 
subsidiaries of bank holding companies, and to order termination of ownership 
and control of a non-banking subsidiary by a bank holding company.
 
    BHCA--ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank holding 
company from acquiring substantially all the assets of a bank or acquiring 
direct or indirect ownership or control of more than 5% of the voting shares 
of any bank, or increasing such ownership or control of any bank, or merging 
or consolidating with any bank holding company without prior approval of the 
FRB. No approval under the BHCA is required, however, for a bank holding 
company already owning or controlling 50% or more of the voting shares of a 
bank to acquire additional shares of such bank. The Riegle-Neal Interstate 
Banking and Branching Efficiency Act of 1994 (the "Interstate Act") generally 
authorizes bank holding companies to acquire banks located in any state. In 
addition, the Interstate Act generally authorizes national and state 
chartered banks to merge across state lines (and thereby create interstate 
branches) commencing June 1, 1997. Under the provisions of the Interstate 
Act, states are permitted to "opt out" of this latter interstate branching 
authority by taking action prior to the commencement date. States may also 
"opt in" early (i.e., prior to June 1, 1997) to the interstate merger 
provisions.


                                       11

<PAGE>
 
    The BHCA also prohibits a bank holding company from acquiring a direct or 
indirect interest in or control of more than 5% of the voting shares of any 
company which is not a bank or bank holding company and from engaging 
directly or indirectly in activities other than those of banking, managing or 
controlling banks or furnishing services to its subsidiary banks, except that 
it may engage in and may own shares of companies engaged in certain 
activities the FRB has determined to be so closely related to banking or 
managing and controlling banks as to be a proper incident thereto. In making 
such determinations, the FRB is required to weigh the expected benefit to the 
public, such as greater convenience, increased competition or gains in 
efficiency, against the possible adverse effects, such as undue concentration 
of resources, decreased or unfair competition, conflicts of interests or 
unsound banking practices.
 
    The FRB has by regulation determined that certain activities are closely 
related to banking within the meaning of the BHCA. Should the Company desire 
to expand its activities beyond its current financial services activities, it 
would generally be limited to the following activities: operating a mortgage 
company, finance company, credit card company, factoring company, trust 
company or savings association; performing certain data processing 
operations; providing limited securities brokerage services; acting as an 
investment or financial advisor; acting as an insurance agent for certain 
types of credit-related insurance; leasing personal property on a 
full-payout, non-operating basis; providing tax planning and preparation 
services; operating a collection agency; and providing certain courier 
services. The FRB also has determined that certain other activities, 
including real estate brokerage and syndication, land development, property 
management and underwriting of life insurance not related to credit 
transactions, are not closely related to banking and a proper incident 
thereto.
 
    COMMITMENTS TO AFFILIATED INSTITUTIONS.  Under FRB policy, the Company is 
expected to act as a source of financial strength to the Bank and to commit 
resources to support the Bank in circumstances when it might not do so absent 
such policy and is expected to maintain the financial flexibility and 
capital-raising capacity to obtain additional resources for assisting the 
Bank. The legality and precise scope of this policy is unclear, however, in 
light of federal judicial precedent. Additionally, the Federal Deposit 
Insurance Act (the "FDIA") requires the holding company parent of an 
undercapitalized bank to guarantee, up to certain limits, the bank's 
compliance with a capital restoration plan approved by the bank's primary 
federal supervisory agency. Because Investors Financial Services Corp., as a 
holding company for the Bank, has no assets other than its ownership interest 
in the Bank, its ability to serve as a source of strength to the Bank through 
the contribution of capital is, presently, limited to contributing proceeds 
from the sale of securities such as the Capital Securities discussed under 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations--Capital Resources."
 
    CAPITAL REQUIREMENTS.  The FRB has adopted capital adequacy guidelines 
pursuant to which it assesses the adequacy of capital in examining and 
supervising a bank holding company and in analyzing applications to it under 
the BHCA. These capital adequacy guidelines generally require bank holding 
companies to maintain total capital equal to 8% of total risk-adjusted assets 
and off-balance sheet items, with at least one-half of that amount consisting 
of Tier I or core capital and the remaining amount consisting of Tier II or 
supplementary capital. Tier I capital for bank holding companies generally 
consists of the sum of common stockholders' equity and perpetual preferred 
stock (subject in the case of the latter to limitations on the kind and 
amount of such stocks which may be included as Tier I capital), less 
goodwill. Tier II capital generally consists of hybrid capital instruments; 
perpetual preferred stock which is not eligible to be included as Tier I 
capital; term subordinated debt and intermediate-term preferred stock; and, 
subject to limitations, general allowances for loan losses. Assets are 
adjusted under the risk-based guidelines to take into account different risk 
characteristics, with the categories ranging from 0% (requiring no additional 
capital) for assets such as cash to 100% for such assets as premises, plant 
and equipment and traditional consumer loans. Claims on, or guaranteed by, 
U.S. government agencies, as well as the portion of claims that are 
collateralized by securities issued or guaranteed by the U.S. Treasury are 
assigned a 20% level in the risk-weighting system. Off-balance sheet items 
also are adjusted to take into account certain risk characteristics.
 
    In addition to the risk-based capital requirements, the FRB requires bank 
holding companies to maintain a minimum leverage capital ratio of Tier I 
capital (defined by reference to the risk-based capital guidelines) to total 
assets of 3.0%. Total assets for this purpose does not include goodwill and 
any other intangible assets and investments that the FRB determines should be 
deducted from Tier I capital. The FRB has announced that the 3.0% Leverage 
Ratio requirement is the minimum for the top-rated bank holding companies 
without any supervisory, financial or operational weaknesses or deficiencies 
or those which are not experiencing or anticipating significant growth. 
Because the Bank, and consequently, the Company, anticipates significant 
future growth, the Company will be required to maintain Leverage Ratios of at 
least 4.0% to 5.0% or more. Management currently intends to maintain Leverage 
Ratios of 6.0%.
 
    The Company currently is in compliance with both the Risk Based Capital 
Ratio and the Leverage Ratio requirements. At December 31, 1997, the Company 
had a Tier I Risk Based Capital Ratio and a Total Risk Based Capital Ratio 
equal to 29.00% and 29.03%, respectively and a Leverage Ratio equal to 6.39%.


                                       12

<PAGE>
 
    LIMITATIONS ON ACQUISITIONS OF COMMON STOCK.  The Federal Change in Bank 
Control Act prohibits a person or group of persons from acquiring "control" 
of a bank holding company unless the FRB has been given 60 days prior written 
notice of such proposed acquisition and within that time period the FRB has 
not issued a notice disapproving the proposed acquisition or extending for up 
to another 30 days the period during which such a disapproval may be issued. 
An acquisition may be made prior to expiration of the disapproval period if 
the FRB issues written notice of its intent not to disapprove the action. 
Under a rebuttable presumption established by the FRB, the acquisition of 10% 
or more of a class of voting stock of a bank holding company with a class of 
securities registered under Section 12 of the Securities Exchange Act of 
1934, as amended (the "Exchange Act") would, under the circumstances set 
forth in the presumption, constitute the acquisition of control.
 
    In addition, any company, as that term is defined in the statute, would 
be required to obtain the approval of the FRB under the BHCA before acquiring 
25% (5% in the case of an acquirer that is a bank holding company) or more, 
or such lesser percentage as the FRB deems to constitute control over the 
Company, of the outstanding Common Stock of the Company. Such approval would 
be contingent upon, among other things, the acquirer registering as a bank 
holding company, divesting all impermissible holdings and ceasing any 
activities not permissible for a bank holding company.
 
    MASSACHUSETTS LAW.  Massachusetts law generally defines a bank holding 
company as a company which owns or controls two or more financial 
institutions. Although the Company owns or controls only one financial 
institution, it is deemed a bank holding company for purposes of 
Massachusetts law due to the manner in which it acquired the Bank. 
Accordingly, the Company has registered with the Commissioner and is 
obligated to make reports to the Commissioner. Further, as a Massachusetts 
bank holding company, the Company may not acquire all or substantially all of 
the assets of a banking institution or merge or consolidate with another bank 
holding company without the prior consent of the Board of Bank Incorporation 
(the "BBI"). As a condition of such consent, the BBI must receive notice from 
the Massachusetts Housing Partnership Fund (the "Fund") that arrangements 
satisfactory to the Fund have been made by the Company to make 0.9% of its 
assets available for financing, down payment assistance, share loans, closing 
costs and other costs related to programs promoted by the Fund, including 
those related to creating affordable rental housing, limited equity 
cooperatives, and tenant management programs.
 
THE BANK
 
    GENERAL. The Bank is subject to extensive regulation and examination by 
the Commissioner and by the FDIC, which insures its deposits to the maximum 
extent permitted by law, and to certain requirements established by the FRB. 
The federal and state laws and regulations which are applicable to banks 
regulate among other things, the scope of their business, their investments, 
their reserves against deposits, the timing of the availability of deposited 
funds and the nature and amount of and collateral for certain loans.
 
    FDIC INSURANCE PREMIUMS.  The Bank pays deposit insurance premiums to the 
FDIC based on an assessment rate established by the FDIC for Bank Insurance 
Fund-member institutions. The FDIC has established a risk-based assessment 
system under which institutions are assigned to one of three capital 
groups--"well capitalized," "adequately capitalized" and 
"undercapitalized"--which are defined in substantially the same manner as 
under the regulations establishing the prompt corrective action system 
pursuant to Section 38 of the FDIA, as discussed below. These three capital 
groups are then each divided into three subgroups which reflect varying 
levels of supervisory concern, from those which are considered to be healthy 
to those which are considered to be of substantial supervisory concern. The 
matrix so created results in nine assessment risk classifications, with 
corresponding assessment rates ranging from .04% for well capitalized, 
healthy institutions to .31% for undercapitalized institutions with 
substantial supervisory concerns. There is a statutory minimum assessment of 
$1,000 per semi-annual period. The Bank is currently subject to the statutory 
minimum assessment.
 
    CAPITAL REQUIREMENTS.  The FDIC has promulgated regulations and adopted a 
statement of policy regarding the capital adequacy of state-chartered banks 
which, like the Bank, are not members of the Federal Reserve System. These 
requirements are substantially similar to those adopted by the FRB regarding 
bank holding companies, as described above.
 
    The FDIC's capital regulation establishes a minimum 3.0% Leverage Ratio 
requirement for the most highly-rated state-chartered, non-member banks, with 
an additional cushion of at least 100 to 200 basis points for all other 
state-chartered, non-member banks, which effectively will increase the 
minimum Leverage Ratio for such other banks to 4.0% to 5.0% or more. Under 
the FDIC's regulation, highest-rated banks are those that the FDIC determines 
are not anticipating or experiencing significant growth and have well 
diversified risk, including no undue interest rate risk exposure, excellent 
asset quality, high liquidity, good earnings and, in general, which are 
considered a strong banking organization, rated composite 1 under the Uniform 
Financial Institutions Rating System. A bank having less than the minimum 
Leverage Ratio shall, within 45 days of the date as of which it fails to 
comply with such requirement, submit to its FDIC regional director for review 
and approval a reasonable plan describing the means and timing by which the 
bank shall achieve its minimum leverage capital requirement. A bank which 
fails to file such plan with the FDIC is deemed to be operating in an unsafe 
and unsound manner, and could be subject to a cease-and-desist order from the 
FDIC. The FDIC's amended regulation also provides 


                                       13

<PAGE>

that any insured depository institution with a Leverage Ratio less than 2.0% 
is deemed to be operating in an unsafe or unsound manner pursuant to Section 
8(a) of the FDIA and is subject to potential termination of deposit 
insurance. Such an institution, however, will not be subject to an 
enforcement proceeding thereunder, solely on account of its capital ratios if 
it has entered into and is in compliance with a written agreement with the 
FDIC to increase its Leverage Ratio to such level as the FDIC deems 
appropriate and to take such other action as may be necessary for the 
institution to be operated in a safe and sound manner. The FDIC capital 
regulation also provides, among other things, for the issuance by the FDIC or 
its designee(s) of a capital directive, which is a final order issued to a 
bank that fails to maintain minimum capital to restore its capital to the 
minimum leverage capital requirement within a specified time period. Such 
directive is enforceable in the same manner as a final cease-and-desist order.
 
    The FDIC has augmented the capital leverage ratios described above with a 
risk-based capital framework which is more explicitly and systematically 
sensitive to the risk profiles of individual banks. Under the risk-based 
capital framework, the assets of the Bank are weighted pursuant to the risk 
category in which each asset falls. These risk categories are substantially 
the same as those described in the discussion of FRB capital requirements 
above. Banks generally will be expected to maintain a minimum Tier I Risk 
Based Capital Ratio of 4.0% and a Total Risk Based Capital Ratio of 8.0%. Any 
bank that does not meet the minimum requirements, or whose capital is 
otherwise considered inadequate, generally will be expected to develop and 
implement a capital plan for achieving an adequate level of capital, 
consistent with the provisions of the risk-based capital framework.
 
    At December 31, 1997, the Bank was in compliance with all minimum Federal 
regulatory capital requirements which are generally applicable to FDIC 
insured banks. As of such date, the Bank had a Tier I Risk Based Capital 
Ratio and a Total Risk Based Capital Ratio equal to 28.54% and 28.57%, 
respectively, and a Leverage Ratio equal to 6.31%.
 
    PROMPT CORRECTIVE ACTION.  Under Section 38 of the FDIA, each federal 
banking agency is required to implement a system of prompt corrective action 
for institutions which it regulates. The federal banking agencies have 
promulgated substantially similar regulations to implement the system of 
prompt corrective action established by Section 38 of the FDIA. Under the 
regulations, a bank shall be deemed to be (i) "well capitalized" if it has 
Total Risk Based Capital Ratio of 10.0% or more, has a Tier I Risk Based 
Capital Ratio of 6.0% or more, has a Leverage Ratio of 5.0% or more and is 
not subject to any written capital order or directive; (ii) "adequately 
capitalized" if it has a total Risk Based Capital Ratio of 8.0% or more, a 
Tier I Risk Based Capital Ratio of 4.0% or more, and a Leverage Ratio of 4.0% 
or more (3.0% under certain circumstances) and does not meet the definition 
of "well capitalized," (iii) "undercapitalized" if it has a Total Risk Based 
Capital Ratio that is less than 8.0%, a Tier I Risk Based Capital Ratio that 
is 4.0% or greater or a Leverage Ratio that is less than 4.0% (3.0% under 
certain circumstances), (iv) "significantly undercapitalized" if it has a 
Total Risk Based Capital Ratio that is less than 6.0%, a Tier I Risk Based 
Capital Ratio that is less than 3.0% or a Leverage Ratio that is less than 
3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible 
equity to total assets that is equal to or less than 2.0%. Section 38 of the 
FDIA and the regulations also specify circumstances under which a federal 
banking agency may reclassify a well capitalized institution as adequately 
capitalized and may require an adequately capitalized institution or an 
undercapitalized institution to comply with supervisory actions as if it were 
in the next lower category, except that the FDIC may not reclassify a 
significantly undercapitalized institution as critically undercapitalized.
 
    An institution generally must file a written capital restoration plan 
which meets specified requirements with an appropriate federal banking agency 
within 45 days of the date that the institution receives notice or is deemed 
to have notice that it is undercapitalized, significantly undercapitalized or 
critically undercapitalized. A federal banking agency must provide the 
institution with written notice of approval or disapproval with 60 days after 
receiving a capital restoration plan, subject to extensions by the agency.
 
    An institution which is required to submit a capital restoration plan 
must concurrently submit a performance guaranty by each company that controls 
the institution. Such guaranty shall be limited to the lesser of (i) an 
amount equal to 5.0% of the institution's total assets at the time the 
institution was notified or deemed to have notice that it was 
undercapitalized or (ii) the amount necessary at such time to restore the 
relevant capital measure of the institution to the levels required for the 
institution to be classified as adequately capitalized. Such a guarantee 
shall expire after the federal banking agency notifies the institution that 
it has remained adequately capitalized for each of four consecutive calendar 
quarters. An institution which fails to submit a written capital restoration 
plan within the requisite period, including any required performance 
guarantee, or fails in any material respect to implement a capital 
restoration plan, shall be subject to the restrictions in Section 38 of the 
FDIA which are applicable to significantly undercapitalized institutions.
 
    A critically undercapitalized institution is to be placed in 
conservatorship or receivership with 90 days unless the FDIC formally 
determines that forbearance from such action would better protect the deposit 
insurance fund. Unless the FDIC or other appropriate federal banking 
regulatory agency makes specific further findings and certifies that the 
institution is viable and is not expected to fail, an institution that 
remains critically undercapitalized on average during the fourth calendar 
quarter after the date it becomes critically undercapitalized must be placed 
in receivership.


                                       14

<PAGE>
 
    Immediately upon becoming undercapitalized, an institution becomes 
subject to the provisions of Section 38 of the FDIA (i) restricting payment 
of capital distributions and management fees, (ii) requiring that the 
appropriate federal banking agency monitor the condition of the institution 
and its efforts to restore its capital, (iii) requiring submission of a 
capital restoration plan, (iv) restricting the growth of the institution's 
assets and (v) requiring prior approval of certain expansion proposals. The 
appropriate federal banking agency for an undercapitalized institution also 
may take any of a number of discretionary supervisory actions if the agency 
determines that any of these actions is necessary to resolve the problems of 
the institution at the least possible long-term cost to the deposit insurance 
fund, subject in certain cases to specified procedures. These discretionary 
supervisory actions include requiring the institution to raise additional 
capital; restricting transactions with affiliates; restricting interest rates 
paid by the institution on deposits; requiring replacement of senior 
executive officers and directors; restricting the activities of the 
institution and its affiliates; requiring divestiture of the institution or 
the sale of the institution to a willing purchaser; and any other supervisory 
action that the agency deems appropriate. These and additional mandatory and 
permissive supervisory actions may be taken with respect to significantly 
undercapitalized and critically undercapitalized institutions.
 
    At December 31, 1997, the Bank was deemed to be a well capitalized 
institution for the above purposes. Bank regulators may raise capital 
requirements applicable to banking organizations beyond current levels. 
Because the Company is unable to predict whether higher capital requirements 
will be imposed and, if so, at what levels and on what schedules, it 
therefore cannot predict what effect such higher requirements may have on the 
Company and the Bank.
 
    BROKERED DEPOSITS.  The FDIA restricts the use of brokered deposits by 
certain depository institutions. Under the FDIA and applicable regulations, 
(i) a well capitalized institution may solicit and accept, renew or roll over 
any brokered deposit without restriction, (ii) an adequately capitalized 
institution may not (x) accept, renew or roll over any brokered deposit 
unless it has applied for and been granted a waiver of this prohibition by 
the FDIC or (y) solicit deposits by offering an effective yield that exceeds 
by more than 75 basis points the prevailing effective yields on insured 
deposits of comparable maturity in such institution's normal market area or 
in the market area in which such deposits are being solicited and (iii) an 
undercapitalized institution may not (x) accept, renew or roll over any 
brokered deposits or (y) solicit deposits by offering an effective yield that 
exceeds by more than 75 basis points the prevailing effective yields on 
insured deposits of comparable maturity in such institution's normal market 
area or in the market area in which such deposits are being solicited. The 
term "undercapitalized insured depository institution" is defined to mean any 
insured depository institution that fails to meet the minimum regulatory 
capital requirement prescribed by its appropriate federal banking agency. The 
FDIC may, on a case-by-case basis and upon application by an adequately 
capitalized insured depository institution, waive the restriction on brokered 
deposits upon a finding that the acceptance of brokered deposits does not 
constitute an unsafe or unsound practice with respect to such institution. 
Currently, the Bank is deemed to be a well capitalized insured depository 
institution for purposes of the restriction on the use of brokered deposits 
by such institutions. The bank historically has not relied upon brokered 
deposits as a source of funding and, at December 31, 1997, the Bank did not 
have any brokered deposits.
 
    TRANSACTIONS WITH AFFILIATES.  The FDIA restricts the range of 
permissible transactions between a member bank and an affiliated company. The 
Bank is subject to certain restrictions on loans to the Company, on 
investment in the stock or securities thereof, on the taking of such stock or 
securities as collateral for loans to any borrower, and on the issuance of a 
guarantee or letter of credit on behalf of the Company. The Bank also is 
subject to certain restrictions on most types of transactions with the 
Company, requiring that the terms of such transactions be substantially 
equivalent to terms to similar transactions with non-affiliates.
 
    ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. Section 24 
of the FDIA generally limits the activities and equity investments of 
FDIC-insured, state-chartered banks to those that are permissible for 
national banks. Under the FDIC's regulations dealing with equity investments, 
an insured state bank generally may not directly or indirectly acquire or 
retain any equity investment of a type, or in an amount, that is not 
permissible for a national bank. An insured state bank is not prohibited 
from, among other things, (i) acquiring or retaining a majority interest in a 
subsidiary, (ii) investing as a limited partner in a partnership the sole 
purpose of which is direct or indirect investment in the acquisition, 
rehabilitation or new construction of a qualified housing project, provided 
that such limited partnership investments may not exceed 2% of the Bank's 
total assets, (iii) acquiring up to 10% of the voting stock of a company that 
solely provides or reinsures directors', trustees', and officers' liability 
insurance coverage or bankers' blanket bond group insurance coverage for 
insured depository institutions, and (iv) acquiring or retaining the voting 
shares of a depository institution if certain requirements are met.
 
    COMMUNITY REINVESTMENT ACT.  The Federal Community Reinvestment Act 
("CRA") requires the FDIC and the Commissioner to evaluate the Bank's 
performance in helping to meet the credit needs of the community. The Bank 
has been designated as a "wholesale institution" for CRA purposes by the 
Commissioner and the FDIC. This designation reflects the nature of the 
Company's business as other than a retail financial institution and 
proscribes CRA review criteria applicable to the Bank's particular type of 
business. As a part of the CRA program, the Bank is subject to periodic 
examinations by the FDIC and the Commissioner, and maintains comprehensive 
records of its CRA activities for this 


                                       15

<PAGE>

purpose. Management believes the Bank is currently in compliance with all CRA 
requirements. The Bank has pending an application with the FDIC to become 
designated a "special purpose" institution, which designation would exempt 
the Bank from CRA review by the FDIC. The Bank would still be subject to 
review by the Commissioner.
 
    MASSACHUSETTS LAW--DIVIDENDS. Under Massachusetts law trust companies 
such as the Bank may pay dividends only out of "net profits" and only to the 
extent that such payments will not impair the Bank's capital stock and 
surplus account. If, prior to declaration of a dividend, the Bank's capital 
stock and surplus accounts do not equal at least 10.0% of its deposit 
liabilities, then prior to the payment of the dividend the Bank must transfer 
from net profits to its surplus account the amount required to make its 
surplus account equal to either (i) together with capital stock, 10.0% of 
deposit liabilities or, (ii) subject to certain adjustments, 100% of capital 
stock. These restrictions on the ability of the Bank to pay dividends to the 
Company may restrict the ability of the Company to pay dividends to its 
stockholders.
 
    REGULATORY ENFORCEMENT AUTHORITY.  The enforcement powers available to 
federal banking regulators include, among other things, the ability to assess 
civil money penalties, to issue cease-and-desist or removal orders and to 
initiate injunctive actions against banking organizations and 
institution-affiliated parties, as defined. In general, these enforcement 
actions may be initiated for violations of law and regulations and unsafe or 
unsound practices. Other actions or inactions may provide the basis for 
enforcement action, including misleading or untimely reports filed with 
regulatory authorities. Federal law requires, except under certain 
circumstances, public disclosure of final enforcement actions by the federal 
banking agencies.
 
    TRANSFER AGENCY.  In order to serve as transfer agent to its clients that 
execute transactions in publicly traded securities, the Company must register 
as a transfer agent under the Exchange Act. As a registered transfer agent, 
the Company is subject to certain reporting and recordkeeping requirements. 
Currently, management believes the Company is in compliance with these 
registration, reporting and recordkeeping requirements.
 
    REGULATION OF INVESTMENT COMPANIES.  Certain of the Company's mutual fund 
and unit investment trust clients are regulated as "investment companies" as 
that term is defined under the Investment Company Act of 1940, as amended 
(the "ICA"), and are subject to examination and reporting requirements 
applicable to the services provided by the Company.
 
    The provisions of the ICA and the regulations promulgated thereunder 
prescribe the type of institution which may act as a custodian of investment 
company assets, as well as the manner in which a custodian administers the 
assets in its custody. Because the Company serves as custodian for a number 
of its investment company clients, these regulations require, among other 
things, that the Company maintain certain minimum aggregate capital, surplus, 
and undivided profits. Additionally, arrangements between the Company and 
clearing agencies or other securities depositories must meet ICA requirements 
for segregation of assets, identification of assets and client approval. 
Future legislative and regulatory changes in the existing laws and 
regulations governing custody of investment company assets, particularly with 
respect to custodian qualifications, may have a material and adverse impact 
on the Company. Currently, management believes the Company is in compliance 
with all minimum capital and securities depository requirements. Further, the 
Company is not aware of any proposed or pending regulatory developments, 
which, if approved, would adversely affect the ability of the Company to act 
as custodian to an investment company.
 
    Investment companies are also subject to extensive recordkeeping and 
reporting requirements. These requirements dictate the type, volume and 
duration of the record-keeping undertaken by the Company, either in its role 
as custodian for an investment company or as a provider of administrative 
services to an investment company. Further, the Company must follow specific 
ICA guidelines when calculating the net asset value of a client mutual fund. 
Consequently, changes in the statutes or regulations governing recordkeeping 
and reporting or valuation calculations will affect the manner in which the 
Company conducts its operations.
 
    New legislation or regulatory requirements could have a significant 
impact on the information reporting requirements applicable to the Company's 
clients and may in the short term adversely affect the Company's ability to 
service those clients at a reasonable cost. Any failure by the Company to 
provide such support could cause the loss of customers and have a material 
adverse effect on the Company's financial results. Additionally, legislation 
or regulations may be proposed or enacted to regulate the Company in a manner 
which may adversely affect the Company's financial results.


                                       16

<PAGE>
 
ITEM 2. PROPERTIES.
 
    As of December 31, 1997, the Company leased three offices located in 
Boston, as well as foreign offices in Toronto, Canada and Dublin, Ireland for 
its offshore funds processing business.
 
    The following table provides certain summary information with respect to 
the principal properties that the Company leases:
 
<TABLE>
<CAPTION>
                                                                                     EXPIRATION
LOCATION                                       FUNCTION                SQ. FT.          DATE
---------------------------------  ---------------------------------  ---------  ------------------
<S>                                <C>                                <C>        <C>
200 Clarendon St., Boston, MA      Principal Executive Offices and      233,992  2007
                                   Operations Center                    
1 Exeter Plaza, Boston, MA         Training Center                       11,375  2001
24 Federal Street, Boston, MA      Operations Center                      3,658  Tenant at will
1 First Canadian Place, Toronto    Offshore Processing Center            13,674  2001
Earlsfort Terrace, Dublin          Offshore Processing Center             3,400  2000
</TABLE>
 
    In January 1997, the Company entered into an agreement to lease 4,116 
square feet at the 1 First Canadian Place location for a four-year term to 
commence in 1998 in order to expand its Toronto operations. In August 1997, 
the Company entered into an agreement to lease 3,735 square feet at the 
Earlsfort Terrace location for a two-year term to commence in 1998 in order 
to expand its Dublin operations. See Note 15 of the Notes to the Consolidated 
Financial Statements.
 
ITEM 3. LEGAL PROCEEDINGS.
 
    The Company is from time to time subject to claims arising in the 
ordinary course of business. While the outcome of any claim cannot be 
predicted with certainty, management does not expect these matters, 
individually or in the aggregate, to have a material adverse effect on the 
results of operations and financial condition of the Company.

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

  No matters were submitted to a vote of the Company's security holders 
during the quarter ended December 31, 1997.
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS.
 
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
 
    The Company's Common Stock is currently included in The Nasdaq National 
Market under the symbol IFIN. The following table sets forth the range of 
quarterly high and low bid quotations for the Company's Common Stock as 
reported by NASDAQ. The quotations represent interdealer quotations without 
adjustment for retail markups, markdowns or commissions, and may not 
necessarily represent actual transactions.
 
<TABLE>
<CAPTION>
1996                                    HIGH BID    LOW BID
--------------------------------------  ---------  ---------
<S>                                     <C>        <C>
First Quarter.........................  $  23.125  $  20.500
Second Quarter........................  $  23.500  $  21.000
Third Quarter.........................  $  26.000  $  20.875
Fourth Quarter........................  $  28.000  $  25.750
</TABLE>
 
<TABLE>
<CAPTION>
1997                                    HIGH BID    LOW BID
--------------------------------------  ---------  ---------
<S>                                     <C>        <C>
First Quarter.........................  $  35.125  $  27.500
Second Quarter........................  $  50.000  $  30.750
Third Quarter.........................  $  48.250  $  41.250
Fourth Quarter........................  $  51.250  $  41.250
</TABLE>
 
    As of February 17, 1998, there were approximately 1,101 stockholders of 
record.


                                       17

<PAGE>

DIVIDENDS
 
    The Company currently intends to retain the majority of future earnings 
to fund the development and growth of its business. The Company's ability to 
pay dividends on the Common Stock depends on the receipt of dividends from 
Investors Bank & Trust Company. In addition, the Company may not pay 
dividends on its Common Stock if it is in default under certain agreements 
which the Company entered into in connection with the sale of the 9.77% 
Capital Securities. See "Management Discussion and Analysis of Financial 
Condition and Results of Operations--Capital Resources." Any dividend 
payments by Investors Bank & Trust Company are subject to certain 
restrictions imposed by the Massachusetts Commissioner of Banks. See 
"Business--Regulation and Supervision." Subject to regulatory requirements, 
Investors Bank & Trust Company expects to pay an annual dividend to the 
Company, which the Company expects to pay to its stockholders, currently 
estimated to be in an amount equal to $.12 per share of outstanding Common 
Stock (approximately $776,438 based upon 6,470,313 shares outstanding as of 
December 31, 1997). The Company expects to declare and pay such dividend 
ratably on a quarterly basis.


                                       18

<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA.
 
    Except as discussed below, the selected financial data presented below 
have been derived from the Company's audited financial statements. This data 
should be read in conjunction with "Management's Discussion and Analysis of 
Financial Condition and Results of Operations," the Company's Consolidated 
Financial Statements and Notes thereto, and other financial information 
appearing elsewhere in this Report.
 
<TABLE>
<CAPTION>                     
                                                                           FOR THE TWO 
                                                                           MONTHS ENDED            FOR THE YEAR
                              FOR THE YEAR ENDED OCTOBER 31,               DECEMBER 31,         ENDED DECEMBER 31,
                              ------------------------------------------------------------------------------------------
                                  1993           1994          1995(1)         1995            1996            1997
                              -------------  -------------  -------------  -------------  --------------  --------------
                                                    (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                           <C>            <C>            <C>            <C>            <C>             <C>
Statement of Income Data:
Net interest income.........  $       4,494  $       4,778  $       5,870   $     1,966   $       17,944  $       26,173
Noninterest income..........         32,967         43,049         51,562         8,085           56,634          76,702
Gain/(loss) on sale of
  investment securities.....             48             --             --            --               (2)            114
                              -------------  -------------  -------------  -------------  --------------  --------------
Net operating revenues......         37,509         47,827         57,432        10,051           74,576         102,989
Operating expenses..........         33,939         42,503         50,224         8,481           61,935          82,649
                              -------------  -------------  -------------  -------------  --------------  --------------
Income before income
  taxes.....................          3,570          5,324          7,208         1,570           12,641          20,340
Income taxes................          1,211          1,863          2,800           670            4,867           7,323
Minority interest expense...             --             --             --            --               --           1,437
                              -------------  -------------  -------------  -------------  --------------  --------------
Net income..................  $       2,359  $       3,461  $       4,408   $       900   $        7,774  $       11,580
                              -------------  -------------  -------------  -------------  --------------  --------------
                              -------------  -------------  -------------  -------------  --------------  --------------
Per Share Data:
Basic earnings per share....                                                $      0.14   $         1.21  $         1.80
                                                                           -------------  --------------  --------------
                                                                           -------------  --------------  --------------
Diluted earnings per
  share.....................                                                $      0.14   $         1.20  $         1.75
                                                                           -------------  --------------  --------------
                                                                           -------------  --------------  --------------
Average Balance Sheet Data:
Interest earning assets.....  $      87,965  $      94,351  $     106,130   $   219,775   $      575,662  $    1,167,361
Total assets................        109,477        116,810        128,174       249,064          628,893       1,236,519
Total deposits..............         99,523        102,664        106,446       197,013          377,219         594,768
Common stockholders'
  equity....................          9,022         11,779         16,119        34,000           56,137          68,370
Selected Financial Ratios:
Return on equity (2)........          26.15%         29.38%         27.35%        15.11%           13.85%          16.94%
Return on assets (2)........           2.15%          2.96%          3.44%         2.12%            1.24%           0.94%
Common equity as % of total
  assets....................           8.24%         10.08%         12.58%        16.57%            6.41%           5.13%
Dividend payout ratio (3)...           2.54%          1.73%          1.36%         0.00%            2.49%           4.45%
Tier 1 capital ratio (4)....          37.08%         42.53%         37.62%        62.10%           24.67%          29.00%
Noninterest income as % of
  net operating income......          87.89%         90.01%         89.78%        80.44%           75.94%          74.48%
Nonperforming assets as % of
  total assets..............           0.00%          0.00%          0.00%         0.00%            0.00%           0.00%
Allowance for loan losses as
  % of total loans..........           0.34%          0.26%          0.26%         0.15%            0.15%           0.18%
Other Statistical Data:
Assets processed at end of
  period (5)................  $  61,239,242  $  72,418,449  $  91,099,976   $94,208,228   $  122,563,401  $  139,418,241
Employees at end of
  period....................            522            678            671           674              792           1,009
</TABLE>
 
------------------------
 
(1) Noninterest income for the year ended October 31, 1995 includes the
    recognition of net proceeds of $2,572,000 from the assignment to a third
    party of asset administration rights associated with $5 billion of unit
    investment trust assets.
 
(2) Ratios for the two months ended December 31, 1995 have been annualized. The
    ratios for the year ended October 31, 1995 include the effect of the unit
    investment trust transaction described in (1) above. Without the earnings
    associated with this transaction, return on equity and return on assets for
    the year ended October 31, 1995 would have been 18.10% and 2.28%,
    respectively.
 
(3) The Company intends to retain the majority of future earnings to fund
    development and growth of its business but the Company currently expects to
    pay cash dividends at an annualized rate of $.12 per share, subject to
    receipt of a like dividend from the Bank and further subject to regulatory
    requirements.
 
(4) Tier I capital consists of the sum of common stockholders' equity and
    non-cumulative perpetual preferred stock minus all intangible assets (other
    than certain qualifying goodwill) and excess deferred tax assets.
 
(5) Assets processed is the total dollar value of financial assets on the
    reported date for which the Company provides one or more of the following
    services: custody, multicurrency accounting, institutional transfer agency,
    performance measurement, foreign exchange, securities lending and mutual
    fund administration and investment advisory services.
 
                                       19
<PAGE>



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
    The following discussion and analysis of the financial condition and 
results of operations of the Company should be read in conjunction with the 
Company's Consolidated Financial Statements and related notes, which are 
included elsewhere in this Report. The Company, through its wholly owned 
subsidiary, Investors Bank & Trust Company, provides global custody, 
multicurrency accounting, institutional transfer agency, performance 
measurement, foreign exchange, securities lending, mutual fund administration 
and investment advisory services to a variety of financial asset managers, 
including 53 mutual fund complexes, investment advisors, banks and insurance 
companies. The Company provides financial asset administration services for 
assets that totaled approximately $139 billion at December 31, 1997, 
including approximately $9 billion of assets based outside the United States. 
The Company also engages in private banking transactions, including secured 
lending and deposit accounts.
 
    The Bank acts as investment advisor to the Merrimac Master Portfolio and 
the Merrimac Funds, master-feeder investment companies (the "Funds"). 
Currently, the Funds have two operating master funds, the Merrimac Cash 
Portfolio and the Merrimac Treasury Portfolio, and three operating feeder 
funds, the Merrimac Cash Fund, the Merrimac Global Cash Fund, and the 
Merrimac Treasury Fund, with assets totaling over $1.4 billion at December 
31, 1997. The Company has engaged The Bank of New York to act as sub-advisor 
to manage the investments of the Merrimac Cash Portfolio and has engaged 
Aeltus Investment Management, Inc. to act as sub-advisor to manage the 
investments of the Merrimac Treasury Portfolio. In addition to acting as 
advisor to the Funds, the Bank has entered into agreements to provide 
custody, fund accounting, administration, transfer agency and certain other 
related services to the Funds. The Merrimac feeder funds offer shares only to 
institutions and other "accredited investors" (as that term is defined in 
Rule 501(a) under the Securities Act of 1933) and invest all of their assets 
in the Merrimac master funds. The Funds may add additional feeder funds 
and/or master funds in the future.
 
    On January 31, 1997, the Company completed the issuance and sale of 
$25,000,000 in 9.77% Capital Securities. The Capital Securities were issued 
by Investors Capital Trust l, a Delaware statutory business trust sponsored 
by the Company. The capital raised in the offering, along with existing 
capital and earnings generated in the future, will be used to support the 
Company's balance sheet growth. The Capital Securities qualify as Tier I 
capital under the capital guidelines of the Federal Reserve. Under current 
Federal Reserve guidelines, no more than 25% of the Company's Tier 1 capital 
may comprise Capital Securities and other capital securities and cumulative 
preferred stock of the Company. In September 1997 the Company completed an 
exchange offer pursuant to which all outstanding capital securities were 
exchanged for substantially identical capital securities registered under the 
Securities Act of 1933.
 
    The Company's current largest client, Eaton Vance, accounted for 14%, 
11%, 10%, and 10% of the Company's net operating revenues for the year ended 
October 31, 1995, for the Transition Period, and for the years ended December 
31, 1996 and 1997, respectively. The Company believes its relationship with 
Eaton Vance is good and expects it to continue. The Company's agreements with 
mutual funds managed by Eaton Vance, pursuant to which the Company provides 
custody and fund accounting services, extend through August 2000 and continue 
thereafter until terminated by either party upon sixty days prior notice. If 
a majority of noninterested trustees of a fund determines that the 
performance of the Company under any such agreement has been unsatisfactory 
or adverse to the interests of the fund's shareholders, or that the terms of 
the agreement are no longer consistent with publicly available industry 
standards, the Company shall have 60 days after receipt of written notice to 
such effect to (i) correct its performance or (ii) renegotiate such terms. If 
such corrective action or renegotiation is not satisfactory to such trustees, 
such agreement may be terminated on sixty days prior notice. There have been 
no requests for corrective action or renegotiation to date pursuant to these 
contract clauses.

    The Company derives its revenues from financial asset administration 
services and private banking transactions. Although interest income and 
noninterest income are reported separately for financial statement 
presentation purposes, the Company's clients view the pricing of the 
Company's asset administration and banking service offerings on a bundled 
basis. In establishing a fee structure for a specific client, management 
analyzes the expected revenue and related expenses, as opposed to separately 
analyzing fee income and interest income and related expenses for each from 
such relationship. Accordingly, management believes net operating revenue 
(net interest income plus noninterest income) and net income are the most 
meaningful measures of financial results. Revenue generated from asset 
administration and other fees and interest income increased 38% from 
$74,576,000 for the year ended December 31, 1996 to $102,989,000 for the year 
ended December 31, 1997.
 
    Noninterest income consists primarily of fees for financial asset 
administration and is principally derived from custody, multicurrency 
accounting, transfer agency and administration services for financial asset 
managers and the assets they control. The Company's clients pay fees based on 
the volume of assets under custody, the number of securities held and 
portfolio transactions, income collected and whether other value-added 
services such as foreign exchange, securities 


                                      20
<PAGE>


lending and performance measurement are needed. Asset-based fees are usually 
charged on a sliding scale. As such, when the assets in a portfolio under 
custody grow as a result of changes in market values or cash inflows, the 
Company's fees may be a smaller percentage of those assets. Fees for 
individually managed accounts, such as custodial, trust and portfolio 
accounting services for individuals, investment advisors, private trustees, 
financial planners, other banks and fiduciaries, and other institutions are 
also included in noninterest income.
 
    Net interest income represents the difference between income generated 
from interest-earning assets and expense on interest-bearing liabilities. 
Interest-bearing liabilities are generated by the Company's clients who, in 
the course of their financial asset management, generate cash balances which 
they deposit on a short-term basis with the Company. The Company invests 
these cash balances and remits a portion of the earnings on these investments 
to its clients. The Company's share of earnings from these investments is 
viewed as part of the total package of compensation paid to the Company from 
its clients for performing asset administration services.
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
 
    From time to time, information provided by the Company, statements made 
by its employees or information included in its filings with the Securities 
and Exchange Commission (including this Form 10-K) may contain statements 
which are not historical facts, so-called "forward-looking statements," which 
involve risks and uncertainties. Forward looking statements in this 10-K 
include certain statements regarding capital ratios and liquidity. The 
Company's actual future results may differ significantly from those stated in 
any forward-looking statements. Factors that may cause such differences 
include, but are not limited to, the factors discussed below. Each of these 
factors, and others, are discussed from time to time in the Company's filings 
with the Securities and Exchange Commission.
 
    The Company's future results may be subject to substantial risks and 
uncertainties. Because certain fees charged by the Company for its services 
are based on the market values of assets processed, such fees and the 
Company's quarterly and annual operating results are sensitive to changes in 
interest rates, declines in stock market values, and investors seeking 
alternatives to the investment offerings of the Company's clients. Also, the 
Company's interest-related services, along with the market value of the 
Company's investments, may be adversely affected by rapid changes in interest 
rates. In addition, many of the Company's client engagements are, and in the 
future are likely to continue to be, terminable upon 60 days notice.
 
    The Company relies on certain intellectual property protections to 
preserve its intellectual property rights. Any invalidation of the Company's 
intellectual property rights or lengthy and expensive defense of those rights 
could have a material adverse effect on the Company. In addition the Year 
2000 Issue discussed below may affect the Company's operations. The segment 
of the financial services industry in which the Company is engaged is 
extremely competitive. Certain current and potential competitors of the 
Company are more established and benefit from greater market recognition and 
have substantially greater financial, development and marketing resources 
than the Company.
 
    The Company's quarterly and annual operating results are affected by a 
wide variety of factors that could materially adversely affect revenues and 
profitability, including: the timing of the commencement or termination of 
client engagements, the rate of net inflows and outflows of investor funds in 
the debt and equity-based investment vehicles offered by the Company's 
clients, the introduction and market acceptance of new services by the 
Company and changes or anticipated changes in economic conditions. Because 
the Company's operating expenses are relatively fixed, any unanticipated 
shortfall in revenues in a specified period may have an adverse impact on the 
Company's results of operations for that period. As a result of the foregoing 
and other factors, the Company may experience material fluctuations in future 
operating results on a quarterly or annual basis which could materially and 
adversely affect its business, financial condition, operating results and 
stock price.
 
IMPACT OF THE YEAR 2000 ISSUE
 
    The Year 2000 Issue is the result of computer programs being written 
using two digits rather than four to define the applicable year. Any of the 
Company's computer programs that have date-sensitive software may recognize a 
date using "00" as the year 1900 rather than the year 2000. This could result 
in a system failure or miscalculations causing disruptions of operations, 
including, among other things, a temporary inability to process transactions, 
send invoices, or engage in similar normal business activities.
 
    In late 1997 the Company, with the assistance of an outside consultant,
completed a detailed assessment of the Company's Year 2000 compliance status. As
part of the assessment process, the Company also developed project plans for
application renovation and testing. Based on this assessment, the Company
determined that it will be required to modify or upgrade portions of its
software so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company presently believes that with modifications to, or
upgrades of, existing software, the Year 2000 Issue can be

                                      21
<PAGE>


mitigated. However, if such modifications and upgrades are not made, or are 
not completed in a timely manner, the Year 2000 Issue could have a material 
impact on the operations of the Company.
 
    The Company has initiated formal communications with all of its 
significant suppliers and large customers to determine the extent to which 
the Company is vulnerable to those third parties' failure to remediate their 
own Year 2000 Issue. The Company's total Year 2000 project cost and estimates 
to complete include the estimated costs and time associated with the impact 
of a third party's Year 2000 Issue, and are based on presently available 
information. However, there can be no guarantee that the systems of other 
companies on which the Company's systems rely will be timely converted, or 
that a failure to convert by another company, or a conversion that is 
incompatible with the Company's systems, would not have a material adverse 
effect on the Company.
 
    The Company will utilize both internal and external resources to modify 
or upgrade existing software and to test such software for Year 2000 
compliance. The Company plans to complete the Year 2000 project, including 
all testing, by December 31, 1998. The total remaining cost of the Year 2000 
project is estimated at $1,600,000, which will be expensed as incurred over 
the next twelve months, and is being funded through operating cash flows. 
These amounts are not expected to have a material effect on the Company's 
results of operations. To date, the Company has incurred and expensed 
approximately $165,000 related to the assessment of, and preliminary 
remediation efforts in connection with, its Year 2000 project and the 
development of a remediation plan.
 
    The costs of the project and the date on which the Company plans to 
complete the Year 2000 modifications are based on management's best 
estimates, which were derived utilizing numerous assumptions of future events 
including the continued availability of certain resources, third party 
modification plans and other factors. However, there can be no guarantee that 
these estimates will be achieved and actual results could differ materially 
from those plans. Specific factors that might cause such material differences 
include, but are not limited to, the availability and cost of personnel 
trained in this area, the ability to locate and correct all relevant computer 
code, the compatibility of third-party interfaces and similar uncertainties.
 
STATEMENT OF OPERATIONS
 
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996
 
NONINTEREST INCOME
 
    Noninterest income increased $20,184,000 to $76,816,000 for the year 
ended December 31, 1997 from $56,632,000 for the year ended December 31, 
1996. Noninterest income consists of the following items:

<TABLE>
<CAPTION>
                                                      FOR THE YEAR ENDED
                                                          DECEMBER 31,
                                                -----------------------------------
                                                  1996       1997        CHANGE
                                                ---------  ---------  -------------
                                                    (DOLLARS IN
                                                     THOUSANDS)
<S>                                             <C>        <C>        <C>
Asset administration fees.....................  $  56,076  $  75,873           35%
Computer service fees.........................        482        468           (3)
Other operating income........................         76        361          375
Net gain/(loss) on sale of securities.........         (2)       114         --
                                                ---------  ---------
Total Noninterest Income......................  $  56,632  $  76,816           36%
                                                ---------  ---------
                                                ---------  ---------
</TABLE>
 
    Asset administration fees increased due principally to higher levels of 
assets processed. The Company earns such fees on assets processed by the 
Company on behalf of a variety of financial asset managers. Assets processed 
is the total dollar value of financial assets on the reported date for which 
the Company provides one or more of the following services: global custody, 
multicurrency accounting, institutional transfer agency, performance 
measurement, foreign exchange, securities lending, mutual fund administration 
and investment advisory services. Total assets processed increased to $139 
billion at December 31, 1997 from $122 billion at December 31, 1996. Of the 
$17 billion net increase in assets processed from December 31, 1996 to 
December 31, 1997, approximately 24% of the increase reflects assets 
processed for new clients, and the remainder of the increase reflects growth 
of assets processed for existing clients, offset in part by the assets of 
clients no longer serviced by the Company. Also contributing to the growth in 
asset administration fees was the expansion of relationships with existing 
clients. The largest component of asset administration fees is asset based 
fees, which increased between periods due to the previously mentioned 
increase in assets processed. Another significant portion of the increase in 
asset administration fees resulted from the Company's success in marketing 
ancillary services such as securities lending, foreign exchange and advisory 
services.

                                      22
<PAGE>


    Computer service fees consist of amounts charged by the Company for data 
processing services related to individual accounts. Other operating income 
consists of dividends received relating to the Federal Home Loan Bank of 
Boston ("FHLBB") stock investment and miscellaneous transaction-oriented 
private banking fees. The increase in other operating income was due entirely 
to the Company's increased investment in FHLBB stock.
 
OPERATING EXPENSES
 
    Total operating expenses increased by $20,714,000 to $82,649,000 for the
year ended December 31, 1997 compared to $61,935,000 for the year ended December
31, 1996. The components of operating expenses were as follows:

<TABLE>
<CAPTION>
                                                           FOR THE YEAR ENDED
                                                               DECEMBER 31,
                                                   -----------------------------------
                                                     1996       1997        CHANGE
                                                   ---------  ---------  -------------
                                                       (DOLLARS IN
                                                        THOUSANDS)
<S>                                                <C>        <C>        <C>
Compensation and benefits........................  $  37,502  $  50,043           33%
Technology and telecommunications................      7,791     10,484           35
Transaction processing services..................      5,683      7,999           41
Occupancy........................................      4,283      4,381            2
Depreciation and amortization....................      1,502      1,930           28
Travel and sales promotion.......................      1,158      1,586           37
Professional fees................................      1,115      1,564           40
Insurance........................................        853        735          (14)
Other operating expenses.........................      2,048      3,927           92
                                                   ---------  ---------
Total Operating Expenses.........................  $  61,935  $  82,649           33%
                                                   ---------  ---------
                                                   ---------  ---------
</TABLE>
 
    Compensation and benefits expense increased by $12,541,000 or 33% from 
period to period due to several factors. The average number of employees 
increased 29% to 939 at December 31, 1997 from 729 at December 31, 1996. This 
increase relates primarily to the increase in client relationships and to the 
expansion of existing client relationships during the period. In addition, 
compensation expense related to the Company's management incentive plans 
increased $799,000 between periods because of the increase in earnings 
subject to incentive payments in 1997 compared to 1996. Benefits, including 
payroll taxes, group insurance plans, retirement plan contributions and 
tuition reimbursement, increased by $984,000 for the year ended December 31, 
1997 from the same period in 1996. The increase was due principally to 
increased payroll taxes attributable to the increase in compensation expense.
 
    Technology and telecommunications expense consists of operating lease 
payments for microcomputers, fees charged by Electronic Data Systems for 
mainframe data processing, telephone expense, software maintenance fees and 
licenses, optical imaging and contract programming fees. Increased hardware, 
software and telecommunications expenses needed to support the growth in 
assets processed accounted for $1,641,000 of the increase between periods. 
Also contributing was the Company's increased use of contract programmers to 
perform information systems development projects, which accounted for 
$644,000 of the increase. License fees on software used to generate automated 
financial statements for Company clients as a part of its expanded mutual 
fund administration services accounted for $408,000 of the increase.
 
    Transaction processing services expense consists of volume-related 
expenses including subcustodian fees and external contract services. The 
increase in this expense relates primarily to an increase in subcustodian 
fees and pricing services, driven by the growth in assets processed. The 
Company's decision to outsource its mailroom and photocopy facility in 
February of 1996 contributed to $325,000 of the increase from year to year.
 
    Depreciation and amortization expense increased $428,000 to $1,930,000 
for the year ended December 31, 1997 from $1,502,000 for the year ended 
December 31, 1996. This increase resulted from the purchase of furniture and 
equipment related to the Company's move to new office space in late 1996 and 
1997.
 
    Travel and sales promotion expense consists of expenses incurred by the 
sales force, client management staff and other employees in connection with 
making sales calls on potential clients, traveling to existing client sites 
and the Company's foreign subsidiaries, and attending industry conferences. 
This expense increased $428,000 to $1,586,000 for the year ended December 31, 
1997 from $1,158,000 for the year ended December 31, 1996 due primarily to 
increased travel to the foreign subsidiaries.
 
    Professional fees increased $449,000 to $1,564,000 for the year ended
December 31, 1997 from $1,115,000 for the year ended December 31, 1996. This
increase resulted primarily from an increase in consulting fees relating to

                                       23
<PAGE>


performing technical development work along with additional audit fees related
to compliance with the Federal Deposit Insurance Corporation Improvement Act of
1991.
 
    Insurance expense decreased by $118,000 between the periods due to the
renegotiation of the Company's premiums and coverages for errors and omissions
liability, directors and officers liability and blanket bond during 1996.
 
    Other operating expenses increased $1,879,000 to $3,927,000 for the year
ended December 31, 1997 from $2,048,000 for the year ended December 31, 1996.
Other operating expenses include fees for office supplies, recruiting costs,
temporary help and various fees assessed by the Massachusetts Banking
Commission. Recruiting costs and temporary help accounted for $770,000 of the
increase; this increase relates to the tight labor market caused by low
unemployment in Massachusetts in 1997. Fees assessed by the Massachusetts
Banking Commission increased by $278,000 due to the growth in the total assets
of the Bank and a change in the assessment base. The remainder of the increase
relates to growth in assets processed.
 
NET INTEREST INCOME
 
    Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities and changes in
interest rates for the year ended December 31, 1997 compared to the year ended
December 31, 1996.
 
<TABLE>
<CAPTION>
                                                  CHANGE     CHANGE
                                                  DUE TO     DUE TO
                                                  VOLUME      RATE        NET
                                                 ---------  ---------  ---------
<S>                                              <C>        <C>        <C>
                                                     (DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Fed funds sold and
  interest-earning deposits....................  $   1,096  $      20  $   1,116
Investment securities..........................     35,563       (564)    34,999
Loans..........................................        514       (270)       244
                                                 ---------  ---------  ---------
Total interest-earning assets..................     37,173       (814)    36,359
                                                 ---------  ---------  ---------
INTEREST-BEARING LIABILITIES
Deposits.......................................      8,768        671      9,439
Borrowings.....................................     18,351        405     18,756
                                                 ---------  ---------  ---------
Total interest-bearing liabilities.............     27,119      1,076     28,195
                                                 ---------  ---------  ---------
Change in net interest income..................  $  10,054  $  (1,890) $   8,164
                                                 ---------  ---------  ---------
                                                 ---------  ---------  ---------
</TABLE>
 
    Net interest income increased $8,164,000 or 45% to $26,173,000 for the 
year ended December 31, 1997 from $18,009,000 for the 1996 period. This net 
increase resulted from an increase in interest income of $36,359,000 offset 
by an increase in interest expense of $28,195,000. The net impact of the 
above changes was an 89 basis point decrease in net interest margin.
 
    The increase in interest income resulted primarily from a higher level of 
interest earning assets. The Company's average assets for the year ended 
December 31, 1997 increased $607,626,000 or 97% compared to the year ended 
December 31, 1996. This growth primarily resulted from an increase in average 
interest earning assets of $591,699,000.
 
    Interest expense increased $28,195,000 due primarily to the higher level 
of deposits and borrowings and to a lesser extent to an increase in the 
interest rate paid by the Company. The average rate paid on deposits and 
short-term borrowings increased from 4.83% to 5.03% between periods.
 
INCOME TAXES
 
    The Company's earnings were taxed on the federal level at 35% for the 1997
and 1996 periods. State taxes on the gross earnings from the Company's portfolio
of investment securities, held by a wholly-owned subsidiary, were assessed at
the tax rate for Massachusetts securities corporations of 1.32%. State taxes on
the remainder of the Company's taxable income were assessed at the tax rate for
Massachusetts banks of 11.32%. The provision for income taxes for the year ended
December 31, 1997 increased by $2,456,000 over the 1996 provision. The overall
effective tax 

                                        24
<PAGE>


rate decreased to 36% for the year ended December 31, 1997, from 38.5% for 
the year ended December 31, 1996. The decrease in the effective tax rate is 
due to the Company's investment in municipal securities in the first quarter 
of 1997.
 
    COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995
 
NONINTEREST INCOME
 
    Noninterest income increased $4,705,000 to $56,632,000 for the year ended
December 31, 1996 from $51,927,000 for the year ended December 31, 1995.
Noninterest income consists of the following items:

<TABLE>
<CAPTION>
                                                            FOR THE YEAR ENDED
                                                                DECEMBER 31,
                                                    -----------------------------------
                                                      1995       1996        CHANGE
                                                    ---------  ---------  -------------
                                                        (DOLLARS IN
                                                         THOUSANDS)
<S>                                                 <C>        <C>        <C>
Asset administration fees.........................  $  48,779  $  56,076       15%
Proceeds from assignment of UIT servicing, net....      2,572     --           --
Computer service fees.............................        501        482       (4)
Other operating income............................         75         76        1
Net loss on sale of securities....................         --         (2)      --
                                                    ---------  ---------
Total Noninterest Income..........................  $  51,927  $  56,632        9%
                                                    ---------  ---------
                                                    ---------  ---------
</TABLE>
 
    Asset administration fees increased due principally to higher levels of 
assets processed. Total assets processed increased to $122 billion at 
December 31, 1996 from $94 billion at December 31, 1995. Of the $28 billion 
net increase in assets processed from December 31, 1995 to December 31, 1996, 
approximately 24% of the increase reflects assets processed for new clients, 
and the remainder of the increase reflects growth of assets processed for 
existing clients and improved methods for tracking the amount of assets 
processed, offset in part by the assets of clients no longer serviced by the 
Company. The remainder of the growth in asset administration fees was due to 
the net expansion of relationships with existing clients and increased use of 
the Company's cash management and foreign exchange services. In addition, 
because the Company is now able to accept deposits that had been historically 
directed to other financial institutions due to CEBA asset growth 
restrictions, the Company has experienced a shift in the mix of compensation 
received from its clients. See "Overview" in this Item 7. A larger portion of 
the Company's compensation from clients is now in the form of interest income 
generated from client deposits, resulting in a decrease to asset 
administration fees and a related increase in net interest income. The growth 
in asset administration fees was also offset by the transfer of unit 
investment trust assets discussed below. The administration of  these assets 
accounted for approximately $1,491,000 in asset administration fees in the 
year ended December 31, 1995.
 
    Unit investment trust ("UIT") assets processed by the Company have decreased
over the last five years, a reflection of declining investor demand for this
type of unmanaged investment product. Declining asset levels led one client,
Merrill Lynch, to consolidate its asset administration service providers, and
it agreed, effective March 1, 1995, to pay the Company to assign the Company's
servicing rights to the Bank of New York Company. The Company recognized
proceeds of $2,572,000, net of expenses, resulting from the assignment of the
rights to service approximately $5.0 billion of the client's unit investment
trust assets. The Company has made the strategic decision to focus its marketing
and processing efforts on mutual funds and other pooled investments which
typically experience higher growth in asset levels and can utilize a wider
variety of services provided by the Company, as compared to unit investment
trusts. See Note 11 of Notes to Consolidated Financial Statements.

    Other operating income consists of miscellaneous private banking fees for
safe deposit and checking account services.

                                      25
<PAGE>
 

OPERATING EXPENSES
 
    Total operating expenses increased by $10,672,000 to $61,935,000 for the
year ended December 31, 1996 compared to $51,263,000 for the year ended December
31, 1995. The components of operating expenses were as follows:

<TABLE>
<CAPTION>
                                                           FOR THE YEAR ENDED
                                                               DECEMBER 31,
                                                   -----------------------------------
<S>                                                <C>        <C>        <C>
                                                     1995       1996        CHANGE
                                                   ---------  ---------  -------------
 
<CAPTION>
                                                       (DOLLARS IN
                                                        THOUSANDS)
<S>                                                <C>        <C>        <C>
Compensation and benefits........................  $  32,899  $  37,502           14%
Technology and telecommunications................      6,476      7,791           20
Transaction processing services..................      2,765      5,683          106
Occupancy........................................      4,163      4,283            3
Depreciation and amortization....................      1,388      1,502            8
Travel and sales promotion.......................        785      1,158           48
Professional fees................................        774      1,115           44
Insurance........................................      1,078        853          (21)
Other operating expenses.........................        935      2,048          119
                                                   ---------  ---------
Total Operating Expenses.........................  $  51,263  $  61,935           21%
                                                   ---------  ---------
                                                   ---------  ---------
</TABLE>
 
    Compensation and benefits increased by $4,603,000 or 14% from period to 
period due to several factors. The number of average employees increased 8% 
to 729 at December 31, 1996 from 677 at December 31, 1995. In addition, 
compensation expense related to the Company's management incentive plan 
increased because of the increase in earnings subject to incentive in 1996 
compared to 1995. Benefits, including payroll taxes, group insurance plans, 
retirement plan contributions and tuition reimbursement, increased $590,000 
for the year ended December 31, 1996 from the same period in 1995. The 12% 
increase was due to increased payroll taxes attributable to the increase in 
compensation expense and a decrease in the discount rate used to calculate 
the expense associated with the defined benefit retirement plan.
 
    Technology and telecommunications expense consists of lease payments for 
microcomputers, fees charged by Electronic Data Systems for mainframe data 
processing, telephone expense, software maintenance fees and licenses, and 
contract programming fees. The expense varies with the level of assets 
processed by the Company. The growth in assets processed between periods 
contributed to $871,000 increase between periods. Also contributing to the 
increase was the Company's continued use of contract programmers which 
accounted for $444,000 of the increase between periods.
 
    The increase in transaction processing expense relates primarily to an 
increase in subcustodian fees and pricing services, driven by the growth in 
assets processed. This expense increased $2,918,000 to $5,683,000 for the 
year ended December 31, 1996 from $2,765,000 for the year ended December 31, 
1995. This increase resulted from the increase in foreign assets processed, 
which are subject to higher subcustodian fees, from $6.4 billion at December 
31, 1995 to $9.3 billion at December 31, 1996, and from the movement by 
clients into emerging markets which have higher costs due to structural 
inefficiencies. These costs are passed through to clients and contribute to 
the increase in asset administration fees. The outsourcing of the photocopy 
service commenced in 1996 and accounted for approximately $240,000 of the 
increase between periods. Fees for daily market pricing data which vary with 
the level of assets processed, increased by $119,000 during the period.
 
    Travel and sales promotion expense increased $373,000 to $1,158,000 for 
the year ended December 31, 1996 from $785,000 for the year ended December 
31, 1995 due primarily to increased travel to the foreign subsidiaries.
 
    Professional fees increased $341,000 to $1,115,000 for the year ended 
December 31, 1996 from $774,000 for the year ended December 31, 1995. Legal 
fees which were incurred in connection with the Company's initial compliance 
with year-end related filings with the Securities and Exchange Commission and 
the change of the Company's fiscal year contributed to this increase.
 
    Insurance expense decreased by $225,000 or 21% between the periods due to
the renegotiation of the Company's coverage for errors and omissions liability,
directors and officers liability and blanket bond.

                                       26
<PAGE>
 

    Other operating expenses increased $1,113,000 to $2,048,000 for the year
ended December 31, 1996 from $935,000 for the year ended December 31, 1995.
Other operating expenses are comprised of office supplies, recruiting costs,
temporary help, and Delaware excise tax. Expenses such as office supplies vary
with staffing levels. The Delaware excise tax is based on the number of shares
authorized for issuance by the Company. This tax was imposed on the Company
after its formation as a Delaware Company in June 1995 and accounts for $180,000
of the increase between periods. Approximately $797,000 of the increase between
periods related to recruiting costs and temporary help caused by a tight labor
market resulting from a period of low unemployment in Massachusetts. The
remainder of the increase resulted from the increases in assets processed and
staffing levels.
 
NET INTEREST INCOME
 
    Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes
in the volume of interest-earning assets or interest-bearing liabilities and
changes in interest rates for the year ended December 31, 1996 compared to
December 31, 1995.
 
<TABLE>
<CAPTION>
                                               CHANGE      CHANGE
                                               DUE TO      DUE TO
                                               VOLUME       RATE         NET
                                              ---------  -----------  ---------
<S>                                           <C>        <C>          <C>
                                                   (DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Fed funds sold and
interest-earning deposits...................  $   1,256   $     (45)  $   1,211
Investment securities.......................     25,876         491      26,367
Loans.......................................      1,341        (250)      1,091
                                              ---------         ---   ---------
Total interest-earning assets...............     28,473         196      28,669
                                              ---------         ---   ---------
INTEREST-BEARING LIABILITIES
Deposits....................................      8,249         180       8,429
Borrowings..................................      9,236         (41)      9,195
                                              ---------         ---   ---------
Total interest-bearing liabilities..........     17,485         139      17,624
                                              ---------         ---   ---------
Change in net interest income...............  $  10,988   $      57   $  11,045
                                              ---------         ---   ---------
                                              ---------         ---   ---------
</TABLE>
 
    Net interest income increased $11,045,000 or 159% to $18,009,000 for the
year ended December 31, 1996 from $6,964,000 for the 1995 period. This net
increase resulted from an increase in interest income of $28,669,000 offset by
an increase in interest expense of $17,624,000. The net impact of the above
changes was a 240 basis point decrease in net interest margin.
 
    The increase in interest income resulted primarily from a higher level of
interest earning assets. Prior to the Spin-Off Transaction, the Company was
subject to a 7% annual asset growth cap under CEBA. The elimination of the CEBA
growth restriction has allowed the Company to accept deposits from clients which
it had historically directed to other financial institutions. The Company's
average assets for the year ended December 31, 1996 increased $483,710,000 or
333% compared to the 1995 period. This growth primarily resulted from an
increase in average interest earning assets of $449,720,000.
 
    Interest expense increased $17,624,000 due primarily to the higher level of
deposits and borrowings and to a lesser extent to an increase in the interest
rate paid by the Company. Prior to the Spin-Off Transaction, the Company was not
trying to attract deposits to its balance sheet and therefore did not pay a
competitive interest rate. The average rate paid on deposits and short-term
borrowings increased from 4.12 % to 4.83% between periods.
 
INCOME TAXES
 
    The Company's earnings were taxed on the federal level at 34% for the 1995
period and 35% for the 1996 period. State taxes on the gross earnings from the
Company's portfolio of investment securities, held by a wholly-owned subsidiary,
were assessed at the tax rate for Massachusetts securities corporations of
1.32%. State taxes on the remainder of the Company's taxable income were
assessed at the tax rate for Massachusetts banks of 11.72%. The provision for
income taxes for the year ended December 31, 1996 increased by $1,856,000 over
the 1995 provision. The overall effective tax rate decreased to 38.5% for the
year ended December 31, 1996, from 39.5% for the year ended December 31, 1995.
The decrease in the effective tax rate was due to a decrease in the income of
the Company's Canadian subsidiary, which was 

                                       27
<PAGE>


taxed at the Canadian effective rate of 45.37%, and the related increase in 
the income of the Company's subsidiaries in Dublin and the Cayman Islands, 
which are lower tax jurisdictions. The reduction of the income in the 
Company's Canadian subsidiary resulted as the Company transferred certain 
offshore processing activities from Toronto to Dublin and the Cayman Islands.

FINANCIAL CONDITION
 
    INVESTMENT PORTFOLIO
 
    The following table summarizes the Company's investment portfolio for the
dates indicated:
 
<TABLE>
<CAPTION>
                                                                  OCTOBER 31,             DECEMBER 31,
                                                                  -----------------------------------------------
                                                                     1995         1995        1996        1997
                                                                  -----------  ----------  ----------  ----------
<S>                                                               <C>          <C>         <C>         <C>
                                                                                (DOLLARS IN THOUSANDS)
Securities held to maturity:
U.S. Treasury securities........................................  $    60,408  $       --  $       --  $       --
State and Political Subdivisions................................           --          --          --      35,225
Mortgage-backed securities......................................       49,609     144,124     414,665     590,365
Federal Agency securities.......................................           --      10,000      37,517     168,687
Foreign Government securities...................................           --          --       7,828       7,769
                                                                  -----------  ----------  ----------  ----------
Total securities held to maturity...............................  $  110, 017  $  154,124  $  460,010  $  802,046
                                                                  -----------  ----------  ----------  ----------
                                                                  -----------  ----------  ----------  ----------
Securities available for sale:
U.S. Treasury securities........................................               $   50,652  $   40,259  $   30,092
Municipal Bonds.................................................                       --          --       8,382
Mortgage-backed securities......................................                   40,167     230,862     424,376
                                                                               ----------  ----------  ----------
Total securities available for sale.............................               $   90,819  $  271,121  $  462,850
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
</TABLE>
 
    The investment portfolio is used to invest depositors' funds and provide a
secondary source of earnings for the Company. In addition, the Company uses the
investment portfolio to secure open positions at securities clearing
institutions in connection with its custody services. The portfolio is comprised
of U.S. Treasury securities, securities of state and political subdivisions,
mortgage-backed securities issued by the Federal National Mortgage Association
("FNMA" or "Fannie Mae") and the Federal Home Loan Mortgage Corporation ("FHLMC"
or "Freddie Mac"), and Federal Agency callable bonds issued by FHLMC and the
Federal Home Loan Bank of Boston ("FHLBB"), municipal securities, and foreign
government bonds issued by the Canadian provinces of Ontario and Manitoba.
 
    The Company invests in mortgage-backed securities and Federal Agency
callable bonds to supplement its portfolio of U.S. Treasury securities and
increase the total return of the investment portfolio. Mortgage-backed
securities generally have a higher yield than U.S. Treasury securities due to
credit and prepayment risk. Credit risk results from the possibility that a loss
may occur if a counterparty is unable to meet the terms of the contract.
Prepayment risk results from the possibility that changes in interest rates may
cause mortgage securities to be paid off prior to their maturity dates. Federal
Agency callable bonds generally have a higher yield than U.S. Treasury
securities due to credit and call risk. Credit risk results from the possibility
that the Federal Agency issuing the bonds may be unable to meet the terms of the
bond. Call risk results from the possibility that fluctuating interest rates and
other factors may result in the exercise of the call option by the Federal
Agency. Credit risk related to mortgage-backed securities and Federal Agency
callable bonds is substantially reduced by payment guarantees and credit
enhancements.
 
    The Company invests in municipal securities to generate stable, tax
advantaged income. Municipal securities generally have lower stated yields than
Federal Agency and U.S. Treasury Securities, but the after-tax yields are
comparable. Municipal Securities are subject to credit risk.
 
    The Company invests in foreign government bonds in order to generate foreign
source income to maximize the use of the foreign tax credit. The foreign
government bonds are denominated in U.S. dollars to avoid foreign currency risk.
These bonds are subject to credit risk.
 
                                       28
<PAGE>


    The book value and weighted average yield of the Company's securities held
to maturity at December 31, 1997, by effective maturity, are reflected in the
following table.
 
<TABLE>
<CAPTION>
                                                                    WEIGHTED
                                                                     AVERAGE
                                                      BOOK VALUE      YIELD
                                                      -----------  -----------
<S>                                                   <C>          <C>
Due from one to five years..........................   $ 357,581         6.65%
Due after five years up to ten years................     183,840         6.57%
Due after ten years.................................     260,625         6.37%
                                                      -----------         
Total securities held to maturity...................   $ 802,046
                                                      -----------        
                                                      -----------        
</TABLE>
 
    The book value and weighted average yield of the Company's securities
available for sale at December 31, 1997, by effective maturity, are reflected in
the following table.
 
<TABLE>
<CAPTION>
                                                                    WEIGHTED
                                                                    AVERAGE
                                                     BOOK VALUE      YIELD
                                                     -----------  -----------
<S>                                                  <C>          <C>
Due within one year................................   $  20,039         5.95%
Due from one to five years.........................     309,518         6.57%
Due after five years up to ten years...............     132,756         6.76%
Due after ten years................................         537         5.57%
                                                     -----------         
Total securities available for sale................   $ 462,850
                                                     -----------        
                                                     -----------        
</TABLE>
 
LOAN PORTFOLIO
 
    The following table summarizes the Company's loan portfolio for the dates
indicated:
 
<TABLE>
<CAPTION>
                                               OCTOBER 31,           DECEMBER 31,
                                               --------------------------------------------
                                                  1995        1995       1996       1997
                                               -----------  ---------  ---------  ---------
<S>                                            <C>          <C>        <C>        <C>
Loans to individuals.........................   $  13,446   $  12,610  $  23,449  $  26,858
Loans to not-for-profit organizations........         289         289         13         13
Loans to mutual funds........................           0      10,000     42,875     29,174
                                               -----------  ---------  ---------  ---------
                                                   13,735      22,899     66,337     56,045
Less: allowance for loan losses..............         (35)        (35)      (100)      (100)
                                               -----------  ---------  ---------  ---------
Net loans....................................   $  13,700   $  22,864  $  66,237  $  55,945
                                               -----------  ---------  ---------  ---------
                                               -----------  ---------  ---------  ---------
Floating Rate................................   $  13,675   $  22,839  $  66,224  $  55,932
Fixed Rate...................................          25          25         13         13
                                               -----------  ---------  ---------  ---------
                                                $  13,700   $  22,864  $  66,237  $  55,945
                                               -----------  ---------  ---------  ---------
                                               -----------  ---------  ---------  ---------
</TABLE>
 
    Virtually all loans to individually managed account customers are written on
a demand basis, bear variable interest rates tied to the prime rate and are
fully secured by liquid collateral, primarily freely tradable securities held in
custody by the Company for the borrower. Since December 1995, the Company has
entered into agreements to provide up to an aggregate of $40 million under lines
of credit to mutual fund clients. The unsecured lines of credit may, in the
event of a default, be collateralized at the Company's option by securities held
in custody by the Company for those mutual funds. Loans to mutual funds also
include advances by the Company to certain mutual fund clients pursuant to the
terms of the custody agreements between the Company and those clients.
 
    At December 31, 1997, the Company's only lending concentrations which 
exceeded 10% of total loans were the revolving lines of credit to mutual fund 
clients discussed above. These loans were made in the ordinary course of 
business on the same terms and conditions prevailing at the time for 
comparable transactions.
 
    The Company's credit loss experience has been excellent. There have been no
loan chargeoffs or adverse credit actions in the history of the Company. It is
the Company's policy to place a loan on non-accrual status when either principal
or interest becomes 60 days past due and the loan's collateral is not sufficient
to cover both principal and accrued interest. As of December 31, 1997, there
were no past due loans, troubled debt restructurings, or any loans on
non-accrual status. 

                                        29
<PAGE>


Although virtually all of the Company's loans are fully collateralized with 
freely tradable securities, management recognizes some credit risk inherent 
in the loan portfolio, and has recorded an allowance for loan losses of 
$100,000 at December 31, 1997. This amount is not allocated to any particular 
loan, but is intended to absorb any risk of loss inherent in the loan 
portfolio. Management actively monitors the loan portfolio and the underlying 
collateral and regularly assesses the adequacy of the allowance for loan 
losses.
 
INTEREST RATE SENSITIVITY
 
    The Company, like all financial intermediaries, is subject to interest rate
risk. Rapid changes in interest rates could adversely affect the profitability
of the Company by causing changes in the market value of the Company's assets
and its net interest income. Interest rate risk arises when an earning asset
matures or when its rate of interest changes in a time frame different from that
of the supporting interest-bearing liability. By seeking to minimize the
difference between the amount of earning assets and the amount of
interest-bearing liabilities that could change interest rates in the same time
frame, the Company attempts to reduce the risk of significant adverse effects on
net interest income caused by interest rate changes. The Company does not
attempt to match each earning asset with a specific interest-bearing liability.
Instead, as shown in the table below, it aggregates all of its earning assets
and interest-bearing liabilities to determine the difference between these in
specific time frames. This difference is known as the rate-sensitivity gap. A
positive gap indicates that more earning assets than interest-bearing
liabilities mature in a time frame, and a negative gap indicates the opposite.
Maintaining a balanced position will reduce risk associated with interest rate
changes, but it will not guarantee a stable interest rate spread because the
various rates within a time frame may change by differing amounts and change in
different directions.
 
    The Company seeks to manage interest rate risk by investment portfolio
actions designed to address the interest rate sensitivity of asset cash flows in
relation to liability cash flows. Portfolio actions used to manage interest rate
risk include managing the effective duration of the portfolio securities and
utilizing interest rate floors and interest rate swaps. Interest rate contracts
are used to hedge against large rate swings and changes in the shape of the
yield curve.
 
    Interest rate contracts involve elements of credit and market risk which are
not reflected in the Company's consolidated financial statements. Such
instruments are entered into for hedging (as opposed to investment or
speculative) purposes. See Note 14 to the Consolidated Financial Statements. The
Company periodically monitors the financial stability of its counterparties
according to prudent investment guidelines and established procedures. There can
be no assurance that such portfolio actions will adequately limit interest rate
risk.
 



                                       30
<PAGE>


    The following table presents the repricing schedule for the Company's
interest earning assets and interest bearing liabilities at December 31, 1997:
 
<TABLE>
<CAPTION>
                                                    WITHIN     OVER THREE   OVER SIX    OVER ONE
                                                     THREE       TO SIX     TO TWELVE   YEAR TO    OVER FIVE
                                                    MONTHS       MONTHS      MONTHS    FIVE YEARS    YEARS       TOTAL
                                                  -----------  -----------  ---------  ----------  ----------  ----------
                                                                            (DOLLARS IN THOUSANDS)
<S>                                               <C>          <C>          <C>        <C>         <C>         <C>
Interest earning assets (1):
Federal Funds Sold..............................  $    75,000          --          --          --          --  $   75,000
Investment securities (2).......................      575,410     202,068     180,773     200,640     106,005   1,264,896
Loans--fixed rate...............................           --          --          --          13          --          13
Loans--variable rate............................       56,032          --          --          --          --      56,032
                                                  -----------  -----------  ---------  ----------  ----------  ----------
Total interest earning assets...................      706,442     202,068     180,773     200,653     106,005   1,395,941
Interest bearing liabilities
Demand deposit accounts.........................      201,549          --          --          --          --     201,549
Savings accounts................................      427,123          --          --          --          --     427,123
Interest rate contracts.........................     (280,000)     60,000     100,000     110,000      10,000           0
Short-term borrowings...........................      499,933          --          --          --          --     499,933
                                                  -----------  -----------  ---------  ----------  ----------  ----------
Total interest bearing liabilities..............      848,605      60,000     100,000     110,000      10,000   1,128,605
                                                  -----------  -----------  ---------  ----------  ----------  ----------
Net interest sensitivity gap during the
  period........................................  ($  142,163)  $ 142,068   $  80,773  $   90,653  $   96,005  $  267,336
                                                  -----------  -----------  ---------  ----------  ----------  ----------
                                                  -----------  -----------  ---------  ----------  ----------  ----------
Cumulative gap..................................  ($  142,163)  ($     95)  $  80,678  $  171,331  $  267,336
                                                  -----------  -----------  ---------  ----------  ----------  
                                                  -----------  -----------  ---------  ----------  ----------  
Interest sensitive assets as a percent of
  interest sensitive liabilities (cumulative)...        83.25%      99.99%     108.00%     115.32%     123.69%
Interest sensitive assets as a percent of total
  assets (cumulative)...........................        48.41%      62.25%      74.64%      88.39%      95.66%
Net interest sensitivity gap as a percent of
  total asets...................................        (9.74%)       9.74%      5.53%       6.21%       6.58%
Cumulative gap as a percent of total asets......        (9.74%)      (0.01%)     5.53%      11.74%      18.32%
</TABLE>
 
------------------------
 
(1) Adjustable rate assets are included in the period in which interest rates 
    are next scheduled to adjust rather than in the period in which they are 
    due. Fixed rate loans are included in the period in which they are 
    scheduled to be repaid.
 
(2) Mortgage-backed securities are included in the pricing category that
    corresponds with their contractual maturity.
 
LIQUIDITY
 
    Liquidity represents the ability of an institution to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management. For
a financial institution such as the Company, these obligations arise from the
withdrawals of deposits and the payment of operating expenses.
 
    The Company's primary sources of liquidity include cash and cash 
equivalents, federal funds sold, new deposits, short-term borrowings, 
interest payments on securities held to maturity and available for sale, fees 
collected from asset administration clients, and the capital raised from the 
sale of the Capital Securities. Asset liquidity is also provided by managing 
the duration of the investment portfolio. As a result of the Company's 
management of liquid assets and the ability to generate liquidity through 
liability funds, management believes that the Company maintains overall 
liquidity sufficient to meet its depositors' needs, to satisfy its operating 
requirements and to fund the payment of an anticipated annual cash dividend 
of approximately $.12 per share.
 
    The Company's ability to pay dividends on the Common Stock depends on the
receipt of dividends from Investors Bank & Trust Company. In addition, the
Company may not pay dividends on its Common Stock if it is in default under
certain agreements entered into in connection with the sale of the Capital
Securities. Any dividend payments by Investors Bank & Trust Company are subject
to certain restrictions imposed by the Massachusetts Commissioner of Banks.
Subject to regulatory requirements, Investors Bank & Trust Company expects to
pay an annual dividend to the Company, which the 

                                       31
<PAGE>


Company expects to pay to its stockholders, currently estimated to be in an 
amount equal to $.12 per share of outstanding Common Stock (approximately 
$776,438 based upon 6,470,313 shares outstanding as of December 31, 1997).
 
    At December 31, 1997, cash and cash equivalents were 1% of total assets,
compared to 2% of total assets at December 31, 1996. At December 31, 1997,
approximately $20 million or 1% of total assets mature within a one year period.
 
    The Company has informal borrowing arrangements with various counterparties
whereby each counterparty has agreed to make funds available to the Company at
the Federal funds overnight rate. The aggregate amount of these borrowing
arrangements as of December 31, 1997 was $141 million. Each bank may terminate
its arrangement at any time and is under no contractual obligation to provide
requested funding to the Company. The Company's borrowings under these
arrangements are typically on an overnight basis. The Company believes that if
these banks were unable to provide funding as described above, a satisfactory
alternative source of funding would be available to the Company.
 
    The Company also has Master Repurchase Agreements in place with various
counterparties whereby each broker has agreed to make funds available to the
Company at various rates in exchange for collateral consisting of marketable
securities. The aggregate amount of these borrowing arrangements at December 31,
1997 was $1.3 billion.
 
    The Company also has a borrowing arrangement with the Federal Home Loan Bank
of Boston (the "FHLBB") whereby the Company may borrow amounts determined by
prescribed collateral levels and the amount of FHLBB stock held by the Company.
The minimum amount of FHLBB stock held by the Company is required to (i) 1% of
its outstanding residential mortgage loan principal (including mortgage pool
securities), (ii) 0.3% of total assets, (iii) total advances from the FHLBB,
divided by a leverage factor of 20. If the Company borrows under this
arrangement, the Company is required to hold FHLBB stock equal to 5% of such
outstanding advances. The aggregate amount of borrowing available to the Company
under this arrangement at December 31, 1997 was $573 million.
 
    The Company's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities, and financing
activities. Cash flows provided by operating activities were $10,806,000 for the
year ended December 31, 1997. Net cash used in investing activities, consisting
primarily of purchases of investment securities and proceeds from maturities of
investment securities, was $490,696,000 for the year ended December 31, 1997.
Net cash provided by financing activities, consisting primarily of net activity
in deposits, was $477,701,000 for the year ended December 31, 1997.
 
CAPITAL RESOURCES
 
    Historically, the Company has financed its operations principally through
internally generated cash flows. The Company incurs capital expenditures for
furniture, fixtures and miscellaneous equipment needs. The Company leases
microcomputers through operating leases. Such capital expenditures have been
incurred and such leases entered into on an as-required basis, primarily to meet
the growing operating needs of the Company. As a result, the Company's capital
expenditures were $1,564,000 for fiscal 1995, $118,000 for the two-months ended
December 31, 1995, and $3,236,000 and $4,771,000 for the years ended December
31, 1996 and 1997, respectively.
 
    On January 31, 1997, the Company completed the issuance and sale of
$25,000,000 in 9.77% Capital Securities. The capital raised in the offering,
along with existing capital and earnings generated in the future, will be used
to support the Company's balance sheet growth.
 
    Stockholders' equity at December 31, 1997 was $74,901,000, an increase of
$13,042,000 or 21%, from $61,859,000 at December 31, 1996. The ratio of
stockholders' equity to assets decreased to 5.13% at December 31, 1997 from
6.41% at December 31, 1996 due to the significant growth in assets.
 
    The Federal Reserve Board has adopted a system using internationally
consistent risk-based capital adequacy guidelines to evaluate the capital
adequacy of banks and bank holding companies. Under the risk-based capital
guidelines, different categories of assets are assigned different risk weights,
based generally upon the perceived credit risk of the asset. These risk weights
are multiplied by corresponding asset balances to determine a "risk-weighted"
asset base. Certain off-balance sheet items, which previously were not expressly
considered in capital adequacy computations, are added to the risk-weighted
asset base by converting them to a balance sheet equivalent and assigning them
the appropriate risk weight.
 
    Federal Reserve Board and FDIC guidelines require that banking organizations
have a minimum ratio of total capital to risk-adjusted assets and off balance
sheet items of 8.0%. Total capital is defined as the sum of "Tier I" and "Tier
II" capital elements, with at least half of the total capital required to be
Tier I. Tier I capital includes, with certain restrictions, the sum of common
stockholders' equity, non-cumulative perpetual preferred stock, a limited amount
of cumulative perpetual

                                      32
<PAGE>

preferred stock, and minority interests in consolidated subsidiaries, less 
certain intangible assets. Tier II capital includes, with certain 
limitations, subordinated debt meeting certain requirements, 
intermediate-term preferred stock, certain hybrid capital instruments, 
certain forms of perpetual preferred stock, as well as maturing capital 
instruments and general allowances for loan losses.
 
    The following table summarizes the Company's Tier I and total capital ratios
at December 31, 1997:
 
<TABLE>
<CAPTION>
                                                              AMOUNT      RATIO
                                                            ----------  ---------
<S>                                                         <C>         <C>
                                                                 (DOLLARS IN
                                                                 THOUSANDS)
Tier I capital............................................  $   97,595      29.00%
Tier I capital minimum requirement........................      13,460       4.00%
                                                            ----------  ---------
Excess Tier I capital.....................................  $   84,135      25.00%
                                                            ----------  ---------
                                                            ----------  ---------
Total capital.............................................  $   97,695      29.03%
Total capital minimum requirement.........................      26,919       8.00%
                                                            ----------  ---------
Excess total capital......................................      70,776      21.03%
                                                            ----------  ---------
                                                            ----------  ---------
Risk adjusted assets, net of intangible assets............  $  336,494
                                                            ----------  
                                                            ----------  
</TABLE>
 

    The following table summarizes the Bank's Tier I and total capital ratios at
December 31, 1997:
 
<TABLE>
<CAPTION>
                                                             AMOUNT      RATIO
                                                           ----------  ---------
<S>                                                        <C>         <C>
                                                                (DOLLARS IN
                                                                THOUSANDS)
Tier I capital...........................................  $   96,041      28.54%
Tier I capital minimum requirement.......................      13,460       4.00%
                                                           ----------  ---------
Excess Tier I capital....................................  $   82,581      24.54%
                                                           ----------  ---------
                                                           ----------  ---------
Total capital............................................  $   96,141      28.57%
Total capital minimum requirement........................      26,919       8.00%
                                                           ----------  ---------
Excess total capital.....................................  $   69,222      20.57%
                                                           ----------  ---------
                                                           ----------  ---------
Risk adjusted assets, net of intangible assets...........  $  336,486
                                                           ----------  
                                                           ----------  
</TABLE>
 
    In addition to the risk-based capital guidelines, the Federal Reserve Board
and the FDIC use a "Leverage Ratio" as an additional tool to evaluate capital
adequacy. The Leverage Ratio is defined to be a Company's Tier I capital divided
by its adjusted total assets. The Leverage Ratio adopted by the federal banking
agencies requires a ratio of 3.0% Tier I capital to adjusted average total
assets for top-rated banking institutions. All other banking institutions are
expected to maintain a Leverage Ratio of 4.0% to 5.0%. The computation of the
risk-based capital ratios and the Leverage Ratio requires the capital of the
Company to be reduced by most intangible assets. The Company's Leverage Ratio at
December 31, 1997 was 6.39%, which is in excess of regulatory requirements. The
Bank's Leverage Ratio at December 31, 1997 was 6.31%, which is also in excess of
regulatory requirements. See "Business--Regulation and Supervision."
 
                                       33
<PAGE>
 
    The following tables present average balances, interest income and expense,
and yields earned or paid on the major categories of assets and liabilities for
the periods indicated.
<TABLE>
<CAPTION>
                                                                                            
                       YEAR ENDED DECEMBER 31, 1995       YEAR ENDED DECEMBER 31, 1996        YEAR ENDED DECEMBER 31, 1997
                      ------------------------------    ---------------------------------  ----------------------------------
                      AVERAGE              AVERAGE      AVERAGE                AVERAGE       AVERAGE                AVERAGE
                      BALANCE   INTEREST  YIELD/COST    BALANCE    INTEREST   YIELD/COST     BALANCE   INTEREST    YIELD/COST
                      --------  --------  ----------    --------   --------   -----------  ----------  --------    ----------
<S>                   <C>       <C>       <C>           <C>        <C>        <C>          <C>         <C>         <C>
Interest-earning
  assets
Fed funds sold......  $ 10,218  $    595     5.82%      $ 33,989    $ 1,859      5.47%    $  53,758    $ 2,981        5.55%
Interest-earning
  deposits..........     1,000        59     5.90%           126          6      4.76%       --           --
Investment
  securities........   100,861     6,123     6.07%       497,965     32,490      6.52%    1,053,009     67,489        6.41% 
Demand Loans........    13,863     1,231     8.88%        43,582      2,322      5.33%       60,594      2,566        4.23% 
                      --------  --------   ------       --------    -------      ----    ----------    -------        ---- 
Total interest-                                                                                                            
  earning assets....   125,942     8,008     6.36%       575,662     36,677      6.37%    1,167,361     73,036        6.26% 
                                --------   ------                   -------      ----                  -------        ----
Allowance for loan
  losses............       (35)                              (74)                              (100)
Noninterest-earning
  assets............    19,276                            53,305                             69,258
                      --------                          --------                         ----------
Total assets........  $145,183                           628,893                         $1,236,519
                      --------                          --------                         ----------
                      --------                          --------                         ----------
Interest-bearing
  liabilities
Deposits:
 Demand.............  $ 11,995  $    610     5.09%      $142,059    $ 6,944      4.89%   $  140,274   $  7,179         5.12% 
 Savings............    10,742       245     2.28%        56,775      2,302      4.05%      252,408     11,468         4.54% 
 Time...............      --        --        --             721         38      5.27%        1,472         76         5.16% 
Short Term
  Borrowings........     2,575       189     7.34%       186,952      9,384      5.02%      538,315     28,140         5.23%
                      --------  --------   -------      --------    -------      ----    ----------   --------         ----
Total interest-
  bearing
  liabilities.......    25,312     1,044     4.12%       386,507     18,668      4.83%      932,469     46,863         5.03%
                                --------   ------                   -------      ----                 --------         ----
Noninterest-bearing
  liabilities:
 Demand deposits....    46,568                           132,063                            142,436
 Noninterest bearing
  time deposits....    46,368                            45,601                             58,178
 Other liabilities..     7,442                             8,585                             12,814
                      --------                          --------                         ---------- 
Total liabilities...   125,690                           572,756                          1,145,897
Trust Preferred
  Securities........    --                                   --                              22,252
Equity..............    19,493                            56,137                             68,370
                      --------                          --------                         ----------
Total liabilities
  and equity........  $145,183                          $628,893                         $1,236,519
                      --------                          --------                         ---------- 
                      --------                          --------                         ---------- 
Net interest
  income............            $  6,964                            $18,009                           $  26,173
                                --------                            -------                           ---------
                                --------                            -------                           ---------

Net interest margin
  (1)...............                         5.53%                               3.13%                                 2.24%
Average interest
  rate spread (2)...                         2.24%                               1.54%                                 1.23%
Ratio of interest-
  earning assets to
interest-bearing
  liabilities.......                        497.6%                              148.9%                                125.2%
 
</TABLE>
 
------------------------
 
(1) Net interest income divided by total interest-earning assets.
 
(2) Yield on interest-earning assets less rate paid on interest-bearing
    liabilities.

                                      34

<PAGE>
 
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
    The information required by this item is contained in the financial 
statements and schedules set forth in Item 14(a) under the captions 
"Consolidated Financial Statements" and "Financial Statement Schedules" 
as a part of this Report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
  ACCOUNTING AND FINANCIAL DISCLOSURE.
 
    There have been no changes in or disagreements with accountants on 
accounting or financial disclosure matters during the Company's two most 
recent fiscal years. 

PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
    The information required under this item is incorporated herein by 
reference to the information in the sections entitled "Occupations of 
Directors and Executive Officers," "Election of Directors" and 
"Compensation and other Information Concerning Directors and Officers" 
contained in the Company's definitive proxy statement pursuant to 
Regulation 14A, which proxy statement will be filed with the Securities and 
Exchange Commission not later than 120 days after the close of the Company's 
fiscal year ended December 31, 1997.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
    The information required under this item is incorporated herein by reference
to the information in the section entitled "Compensation and other Information
Concerning Directors and Officers" contained in the Company's definitive proxy
statement pursuant to Regulation 14A, which proxy statement will be filed with
the Securities and Exchange Commission not later than 120 days after the close
of the Company's fiscal year ended December 31, 1997.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
    The information required under this item is incorporated herein by 
reference to the information in the section entitled "Management and 
Principal Holders of Voting Securities" contained in the Company's definitive 
proxy statement pursuant to Regulation 14A, which proxy statement will be 
filed with the Securities and Exchange Commission not later than 120 days 
after the close of the Company's fiscal year ended December 31, 1997.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
    The information required under this item is incorporated herein by reference
to the information in the section entitled "Certain Relationships and Related
Transactions" contained in the Company's definitive proxy statement pursuant to
Regulation 14A, which proxy statement will be filed with the Securities and
Exchange Commission not later than 120 days after the close of the Company's
fiscal year ended December 31, 1997.

                                      35

<PAGE>
 
PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
    (a) 1. Consolidated Financial Statements.
 
    For the following consolidated financial information included herein, see
Index on Page F-1:
 
    Report of Independent Accountants. 
    Consolidated Balance Sheets as of December 31, 1996 and December 31, 1997. 
    Consolidated Statements of Income for the Year Ended October 31, 1995, 
      for the Two-Month Period Ended December 31, 1995, and for the Years 
      Ended December 31, 1996 and 1997. 

    Statements of Stockholders' Equity for the Year Ended October 31, 1995, for 
      the Two-Month Period Ended December 31, 1995, and for the Years Ended 
      December 31, 1996 and 1997. 
    Consolidated Statements of Cash Flows for the Year Ended October 31, 1995,
      for the Two-Month Period Ended December 31, 1995, and for the Years Ended
      December 31, 1996 and 1997. 

Notes to Consolidated Financial Statements.
 
    2. Financial Statement Schedules.
 
    None.

    3. List of Exhibits.
 
<TABLE>
<CAPTION>
EXHIBIT NO.                                               DESCRIPTION
-----------  -----------------------------------------------------------------------------------------------------
<C>          <S>
2.1(1)       Plan of Exchange of Common and Class A Stock of the Company for all outstanding stock of the Bank
3.1(1)       Certificate of Incorporation of the Company
3.2(1)       By-laws of the Company
4.1(1)       Specimen certificate representing the Common Stock
4.2(1)       Stockholder Rights Plan
10.1 *       Amended and Restated 1995 Stock Plan
10.2(1)      Custodian Agreement among and between the Company, Eaton Vance Corp. and each investment company
             advised by Eaton Vance Corp. which adopted the Agreement dated December 17, 1990
10.3(1)      Transfer and Assumption Agreement between the Company and Bank of New York dated January 27, 1995
             regarding the assignment of Merrill Lynch Unit Investment Trust administration service
10.4(1)      Information Technology Services Contract between the Company and Electronic Data Systems, Inc. dated
             September 24, 1990
10.5(1)      Third Party Hub and Spoke Processing License Agreement between the Company and Signature Financial
             Group, Inc. dated May 21, 1993
10.6(1)      Hub and Spoke Facilities Management Agreement between the Company and Signature Financial Group, Inc.
             dated May 21, 1993
10.7(1)      Loan Agreements with Landon Clay dated May 10, 1993 and October 6, 1994
10.8(1)*     Description of the executive bonus arrangement
10.9(1)*     Employment contract between the Company and Kevin Sheehan
10.10(1)*    Employment contract between the Company and Michael Rogers
10.11(1)*    Employment contract between the Company and Edmund Maroney
10.12(1)*    Employment contract between the Company and Robert Mancuso
10.13(1)     Sublease Agreement, as amended, between the Company and the Bank of New England, N.A. dated May 25,
             1990, for premises located at 89 South Street, Boston, Massachusetts
10.14(3)*    1995 Non-Employee Director Stock Option Plan
10.15(2)     Information Technology Services Contract between the Company and Electronic Data Systems, Inc. dated
             September 20,1995,
10.16(2)     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.
10.17(3)*    Employment contract between the Company and Karen C. Keenan
10.18(3)*    1995 Employee Stock Purchase Plan
</TABLE>

                                      36

<PAGE>

<TABLE>
<C>          <S>
10.19(3)     Amended and Restated Declaration of Trust among the Company and the Trustees named therein, dated
             January 31, 1997
10.20(3)     Purchase Agreement among the Company, Investors Capital Trust I and Keefe, Bruyette & Woods, Inc.,
             dated January 30, 1997 (Included in Exhibit 10.19)
10.21(3)     Indenture between the Company and The Bank of New York, dated January 31, 1997
10.22(3)     Registration Rights Agreement, among the Company, Investors Capital Trust I and Keefe, Bruyette &
             Woods, Inc., dated January 31, 1997
10.23(3)     Common Securities Guarantee Agreement by the Company as Guarantor, dated January 31, 1997
10.24(3)     Capital Securities Guarantee Agreement between the Company as Guarantor and The Bank of New York as
             Capital Securities Guarantee Trustee, dated January 31, 1997
21.1         Subsidiaries of the Company
23.1         Consent of Deloitte & Touche LLP
24.1         Power of Attorney (See Page 38 of this Report)
27           Financial Data Schedule
</TABLE>

(1) Incorporated herein by reference to the exhibits to the Company's
    Registration Statement on Form S-1 (File No. 33-95980). 
(2) Previously filed as an exhibit to Form 10-K for the fiscal year ended 
    October 31, 1995. 
(3) Previously filed as an exhibit to Form 10-K for the fiscal year ended
    December 31, 1996. 

* Indicates a management contract or a compensatory plan, contract or 
  arrangement.
 
    (b) Reports on Form 8-K.
 
    There were no Current Reports on Form 8-K filed by the Company during the
quarter ended December 31, 1997.
 
    (c) Exhibits.
 
    The Company hereby files as part of this Form 10-K the exhibits listed in 
Item 14(a)(3) above. Exhibits which are incorporated herein by reference can 
be inspected and copied at the public reference facilities maintained by the 
Securities and Exchange Commission, 450 Fifth Street, N.W., Room 1024, 
Washington, D.C., and at the Securities and Exchange Commission's regional 
offices at CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 
60661-2511 and Seven World Trade Center, Suite 1300, New York, NY 10048. 
Copies of such material can also be obtained from the Public Reference 
Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., 
Washington, D.C. 29549, at prescribed rates.
 
    (d) Financial Statement Schedules
 
    None.
 
                                      37

<PAGE>

                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the registrant has duly caused this report to be signed 
on its behalf by the undersigned, thereunto duly authorized, in Boston, 
Massachusetts on the 27th day of February, 1998.
 
                                INVESTORS FINANCIAL SERVICES CORP.
 
                                BY:  /S/ KEVIN J. SHEEHAN
                                     -----------------------------------------
                                     Kevin J. Sheehan
                                     President, Chief Executive Officer and 
                                     Chairman of the Board
 
                       POWER OF ATTORNEY AND SIGNATURES 

    We, the undersigned officers and directors of Investors Financial 
Services Corp., hereby severally constitute and appoint Kevin J. Sheehan and 
Michael F. Rogers, and each of them singly, our true and lawful attorneys, 
with full power to them and each of them singly, to sign for us in our names 
in the capacities indicated below, all amendments to this report, and 
generally to do all things in our names and on our behalf in such capacities 
to enable Investors Financial Services Corp. to comply with the provisions of 
the Securities Exchange Act of 1934, as amended, and all requirements of the 
Securities and Exchange Commission.
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, this 
report has been signed by the following persons in the capacities and on the 
27th day of February, 1998.

<TABLE>
<CAPTION>
          SIGNATURE                                      TITLE(s)                
------------------------------    ------------------------------------------------------
<S>                               <C>
/s/ KEVIN J. SHEEHAN              President, Chief Executive Officer and Chairman of the 
------------------------------    Board (Principal Executive Officer); Director
Kevin J. Sheehan           

/s/ MICHAEL F. ROGERS             Executive Vice President
------------------------------
Michael F. Rogers
                                
/s/ KAREN C. KEENAN               Senior Vice President and Chief Financial Officer (Principal
------------------------------    Financial Officer and Principal Accounting Officer)
Karen C. Keenan
                                  
/s/ ROBERT B. FRASER              Director
------------------------------
Robert B. Fraser

/s/ DONALD G. FRIEDL              Director
------------------------------
Donald G. Friedl

/s/ JAMES M. OATES                Director
------------------------------
James M. Oates

/s/ PHYLLIS S. SWERSKY            Director
------------------------------
Phyllis S. Swersky

/s/ THOMAS P. MCDERMOTT           Director 
------------------------------   
Thomas P. Mcdermott

/s/ FRANK B. CONDON, JR.          Director
------------------------------ 
Frank B. Condon, Jr.
</TABLE>

                                      38

<PAGE>
 
                       INVESTORS FINANCIAL SERVICES CORP.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                          PAGE
                                                          ----
<S>                                                       <C>
 
Report of Independent Accountants.......................  F-2
 
Consolidated Balance Sheets as of December 31, 1996 and   
  December 31, 1997.....................................  F-3
 
Consolidated Statements of Income for the Year Ended
  October 31,1995, for the Two-Month Period Ended 
  December 31, 1995 and for the Years Ended 
  December 31, 1996 and December 31,1997................  F-4
 
Statements of Stockholders' Equity for the Year Ended
  October 31, 1995, for the Two-Month Period Ended
  December 31, 1995 and for the Years Ended 
  December 31, 1996 and December 31, 1997...............  F-5
 
Consolidated Statements of Cash Flows for the Year Ended
  October 31, 1995, for the Two-Month Period Ended
  December 31, 1995, and for the Years Ended December
  31, 1996 and December 31, 1997........................  F-7
 
Notes to Consolidated Financial Statements..............  F-9
</TABLE>
 

                                      F-1

<PAGE>

INDEPENDENT AUDITORS' REPORT
 
To the Stockholders and the Board of Directors of 
  Investors Financial Services Corp.:
 
    We have audited the accompanying consolidated balance sheets of Investors 
Financial Services Corp., including its predecessor, Investors Bank & Trust 
Company and its subsidiaries (collectively, the "Company") as of December 31, 
1996 and 1997 and the related consolidated statements of income, 
stockholders' equity, and cash flows for the year ended October 31, 1995, for 
the two-month period ended December 31, 1995 and for the years ended December 
31, 1996 and December 31, 1997. These financial statements are the 
responsibility of the Company's management. Our responsibility is to express 
an opinion on these financial statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits provide a 
reasonable basis for our opinion.

    In our opinion, such consolidated financial statements present fairly, in 
all material respects, the financial position of the Company at December 31, 
1996 and 1997, and the results of their operations and their cash flows for 
each of the year ended October 31, 1995, for the two-month period ended 
December 31, 1995 and for the years ended December 31, 1996 and 1997 in 
conformity with generally accepted accounting principles.
 
    As discussed in Note 1 to the consolidated financial statements, in 
November 1995 Investors Bank & Trust Company became a wholly owned subsidiary 
of Investors Financial Services Corp. as a result of the share exchange 
between Investors Financial Services Corp. and shareholders of Investors Bank 
& Trust Company.
 
Deloitte & Touche LLP 
Boston, Massachusetts
 
February 13, 1998
 
                                      F-2

<PAGE>
                       INVESTORS FINANCIAL SERVICES CORP.
 
                          CONSOLIDATED BALANCE SHEETS
 
                           DECEMBER 31, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,     DECEMBER 31,
                                                                                      1996             1997
                                                                                 --------------  ----------------
<S>                                                                              <C>             <C>
ASSETS
Cash and due from banks........................................................  $   19,226,453  $     17,037,568
Federal funds sold and securites purchased under resale agreements.............     120,000,000        75,000,000
Securities held to maturity (approximate market values of $460,182,579 and
  $809,708,389 at December 31, 1996 and December 31, 1997, respectively).......     460,009,923       802,046,077
Securities available for sale..................................................     271,120,964       462,850,089
Nonmarketable equity securities................................................         967,400         5,476,600
Loans, less allowance for loan losses of $100,000 at December 31, 1996 and
  December 31, 1997, respectively..............................................      66,236,889        55,944,957
Accrued interest and fees receivable...........................................      16,366,171        22,810,182
Equipment and leasehold improvements, net......................................       5,243,974         7,900,994
Other assets...................................................................       5,289,873        10,277,738
                                                                                 --------------  ----------------
TOTAL ASSETS                                                                     $  964,461,647  $  1,459,344,205
                                                                                 --------------  ----------------
                                                                                 --------------  ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
  DEPOSITS:
    DEMAND.....................................................................  $  264,914,614  $    354,616,945
    SAVINGS....................................................................     276,602,295       427,122,987
    TIME.......................................................................      55,000,000        65,000,000
                                                                                 --------------  ----------------
      TOTAL DEPOSITS...........................................................     596,516,909       846,739,932
SHORT-TERM BORROWINGS..........................................................     296,421,201       499,932,628
OTHER LIABILITIES..............................................................       9,664,227        13,609,660
                                                                                 --------------  ----------------
      TOTAL LIABILITIES........................................................     902,602,337     1,360,282,220
                                                                                 --------------  ----------------
COMPANY OBLIGATED MANDITORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
  TRUST HOLDING JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES OF THE
  COMPANY......................................................................        --              24,161,104
                                                                                 --------------  ----------------
STOCKHOLDERS' EQUITY:
  CLASS A COMMON STOCK.........................................................           3,595         --
  COMMON STOCK.................................................................          60,848            64,703
  SURPLUS......................................................................      54,352,812        55,072,990
  DEFERRED COMPENSATION........................................................      (1,687,675)       (1,248,775)
  RETAINED EARNINGS............................................................       8,480,431        19,545,070
  NET UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE.........................         649,299         1,466,893
                                                                                 --------------  ----------------
TOTAL STOCKHOLDERS' EQUITY.....................................................      61,859,310        74,900,881
                                                                                 --------------  ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.....................................  $  964,461,647  $  1,459,344,205
                                                                                 --------------  ----------------
                                                                                 --------------  ----------------
</TABLE>
 
                See notes to consolidated financial statements.
 
                                      F-3
<PAGE>
                       INVESTORS FINANCIAL SERVICES CORP.
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
   YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED DECEMBER 31, 1995
 
                 AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                                  TWO MONTHS ENDED
                                                    OCTOBER 31,     DECEMBER 31,     DECEMBER 31,  DECEMBER 31,
                                                        1995            1995             1996          1997
                                                    ------------  -----------------  ------------  -------------
<S>                                                 <C>           <C>                <C>           <C>
OPERATING REVENUE:
  Interest income:
    Federal funds sold and securities purchased
      under resale agreements.....................  $    373,384    $     289,843     $1,864,989   $   2,980,617
    Investment securities held to maturity and
      available for sale..........................     5,116,155        1,844,222     32,490,280      67,488,991
    Loans.........................................     1,202,029          229,690      2,322,158       2,566,321
                                                    ------------  -----------------  ------------  -------------
      Total interest income.......................     6,691,568        2,363,755     36,677,427      73,035,929
                                                    ------------  -----------------  ------------  -------------
  Interest expense:
    Deposits......................................       720,395          286,945      9,271,675      18,722,500
    Short-term borrowings.........................       101,198          111,154      9,396,359      28,140,731
                                                    ------------  -----------------  ------------  -------------
      Total interest expense......................       821,593          398,099     18,668,034      46,863,231
                                                    ------------  -----------------  ------------  -------------
    Net interest income...........................     5,869,975        1,965,656     18,009,393      26,172,698
    Provision for loan losses.....................       --              --               65,000        --
                                                    ------------  -----------------  ------------  -------------
    Net interest income after provision for loan
      losses......................................     5,869,975        1,965,656     17,944,393      26,172,698
  Noninterest income:
    Asset administration fees.....................    48,412,551        7,988,056     56,075,625      75,873,093
    Proceeds from assignment of UIT servicing,
      net.........................................     2,572,298         --               --            --
    Computer service fees.........................       505,534           83,424        482,275         468,407
    Other operating income........................        72,029           13,772         76,305         360,742
    Gain/(loss) on securities available for
      sale........................................       --              --               (2,488)        113,958
                                                    ------------  -----------------  ------------  -------------
    Net operating revenue.........................    57,432,387       10,050,908     74,576,110     102,988,898
OPERATING EXPENSES
  Compensation and benefits.......................    31,898,693        5,797,463     37,502,215      50,042,736
  Technology and telecommunications...............     6,404,922        1,052,445      7,790,792      10,484,519
  Transaction processing services.................     2,885,483          382,528      5,682,979       7,998,604
  Occupancy.......................................     4,215,472          624,816      4,283,008       4,380,908
  Depreciation and amortization...................     1,220,988          185,791      1,502,196       1,929,920
  Travel and sales promotion......................       837,136          122,682      1,157,718       1,586,167
  Professional fees...............................       885,754          100,774      1,115,249       1,563,835
  Insurance.......................................     1,060,468          194,016        852,638         735,148
  Other operating expenses........................       815,037           20,301      2,048,782       3,927,160
                                                    ------------  -----------------  ------------  -------------
    Total operating expenses......................    50,223,953        8,480,816     61,935,577      82,648,997
                                                    ------------  -----------------  ------------  -------------
NET INCOME BEFORE INCOME TAXES AND MINORITY
  INTEREST........................................     7,208,434        1,570,092     12,640,533      20,339,901
Provision for income taxes........................     2,800,000          670,298      4,866,571       7,322,364
</TABLE>
 

<PAGE>

                       INVESTORS FINANCIAL SERVICES CORP.
 
                 CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
 
   YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED DECEMBER 31, 1995
 
                 AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                                  TWO MONTHS ENDED
                                                    OCTOBER 31,     DECEMBER 31,     DECEMBER 31,  DECEMBER 31,
                                                        1995            1995             1996          1997
                                                    ------------  -----------------  ------------  -------------
<S>                                                 <C>           <C>                <C>           <C>
Minority interest expense, net of income taxes....       --              --               --           1,437,276
                                                    ------------  -----------------  ------------  -------------
NET INCOME........................................  $  4,408,434    $     899,794     $7,773,962   $  11,580,261
                                                    ------------  -----------------  ------------  -------------
                                                    ------------  -----------------  ------------  -------------
BASIC EARNINGS PER SHARE..........................                  $       0.14    $        1.21     $     1.80
                                                                  -----------------  ------------  -------------
                                                                  -----------------  ------------  -------------
DILUTED EARNINGS PER SHARE........................                  $       0.14    $        1.20     $     1.75
                                                                  -----------------  ------------  -------------
                                                                  -----------------  ------------  -------------
</TABLE>
 
                See notes to consolidated financial statements.
 
                                      F-4
<PAGE>
                       INVESTORS FINANCIAL SERVICES CORP.
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
 
 YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED DECEMBER 31, 1995 AND
 
                   THE YEARS ENDED DECEMBER 31, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                                                                   NET
                                                                                                UNREALIZED
                                                                                                 GAIN ON
                         CLASS A                                                                SECURITIES
                         COMMON       COMMON                       DEFERRED       RETAINED      AVAILABLE
                          STOCK        STOCK         SURPLUS     COMPENSATION     EARNINGS       FOR SALE        TOTAL
                        ---------  -------------  -------------  -------------  -------------  ------------  -------------
<S>                     <C>        <C>            <C>            <C>            <C>            <C>           <C>
BALANCE, NOVEMBER 1,
  1994................  $  --      $  10,000,000  $    --         $   --        $   3,713,042  $    --       $  13,713,042
 
Net income............                  --                                          4,408,434                    4,408,434
Cash dividend, $0.06
  per share...........                  --                                            (60,000)                     (60,000)
                        ---------  -------------  -------------  -------------  -------------  ------------  -------------
BALANCE, OCTOBER 31,
  1995................  $  --      $  10,000,000  $    --         $   --        $   8,061,476  $    --       $  18,061,476
                        ---------  -------------  -------------  -------------  -------------  ------------  -------------
                        ---------  -------------  -------------  -------------  -------------  ------------  -------------
Effect of share
  exchange (Note 1)...  $   6,114  $      34,186  $  18,021,176   $   --        $    --        $    --       $  18,061,476
Common stock issuance,
  net of costs of
  $3,829,062..........     --             23,000     34,097,938       --             --             --          34,120,938
Issuance of restricted
  stock...............     --              1,140      2,193,360    (2,194,500)       --             --            --
Conversion of Class A
  to common stock.....       (179)           179       --             --             --             --            --
Amortization of
  deferred
  compensation........     --           --             --              76,713        --             --              76,713
Net income............     --           --             --             --              899,794       --             899,794
Net unrealized gain on
  securities available
  for sale............     --           --             --             --             --             262,010        262,010
                        ---------  -------------  -------------  -------------  -------------  ------------  -------------
BALANCE, DECEMBER 31,
  1995................      5,935         58,505     54,312,474    (2,117,787)        899,794       262,010     53,420,931
 
Adjustment to costs of
  stock issuance......     --           --               35,193       --             --             --              35,193
Conversion of Class A
  to common stock.....     (2,340)         2,340       --             --             --             --            --
</TABLE>
 
                                      F-5
<PAGE>
                       INVESTORS FINANCIAL SERVICES CORP.
 
                 STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
 
 YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED DECEMBER 31, 1995 AND
 
                   THE YEARS ENDED DECEMBER 31, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                                                                   NET
                                                                                                UNREALIZED
                                                                                                 GAIN ON
                         CLASS A                                                                SECURITIES
                         COMMON       COMMON                       DEFERRED       RETAINED      AVAILABLE
                          STOCK        STOCK         SURPLUS     COMPENSATION     EARNINGS       FOR SALE        TOTAL
                        ---------  -------------  -------------  -------------  -------------  ------------  -------------
<S>                     <C>        <C>            <C>            <C>            <C>            <C>           <C>
Amortization of
  deferred
  compensation........     --           --             --             430,112        --             --             430,112
Exercise of stock
  options.............     --                  3          5,145       --             --             --               5,148
Net income............     --           --             --             --            7,773,962       --           7,773,962
Cash dividend, $0.03
  per share...........     --           --             --             --             (193,325)      --            (193,325)
Change in net
  unrealized gain on
  securities available
  for sale............     --           --             --             --             --             387,289        387,289
                        ---------  -------------  -------------  -------------  -------------  ------------  -------------
BALANCE, DECEMBER 31,
  1996................      3,595         60,848     54,352,812    (1,687,675)      8,480,431       649,299     61,859,310

Conversion of Class A
  to common stock.....     (3,595)         3,595       --             --             --             --            --
Amortization of
  deferred
  compensation........     --           --             --             438,900        --             --             438,900
Exercise of stock
  options.............     --                260        720,178       --             --             --             720,438
Net income............     --           --             --             --           11,580,261       --          11,580,261
Cash dividend, $0.08
  per share...........     --           --             --             --             (515,622)      --            (515,622)
Change in net
  unrealized gain on
  securities available
  for sale............     --           --             --             --             --             817,594        817,594
                        ---------  -------------  -------------  -------------  -------------  ------------  -------------
BALANCE, DECEMBER 31,
  1997................  $  --      $      64,703  $  55,072,990   $(1,248,775)  $  19,545,070  $  1,466,893  $  74,900,881
                        ---------  -------------  -------------  -------------  -------------  ------------  -------------
                        ---------  -------------  -------------  -------------  -------------  ------------  -------------
</TABLE>
 
                                      F-6
<PAGE>
                       INVESTORS FINANCIAL SERVICES CORP.
 
                      CONSOLIDATED STATEMENTS OF CASHFLOWS
 
 YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED DECEMBER 31, 1995 AND
 
                   THE YEARS ENDED DECEMBER 31, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                OCTOBER 31,     DECEMBER 31,     DECEMBER 31,     DECEMBER 31,
                                                    1995            1995             1996             1997
                                               --------------  ---------------  ---------------  ---------------
<S>                                            <C>             <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................  $    4,408,434  $       899,794  $     7,773,962  $    11,580,261
                                               --------------  ---------------  ---------------  ---------------
  Adjustments to reconcile net income to net
    cash provided by operating activities:
  Depreciation and amortization..............       1,220,988          185,791        1,502,196        1,929,920
  Amortization of deferred compensation......        --                 76,713          430,112          438,900
  Provision for loan losses..................        --              --                  65,000        --
  Amortization of premiums on securities, net
    of accretion on discounts................         792,574          205,071        2,521,119        4,455,050
  (Gain)/loss on sale of securities available
    for sale.................................        --              --                   2,488         (113,958)
  (Gain)/loss on disposal of fixed assets....        --              --                  15,211           (4,727)
  Deferred income taxes......................        (469,000)          78,377          898,513          336,851
  Adjustment to carrying value of interest
    rate floor contracts.....................       1,057,700        --               --               --
  Changes in assets and liabilities:
    Accrued interest and fees receivable.....        (189,689)        (868,478)      (5,925,413)      (6,444,011)
    Other assets.............................        (639,592)         814,394       (3,568,354)      (4,987,865)
    Other liabilities........................       1,074,563         (667,218)       3,928,728        3,615,871
                                               --------------  ---------------  ---------------  ---------------
      Total adjustments......................       2,847,544         (175,350)        (130,400)        (773,969)
                                               --------------  ---------------  ---------------  ---------------
    Net cash provided by operating
      activities.............................       7,255,978          724,444        7,643,562       10,806,292
                                               --------------  ---------------  ---------------  ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
  available for sale.........................        --              --              48,406,151      105,833,935
Proceeds from maturities of securities held
  to maturity................................      18,404,529       12,865,343       39,691,309      107,992,568
Proceeds from sales of securities available
  for sale...................................        --              --              26,904,258       24,833,488
Purchases of securities available for sale...        --              --            (243,550,740)    (323,691,447)
Purchases of securities held to maturity.....     (40,936,504)    (147,559,658)    (359,516,797)    (451,865,060)
Purchase of nonmarketable equity
  securities.................................        --              --                (967,400)      (4,509,200)
Net (increase) decrease in time deposits due
  from banks.................................         (24,345)          24,345        1,000,000        --
Net (increase) decrease in federal funds sold
  and securities purchased under resale
  agreements.................................     (36,000,000)      21,000,000     (105,000,000)      45,000,000
Net (increase) decrease in loans.............        (129,487)      (9,164,520)     (43,437,672)      10,291,932
Proceeds from sales of equipment and
  leasehold improvements.....................        --              --               --                 189,121
Purchases of equipment and leasehold
  improvements...............................      (1,563,538)        (118,205)      (3,235,800)      (4,771,333)
                                               --------------  ---------------  ---------------  ---------------
    Net cash used for investing activities...     (60,249,345)    (122,952,695)    (639,706,691)    (490,695,996)
                                               --------------  ---------------  ---------------  ---------------
</TABLE>
 
                                      F-7

<PAGE>
                       INVESTORS FINANCIAL SERVICES CORP.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
   YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED DECEMBER 31, 1995
           AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997 (CONTINUED)
 
<TABLE>
<CAPTION>
                                                          OCTOBER 31,   DECEMBER 31,  DECEMBER 31,   DECEMBER 31,
                                                             1995          1995           1996           1997
                                                        ------------  -------------  -------------  -------------
<S>                                                     <C>           <C>            <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits............    53,411,987    (39,453,616)   142,007,125     89,702,331
Net increase in time and savings deposits.............       332,489     66,023,363    265,516,792    160,520,692
Net increase in short-term borrowings.................       --          74,401,454    222,019,746    203,111,876
Proceeds from issuance of common stock................       --          37,950,000       --              720,438
Proceeds from exercise of stock options...............       --            --                5,148       --
Proceeds from issuance of trust preferred stock.......       --            --             --           25,000,000
Costs of stock issuance...............................       --          (3,829,062)        35,193       (838,896)
Dividends paid........................................       (60,000)      --             (193,325)      (515,622)
                                                        ------------  -------------  -------------  -------------
  Net cash provided by financing activities...........    53,684,476    135,092,139    629,390,679    477,700,819
                                                        ------------  -------------  -------------  -------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS........       691,109     12,863,888     (2,672,450)    (2,188,885)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD..........     8,343,906      9,035,015     21,898,903     19,226,453
                                                        ------------  -------------  -------------  -------------
CASH AND DUE FROM BANKS, END OF PERIOD................  $  9,035,015  $  21,898,903  $  19,226,453  $  17,037,568
                                                        ------------  -------------  -------------  -------------
                                                        ------------  -------------  -------------  -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................  $    898,000  $     197,750  $  17,253,000  $  45,968,000
                                                        ------------  -------------  -------------  -------------
                                                        ------------  -------------  -------------  -------------
Cash paid for income taxes............................  $  2,919,000  $     885,000  $   4,220,000  $   7,049,000
                                                        ------------  -------------  -------------  -------------
                                                        ------------  -------------  -------------  -------------
</TABLE>
 
    See notes to consolidated financial statements.



                               F-8
<PAGE> 

INVESTORS FINANCIAL SERVICES CORP.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1995, THE TWO-MONTH PERIOD ENDED DECEMBER 31, 1995
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1997
------------------------------------------------------------------------------

1. DESCRIPTION OF BUSINESS
   
   Investors Financial Services Corp. ("IFSC") provides asset 
   administration services for the financial services industry 
   through its wholly owned subsidiary, Investors Bank & Trust 
   Company (the "Bank"). The Bank provides global custody, 
   multicurrency accounting, institutional transfer agency, 
   performance measurement, foreign exchange, securities lending, 
   mutual fund administration and investment advisory services to a 
   variety of financial asset managers, including mutual fund 
   complexes, investment advisors, banks and insurance companies. 
   IFSC and the Bank are subject to regulation by the Federal Reserve 
   Board of Governors, the Office of the Commissioner of Banks of the 
   Commonwealth of Massachusetts and the Federal Deposit Insurance 
   Corporation.
    
   As used herein, the defined term "the Company" shall mean IFSC 
   together with the Bank and its domestic and foreign subsidiaries 
   from the date of the share exchange discussed below and shall mean 
   the Bank prior to that date.
    
   On November 8, 1995, the business operations of the Company were 
   separated from its former parent, Eaton Vance Corp. ("EVC"), by 
   means of a tax-free, pro rata distribution of EVC's ownership 
   interest in the Company to the EVC stockholders (the "Spin-off 
   Transaction"). Immediately prior to the Spin-off Transaction, all 
   of the stockholders of the Bank exchanged their 1,000,000 shares 
   of the Bank's capital stock for a combination of 3,418,573 shares 
   of Common Stock and 611,427 shares of Class A Common Stock ("Class 
   A Stock") of a newly formed bank holding company formed for the 
   purpose of facilitating the Spin-off Transaction. For financial 
   reporting purposes, the exchange has been accounted for as if it 
   occurred on November 1, 1995. Subsequent to the completion of the 
   Spin-off Transaction, IFSC sold 2,300,000 additional shares of its 
   Common Stock in an initial public offering at an offering price of 
   $16.50 per share. The net effect of this transaction was an 
   increase in the Company's consolidated capital of approximately 
   $34,000,000.
    
   In December 1995, the Company changed its fiscal year end from 
   October 31 to December 31.
    
   On September 19, 1997, pursuant to the terms of the Certificate of 
   Incorporation of the Company, all shares of the Company's Class A 
   Common Stock automatically converted into shares of the Company's 
   Common Stock. The terms of the Class A Common Stock were identical 
   to the terms of the Common Stock, except that the Common Stock 
   receives only one vote per share rather than the ten votes per 
   share previously received by Class A Common Stock.
    
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
   Basis of Presentation--The consolidated financial statements 
   include the accounts of the Company and its domestic and foreign 
   subsidiaries. All significant intercompany accounts and 
   transactions have been eliminated.
    
   Custody and Trust Assets--Asset administration fees, including 
   securities lending and foreign exchange services and computer 
   services fees, are composed primarily of fee and fee-related 
   income and are recorded on the accrual basis.
    
   Accounting Estimates--The preparation of the financial statements 
   in conformity with generally accepted accounting principles 
   requires management to make estimates and assumptions that affect 
   the reported amounts of assets and liabilities and disclosure of 
   contingent assets and liabilities at the date of the financial 
   statements and the reported amounts of revenues and expenses 
   during the reporting period. Actual results could differ from 
   those estimates.
 
                               F-9
<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

   Securities--The Company classifies all equity securities that have 
   readily determinable fair values and all investments in debt 
   securities into one of three categories, as follows:
   
   - Debt securities that the Company has the positive intent and 
     ability to hold to maturity are classified as held to maturity and 
     reported at amortized cost. 
   
   - Debt and equity securities that are bought and held principally 
     for the purpose of selling them in the near term are classified as 
     trading securities and reported at fair value, with unrealized 
     gains and losses included in earnings. 
   
   - All other debt and equity securities are classified as available 
     for sale and reported at fair value, with unrealized gains and 
     losses excluded from earnings and reported in a separate component 
     of stockholders' equity.
    
   Fair Value of Financial Instruments--Statement of Financial 
   Accounting Standards ("SFAS") No. 107 requires the disclosure of 
   the estimated fair value of financial instruments, whether or not 
   recognized in the Company's consolidated balance sheets, estimated 
   using available market information or other appropriate valuation 
   methodologies.
    
   The carrying amounts of cash and due from banks are a reasonable 
   estimate of their fair value. The fair value of the Company's 
   securities is estimated based on quoted market prices. Both loans 
   (including commitments to lend) and deposits (including time 
   deposits) bear interest at variable rates and are subject to 
   periodic repricing. As such, the carrying amount of loans and 
   deposits is a reasonable estimate of fair value. The fair value of 
   the Company's interest rate contracts is estimated based on quoted 
   market prices. The Company does not have any other significant 
   financial instruments.
    
   Loans--Interest income on loans is recorded on the accrual basis. 
   Losses on loans are provided for under the allowance method of 
   accounting. The allowance is increased by provisions charged to 
   operating expenses based on amounts management considers necessary 
   to meet reasonably foreseeable losses on loans.
    
   Equipment and Leasehold Improvements--Equipment and leasehold 
   improvements are stated at cost, less accumulated depreciation and 
   amortization. Depreciation and amortization are provided on the 
   straight-line method over the estimated useful lives of the assets 
   which range from three to seven years.
    
   Income Taxes--Income tax expense is based on estimated taxes 
   payable or refundable on a tax return basis for the current year 
   and the changes in deferred tax assets and liabilities during the 
   year in accordance with SFAS No. 109, "Accounting for Income 
   Taxes." Deferred tax assets and liabilities are established for 
   temporary differences between the accounting basis and the tax 
   basis of the Company's assets and liabilities at enacted tax rates 
   expected to be in effect when the amounts related to such 
   temporary differences are realized or settled.
    
   Translation of Foreign Currencies--The functional currency of the 
   Company's foreign subsidiaries is the U.S. dollar. Accordingly, 
   gains and losses realized from the settlement of foreign currency 
   transactions, which were not significant in the year ended October 
   31, 1995, the two-month period ended December 31, 1995, or the 
   years ended December 31, 1996 and 1997, are included in other 
   operating expenses in the consolidated statements of income.
    
   Derivative Financial Instruments--Prior to the assignment of the 
   unit investment trust servicing more fully described in Note 11, 
   the Bank used derivative financial instruments in the form of 
   interest rate floor contracts ("Floors"). These instruments were 
   matched with fees on trust and custody assets that were based on 
   current interest rates. Periodic cash payments were accrued on a 
   settlement basis. The premiums associated with the instruments 
   were amortized over their term until they were adjusted to market 
   value in March 1995 in connection with the sale of the hedged 
   assets as more fully described in Note 11.
    
   The Company does not purchase derivative financial instruments for 
   trading purposes. Interest rate swap agreements are matched with 
   specific financial instruments reported on the balance sheet and 
   periodic cash payments are accrued on a settlement basis.
   
                               F-10
<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

   The Company also enters into interest rate swap agreements as 
   discussed in Note 14 and foreign exchange contracts as discussed 
   in Note 17. The Company implemented SFAS 119, "Disclosure About 
   Derivative Financial Investments and Fair Value of Financial 
   Instruments," in fiscal 1996. This standard requires expanded 
   disclosure about amounts, nature and terms associated with the 
   derivative financial instruments held. The adoption of SFAS 119 
   did not have a significant impact on the Company's consolidated 
   financial statements.
    
   The Company enters into foreign exchange contracts with clients 
   and simultaneously enters into a matched position with another 
   bank. These contracts are subject to market value fluctuations in 
   foreign currencies. Gains and losses from such fluctuations are 
   netted and recorded as an adjustment of asset administration fees.
    
   Liabilities--"Accounting for Transfers and Servicing of Financial 
   Assets and Extinguishments of Liabilities," SFAS No. 125 
   establishes consistent accounting standards for transfers and 
   servicing of financial assets and extinguishments of liabilities. 
   SFAS No. 125 provides consistent standards for distinguishing 
   transfers of financial assets that are sales from transfers of 
   financial assets that are secured borrowings based upon the 
   existence of control. SFAS No. 125 was effective and adopted 
   during fiscal 1997. SFAS No. 125 had no material effect upon the 
   Company's consolidated financial statements.
    
   Stock-Based Compensation--The Company accounts for stock-based 
   compensation using the intrinsic value-based method of Accounting 
   Principles Board Opinion No. 25, as allowed under SFAS No. 123, 
   "Accounting for Stock-Based Compensation."
    
   Earnings Per Share--In 1997, the Company adopted SFAS No. 128, 
   "Earnings per Share," and SFAS No. 129, "Disclosure of Information 
   about Capital Structure".
    
   SFAS No. 128 requires that entities with publicly held common 
   stock or potential common stock compute, present, and disclose 
   earnings per share based upon the Basic and/or Diluted earnings 
   per share ("EPS"). Basic EPS were computed by dividing net income 
   by the weighted average number of common shares outstanding during 
   the year. Diluted EPS were computed by increasing the weighted 
   average of common shares outstanding used in Basic EPS by the 
   number of additional common shares that would have been 
   outstanding if the dilutive common stock had been issued. Based 
   upon the Company's capital structure, the Statement requires 
   presentation of both Basic and Diluted EPS.
    
   SFAS No. 129 establishes standards for disclosure, in summary form 
   with an entity's financial statements, the pertinent rights and 
   privileges of the various securities outstanding. Under SFAS No. 
   129, the Company discloses within its financial statements the 
   number of shares issued upon conversion, exercise, or satisfaction 
   of required conditions during the most recent annual fiscal period.
    
   New Accounting Principles--"Reporting Comprehensive Income," SFAS 
   No. 130 establishes standards for reporting and display of 
   comprehensive income and its components in a full set of 
   general-purpose financial statements. SFAS No. 130 requires that 
   an enterprise classify items of other comprehensive income by 
   their nature in a financial statement and display the accumulated 
   balance of other comprehensive income separately from retained 
   earnings and additional paid-in capital in the equity section of a 
   statement of financial position. SFAS No. 130 is effective for 
   financial statements for periods beginning after December 15, 
   1997. 

   "Disclosures about Segments of an Enterprise and Related 
   Information," SFAS No. 131 establishes standards for the way that 
   public business enterprises report information about operating 
   segments in annual financial statements and requires that those 
   enterprises report selected information about operating segments 
   in the financial reports issued to shareholders. It also 
   establishes standards for related disclosures about products and 
   services, geographic areas, and major customers. SFAS No. 131 is 
   effective for financial statements for periods beginning after 
   December 15, 1997.
    
   Reclassifications--Certain amounts in the prior periods' financial 
   statements have been reclassified to conform to the current year's 
   presentation.
    
                               F-11
<PAGE>

3. SECURITIES
 
    Carrying amounts and approximate market values of securities are summarized
    as follows as of December 31, 1996:
 
<TABLE>
<CAPTION>
                                                                                                    APPROXIMATE 
                                                         CARRYING      UNREALIZED    UNREALIZED       MARKET
HELD TO MATURITY                                          VALUE          GAINS         LOSSES         VALUE
----------------------------------------------------  --------------  ------------  ------------  --------------
<S>                                                   <C>             <C>           <C>           <C>
Mortgage-backed securities..........................  $  414,664,590  $  1,973,263  $  1,750,168  $  414,887,685
Federal Agency securities...........................      37,517,495        49,546       224,972      37,342,069
Foreign government securities.......................       7,827,838       124,987       --            7,952,825
                                                      --------------  ------------  ------------  --------------
Total...............................................  $  460,009,923  $  2,147,796  $  1,975,140  $  460,182,579
                                                      --------------  ------------  ------------  --------------
                                                      --------------  ------------  ------------  --------------
</TABLE>
 
<TABLE>
<CAPTION>
                                                          AMORTIZED      UNREALIZED   UNREALIZED    CARRYING
AVAILABLE FOR SALE                                          COST            GAINS       LOSSES        VALUE
------------------------------------------------------  --------------  ------------  ----------  --------------
<S>                                                     <C>             <C>           <C>         <C>
U.S. Treasury securities..............................  $   40,107,999  $    151,304  $        3  $   40,259,300
Mortgage-backed securities............................     229,930,801     1,086,092     155,229     230,861,664
                                                        --------------  ------------  ----------  --------------
Total.................................................  $  270,038,800  $  1,237,396  $  155,232  $  271,120,964
                                                        --------------  ------------  ----------  --------------
                                                        --------------  ------------  ----------  --------------
</TABLE>
 
    Carrying amounts and approximate market values of securities are summarized
    as follows as of December 31, 1997:
 
<TABLE>
<CAPTION>
                                                                                                    APPROXIMATE 
                                                         CARRYING      UNREALIZED    UNREALIZED        MARKET   
HELD TO MATURITY                                          VALUE          GAINS         LOSSES          VALUE    
----------------------------------------------------  --------------  ------------  ------------  --------------
<S>                                                   <C>             <C>           <C>           <C>
State and political subdivisions....................  $   35,224,790  $  2,296,252  $    --       $   37,521,042
Mortgage-backed securities..........................     590,364,940     5,649,718       514,023     595,500,635
Federal Agency securities...........................     168,687,478       545,863       491,229     168,742,112
Foreign government securities.......................       7,768,869       175,731       --            7,944,600
                                                      --------------  ------------  ------------  --------------
Total...............................................  $  802,046,077  $  8,667,564  $  1,005,252  $  809,708,389
                                                      --------------  ------------  ------------  --------------
                                                      --------------  ------------  ------------  --------------
</TABLE>
 
<TABLE>
<CAPTION>
                                                          AMORTIZED      UNREALIZED   UNREALIZED    CARRYING
AVAILABLE FOR SALE                                          COST            GAINS       LOSSES        VALUE
------------------------------------------------------  --------------  ------------  ----------  --------------
<S>                                                     <C>             <C>           <C>         <C>
U.S. Treasury securities..............................  $   30,002,114  $     90,136  $   --      $   30,092,250
Municipal Bonds.......................................       8,348,265        33,588      --           8,381,853
Mortgage-backed securities............................     422,207,689     2,624,065     455,768     424,375,986
                                                        --------------  ------------  ----------  --------------
Total.................................................  $  460,558,068  $  2,747,789  $  455,768  $  462,850,089
                                                        --------------  ------------  ----------  --------------
                                                        --------------  ------------  ----------  --------------
</TABLE>
 

                               F-12
<PAGE>

3.  SECURITIES (CONTINUED)

   Nonmarketable equity securities at December 31, 1996 and 1997 
   consisted of stock of the Federal Home Loan Bank of Boston (the 
   "FHLBB"). As a member of the FHLBB, the Company is required to 
   invest in $100 par value stock of the FHLBB in an amount equal to 
   the greater of (i) 1% of its outstanding residential mortgage loan 
   principal (including mortgage pool securities), (ii) 0.3% of total 
   assets, and (iii) total advances from the FHLBB, divided by a 
   leverage factor of 20. If and when such stock is redeemed, the 
   Company will receive an amount equal to the par value of the stock.
    
    The carrying amounts and approximate market values of securities by
    effective maturity are as follows:
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31, 1996               DECEMBER 31, 1997
                                                 ------------------------------  ------------------------------
                                                                  APPROXIMATE                      APPROXIMATE
                                                    CARRYING         MARKET         CARRYING         MARKET
HELD TO MATURITY                                     VALUE           VALUE           VALUE           VALUE
-----------------------------------------------  --------------  --------------  --------------  --------------
<S>                                              <C>             <C>             <C>             <C>
Due within one year............................  $   19,052,213  $   18,873,837  $     --        $     --
Due from one to five years.....................     114,459,070     113,819,081     357,580,590     360,361,877
Due five years up to ten years.................     240,620,332     241,016,881     183,840,479     184,373,997
Due after ten years............................      85,878,308      86,472,780     260,625,008     264,972,515
                                                 --------------  --------------  --------------  --------------
Total..........................................  $  460,009,923  $  460,182,579  $  802,046,077  $  809,708,389
                                                 --------------  --------------  --------------  --------------
                                                 --------------  --------------  --------------  --------------
</TABLE>
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31, 1996               DECEMBER 31, 1997
                                                 ------------------------------  ------------------------------
                                                    
                                                    AMORTIZED       CARRYING       AMORTIZED        CARRYING
AVAILABLE FOR SALE                                    COST           VALUE            COST           VALUE
-----------------------------------------------  --------------  --------------  --------------  --------------
<S>                                              <C>             <C>             <C>             <C>
Due within one year............................  $   19,964,080  $   20,046,800  $   20,020,094  $   20,039,100
Due from one to five years.....................     213,758,992     214,525,641     307,636,460     309,517,768
Due five years up to ten years.................      36,315,728      36,548,523     132,367,416     132,756,384
Due after ten years............................        --              --               534,098         536,837
                                                 --------------  --------------  --------------  --------------
Total..........................................  $  270,038,800  $  271,120,964  $  460,558,068  $  462,850,089
                                                 --------------  --------------  --------------  --------------
                                                 --------------  --------------  --------------  --------------
</TABLE>
 
   The maturity distributions of mortgage-backed securities have been allocated
   over maturity groupings based upon actual pre-payments to date and 
   anticipated pre-payments based upon historical experience.
    
   Five securities available for sale were sold during the year ended December
   31, 1997 resulting in gains totaling $113,958.
 
   The carrying value of securities pledged amounted to approximately
   $362,000,000 and $590,000,000 at December 31, 1996 and December 31, 1997,
   respectively. Securities are pledged primarily to secure public funds and
   clearings with other depository institutions.
 
                               F-13
<PAGE>

4. LOANS
 
   Loans consist of demand loans with individuals and not-for-profit 
   institutions located in the greater Boston, Massachusetts 
   metropolitan area and loans to mutual fund clients. The loans to 
   mutual funds include lines of credit and advances pursuant to the 
   terms of the custody agreements between the Company and those 
   mutual fund clients to facilitate securities transactions and 
   redemptions. Generally, the loans are, or may be, in the event of 
   default, collateralized with marketable securities held by the 
   Company as custodian. There were no impaired or nonperforming 
   loans at December 31, 1996 or December 31, 1997. In addition, 
   there have been no loan charge-offs or recoveries during the year 
   ended October 31, 1995, the two months ended December 31, 1995 or 
   the years ended December 31, 1996 and 1997. Loans consisted of the 
   following at December 31, 1996 and December 31, 1997:
    
<TABLE>
<CAPTION>
                                                    DECEMBER 31,           DECEMBER 31,
                                                       1996                   1997
                                                  ---------------         -------------
<S>                                               <C>                     <C>
Loans to individuals............................  $    23,448,999         $  26,857,933
Loans to not-for-profit institutions............           12,500                12,500
Loans to mutual funds...........................       42,875,390            29,174,524
                                                  ---------------         -------------
                                                       66,336,889            56,044,957
Less allowance for loan losses..................          100,000               100,000
                                                  ---------------         -------------
Total...........................................  $    66,236,889         $  55,944,957
                                                  ---------------         -------------
                                                  ---------------         -------------
</TABLE>
 
   The Company had commitments to lend of approximately $37,128,000 
   and $62,845,000 at December 31, 1996 and December 31, 1997, 
   respectively. The terms of these commitments are similar to the 
   terms of outstanding loans.
 
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
 
   The major components of equipment and leasehold improvements are as follows
   at December 31, 1996 and December 31, 1997:
 
<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,   DECEMBER 31,
                                                                                           1996          1997
                                                                                       ------------  -------------
<S>                                                                                    <C>           <C>
Furniture, fixtures and equipment....................................................  $  8,516,450  $  11,189,053
Leasehold improvements...............................................................       744,395        492,138
                                                                                       ------------  -------------
Total................................................................................     9,260,845     11,681,191
Less accumulated depreciation and amortization.......................................     4,016,871      3,780,197
                                                                                       ------------  -------------
Equipment and leasehold improvements, net............................................  $  5,243,974  $   7,900,994
                                                                                       ------------  -------------
                                                                                       ------------  -------------
</TABLE>
 
                               F-14
<PAGE>

6. DEPOSITS
 
   Time deposits at December 31, 1996 and December 31, 1997 include
   noninterest-bearing amounts of approximately $55,000,000 and $65,000,000,
   respectively.
 
   All time deposits had a minimum balance of $100,000 and a maturity of less
   than three months at December 31, 1996 and December 31, 1997.

7. SHORT-TERM BORROWINGS
 
   The major components of short-term borrowings are as follows at December 31,
   1996 and December 31, 1997:
 
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,    DECEMBER 31,
                                                                                        1996            1997
                                                                                   --------------  --------------
<S>                                                                                <C>             <C>
Repurchase agreements............................................................  $  296,421,201  $  499,188,363
Treasury, Tax and Loan account...................................................         399,551         744,265
                                                                                   --------------  --------------
Total............................................................................  $  296,820,752  $  499,932,628
                                                                                   --------------  --------------
                                                                                   --------------  --------------
</TABLE>
 
   The Company enters into repurchase agreements whereby securities 
   are sold by the Company under agreements to repurchase. The 
   interest rate on the outstanding agreements at December 31, 1996 
   was 5.91% and all agreements matured on January 2, 1997. The 
   interest rate on the outstanding agreements at December 31, 1997 
   ranged from 4.95% to 5.90% and all agreements mature by March 3, 
   1998. 

   The Company receives federal tax deposits from clients as an 
   agent for the Federal Reserve Bank and accumulates these deposits 
   in the Treasury, Tax and Loan account. The Federal Reserve Bank 
   charges the Company interest at the Federal Funds rate on such 
   deposits. The interest rates on the outstanding balances at 
   December 31, 1996 and December 31, 1997 were 5.10% and 5.26% 
   respectively. 

   The following securities were pledged under the repurchase 
   agreements at December 31, 1996 and December 31, 1997:
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31, 1996               DECEMBER 31, 1997
                                                 ------------------------------  ------------------------------
<S>                                              <C>             <C>             <C>             <C>
                                                                   APPROXIMATE                     APPROXIMATE
                                                    CARRYING         MARKET         CARRYING         MARKET
                                                     VALUE           VALUE           VALUE           VALUE
                                                 --------------  --------------  --------------  --------------
U.S. Treasury securities.......................  $   37,249,940  $   37,249,940  $   20,392,469  $   20,392,469
Federal Agency securities......................      25,000,000      24,803,950        --              --
Mortgage-backed securities.....................     245,689,672     246,777,873     501,141,751     503,300,183
                                                 --------------  --------------  --------------  --------------
Total..........................................  $  307,939,612  $  308,831,763  $  521,534,220  $  523,692,652
                                                 --------------  --------------  --------------  --------------
                                                 --------------  --------------  --------------  --------------
</TABLE>
 
   The amount outstanding at December 31, 1997 was the highest amount 
   outstanding at any month end during the year ended December 31, 
   1997. The average balance during the year ended December 31, 1997 
   was $509,288,000.
 
                               F-15
<PAGE>
 
8. INCOME TAXES
 
    The components of income tax expenses are as follows for the year ended
October 31, 1995, the two-month period ended December 31, 1995, and the years
ended December 31, 1996 and 1997:
 
<TABLE>
<CAPTION>
                                                          OCTOBER 31,   DECEMBER 31,  DECEMBER 31,  DECEMBER 31,
                                                              1995          1995          1996          1997
                                                          ------------  ------------  ------------  ------------
<S>                                                       <C>           <C>           <C>           <C>
Current:
  Federal...............................................  $  2,781,000   $  445,480    $3,593,391    $5,453,161
  State.................................................       484,000      139,429       181,416       714,422
  Foreign...............................................         4,000        7,012       193,251         9,462
                                                          ------------  ------------  ------------  ------------
                                                             3,269,000      591,921     3,968,058     6,177,045
                                                          ------------  ------------  ------------  ------------
Deferred:
  Federal...............................................      (391,000)      50,538       619,357       246,014
  State.................................................      (154,000)      17,580       240,861        90,838
  Foreign...............................................        76,000       10,259        38,295        --
                                                          ------------  ------------  ------------  ------------
                                                              (469,000)      78,377       898,513       336,852
                                                          ------------  ------------  ------------  ------------
Minority Interest.......................................       --            --            --           808,467
                                                          ------------  ------------  ------------  ------------
Total income taxes......................................  $  2,800,000   $  670,298    $4,866,571    $7,322,364
                                                          ------------  ------------  ------------  ------------
                                                          ------------  ------------  ------------  ------------
</TABLE>
 
    Differences between the effective income tax rate and the federal statutory
rates are as follows for the year ended October 31, 1995, the two-month period
ended December 31, 1995, and the years ended December 31, 1996 and 1997:
 
<TABLE>
<CAPTION>
                                                            OCTOBER 31,    DECEMBER 31,     DECEMBER 31,     DECEMBER 31,
                                                               1995            1995             1996             1997
                                                           -------------  ---------------  ---------------  ---------------
<S>                                                        <C>            <C>              <C>              <C>
Federal statutory rate...................................        34.00%          34.00%           35.00%           35.00%
State income tax rate, net of federal benefit............         3.00            6.60             2.20             2.89
Foreign income taxes with different rates................         0.70            1.10             1.20             0.03
Tax-exempt income, net of disallowance...................       --              --               --                (2.79)
Other....................................................         1.10            1.00             0.10             0.87
                                                                 -----           -----            -----            -----
Effective tax rate.......................................        38.80%          42.70%           38.50%           36.00%
</TABLE>
 
                                      F-16
<PAGE>

8. INCOME TAXES (CONTINUED)
    The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities consist of the following at
December 31, 1996 and December 31, 1997:
 
<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,  DECEMBER 31,
                                                                                          1996          1997
                                                                                      ------------  -------------
<S>                                                                                   <C>           <C>
Deferred tax assets:
  Employee benefit plans............................................................   $  933,216   $     829,330
  Other.............................................................................       37,562          84,716
                                                                                      ------------  -------------
                                                                                          970,778         914,046
Deferred tax liabilities:
  Prepaid insurance.................................................................     (620,979)       (636,948)
  Securities available for sale.....................................................     (432,866)       (825,128)
  Unearned compensation.............................................................     (183,175)       (139,431)
  Depreciation and amortization.....................................................     (106,514)       (414,409)
                                                                                      ------------  -------------
Net deferred tax asset (liability)..................................................   $ (372,756)  $  (1,101,870)
                                                                                      ------------  -------------
                                                                                      ------------  -------------
</TABLE>
 
    Net deferred tax liabilities are reported as a component of other
liabilities in the 1996 and 1997 consolidated balance sheets.
 
9. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES OF THE COMPANY
 
    On January 31, 1997, a trust sponsored and wholly owned by the Company
issued $25,000,000 in 9.77% Trust Preferred Securities (the "Capital
Securities"), the proceeds of which were invested by the trust in the same
aggregate principal amount of the Company's newly issued 9.77% Junior
Subordinated Deferrable Interest Debentures due February 1, 2027 (the "Junior
Subordinated Debentures"). The $25,000,000 aggregate principal amount of the
Junior Subordinated Debentures represents the sole asset of the Trust. The
Company has guaranteed, on a subordinated basis, distributions and other
payments due on the Capital Securities (the "Guarantee"). The Guarantee, when
taken together with the Company's obligations under (i) the Debentures; (ii) the
indenture pursuant to which the Junior Subordinated Debentures were issued; and
(iii) the Amended and Restated Declaration of Trust governing the Trust
constitutes a full and unconditional guarantee of the Trust's obligations under
the Capital Securities.
 
10. STOCKHOLDERS' EQUITY
 
    The Company has authorized 1,000,000 shares of Preferred Stock, 650,000
shares of Class A Common Stock and 20,000,000 shares of Common Stock, all with a
par value of $.01 per share. At December 31, 1996 and December 31, 1997, there
were no preferred shares issued or outstanding. There were 359,545 and 0 shares
of Class A Common Stock and 6,084,767 and 6,470,313 shares of Common Stock
issued and outstanding at December 31, 1996 and December 31, 1997, respectively.
 
    The Company has three stock option plans, the 1995 Stock Plan, the 1995 
Non-Employee Director Stock Option Plan, and the 1997 Employee Stock Purchase 
Plan. Under the terms of the 1995 Stock Plan, the Company may grant options 
to purchase up to a maximum of 560,000 shares of Common Stock to certain 
employees, consultants, directors and officers. On November 18, 1997, subject 
to approval by a majority of the holders of the Company's Common Stock 
eligible to vote thereon, the Board of Directors of the Company authorized 
the issuance of up to an additional 600,000 shares of Common Stock under the 
1995 Stock Plan. The options may be awarded as incentive stock options 
(employees only), nonqualified stock options, stock awards or opportunities 
to make direct purchases of stock.

                                      F-17
<PAGE>

10. STOCKHOLDERS' EQUITY (CONTINUED)

    Under the terms of the 1995 Non-Employee Director Stock Option Plan, the
Company may grant options to non-employee directors to purchase up to a maximum
of 40,000 shares of Common Stock. Options to purchase 2,500 shares of Common
Stock were awarded at the date of initial public offering to each director.
Subsequently, any director elected or appointed after such date will receive an
automatic initial grant of options to purchase 2,500 shares upon becoming a
director. Thereafter, each director will receive an automatic grant of options
to purchase 2,500 shares effective upon each one-year anniversary of the date of
such director's original grant. Additionally, non-employee directors may elect
to receive options to acquire shares of the Company's Common Stock in lieu of
such director's cash retainer. Any election is subject to certain restrictions
under the 1995 Non-Employee Director Stock Option Plan. The number of shares of
stock underlying the option is equal to the quotient obtained by dividing the
cash retainer by the value of an option on the date of grant as determined using
the Black-Scholes model.
 
    The exercise price of options under the 1995 Non-Employee Director Stock
Option Plan and the incentive options under the 1995 Stock Plan may not be less
than the fair market value at the date of the grant. The exercise price of the
nonqualified options from the 1995 Stock Plan is determined by the compensation
committee of the Board of Directors. All options become exercisable as specified
at the date of the grant.
 
    In November 1995, the Company granted 114,000 shares to certain officers of
the Company under the 1995 Stock Plan. Of these grants, 105,000 shares vest in
sixty equal monthly installments, and the remainder vest in five equal annual
installments. Upon termination of employment, the Company has the right to
repurchase all unvested shares at a price equal to the fair market value at the
date of the grant. The Company has recorded deferred compensation of $1,687,675
and $1,248,775 at December 31, 1996 and December 31, 1997, respectively,
pursuant to these grants.
 
    The 1997 Employee Stock Purchase Plan was adopted by the Board of Directors
on January 14, 1997 and subsequently approved by the stockholders at the
Company's 1997 Annual Meeting. The Company has authorized the issuance of
140,000 shares of Common Stock pursuant to the exercise of nontransferable
options granted to participating employees. The 1997 Purchase Plan permits
eligible employees to purchase up to 1,000 shares of Common Stock per payment
period, subject to limitations provided by Section 423(b) of the Internal
Revenue Code, through accumulated payroll deductions. The purchases are made
twice a year at a price equal to the lesser of (i) 90% of the average market
value of the Common Stock on the first business day of the payment period, or
(ii) 90% of the average market value of the Common Stock on the last business
day of the payment period. Annual payment periods consist of two six-month
periods, January 1 through June 30 and July 1 through December 31.
 
    A summary of option activity under all plans is as follows:
 
<TABLE>
<CAPTION>
                                                                                       NUMBER OF    WEIGHTED-AVERAGE
                                                                                        SHARES       EXERCISE PRICE
                                                                                      -----------  -------------------
<S>                                                                                   <C>          <C>
Outstanding at December 31, 1996....................................................     345,150        $      21
Granted.............................................................................     187,262               43
Exercised...........................................................................     (14,753)              17
Canceled............................................................................        (375)              17
                                                                                      -----------
Outstanding at December 31, 1997....................................................     517,284               30
                                                                                      -----------
Outstanding and exercisable at December 31, 1997....................................     148,939
                                                                                      -----------
</TABLE>
 
    Under the Employee Stock Purchase Plan, adopted in fiscal year 1997, the
Company sold 11,248 shares of Common Stock to employees at December 31, 1997.
The exercise price of the stock was $41.50, or 90% of the average market value
of the Common Stock on the last business day of the payment period.

                                      F-18
<PAGE>

10. STOCKHOLDERS' EQUITY (CONTINUED)

    Employee Stock-Based Compensation--With respect to employee stock-based
compensation, the Company has adopted the disclosure-only requirements of SFAS
No. 123. Accordingly, no compensation cost has been recognized in the
accompanying financial statements for employee stock-based compensation awarded
under the three stock employee stock option plans. If compensation cost had been
determined for awards granted under the employee stock option plans based on the
fair value of the awards at the date of grant in accordance with the provisions
of SFAS No. 123, the Company's net income and earnings per share for the years
ended December 31, 1996 and December 31, 1997 would have decreased to the pro
forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31,   DECEMBER 31,
                                                        1996           1997
                                                   --------------  ------------
<S>                                 <C>             <C>            <C>
Net income                          As reported      $7,773,942    $  11,580,261
                                    Pro forma         7,502,714       10,976,162
                                                                 
Basic earnings per share            As reported            1.21             1.80
                                    Pro forma              1.17             1.71
                                                                 
Diluted earnings per share          As reported            1.20             1.75
                                    Pro forma              1.16             1.66
</TABLE>
 
    The fair value of each option grant under the employee stock option plan was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions for the years ended December 31, 1997 and 1996,
respectively: an assumed risk-free interest rate of 5.61% and 6.25%, an expected
life of five years for both years, an expected volatility of 27% and 20%, and
nominal dividends paid for both years.
 
    The fair value of each option grant under the employee stock purchase plan
was estimated by computing the option discount which is the difference between
the average market value of the Company's Common Stock during the payment period
and the lesser of (i) 90% of the average market value of the Common Stock on the
first business day of the payment period, or (ii) 90% of the average market
value of the Common Stock on the last business day of the payment period.
 
                                      F-19
<PAGE>

10. STOCKHOLDERS' EQUITY (CONTINUED)

    EARNINGS PER SHARE--As a result of the EPS methods required to be disclosed
by the Company under SFAS No. 128, the Statement also requires disclosure of a
reconciliation from Basic EPS to Diluted EPS for the two-month period ended
December 31, 1995, and for the years ended December 31, 1996 and 1997 as
follows:
 
<TABLE>
<CAPTION>
                                                                                                            PER-
                                                                                                            SHARE
                                                                                 INCOME        SHARES      AMOUNT
                                                                              -------------  ----------  -----------
<S>                                                                           <C>            <C>         <C>
DECEMBER 31, 1997
BASIC EPS
Income available to common stockholders.....................................  $  11,580,261   6,446,428   $    1.80
                                                                                                              -----
                                                                                                              -----
Dilutive effect of common equivalent shares of stock options................                    169,175
                                                                                             ----------
DILUTED EPS
Income available to common stockholders.....................................  $  11,580,261   6,615,603   $    1.75
                                                                              -------------  ----------       -----
                                                                              -------------  ----------       -----
 
DECEMBER 31, 1996
BASIC EPS
Income available to common stockholders.....................................  $   7,773,942   6,444,195   $    1.21
                                                                                                              -----
                                                                                                              -----
Dilutive effect of common equivalent shares of stock options................                     60,187
                                                                                             ----------
DILUTED EPS
Income available to common stockholders.....................................  $   7,773,942   6,504,382   $    1.20
                                                                              -------------  ----------       -----
                                                                              -------------  ----------       -----
 
DECEMBER 31, 1995
BASIC EPS
Income available to common stockholders.....................................  $     899,794   6,444,000   $    0.14
                                                                                                              -----
                                                                                                              -----
Dilutive effect of common equivalent shares of stock options................                     36,561
                                                                                             ----------
DILUTED EPS
Income available to common stockholders.....................................  $     899,794   6,480,561   $    0.14
                                                                              -------------  ----------       -----
                                                                              -------------  ----------       -----
</TABLE>
 
11. PROCEEDS FROM ASSIGNMENT OF UNIT INVESTMENT TRUST SERVICING, NET
 
    On March 1, 1995, the Company recognized a net gain of $2,572,298 of
noninterest income resulting from the assignment to another company of the
rights to service approximately $5.0 billion of unit investment trust assets. In
connection with the assignment, the Company adjusted to market value interest
rate floors with a notional amount of $80,000,000, and the resulting loss of
$1,057,700 is reported net of the cash proceeds from the assignment of unit
investment trust servicing. These interest rate floors had previously been
designated as hedges of fees from the unit investment trusts (see Note 14).
 
                                      F-20
<PAGE>

12. EMPLOYEE BENEFIT PLANS

    PENSION PLAN--The Company has a trusteed, noncontributory, qualified 
defined benefit pension plan covering substantially all of its employees who 
were hired before January 1, 1997. The benefits are based on years of service 
and the employee's compensation during employment. The Company's funding 
policy is to contribute annually the maximum amount which can be deducted for 
federal income tax purposes. Contributions are intended to provide not only 
for benefits attributed to service to date but also for benefits expected to 
be earned in the future.
 
    The Company established a supplemental retirement plan in 1994 that covers
certain employees and pays benefits that supplements any benefits paid under the
qualified plan. Benefits under the supplemental plan are generally based on
compensation not includable in the calculation of benefits to be paid under the
qualified plan. The total cost of this plan to the Company was $86,563, $6,827,
$36,960 and $60,002 in the year ended October 1995, the two-month period ended
December 31, 1995, and the years ended December 31, 1996 and December 31, 1997,
respectively.
 
    The following table sets forth the funded status and accrued pension cost
for the Company's pension plans.
 
<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,   DECEMBER 31,
                                                                                          1996           1997
                                                                                      -------------  -------------
<S>                                                                                   <C>            <C>
Actuarial present value of benefit obligations:
  Accumulated benefit obligations, including vested benefits of $3,746,000 and
    $4,316,000 for December 31, 1996 and 1997, respectively.........................  $   4,109,000  $   4,775,000
                                                                                      -------------  -------------
                                                                                      -------------  -------------
Projected benefit obligations for services rendered to date.........................  $   6,885,000  $   6,285,000
Plan assets at fair value, primarily listed stocks and U.S. government
  obligations.......................................................................      6,213,000      8,168,000
                                                                                      -------------  -------------
Projected benefit obligations in excess of assets...................................       (672,000)     1,883,000
Unrecognized net gain from past experience different from that assumed and effects
  of changes in assumptions.........................................................     (1,075,000)    (3,363,000)
Prior service cost not yet recognized in periodic pension cost......................        238,000        210,000
Unrecognized net (asset) liability..................................................       (378,000)      (339,000)
                                                                                      -------------  -------------
Accrued pension cost................................................................  $  (1,887,000) $  (1,609,000)
                                                                                      -------------  -------------
                                                                                      -------------  -------------
</TABLE>
 
    Net pension cost included the following components for the year ended
October 31, 1995, the two-month period ended December 31, 1995 and the years
ended December 31, 1996 and 1997:
 
<TABLE>
<CAPTION>
                                                          OCTOBER 31,  DECEMBER 31,  DECEMBER 31,   DECEMBER 31,
                                                             1995          1995          1996           1997
                                                          -----------  ------------  -------------  -------------
<S>                                                       <C>          <C>           <C>            <C>
Service cost--benefits earned during the period.........   $ 618,000    $  123,000   $     848,000  $     540,000
Interest cost on projected benefit obligations..........     425,000        86,000         520,000        557,000
Return on plan assets...................................    (420,000)      (73,000)     (1,013,000)    (1,279,000)
Net amortization and deferral...........................      (5,000)        1,000         508,000        714,000
                                                          -----------  ------------  -------------  -------------
Net periodic pension cost...............................   $ 618,000    $  137,000   $     863,000  $     532,000
                                                          -----------  ------------  -------------  -------------
                                                          -----------  ------------  -------------  -------------
</TABLE>
 
                                      F-21
<PAGE>

12. EMPLOYEE BENEFIT PLANS (CONTINUED)

    The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations were as follows:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,       DECEMBER 31,
                                                                   1996               1997
                                                             -----------------  -----------------
<S>                                                          <C>                <C>
Weighted average discount rate.............................            7.5%               7.5%
Rate of increase in future compensation levels.............            5.0                5.0
Long-term rate of return on plan assets....................            8.5                8.5
</TABLE>
 
    EMPLOYEE SAVINGS PLAN--The Company sponsors a qualified defined contribution
employee savings plan covering substantially all employees who elect to
participate. The Company matches employee contributions to the plan up to
specified amounts. The total cost of this plan to the Company was $222,000,
$36,000, $208,000 and $436,000 in the year ended October 31, 1995, the two-month
period ended December 31, 1995, and the years ended December 31, 1996 and 1997,
respectively.
 
13. RELATED-PARTY TRANSACTIONS
 
    As a result of the Spin-off Transaction described in Note 1, transactions
between the Company and EVC are no longer considered related-party transactions.
However, prior to the Spin-off Transaction, the Company entered into various
transactions with EVC and a group of mutual funds sponsored by EVC. The
following is a summary of such related-party transactions for the year ended
October 31, 1995:
 
<TABLE>
<CAPTION>
                                                                                 OCTOBER 31,
                                                                                     1995
                                                                                --------------
<S>                                                                             <C>
Asset administration fee income...............................................  $    8,355,000
Computer service fee income...................................................         506,000
Occupancy expense.............................................................         260,000
</TABLE>
 
    The aggregate of the above fees exceeded 10% of the Company's interest
income and non-interest income.
 
    In addition, EVC and its group of mutual funds had the following amounts
outstanding with the Company at October 31, 1995:
 
<TABLE>
<S>                                                             <C>
Fees receivable...............................................  $   308,000
Deposits......................................................  102,869,000
</TABLE>
 
                                      F-22
<PAGE>

 
14. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
 
    LINES OF CREDIT--At December 31, 1997, the Company had commitments to 
individuals under collateralized open lines of credit totaling $90,726,000, 
against which $27,881,000 in loans were drawn. The credit risk involved in 
issuing lines of credit is essentially the same as that involved in extending 
loan facilities. The Company does not anticipate any loss as a result of 
these lines of credit.
 
    INTEREST-RATE CONTRACTS--The following table summarizes the contractual 
or notional amounts of derivative financial instruments held by the Company 
at December 31, 1996 and 1997:
 
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,    DECEMBER 31,
                                                                                        1996            1997
                                                                                   --------------  --------------
<S>                                                                                <C>             <C>
Interest rate contracts:
Swap agreements..................................................................  $  180,000,000  $  340,000,000
Floor contracts..................................................................      30,000,000        --
</TABLE>
 
    Interest rate contracts involve an agreement with a counterparty to 
exchange cash flows based on an underlying interest rate index. An interest 
rate floor is a contract purchased from a counterparty which specifies a 
minimum interest rate for the specified period of time. A swap agreement 
involves the exchange of a series of interest payments, either at a fixed or 
variable rate, based upon the notional amount without the exchange of the 
underlying principal amount. The Company's exposure from these interest rate 
contracts results from the possibility that one party may default on its 
contractual obligation. Credit risk is limited to the positive market value 
of the derivative financial instrument, which is significantly less than the 
notional value. During 1997, the Company entered into agreements to assume 
fixed-rate interest payments in exchange for variable market-indexed interest 
payments. The original terms range from 12 to 24 months. The weighted-average 
fixed-payment rates were 5.90 percent at December 31, 1997. Variable-interest 
payments received are indexed to 1 month LIBOR. At December 31, 1997, the 
weighted-average rate of variable market-indexed interest payment obligations 
to the Bank was 5.79 percent. The effect of these agreements was to lengthen 
short-term variable rate liabilities into longer-term fixed rate liabilities. 
These contracts had no carrying value and the market value was approximately 
($358,000) at December 31, 1997.
 
15. COMMITMENTS AND CONTINGENCIES
 
    RESTRICTIONS ON CASH BALANCES--The Company is required to maintain 
certain average cash reserve balances with the Federal Reserve Bank. The 
reserve balance requirement as of December 31, 1997 was $37,081,000. In 
addition, other cash balances in the amount of $1,562,000 were pledged to 
secure clearings with a depository institution as of December 31, 1997.
 
    LEASE COMMITMENTS--Minimum future commitments on noncancelable operating
leases at December 31, 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                                                            BANK
                                                                                          PREMISES     EQUIPMENT
                                                                                        ------------  ------------
<S>                                                                                     <C>           <C>
Fiscal Year Ending
1998..................................................................................  $  6,051,092  $  1,997,720
1999..................................................................................     6,079,504     1,661,790
2000..................................................................................     5,814,212       525,269
2001..................................................................................     5,694,734       --
2002 and beyond.......................................................................    29,999,475       --
</TABLE>
 
    Total rent expense was $5,511,000, $843,000, $5,838,000 and $6,426,000 
for the year ended October 31, 1995, the two months ended December 31, 1995, 
and the years ended December 31, 1996 and 1997, respectively.
 
    On February 1, 1996, the Company entered into a five year facility 
management agreement with a third party provider of duplicating and delivery 
services. Under the terms of the agreement, the Company agreed to pay minimum 
annual charges of $387,214, $406,788, $427,119, and $35,735 in the years 
ended December 31, 1998, 1999, 2000, and 2001, respectively. These minimum 
charges can increase due to certain usage thresholds. Service expense under 
this contract was $452,463 for the year ended December 31, 1997.

                                     F-23

<PAGE>
 
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
 
    CONTINGENCIES--The Company provides global custody, multicurrency 
accounting, institutional transfer agency, performance measurement, foreign 
exchange, securities lending and mutual fund administration services to a 
variety of financial asset managers, including mutual fund complexes, 
investment advisors, banks and insurance companies. Assets under custody and 
management, held by the Company in a fiduciary capacity, are not included in 
the consolidated balance sheets since such items are not assets of the 
Company. Management conducts regular reviews of its fiduciary 
responsibilities and considers the results in preparing its consolidated 
financial statements. In the opinion of management, there are no contingent 
liabilities at December 31, 1997 that are material to the consolidated 
financial position or results of operations of the Company.
 
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
    The carrying value and estimated fair value of financial instruments are as
follows at December 31, 1996 and 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 1996        DECEMBER 31, 1997
                                                                 -----------------------  -----------------------
<S>                                                              <C>         <C>          <C>         <C>
                                                                  CARRYING      FAIR       CARRYING      FAIR
                                                                   AMOUNT       VALUE       AMOUNT       VALUE
                                                                 ----------  -----------  ----------  -----------
On-balance sheet amounts:
  Cash and due from banks......................................  $   19,226  $    19,226  $   17,038  $    17,038
  Federal funds sold...........................................     120,000      120,000      75,000       75,000
  Securities held to maturity..................................     460,010      460,183     802,046      809,708
  Securities available for sale................................     271,121      271,121     462,850      462,850
  Loans........................................................      66,237       66,237      55,945       55,945
  Deposits.....................................................     596,517      596,517     846,740      846,740

 Off-balance sheet amounts:
  Commitments to lend ($37,127 and $62,845 at December 31, 1996
    and 1997)..................................................      --           37,127      --           62,845
  Interest rate floor contracts (notional amounts of $30,000
    and $0 at December 31, 1996 and 1997)                            --          --           --          --
  Interest rate swap agreements (notional amounts of $180,000 and
    $340,000 at December 31, 1996 and 1997)....................      --         (112,160)     --         (357,927)
  Foreign exchange contracts (notional amounts of $114,302 and
    $45,884 at December 31, 1996 and 1997).....................      --          --           --          --
</TABLE>
 
    The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996 and 1997. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been significantly revalued for purposes of
these consolidated financial statements since those dates and therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
                                      F-24
<PAGE>
 
17. FOREIGN EXCHANGE CONTRACTS
 
    A summary of foreign exchange contracts outstanding at December 31, 1996 and
December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
                                                                  DECEMBER 31, 1996             
                                                       ---------------------------------------  
                                                                                 UNREALIZED
CURRENCY                                                PURCHASES     SALES       GAIN/LOSS     
-----------------------------------------------------  -----------  ---------  ---------------  
<S>                                                    <C>          <C>        <C>              
Hong Kong (HKD)......................................   $   1,807   $   1,807        --         
Japan (JPY)..........................................      40,828      40,828        --         
France (FRF).........................................       1,093       1,093        --         
United Kingdom (GBP).................................       1,873       1,873        --         
Malaysia (MYR).......................................       6,009       6,009        --         
Germany (DEM)........................................       2,118       2,118        --         
Switzerland (CHF)....................................      --          --            --         
Singapore (SGD)......................................         331         331        --         
Sweden (SEK).........................................         139         139        --         
Canada (CAD).........................................      --          --            --         
Netherlands (NLG)....................................         918         918        --         
Spain (ESP)..........................................          85          85        --         
Italy (ITL)..........................................          51          51        --         
Other currencies.....................................       1,894       1,894        --         
                                                       -----------  ---------  ---------------  
                                                        $  57,146   $  57,146        --         
                                                       -----------  ---------  ---------------  
                                                       -----------  ---------  ---------------  
 
<CAPTION>

                                                                     DECEMBER 31, 1997
                                                         ------------------------------------------
                                                                                      UNREALIZED
CURRENCY                                                  PURCHASES     SALES          GAIN/LOSS
-----------------------------------------------------    -----------  ---------     ---------------
<S>                                                      <C>          <C>           <C>
Hong Kong (HKD)......................................     $   5,011   $   5,011           --
Japan (JPY)..........................................         5,000       5,000           --
France (FRF).........................................         4,292       4,292           --
United Kingdom (GBP).................................         3,440       3,440           --
Malaysia (MYR).......................................         1,218       1,218           --
Germany (DEM)........................................         1,016       1,016           --
Switzerland (CHF)....................................           483         483           --
Singapore (SGD)......................................           368         368           --
Sweden (SEK).........................................           317         317           --
Canada (CAD).........................................           278         278           --
Netherlands (NLG)....................................           271         271           --
Spain (ESP)..........................................           185         185           --
Italy (ITL)..........................................           145         145           --
Other currencies.....................................           918         918           --
                                                         -----------  ---------     ---------------
                                                          $  22,942   $  22,942           --
                                                         -----------  ---------     ---------------
                                                         -----------  ---------     ---------------
</TABLE>
 
The maturity of contracts outstanding as of December 31, 1997 is as follows:
 
<TABLE>
<CAPTION>
MATURITY                                                                                      PURCHASES     SALES
-------------------------------------------------------------------------------------------  -----------  ---------
<S>                                                                                          <C>          <C>
January 1998...............................................................................   $  17,279   $  17,279
February 1998..............................................................................       5,663       5,663
</TABLE>
 
18. REGULATORY MATTERS
 
    The Company and the Bank are subject to various regulatory capital 
requirements administered by the federal banking agencies. Failure to meet 
minimum capital requirements can initiate certain mandatory--and possibly 
additional discretionary--actions by regulators that, if undertaken, could 
have a direct material effect on the Company's and the Bank's financial 
statements. Under capital adequacy guidelines and the regulatory framework 
for prompt corrective action, the Bank must meet specific capital guidelines 
that involve quantitative measures of the Bank's assets, liabilities, and 
certain off-balance sheet items as calculated under regulatory accounting 
practices. The Company's and the Bank's capital amounts and classification 
are also subject to qualitative judgments by the regulators about components, 
risk weightings, and other factors.
 
    Quantitative measures established by regulation to ensure capital 
adequacy require the Company and the Bank to maintain minimum amounts and 
ratios (set forth in the table below) of total and Tier 1 capital (as defined 
in the regulations) to risk-weighted assets (as defined), and of Tier 1 
capital (as defined) to average assets (as defined). Management believes, as 
of December 31, 1997, that the Company and the Bank meet all capital adequacy 
requirements to which it is subject.
 
    As of December 31, 1997, the most recent notification from the Federal 
Deposit Insurance Corporation categorized the Company and the Bank as well 
capitalized under the regulatory framework for prompt corrective action. To 
be categorized as well capitalized, the Company and the Bank must maintain 
minimum total risk-based, Tier I risk based, and Tier I leverage ratios as 
set forth in the table. There are no conditions or events since that 
notification that management believes have changed the Company's or the 
Bank's category. The following table presents the capital ratios for the Bank 
and the Company for the years ended December 31, 1997 and December 31, 1996. 
The capital ratios for the Bank were substantially the same as the capital 
ratios of the Company for the year ended December 31, 1996.

                                      F-25
<PAGE>

18. REGULATORY MATTERS (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                                          TO BE WELL
                                                                                                      CAPITALIZED UNDER
                                                                               FOR CAPITAL            PROMPT CORRECTIVE
                                                        ACTUAL              ADEQUACY PURPOSES:        ACTION PROVISIONS:
                                               ------------------------  ------------------------  ------------------------
                                                  AMOUNT        RATIO       AMOUNT        RATIO       AMOUNT        RATIO
                                               -------------  ---------  -------------  ---------  -------------  ---------
<S>                                            <C>            <C>        <C>            <C>        <C>            <C>
AS OF DECEMBER 31, 1997:
  Total Capital
    (to Risk Weighted Assets--the Company)...  $  97,695,092     29.03%  $  26,919,487      8.00%       N/A          N/A
    (to Risk Weighted Assets--the Bank)......  $  96,140,693     28.57%  $  26,918,947      8.00%  $  33,648,684     10.00%
  Tier I Capital
    (to Risk Weighted Assets--the Company)...  $  97,595,092     29.00%  $  13,459,744      4.00%       N/A          N/A
    (to Risk Weighted Assets--the Bank)......  $  96,040,693     28.54%  $  13,459,473      4.00%  $  20,189,210      6.00%
  Tier I Capital
    (to Average Assets- the Company).........  $  97,595,092      6.39%  $  61,062,667      4.00%       N/A          N/A
    (to Average Assets--the Bank)............  $  96,040,693      6.31%  $  60,892,699      4.00%  $  76,115,874      5.00%
 
AS OF DECEMBER 31, 1996:
  Total Capital
    (to Risk Weighted Assets)................  $  60,818,485     24.71%  $  19,691,528      8.00%  $  24,614,410     10.00%
  Tier 1 Capital
    (to Risk Weighted Assets)................  $  60,718,485     24.67%  $   9,845,764      4.00%  $  14,768,646      6.00%
  Tier I Capital
    (to Average Assets)......................  $  60,718,485      9.65%  $  25,155,710      4.00%  $  31,444,637      5.00%
</TABLE>
 
    Under Massachusetts law, trust companies such as the Bank may only pay 
dividends out of "net profits" and only to the extent that such payments will 
not impair the Bank's capital stock and surplus account. If, prior to 
declaration of a dividend, the Bank's capital stock and surplus accounts do 
not equal at least 10% of its deposit liabilities, then prior to the payment 
of the dividend, the Bank must transfer from net profits to its surplus 
account the amount required to make its surplus account equal to either (i) 
together with capital stock, 10% of deposit liabilities, or (ii) subject to 
certain adjustments, 100% of capital stock.
 
<TABLE>
<CAPTION>
                                                          FIRST         SECOND          THIRD         FOURTH
YEAR ENDED DECEMBER 31, 1997                             QUARTER        QUARTER        QUARTER        QUARTER
----------------------------------------------------  -------------  -------------  -------------  -------------
<S>                                                   <C>            <C>            <C>            <C>
Interest income.....................................  $  15,031,602  $  16,991,919  $  19,117,584  $  21,894,824
Interest expense....................................      8,575,466     10,402,357     13,020,232     14,865,176
Noninterest income..................................     17,759,820     18,549,079     19,981,922     20,525,379
Operating expenses..................................     19,313,673     20,093,016     20,873,443     22,368,865
Income before income taxes and Minority Interest....      4,902,283      5,045,625      5,205,831      5,186,162
Income taxes........................................      1,822,219      1,758,081      1,875,046      1,867,018
Minority Interest...................................        258,498        392,835        395,143        390,800
Net income..........................................      2,821,566      2,894,709      2,935,642      2,928,344
Basic earnings per share............................            .44            .45            .46            .45
Diluted earnings per share..........................            .43            .44            .44            .44
</TABLE>

                                      F-26
<PAGE>

20. FINANCIAL STATEMENTS OF INVESTORS FINANCIAL SECURITIES CORP. (PARENT ONLY)
 
    The following represents the separate condensed financial statements of IFSC
as of December 31, 1996 and 1997, and for the two-month period ended December
31, 1995 and the years ended December 31, 1996 and 1997.
 
<TABLE>
<CAPTION>
                                                                       TWO MONTHS
                                                                          ENDED       YEAR ENDED    YEAR ENDED
                                                                       DECEMBER 31,  DECEMBER 31,  DECEMBER 31,
STATEMENTS OF INCOME                                                      1995           1996          1997
---------------------------------------------------------------------  ------------  ------------  -------------
<S>                                                                    <C>           <C>           <C>
Equity in undistributed income of bank subsidiary....................   $  899,794    $7,601,082   $  11,026,680
Equity in undistributed income of non-bank subsidiaries..............       --            --              28,475
Dividend income from bank subsidiary.................................       --           478,546       2,142,391
Dividend income from non-bank subsidiaries...........................       --            --              69,528
Interest expense on subordinated debt................................       --            --          (2,315,271)
Income tax benefit...................................................       --            --             908,284
Operating expenses...................................................       --          (305,666)       (279,826)
                                                                       ------------  ------------  -------------
Net income...........................................................   $  899,794    $7,773,962   $  11,580,261
                                                                       ------------  ------------  -------------
                                                                       ------------  ------------  -------------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,    DECEMBER 31,
BALANCE SHEETS                                                                          1996            1997
----------------------------------------------------------------------------------  -------------  --------------
<S>                                                                                 <C>            <C>
Assets:
 
Cash..............................................................................  $    --        $    1,154,645
Investments in bank subsidiary....................................................     61,367,783      97,507,587
Investments in non-bank subsidiaries..............................................       --               732,946
Receivable due from bank subsidiary...............................................        493,089       1,455,953
Income tax receivable.............................................................       --                 1,584
Other assets......................................................................          3,438           5,168
                                                                                    -------------  --------------
Total Assets......................................................................  $  61,864,310  $  100,857,883
                                                                                    -------------  --------------
                                                                                    -------------  --------------
 
Liabilities and Stockholders' Equity
Accrued expenses..................................................................  $    --        $       23,426
Other liabilities.................................................................          5,000         159,576
Subordinated debt.................................................................       --            25,774,000
                                                                                    -------------  --------------
    Total Liabilities.............................................................          5,000      25,957,002
                                                                                    -------------  --------------
                                                                                    -------------  --------------
Stockholders' Equity
  Common stock....................................................................         64,443          64,703
  Surplus.........................................................................     54,352,812      55,072,990
  Deferred compensation...........................................................     (1,687,675)     (1,248,775)
  Retained earnings...............................................................      8,480,431      19,545,070
  Net unrealized gains on available for sale securities...........................        649,299       1,466,893
                                                                                    -------------  --------------
    Total Stockholders' Equity....................................................     61,859,310      74,900,881
                                                                                    -------------  --------------
Total Liabilities and Stockholders' Equity........................................  $  61,864,310  $  100,857,883
                                                                                    -------------  --------------
                                                                                    -------------  --------------
</TABLE>
                                      F-27
<PAGE>

20. FINANCIAL STATEMENTS OF INVESTORS FINANCIAL SECURITIES CORP. (PARENT ONLY)
(CONTINUED)

<TABLE>
<CAPTION>
                                                                        TWO MONTHS
                                                                           ENDED       YEAR ENDED    YEAR ENDED
                                                                       DECEMBER 31,   DECEMBER 31,  DECEMBER 31,
STATEMENTS OF CASH FLOWS                                                   1995           1996          1997
---------------------------------------------------------------------  -------------  ------------  -------------
<S>                                                                    <C>            <C>           <C>
Cash flows from operating activities:
  Net income.........................................................  $     899,794   $7,773,962   $  11,580,261
                                                                       -------------  ------------  -------------
  Adjustments to reconcile net income to net cash provided by
    operating activities:
    Amortization of deferred compensation............................         76,713      430,112         438,900
    Change in assets and liabilities:
      Receivable due from bank subsidiary............................       --           (416,376)       (962,864)
      Income tax receivable..........................................       --             --              (1,584)
      Accrued expenses...............................................       --             --              23,426
      Other assets...................................................       --             (3,438)         (1,731)
      Other liabilities..............................................       --              5,000         154,576
    Equity in undistributed earnings of bank subsidiary..............       (976,507)  (7,601,082)    (11,055,155)
                                                                       -------------  ------------  -------------
  Total adjustments..................................................       (899,794)  (7,585,784)    (11,404,432)
                                                                       -------------  ------------  -------------
Net cash provided by operating activities............................       --            188,178         175,829
                                                                       -------------  ------------  -------------
Cash flows from investing activities:
  Payments for investments in and advances to subsidiary.............    (34,120,938)     (35,193)    (25,000,000)
                                                                       -------------  ------------  -------------
Net cash used by investing activities................................    (34,120,938)     (35,193)    (25,000,000)
                                                                       -------------  ------------  -------------
Cash flows from financing activities:
  Proceeds from common stock.........................................     37,950,000       --            --
  Costs of stock issuance............................................     (3,829,062)      35,193         720,438
  Proceeds from issuance of subordinated debt, net of issuance
    costs............................................................       --             --          25,774,000
  Proceeds from exercise of stock options............................       --              5,148        --
  Dividends paid.....................................................                    (193,326)       (515,622)
                                                                       -------------  ------------  -------------
Net cash provided (used) by financing activities.....................     34,120,938     (152,985)     25,978,816
                                                                       -------------  ------------  -------------
Net increase in cash and due from banks..............................       --             --           1,154,645
Cash and Due from Banks, beginning of period.........................       --             --            --
                                                                       -------------  ------------  -------------
Cash and Due from Banks, end of period...............................  $    --         $   --       $   1,154,645
                                                                       -------------  ------------  -------------
                                                                       -------------  ------------  -------------
</TABLE>
 
                                      F-28