INVESTORS FINANCIAL SERVICES CORP, S-3, 2000-12-05

INVESTORS FINANCIAL SERVICES CORP
S-3, 2000-12-05
INVESTMENT ADVICE

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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 5, 2000

REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------

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
incorporation or organization) Identification No.)
</TABLE>

200 CLARENDON STREET, BOSTON, MA 02116 (617) 330-6700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

JOHN E. HENRY, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
INVESTORS FINANCIAL SERVICES CORP.
200 CLARENDON STREET
BOSTON, MA 02116
(617) 937-6700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------

COPIES TO:

<TABLE>
<S> <C>
EDWIN L. MILLER, JR., ESQ. ROBERT E. BUCKHOLZ, JR., ESQ.
TESTA, HURWITZ & THIBEAULT, LLP SULLIVAN & CROMWELL
125 High Street 125 Broad Street
Boston, Massachusetts 02110 New York, New York 10004
Tel: (617) 248-7000 Tel: (212) 558-4000
Fax: (617) 248-7200 Fax: (212) 558-3588
</TABLE>

------------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box. / /

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $.01 par value................ 1,380,000 shares $67.25 $92,805,000 $24,501
Preferred Stock Purchase Rights(4).......... -- -- -- --
</TABLE>

(1) Includes 180,000 shares that the underwriters have the right to purchase
from the registrant to cover over-allotments.

(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933.

(3) Pursuant to Rule 457(c) of the Securities Act of 1933, the registration fee
has been calculated based upon the average of the high and low prices per
share of the common stock of Investors Financial Services Corp. on the
Nasdaq National Market on December 1, 2000.

(4) Pursuant to our Rights Agreement, as amended, one-fourth of one right to
purchase a unit of preferred stock (each a "Right") is deemed to be
delivered with each share of common stock issued by us. The Rights currently
are not separately transferable apart from the common stock, nor are they
exercisable until the occurrence of certain events. Accordingly, no
independent value has been attributed to the Rights.
------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION. DATED DECEMBER 5, 2000.

1,200,000 Shares

[LOGO]

Common Stock

----------------

The common stock is quoted on the Nasdaq National Market under the symbol
"IFIN". The last reported sale price of the common stock on December 1, 2000 was
$66.50 per share.

SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.

------------------------

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

------------------------

<TABLE>
<CAPTION>
Per Share Total
--------- --------
<S> <C> <C>
Initial price to public..................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Investors Financial........... $ $
</TABLE>

To the extent that the underwriters sell more than 1,200,000 shares of
common stock, the underwriters have the option to purchase up to an additional
180,000 shares from Investors Financial at the initial price to public less the
underwriting discount.

------------------------

The underwriters expect to deliver the shares against payment in New York,
New York on , 2001.

GOLDMAN, SACHS & CO.

----------------

Prospectus dated , 2001.
<PAGE>
PROSPECTUS SUMMARY

YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE
FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED BY
REFERENCE AS DESCRIBED BELOW UNDER "WHERE YOU CAN FIND MORE INFORMATION".

UNLESS OTHERWISE INDICATED OR UNLESS THE CONTEXT REQUIRES OTHERWISE, ALL
REFERENCES IN THIS PROSPECTUS TO "INVESTORS FINANCIAL," "WE," "US," "OUR," OR
SIMILAR REFERENCES MEAN INVESTORS FINANCIAL SERVICES CORP., TOGETHER WITH OUR
SUBSIDIARIES. "INVESTORS BANK" OR THE "BANK" WILL BE USED TO MEAN OUR
SUBSIDIARY, INVESTORS BANK & TRUST COMPANY, ALONE.

INVESTORS FINANCIAL SERVICES CORP.

Investors Financial Services Corp. is a bank holding company. Our primary
operating subsidiary is Investors Bank & Trust Company-Registered Trademark-.
Through our subsidiaries, we provide a comprehensive range of services to
financial asset managers, such as mutual fund complexes, investment advisors,
banks and insurance companies. We think of these services in two categories:
core services and value-added services.

- We provide core services, which include global custody and multicurrency
accounting, to almost all of our clients.

- We also provide value-added services to most of our clients as part of an
integrated package that builds on information obtained through providing
core services. Value-added services include mutual fund administration,
securities lending, foreign exchange and cash management. For example, as
part of our accounting services, we calculate the cash available in an
asset manager's portfolio. This information allows us to sweep any excess
cash to an overnight investment vehicle as part of our cash management
services.

We provide services from offices in Boston, New York, Toronto, Dublin and
the Cayman Islands.

At September 30, 2000, we provided services for approximately $289 billion
in net assets, including approximately $18 billion of foreign assets. For the
first nine months of 2000, our operating revenue was $162.2 million and our net
income was $24.2 million. Between 1995 and 1999, our operating revenue and net
income grew at compounded annual rates of 30% and 41%, respectively.

INVESTMENT HIGHLIGHTS

We believe that the following factors are important in understanding the
growth potential of our business:

INDUSTRY FACTORS

- SUSTAINED FINANCIAL ASSET GROWTH: The growth rate in financial assets has
been strong over the past ten years, benefiting the asset servicing industry.
Factors driving this growth include an aging population, the privatization of
retirement systems and the increased popularity of pooled investment
products, including mutual funds. These trends are expected to continue. U.S.
financial assets held in mutual funds, life insurance companies, private
pension funds and bank personal trust accounts grew to $15.4 trillion at
December 31, 1999 from $4.5 trillion at December 31, 1989, a compounded
annual growth rate of 13%. Assets held in U.S. mutual funds grew to $6.3
trillion at December 31, 1999 from $1.0 trillion at December 31, 1989, a
compounded annual growth rate of 19%. During the same period, our assets
processed grew to $290 billion from $8 billion, a compounded annual growth
rate of 43%.

1
<PAGE>
- CONSOLIDATION IN NUMBER OF SERVICE PROVIDERS: During the past ten years, a
number of small and mid-size asset servicers have consolidated with larger
service providers or divested their asset servicing operations in order to
focus their resources on core businesses. Since the early 1990's, more than
25 service providers have consolidated their operations with other companies.
This consolidation has concentrated the industry around a smaller number of
providers, many of which are specialists, including us, and presents us with
increasing opportunities for growth.

- OUTSOURCING TREND: Keeping abreast of developments like Internet data
delivery, Y2K, the Euro, decimalization of stock prices and compressed
settlement cycles has forced significant increases in technology spending
across the financial services industry. We believe that this increase in
spending requirements is accelerating the pace at which asset managers
outsource back office operations to asset servicers. We also believe that we
are well positioned to capture an increasing share of the market as a result
of this trend.

COMPANY FACTORS

- INTEGRATED TECHNOLOGY PLATFORM: Our Fund Accounting and Custody Tracking
System, or FACTS, is a proprietary technology platform that consolidates a
number of functions into one solution for clients. As a result, we can assign
a dedicated client team to provide a full suite of services to each account,
rather than operate separate teams along strictly functional lines. In
addition, the integrated nature of FACTS can accommodate rapid growth and
enables us to implement modifications and enhancements quickly. We believe
that our integrated approach and ability to respond quickly to client needs
help us to provide high quality service and to maintain better overall
relationships with our clients. Clients also benefit from our outsourcing
agreement with Electronic Data Systems, which allows us to focus our
resources on software development and provides access to state-of-the-art
mainframe technology and virtually unlimited capacity.

- EXPERTISE IN COMPLEX INVESTMENT PRODUCTS: We believe the design of FACTS
provides us with a competitive advantage in servicing clients' complex
investment products because we are able to respond rapidly to the demanding
system requirements of these structures. We have developed expertise in
multi-tiered and multi-managed funds, limited partnerships and, most
recently, exchange traded funds. We also have expertise in the more
complicated fund of funds and offshore fund structures.

- We were recently chosen to be the service provider for a family of
exchange traded funds, launched in May 2000, which held approximately $4
billion in assets as of September 30, 2000.

- We service over $33 billion of assets managed by The Common Fund for
Nonprofit Organizations, which uses a multi-manager structure.

- ABILITY TO CROSS-SELL SERVICES TO EXISTING AND ACQUIRED CLIENTS: We are able
to cross-sell our services to existing and acquired clients in two ways.
First, our expertise in complex investment products allows us access to new
client relationships which, in turn, provides us opportunities to broaden
those relationships to include additional investment products. Second, some
of our clients engage us to provide our core services of global custody and
multicurrency accounting, but not our value-added services like foreign
exchange or cash management. Our strategy is to expand these relationships by
increasing the number of services provided.

2
<PAGE>
- CONSISTENT FINANCIAL PERFORMANCE: We have demonstrated the ability to achieve
performance targets on a consistent basis in a variety of market conditions.
We believe that we will achieve long-term annual earnings per share growth of
approximately 25%, before acquisitions.

- SELECTIVE USE OF ACQUISITIONS TO ENHANCE BUSINESS: We have successfully
integrated the acquisition of BankBoston's domestic institutional trust and
custody business and have recently announced the acquisition of The Chase
Manhattan Bank's advisor custody unit. We may pursue additional acquisitions
on an opportunistic basis in the future to enhance our growth rate.

PENDING ACQUISITION OF CHASE ADVISOR CUSTODY UNIT

On November 28, 2000, Investors Bank agreed to purchase the advisor custody
unit of The Chase Manhattan Bank. This unit provides institutional custody
services to accounts holding approximately $27 billion in assets as of
October 31, 2000. We will pay Chase, in two installments, a total purchase price
of up to $42 million plus the book value of loans to clients that totaled
approximately $38 million at October 31, 2000. The amount of the second
installment will be based on client retention. We expect that the purchase will
close during the first quarter of 2001, subject to regulatory approvals and
customary closing conditions.

We believe that our knowledge and experience in the asset servicing
business, as well as our core strategy of providing superior client service,
will provide opportunities to service additional assets managed by clients
acquired from Chase.

3
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Shares offered............................... 1,200,000 shares
Shares to be outstanding after this
offering................................... 31,025,675 shares
Nasdaq National Market symbol................ IFIN
Use of proceeds.............................. To fund the acquisition of the advisor
custody unit of The Chase Manhattan Bank and
for general corporate purposes, including
working capital and possible future
acquisitions.
</TABLE>

The number of shares to be outstanding after this offering includes:

- 29,825,675 shares of common stock outstanding at September 30, 2000;
and

- 1,200,000 shares of common stock offered in this offering.

The number of shares to be outstanding after this offering excludes:

- 2,352,568 shares of common stock issuable upon exercise of stock
options outstanding at September 30, 2000, with a weighted average
exercise price of $15 per share; and

- 875,726 shares of common stock available for grant at September 30,
2000 under our stock option and stock purchase plans.

All share numbers shown in this prospectus have been restated to reflect the
two-for-one stock splits paid March 17, 1999 and June 15, 2000. Except as
otherwise indicated, information in this prospectus assumes no exercise of the
underwriters' option to purchase additional shares in the offering.
------------------------

We are a Delaware corporation organized in 1995. Investors Bank is a
Massachusetts-chartered trust company organized in 1969. Our principal executive
offices are located at 200 Clarendon Street, Boston, Massachusetts 02116, and
our telephone number is (617) 937-6700. We maintain a corporate Web site at
www.ibtco.com. The contents of our website are not part of this prospectus.

4
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA

You should read the summary consolidated financial and operating data below
together with our consolidated financial statements and the notes to those
financial statements, and the other financial information included or
incorporated by reference in this prospectus, including the information in the
section called "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Information reported for years prior to 1998 has been
restated for the acquisition of AMT Capital Services, Inc., which was accounted
for as a pooling-of-interests (Dollars in thousands, except per share data).
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
----------------------------- -------------------------------------------------------------
2000 1999 1999 1998 1997 1996
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income....... $ 41,427 $ 24,842 $ 35,773 $ 26,694 $ 26,173 $ 17,944
Non-interest income....... 120,766 98,289 133,761 98,023 82,524 59,189
Gain/(loss) on sale of
investment securities... -- -- -- 833 114 (2)
------------ ------------ ------------ ------------ ------------ ------------
Net operating revenues.... 162,193 123,131 169,534 125,550 108,811 77,131
Operating expenses........ 124,814 98,507 135,815 99,584 87,362 64,613
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes
and minority interest... 37,379 24,624 33,719 25,966 21,449 12,518
Income taxes.............. 12,016 7,880 10,790 9,348 7,382 4,852
Minority interest
expense................. 1,191 1,245 1,661 1,563 1,437 --
------------ ------------ ------------ ------------ ------------ ------------
Net income................ $ 24,172 $ 15,499 $ 21,268 $ 15,055 $ 12,630 $ 7,666
------------ ------------ ------------ ------------ ------------ ------------
PER SHARE DATA(6):
Basic earnings per
share................... $ 0.81 $ 0.54 $ 0.74 $ 0.56 $ 0.48 $ 0.29
============ ============ ============ ============ ============ ============
Diluted earnings per
share................... $ 0.78 $ 0.53 $ 0.72 $ 0.55 $ 0.46 $ 0.29
============ ============ ============ ============ ============ ============
Dividend per share........ $ 0.045 $ 0.030 $ 0.040 $ 0.030 $ 0.020 $ 0.010
============ ============ ============ ============ ============ ============
BALANCE SHEET DATA:
Total assets at end of
period.................. $ 3,170,782 $ 2,200,256 $ 2,553,080 $ 1,465,508 $ 1,460,447 $ 965,394
AVERAGE BALANCE SHEET
DATA:
Interest earning assets... $ 2,610,732 $ 1,721,229 $ 1,837,963 $ 1,443,487 $ 1,167,361 $ 575,662
Total assets.............. 2,753,680 1,853,003 1,970,702 1,542,765 1,236,519 628,893
Total deposits............ 1,455,338 1,103,274 1,150,814 845,093 594,768 377,219
Preferred securities...... 24,227 24,199 24,203 24,174 22,252 --
Common stockholders'
equity.................. 151,382 114,109 118,622 81,456 68,370 56,137
SELECTED FINANCIAL RATIOS:
Return on average
equity(2)............... 21.3% 18.2% 17.9% 18.5% 18.5% 13.7%
Return on average
assets(2)............... 1.2% 1.1% 1.1% 1.0% 1.0% 1.2%
Common equity as % of
total assets............ 5.5% 6.2% 6.0% 5.3% 5.2% 6.4%
Dividend payout
ratio(3)................ 5.8% 5.7% 5.4% 5.4% 4.4% 3.5%
Tier I capital ratio(4)... 14.4% 16.5% 15.0% 15.3% 29.2% 24.6%
Leverage ratio(4)......... 5.4% 5.9% 5.5% 4.6% 6.4% 6.3%
Non-interest income as %
of net operating
income.................. 74.5% 79.8% 78.9% 78.1% 75.8% 76.7%
OTHER STATISTICAL DATA:
Assets processed at end of
period(5)............... $288,554,241 $262,351,745 $290,162,547 $244,935,314 $139,418,241 $122,563,400
Employees at end of
period.................. 1,750 1,508 1,507 1,258 1,028 827

<CAPTION>
FOR THE TWO FOR THE
MONTHS ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31,
1995 1995(1)
-------------- ------------
<S> <C> <C>
Net interest income....... $ 1,966 $ 5,870
Non-interest income....... 8,407 53,607
Gain/(loss) on sale of
investment securities... -- --
----------- -----------
Net operating revenues.... 10,373 59,477
Operating expenses........ 8,877 52,569
----------- -----------
Income before income taxes
and minority interest... 1,496 6,908
Income taxes.............. 664 2,782
Minority interest
expense................. -- --
----------- -----------
Net income................ $ 832 $ 4,126
----------- -----------
PER SHARE DATA(6):
Basic earnings per
share................... $ 0.04
===========
Diluted earnings per
share................... $ 0.03
===========
Dividend per share........

BALANCE SHEET DATA:
Total assets at end of
period.................. $ 332,436 $ 186,773
AVERAGE BALANCE SHEET
DATA:
Interest earning assets... $ 219,775 $ 106,130
Total assets.............. 249,064 128,174
Total deposits............ 197,013 106,446
Preferred securities...... -- --
Common stockholders'
equity.................. 34,000 16,119
SELECTED FINANCIAL RATIOS:
Return on average
equity(2)............... 14.7% 25.6%
Return on average
assets(2)............... 2.0% 3.2%
Common equity as % of
total assets............ 16.6% 12.6%
Dividend payout
ratio(3)................ 0.0% 1.4%
Tier I capital ratio(4)... 44.5% 37.6%
Leverage ratio(4)......... 16.6% 9.7%
Non-interest income as %
of net operating
income.................. 81.1% 90.1%
OTHER STATISTICAL DATA:
Assets processed at end of
period(5)............... $94,208,228 $91,099,976
Employees at end of
period.................. 682 679
</TABLE>

----------------------------------
(1) Non-interest income for the year ended October 31, 1995 includes the
recognition of net proceeds of $2.6 million from the assignment to a third
party of asset servicing 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 15.8% and 2.0%,
respectively.
(3) We intend to retain the majority of future earnings to fund development and
growth of our business. We currently expect to pay cash dividends at an
annualized rate of $.06 per share subject to regulatory requirements. Refer
to "Market Risk: Liquidity" included in the Management's Discussion and
Analysis section for further information.
(4) Refer to "Capital Resources" included within the Management's Discussion and
Analysis section for further information.
(5) Assets processed is the total dollar value of financial assets on the
reported date for which we provide one or more of the following services:
global custody, multicurrency accounting, mutual fund administration,
securities lending, foreign exchange, cash management, institutional
transfer agency and performance measurement.

(6) All numbers shown in this table have been restated to reflect the
two-for-one stock splits paid March 17, 1999 and June 15, 2000, where
applicable.

5
<PAGE>
RISK FACTORS

You should carefully consider the following risks before investing in our
common stock. The following risk factors could harm our business, results of
operations and financial condition. In that case, the trading price of our
common stock is likely to decline, and you may lose all or part of your
investment.

THE FAILURE TO PROPERLY MANAGE OUR GROWTH COULD ADVERSELY AFFECT THE QUALITY OF
OUR SERVICES AND RESULT IN THE LOSS OF CLIENTS.

We have been experiencing a period of rapid growth that has required the
dedication of significant management and other resources. Continued rapid growth
could place a strain on our management, financial and other resources. To manage
future growth effectively, we must continue to invest in our operational,
financial and other internal systems, and our human resources. Also, we must
continue to expand our office space at reasonable rates in a competitive real
estate market. If we fail to do so, our future growth could have a negative
effect on the quality of our services, could result in the loss of clients and
could cause our business and results of operations to suffer significantly.

OUR FUTURE RESULTS DEPEND, IN PART, ON SUCCESSFUL INTEGRATION OF PENDING AND
POSSIBLE FUTURE ACQUISITIONS.

Our pending acquisition of Chase's advisor custody unit presents us with
challenges and will demand management attention that has to be diverted from
other matters. Any future acquisitions will present similar challenges. Our
business and operating results could suffer significantly if we are unable to
integrate these businesses successfully into our operations.

WE MUST HIRE AND RETAIN SKILLED PERSONNEL IN A TIGHT LABOR MARKET IN ORDER TO
SUCCEED.

Qualified personnel, in particular managers and other senior personnel, are
in great demand throughout the financial services industry. We could find it
increasingly difficult to continue to attract and retain sufficient numbers of
these highly skilled employees. If we fail to attract and retain these
employees, our business and operating results could be negatively affected.

OUR OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS IN INTEREST RATES AND THE
SECURITIES MARKETS.

We base some of our fees on the market value of the assets we process.
Accordingly, our operating results are subject to fluctuations in interest rates
and declines in the securities markets as these fluctuations affect the market
value of assets processed. Also, our net interest income is earned by investing
depositors' funds and making loans. Rapid changes in interest rates or changes
in the relationship between different index rates could adversely affect the
market value of, or the earnings produced by, our investment and loan
portfolios. Fluctuations in interest rates or the securities markets can also
lead to investors seeking alternatives to the investment offerings of our
clients, which results in a lower amount of assets we process and
correspondingly lower fees.

WE FACE SIGNIFICANT COMPETITION FROM OTHER FINANCIAL SERVICES COMPANIES WHICH
COULD NEGATIVELY AFFECT OUR OPERATING RESULTS.

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

6
<PAGE>
or future competitors. If we fail to compete effectively, our business and
operating results will be materially adversely affected.

WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY.

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

OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY FLUCTUATE.

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

- The timing of 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 our clients; and

- Changes or anticipated changes in economic conditions, including
fluctuations in interest rates and declines in stock market values.

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

WE ARE SUBJECT TO EXTENSIVE FEDERAL AND STATE REGULATIONS THAT IMPOSE COMPLEX
RESTRAINTS ON OUR BUSINESS.

Federal and state laws and regulations applicable to financial institutions
and their parent companies apply to us. Our primary banking regulators are the
Federal Reserve Board, the FDIC and the Massachusetts Commissioner of Banks.
Virtually all aspects of our operations are subject to specific requirements or
restrictions and general regulatory oversight including the following:

- The FRB and the FDIC maintain capital requirements that we must meet.
Failure to meet those requirements could lead to severe regulatory action
or even receivership. We are currently considered to be "well
capitalized;"

- Under Massachusetts law, the Bank may be restricted in its ability to pay
dividends to Investors Financial, which may in turn restrict our ability
to pay dividends to our stockholders; and

- The FRB and the FDIC are empowered to assess monetary penalties against,
and to order termination of activities by, companies or individuals who
violate the law.

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

7
<PAGE>
FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus or the documents
incorporated by reference in this prospectus are forward-looking statements.
These statements relate to future events or our future financial performance and
are identified by words such as "may," "will," "could," "should," "expect,"
"plan," "intend," "seek," "anticipate," "believe," "estimate," "potential," or
"continue" or the negative of those terms or other comparable terms. These
statements are only predictions and are not guarantees. You should not place
undue reliance on these forward-looking statements. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various important factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
the expectations reflected in any forward-looking statements.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform those
statements to actual results.

8
<PAGE>
USE OF PROCEEDS

We estimate the net proceeds to us from the sale of 1,200,000 shares of
common stock in this offering to be approximately $ at the estimated
public offering price of $ per share (the closing price of the common stock on
December , 2000), after deducting the estimated underwriting discount and
offering expenses. If the underwriters' over-allotment option is exercised in
full, we estimate net proceeds will be approximately $ . We expect
to use a portion of these proceeds to fund the purchase price and related
expenses incurred in connection with the purchase of The Chase Manhattan Bank's
advisor custody unit. The remaining proceeds will be used for working capital
and to fund future acquisitions, if any, although we have no definitive
agreements other than the agreement with Chase at this time.

Pending use as described above, any remaining net proceeds of this offering
will be invested in short-term instruments.

PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY

Our common stock is quoted on the Nasdaq National Market under the symbol
"IFIN". The following table sets forth, for the calendar periods indicated, the
high and low sale prices for the common stock as reported by Nasdaq and
dividends paid on the common stock.

<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
-------- -------- --------
<S> <C> <C> <C>
1998
First quarter.................................... $14.00 $10.25 $0.0075
Second quarter................................... 14.89 12.38 0.0075
Third quarter.................................... 17.09 10.09 0.0075
Fourth quarter................................... 16.25 7.88 0.0075

1999
First quarter.................................... 16.50 13.38 0.0100
Second quarter................................... 20.28 14.50 0.0100
Third quarter.................................... 22.50 16.00 0.0100
Fourth quarter................................... 24.72 15.63 0.0100

2000
First quarter.................................... 32.75 18.06 0.0150
Second quarter................................... 45.75 29.00 0.0150
Third quarter.................................... 68.13 35.50 0.0150
Fourth quarter (through December 1).............. 75.69 51.56 0.0150
</TABLE>

DIVIDEND POLICY

We currently intend to retain most of our earnings to finance the growth and
development of our business, including possible acquisitions. We do not
anticipate paying significant cash dividends for the foreseeable future. Any
payment of cash dividends in the future will depend upon our financial
condition, capital requirements and earnings, as well as other factors our board
of directors may deem relevant. Our ability to pay dividends on our common stock
may depend on the receipt of distributions from Investors Bank, which in turn
are subject to restrictions imposed by the Massachusetts Commissioner of Banks.
In addition, we may not pay dividends on our common stock if we are in default
under agreements relating to the 9.77% Capital Securities of Investors Capital
Trust I, one of our subsidiaries.

9
<PAGE>
CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2000
on an actual basis, and as adjusted to reflect the sale of the 1,200,000 shares
of common stock in this offering at the estimated public offering price of $
per share (the closing price of the common stock on December , 2000), after
deducting the estimated underwriting discount and offering expenses. You should
read this information together with our consolidated financial statements and
the notes to the financial statements included or incorporated by reference in
this prospectus (Dollars in thousands).

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
Company-obligated, mandatorily redeemable, preferred
securities of subsidiary trust holding solely junior
subordinated deferrable interest debentures............... $ 24,239 $24,239

Shareholders' equity(1):
Capital stock:
Preferred stock, par value $.01; authorized, 1,000,000
shares; issued and outstanding, none.................. -- --
Common stock, par value $.01; authorized, 40,000,000
shares; issued and outstanding, 29,825,675 shares; as
adjusted, 31,025,675 shares........................... 298
-------
Surplus..................................................... 92,425
-------
Deferred compensation....................................... (306) (306)
Retained earnings........................................... 76,232 76,232
Accumulated other comprehensive loss, net................... (3,919) (3,919)
Treasury stock, par value $0.01 (10,814 shares)............. -- --
-------- -------
Total shareholders' equity................................ 164,730 --
-------- -------
Total capitalization........................................ $188,969 $ --
-------- -------
Regulatory Capital Ratios(2):
Tier 1 Risk-Based Capital................................... 14.39% %
Total Risk-Based Capital.................................... 14.40% %
Leverage Capital............................................ 5.40% %
</TABLE>

------------------------

(1) The table above excludes:

- 2,352,568 shares of common stock issuable upon exercise of stock options
outstanding at September 30, 2000, with a weighted average exercise price
of $15 per share; and

- 875,726 shares of common stock available for grant at September 30, 2000
under our stock option and stock purchase plans.

(2) Refer to "Capital Resources" within the Management's Discussion and Analysis
section for further information.

10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

You should read the following consolidated financial and operating data below
together with our consolidated financial statements and the notes to such
financial statements, and the other financial information included or
incorporated by reference in this prospectus, including the information in the
section called "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The consolidated statement of operations data for the
fiscal years shown and the consolidated balance sheet data as of the year-end
dates shown are derived from our consolidated financial statements previously
filed with the SEC. The consolidated statement of operations data for the
interim periods shown and the related consolidated balance sheet data are
derived from our unaudited consolidated financial statements and include, in the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial information shown. These
results are not necessarily indicative of the results that may be expected for
future periods. Information reported for years prior to 1998 has been restated
for the acquisition of AMT Capital Services, Inc., which was accounted for as a
pooling-of-interests (Dollars in thousands, except per share data).
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
----------------------------- -------------------------------------------------------------
2000 1999 1999 1998 1997 1996
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income................. $ 41,427 $ 24,842 $ 35,773 $ 26,694 $ 26,173 $ 17,944
Non-interest income................. 120,766 98,289 133,761 98,023 82,524 59,189
Gain/(loss) on sale of investment
securities........................ -- -- -- 833 114 (2)
------------ ------------ ------------ ------------ ------------ ------------
Net operating revenues.............. 162,193 123,131 169,534 125,550 108,811 77,131
Operating expenses.................. 124,814 98,507 135,815 99,584 87,362 64,613
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes and
minority interest................. 37,379 24,624 33,719 25,966 21,449 12,518
Income taxes........................ 12,016 7,880 10,790 9,348 7,382 4,852
Minority interest expense........... 1,191 1,245 1,661 1,563 1,437 --
------------ ------------ ------------ ------------ ------------ ------------
Net income.......................... $ 24,172 $ 15,499 $ 21,268 $ 15,055 $ 12,630 $ 7,666
------------ ------------ ------------ ------------ ------------ ------------
PER SHARE DATA(6):
Basic earnings per share............ $ 0.81 $ 0.54 $ 0.74 $ 0.56 $ 0.48 $ 0.29
============ ============ ============ ============ ============ ============
Diluted earnings per share.......... $ 0.78 $ 0.53 $ 0.72 $ 0.55 $ 0.46 $ 0.29
============ ============ ============ ============ ============ ============
Dividend per share.................. $ 0.045 $ 0.030 $ 0.040 $ 0.030 $ 0.020 $ 0.010
============ ============ ============ ============ ============ ============
BALANCE SHEET DATA:
Total assets at end of period....... $ 3,170,782 $ 2,200,256 $ 2,553,080 $ 1,465,508 $ 1,460,447 $ 965,394
AVERAGE BALANCE SHEET DATA:
Interest earning assets............. $ 2,610,732 $ 1,721,229 $ 1,837,963 $ 1,443,487 $ 1,167,361 $ 575,662
Total assets........................ 2,753,680 1,853,003 1,970,702 1,542,765 1,236,519 628,893
Total deposits...................... 1,455,338 1,103,274 1,150,814 845,093 594,768 377,219
Preferred securities................ 24,227 24,199 24,203 24,174 22,252 --
Common stockholders' equity......... 151,382 114,109 118,622 81,456 68,370 56,137
SELECTED FINANCIAL RATIOS:
Return on average equity(2)......... 21.3% 18.2% 17.9% 18.5% 18.5% 13.7%
Return on average assets(2)......... 1.2% 1.1% 1.1% 1.0% 1.0% 1.2%
Common equity as % of total
assets............................ 5.5% 6.2% 6.0% 5.3% 5.2% 6.4%
Dividend payout ratio(3)............ 5.8% 5.7% 5.4% 5.4% 4.4% 3.5%
Tier I capital ratio(4)............. 14.4% 16.5% 15.0% 15.3% 29.2% 24.6%
Leverage ratio(4)................... 5.4% 5.9% 5.5% 4.6% 6.4% 6.3%
Non-interest income as % of net
operating income.................. 74.5% 79.8% 78.9% 78.1% 75.8% 76.7%
OTHER STATISTICAL DATA:
Assets processed at end of
period(5)......................... $288,554,241 $262,351,745 $290,162,547 $244,935,314 $139,418,241 $122,563,400
Employees at end of period.......... 1,750 1,508 1,507 1,258 1,028 827

<CAPTION>
FOR THE TWO FOR THE
MONTHS ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31,
1995 1995(1)
-------------- ------------
<S> <C> <C>
Net interest income................. $ 1,966 $ 5,870
Non-interest income................. 8,407 53,607
Gain/(loss) on sale of investment
securities........................ -- --
----------- -----------
Net operating revenues.............. 10,373 59,477
Operating expenses.................. 8,877 52,569
----------- -----------
Income before income taxes and
minority interest................. 1,496 6,908
Income taxes........................ 664 2,782
Minority interest expense........... -- --
----------- -----------
Net income.......................... $ 832 $ 4,126
----------- -----------
PER SHARE DATA(6):
Basic earnings per share............ $ 0.04
===========
Diluted earnings per share.......... $ 0.03
===========
Dividend per share..................

BALANCE SHEET DATA:
Total assets at end of period....... $ 332,436 $ 186,773
AVERAGE BALANCE SHEET DATA:
Interest earning assets............. $ 219,775 $ 106,130
Total assets........................ 249,064 128,174
Total deposits...................... 197,013 106,446
Preferred securities................ -- --
Common stockholders' equity......... 34,000 16,119
SELECTED FINANCIAL RATIOS:
Return on average equity(2)......... 14.7% 25.6%
Return on average assets(2)......... 2.0% 3.2%
Common equity as % of total
assets............................ 16.6% 12.6%
Dividend payout ratio(3)............ 0.0% 1.4%
Tier I capital ratio(4)............. 44.5% 37.6%
Leverage ratio(4)................... 16.6% 9.7%
Non-interest income as % of net
operating income.................. 81.1% 90.1%
OTHER STATISTICAL DATA:
Assets processed at end of
period(5)......................... $94,208,228 $91,099,976
Employees at end of period.......... 682 679
</TABLE>

(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 15.8% and 2.0%,
respectively.

(3) We intend to retain the majority of future earnings to fund development and
growth of our business. We currently expect to pay cash dividends at an
annualized rate of $.06 per share subject to regulatory requirements. Refer
to "Market Risk: Liquidity" within the Management's Discussion and Analysis
section for further information.

(4) Refer to "Capital Resources" included within the Management's Discussion and
Analysis section for further information.

(5) Assets processed is the total dollar value of financial assets on the
reported date for which we provide one or more of the following services:
global custody, multicurrency accounting, mutual fund administration,
securities lending, cash management, transfer agency and performance
measurement.

(6) All numbers shown in this table have been restated to reflect the
two-for-one stock splits paid March 17, 1999 and June 15, 2000, where
applicable.

11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES TO SUCH FINANCIAL STATEMENTS, AND THE OTHER
FINANCIAL INFORMATION INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT OUR
PLANS, ESTIMATES AND BELIEFS. SEE THE SECTION CALLED "FORWARD-LOOKING
STATEMENTS" ON PAGE 8 OF THIS PROSPECTUS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS, PARTICULARLY UNDER "RISK
FACTORS".

OVERVIEW

We provide global custody, multicurrency accounting, mutual fund
administration, securities lending, foreign exchange, cash management,
performance measurement, institutional transfer agency and investment advisory
services to a variety of financial asset managers, including mutual fund
complexes, investment advisors, banks and insurance companies. We provide
services for net assets that totaled approximately $289 billion as of
September 30, 2000, including approximately $18 billion of foreign assets.

On May 29, 1998 we acquired AMT Capital Services, Inc. and an affiliated
company, a New York based firm recognized for providing mutual fund
administration services to investment management firms. Under the terms of the
acquisition agreement, we acquired all of AMT Capital's outstanding capital
stock in exchange for 762,396 shares of our common stock. The acquisition was
accounted for as a pooling-of-interests. Upon completion of the acquisition, AMT
Capital became a wholly owned subsidiary of Investors Financial and was renamed
Investors Capital Services, Inc.

On October 1, 1998, we acquired the domestic institutional trust and custody
business of BankBoston, N.A. Under the terms of the purchase agreement, we paid
approximately $48 million to BankBoston as of the closing and subsequently paid
an additional $4.9 million based upon client retention. The acquired business
provides master trust and custody services to endowments, pension funds,
municipalities, mutual funds and other financial institutions, primarily in New
England. The acquisition was accounted for using the purchase method of
accounting. In connection with the acquisition, we also entered into an
outsourcing agreement with BankBoston under which we would provide custodial and
certain other services for BankBoston's private banking and institutional asset
management businesses. As a result of the early termination of the outsourcing
agreement and our custody agreement with the BankBoston-sponsored 1784 Funds, we
received a total of $11.4 million in termination fees. We do not anticipate a
material impact on net income due to the termination of either agreement. We
were informed by BankBoston that its decision to terminate both of the
agreements was not related in any way to our quality of service, but was made as
part of the integration process undertaken in connection with the merger of
BankBoston with Fleet.

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

On March 26, 1999, we completed the issuance and sale of 1,800,000 shares of
common stock at $14.50 per share in a private placement to one investor. The net
capital raised in the private placement was used to support our balance sheet
growth.

On October 29, 1999, Investors Bank entered into an agreement with Sanwa
Bank California, pursuant to which it agreed to purchase the right to provide
institutional custody and related

12
<PAGE>
services to accounts managed by the Trust Company of the West. The accounts
subject to the agreement totaled approximately $4.6 billion in assets at
March 10, 2000, when we completed the purchase.

On May 15, 2000, our board of directors declared a two-for-one stock split
in the form of a 100% stock dividend payable on June 15, 2000 to stockholders of
record on May 31, 2000. All numbers in this prospectus have been restated to
reflect the two-for-one stock split paid June 15, 2000, where applicable.

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify areas
causing difficulties in implementation. We have appointed a team to implement
SFAS 133 for us on a consolidated basis. We will adopt SFAS 133 and the
corresponding amendments under SFAS 138 on January 1, 2001. Our SFAS 133 team is
currently determining the impact of SFAS 133 and does not anticipate a
significant impact on the consolidated results of operations and financial
position.

REVENUE AND EXPENSE OVERVIEW

We derive our revenues from financial asset servicing. Although interest
income and non-interest income are reported separately for financial statement
presentation purposes, our clients view the pricing of our service offerings on
a bundled basis. In establishing a fee structure for a specific client,
management analyzes all expected revenue and related expenses, as opposed to
separately analyzing fee income and interest income and related expenses for
each from such relationship. Accordingly, management believes net operating
revenue (net interest income plus non-interest income) and net income are the
most meaningful measures of our financial results. Net operating revenue
increased 32% to $162 million in the first nine months of 2000 from
$123 million in the first nine months of 1999.

Non-interest income consists primarily of fees for financial asset servicing
and is principally derived from global custody, multicurrency accounting, mutual
fund administration and institutional transfer agency services for financial
asset managers and the assets they control. Our clients pay fees based on the
volume of assets under custody, portfolio transactions, income collected and
whether other value-added services such as foreign exchange, securities lending
and performance measurement are needed. Asset-based fees are usually charged on
a sliding scale and are subject to minimum fees. As such, when the assets in a
portfolio under custody grow as a result of changes in market values or cash
inflows, our fees may be a smaller percentage of those assets. If the value of
equity assets held by our clients were to increase or decrease by 10%, we
estimate that this, by itself, would cause a corresponding change of
approximately 3% in our earnings per share.

Net interest income represents the difference between income generated from
interest-earning assets and expense on interest-bearing liabilities.
Interest-bearing liabilities are generated by our clients who, in the course of
their financial asset management, generate cash balances, which they deposit on
a short-term basis with us. We invest these cash balances and remit a portion of
the earnings on these investments to our clients. Our share of earnings from
these investments is viewed as part of the total package of compensation paid to
us from our clients for performing asset servicing.

Operating expenses consist of costs incurred in support of our business
activities. As a service provider, our largest expenditures are staffing costs,
including compensation and benefits. We also rely heavily on technological tools
and services for processing, communicating and storing data. As a result, our
technology and telecommunication expense is also a large percentage of our
operating expenses.

13
<PAGE>
STATEMENT OF OPERATIONS

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
1999

NON-INTEREST INCOME

Non-interest income increased $22.5 million to $120.8 million for the nine
months ended September 30, 2000 from $98.3 million for the nine months ended
September 30, 1999. Non-interest income consists of the following items (Dollars
in thousands):

<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
--------------------
2000 1999 CHANGE
--------- -------- --------
<S> <C> <C> <C>
Asset servicing fees........................... $119,206 $97,404 22%
Computer service fees.......................... 359 367 (2)
Other operating income......................... 1,201 518 132
-------- -------
Total non-interest income...................... $120,766 $98,289 23%
======== =======
</TABLE>

Asset servicing fees increased $21.8 million to $119.2 million for the nine
months ended September 30, 2000 compared to $97.4 million for the same period in
1999. The largest component of asset servicing fees is asset-based fees, which
increased due to an increase in assets processed. Net assets processed is the
total dollar value of financial assets on the reported date for which we provide
one or more of the following services: global custody, multicurrency accounting,
mutual fund administration, securities lending, foreign exchange, cash
management, performance measurement and institutional transfer agency. Total net
assets processed increased to $289 billion at September 30, 2000 from
$262 billion at September 30, 1999. This increase represents net growth in
assets processed of $67 billion between those dates, offset in part by the loss
of $40 billion in assets processed due to the termination of the BankBoston
outsourcing arrangement and BankBoston 1784 Funds custodian agreement discussed
under "Overview" above. Of the net increase in assets processed, approximately
71% reflects assets processed for new clients and the remainder reflects growth
of assets processed for existing clients. Another significant portion of the
increase in asset servicing fees resulted from our success in marketing
ancillary services, such as foreign exchange and securities lending services.

Computer service fees consist of amounts charged by us for data processing
services related to client accounts. Other operating income consists primarily
of dividends received relating to the FHLBB stock investment. The increase in
other operating income resulted from an increase in FHLBB stock dividend income
due to an increase in our average investment in FHLBB stock during the nine
months ended September 30, 2000, compared to the nine months ended
September 30, 1999. Other operating income for the nine months ended
September 30, 2000 included income from consulting services performed for a
client.

14
<PAGE>
OPERATING EXPENSES

Total operating expenses increased by $26.3 million to $124.8 million for
the nine months ended September 30, 2000 compared to $98.5 million for the same
period in 1999. The components of operating expenses were as follows (Dollars in
thousands):

<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
--------------------
2000 1999 CHANGE
--------- -------- --------
<S> <C> <C> <C>
Compensation and benefits...................... $ 76,360 $60,372 26%
Technology and telecommunications.............. 16,538 11,140 48
Occupancy...................................... 8,008 6,061 32
Transaction processing services................ 7,447 6,784 10
Depreciation and amortization.................. 3,367 2,835 19
Travel and sales promotion..................... 2,599 1,733 50
Professional fees.............................. 2,059 2,554 (19)
Amortization of goodwill....................... 1,201 1,330 (10)
Insurance...................................... 598 572 5
Other operating expenses....................... 6,637 5,126 29
-------- -------
Total operating expenses..................... $124,814 $98,507 27%
======== =======
</TABLE>

Compensation and benefits expense increased $16.0 million or 26% to
$76.4 million for the nine months ended September 30, 2000 from $60.4 million
for 1999. The average number of employees increased 15% to 1,602 during the nine
months ended September 30, 2000 from 1,391 during the same period in 1999. We
increased the number of employees to support the expansion of client
relationships. In addition, compensation expense related to our management
incentive plans increased $3.3 million because of the increase in earnings
subject to incentive payments. Benefits, including payroll taxes, group
insurance plans, retirement plan contributions and tuition reimbursement,
increased by $1.1 million for the nine months ended September 30, 2000 from the
same period in 1999. This increase was due principally to increased payroll
taxes attributable to the increase in compensation expense.

Technology and telecommunication fees increased $5.4 million to
$16.5 million for the nine months ended September 30, 2000 from $11.1 million
for the same period in 1999. Our use of contract programmers to perform systems
development projects accounted for $2.4 million of the increase. Increased
hardware leasing and software maintenance and licensing fees needed to support
the growth in assets processed accounted for $1.5 million of the increase.
Expenses related to network monitoring and help desk services, which commenced
in 2000, along with mainframe data processing accounted for $0.5 million of the
increase.

Occupancy expense increased $1.9 million to $8.0 million for the nine months
ended September 30, 2000 from $6.1 million for the nine months ended
September 30, 1999. The increase was primarily due to increased rent resulting
from the expansion of office space in our Boston location at the current market
rental rates.

Transaction processing services expense consists of volume related expenses
including subcustodian fees and external contract services. Transaction
processing services expense increased $0.6 million to $7.4 million for the nine
months ended September 30, 2000 from $6.8 million for the nine months ended
September 30, 1999. This increase was due primarily to an increase in
subcustodian fees and pricing services driven by the growth in assets processed.

Depreciation and amortization expense increased $0.6 million to
$3.4 million for the nine months ended September 30, 2000 from $2.8 million for
1999. This increase resulted from

15
<PAGE>
capitalized expenditures associated with the expansion into additional office
space and capitalized software.

Travel and sales promotion expense consists of expenses incurred by the
sales force, client management staff and other employees in connection with
sales calls on potential clients, traveling to existing client sites and our
foreign subsidiaries. Travel and sales promotion expense increased $0.9 million
to $2.6 million for the nine months ended September 30, 2000 from $1.7 million
for the nine months ended September 30, 1999. The increase is consistent with
the increased level of business activity this year.

Professional fees decreased by $0.5 million to $2.1 million for the nine
months ended September 30, 2000 from $2.6 million for the nine months ended
September 30, 1999. The decrease in professional fees relates primarily to
nonrecurring consulting services during 1999 related to the integration of the
BankBoston acquisition and tax planning.

Other operating expenses include fees for recruiting costs, office supplies,
temporary help and various fees assessed by the Massachusetts Commissioner of
Banks. These expenses increased $1.5 million to $6.6 million for the nine months
ended September 30, 2000 from $5.1 million for the nine months ended
September 30, 1999. The growth in assets processed contributed to the overall
increase in other operating expenses.

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 or changes in
interest rates compared to the same period in 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 VS
SEPTEMBER 30, 1999
------------------------------
CHANGE CHANGE
DUE TO DUE TO
VOLUME RATE NET
-------- -------- --------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and other................... $ 361 $ 403 $ 764
Investment securities.......................... 40,140 10,867 51,007
Loans.......................................... 1,677 263 1,940
------- ------- -------
Total interest-earning assets................ $42,178 $11,533 $53,711
------- ------- -------
INTEREST-BEARING LIABILITIES:
Deposits....................................... $ 9,542 $ 2,060 $11,602
Borrowings..................................... 19,431 6,093 25,524
------- ------- -------
Total interest-bearing liabilities........... $28,973 $ 8,153 $37,126
------- ------- -------
Change in net interest income.................. $13,205 $ 3,380 $16,585
======= ======= =======
</TABLE>

Net interest income increased $16.6 million or 67% to $41.4 million for the
nine months ended September 30, 2000 from $24.8 million for the same period in
1999. This increase resulted from an increase in interest income of
$53.7 million net of an increase in interest expense of $37.1 million. The
improvement in net interest income primarily reflects the positive effect of
balance sheet growth driven by increased client deposits and borrowings. The net
interest margin increased 20 basis points to 2.12% for the nine-month period
ended September 30, 2000 compared to the same period last year.

16
<PAGE>
Average interest-earning assets, primarily investment securities, increased
$889.5 million or 52% to $2.6 billion for the nine months ended September 30,
2000 from $1.7 billion for the nine months ended September 30, 1999. Funding for
the asset growth was provided by an increase in average short-term borrowings,
primarily client repurchase agreements, of $493.7 million and an increase in
average client deposits of $286.2 million. The effect on net interest income
from changes in volume of interest-earning assets and interest-bearing
liabilities was an increase of approximately $13.2 million for the nine months
ended September 30, 2000 compared to the same period in 1999.

Average yield on interest earning assets increased 80 basis points to 6.50%
for the nine months ended September 30, 2000 from 5.70% for the same period in
1999. The average rate that we paid on interest-bearing liabilities increased 75
basis points to 5.12% for the nine months ended September 30, 2000 from 4.37%
for the year to date period ended September 30, 1999. The increase in rates
reflects the current higher interest rate environment compared with 1999. The
effect on net interest income due to changes in rates was an increase of
approximately $3.4 million for the nine months ended September 30, 2000 compared
to the same period in 1999.

INCOME TAXES

Taxes for the nine months ended September 30, 2000 were $12.0 million, up
from $7.9 million for the same period in 1999. The effective tax rate remained
at 32% for both nine-month periods.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

NON-INTEREST INCOME

Non-interest income increased $34.9 million to $133.8 million for the year
ended December 31, 1999 from $98.9 million for the year ended December 31, 1998.
Non-interest income consists of the following items (Dollars in thousands):

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1999 1998 CHANGE
--------- -------- --------
<S> <C> <C> <C>
Asset servicing fees........................... $132,478 $96,757 37%
Computer service fees.......................... 488 518 (6%)
Other operating income......................... 795 748 6%
Net gain on sale of securities................. -- 833 --
-------- -------
Total non-interest income...................... $133,761 $98,856 35%
======== =======
</TABLE>

Asset servicing fees increased $35.7 million due principally to higher
levels of assets processed resulting from the addition of new clients as well as
the expansion of existing client relationships. Total net assets processed
increased 18% to $290 billion at December 31, 1999 from $245 billion at
December 31, 1998. The largest component of asset servicing fees is asset-based
fees, which increased between periods due to the increase in assets processed.
Another significant portion of the increase in asset servicing fees resulted
from our success in marketing ancillary services such as cash management and
securities lending.

Computer service fees consist of amounts we charged for data processing
services related to client accounts. Other operating income consists of
dividends received relating to the FHLBB stock investment and miscellaneous
transaction-oriented private banking fees.

17
<PAGE>
OPERATING EXPENSES

In 1999 total operating expenses were $135.8 million, up 36% from 1998. The
components of operating expenses were as follows (Dollars in thousands):

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1999 1998 CHANGE
--------- -------- --------
<S> <C> <C> <C>
Compensation and benefits...................... $ 83,302 $61,901 35%
Technology and telecommunications.............. 15,744 10,965 44
Transaction processing services................ 9,234 7,251 27
Occupancy...................................... 8,032 6,991 15
Depreciation and amortization.................. 3,911 2,657 47
Professional fees.............................. 3,573 1,590 125
Travel and sales promotion..................... 2,551 1,920 33
Amortization of goodwill....................... 1,756 442 297
Insurance...................................... 769 783 (2)
Other operating expenses....................... 6,943 5,084 37
-------- -------
Total operating expenses....................... $135,815 $99,584 36%
======== =======
</TABLE>

Compensation and benefits expense, the largest component of our expenses,
increased by $21.4 million or 35% from year to year due to several factors. The
average number of employees increased 25% to 1,423 at December 31, 1999 from
1,139 at December 31, 1998. This increase relates to the increase in client
relationships and the expansion of existing client relationships during the
year. In addition, compensation expense related to our management incentive
plans increased $4.0 million between years because of the increase in earnings
subject to incentive payments in 1999 compared to 1998. Benefits, including
payroll taxes, group insurance plans, retirement plan contributions and tuition
reimbursement, increased by $2.4 million for the year ended December 31, 1999
from the same period in 1998.

Technology and telecommunication fees increased $4.8 million year over year.
Increased hardware, software and telecommunications expenses needed to support
the growth in assets processed accounted for $1.7 million of the increase. Our
use of contract programmers to perform information systems development projects
accounted for $0.8 million of the increase. Expenses relating to the conversion
of the BankBoston business accounted for $0.5 million of the increase.

The increase in transaction processing services expense of $2.0 million from
year to year relates primarily to an increase in subcustodian fees driven by
growth in foreign assets processed for clients.

Occupancy expense increased $1.0 million to $8.0 million for the year ended
December 31, 1999 from $7.0 million for the year ended December 31, 1998. This
increase resulted from the temporary rental of office space relating to the
BankBoston acquisition along with the expansion of office space in our Boston
location.

Depreciation and amortization expense increased $1.2 million to
$3.9 million for the year ended December 31, 1999 from $2.7 million for the year
ended December 31, 1998. This increase resulted primarily from software costs
capitalized under AICPA Statement of Position 98-1, 'Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use,' ('SOP 98-1'), which
were placed in service in 1999.

Professional fees increased $2.0 million to $3.6 million for the year ended
December 31, 1999 from $1.6 million for the year ended December 31, 1998. The
increase in professional fees relates

18
<PAGE>
primarily to consulting services related to the integration of the BankBoston
business and tax planning.

Travel and sales promotion expense increased $0.6 million to $2.6 million
for the year ended December 31, 1999 from $1.9 million for the year ended
December 31, 1998 due primarily to increased travel relating to the integration
of the BankBoston business.

The acquisition of BankBoston's institutional trust and custody business was
accounted for under the purchase method of accounting and as a result, the
purchase price was allocated first to all identifiable tangible and intangible
assets acquired and liabilities assumed. The remainder of the purchase price
(excess of purchase price over the fair value of intangible net assets) was then
allocated to goodwill. Goodwill expense relates to the amortization of the
resulting goodwill from the acquisition, which is being amortized over its
estimated useful life.

Other operating expenses increased $1.8 million to $6.9 million for the year
ended December 31, 1999 from $5.1 million for the year ended December 31, 1998.
Recruiting costs accounted for $0.9 million of the increase due to the growth of
our staffing needs. The growth in assets processed has resulted in an overall
increase in operating expenses.

NET INTEREST INCOME

Net interest income is the amount of interest received on interest-earning
assets less the interest paid on interest-bearing liabilities. 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, 1999 compared to the year ended December 31, 1998.
Changes attributed to both volume and rate have been allocated based on the
proportion of change in each category (Dollars in thousands).

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1999 VS DECEMBER 31, 1998
---------------------------------
CHANGE CHANGE
DUE TO DUE TO
VOLUME RATE NET
--------- --------- ---------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Fed funds sold and interest-earning deposits... $ 480 $ (144) $ 336
Investment securities.......................... 21,146 (1,374) 19,772
Loans.......................................... 1,046 (284) 762
------- ------- -------
Total interest-earning assets.................. $22,672 $(1,802) $20,870
------- ------- -------

INTEREST-BEARING LIABILITIES
Deposits....................................... $15,143 $(3,500) $11,643
Borrowings..................................... 973 (825) 148
------- ------- -------
Total interest-bearing liabilities............. $16,116 $(4,325) $11,791
------- ------- -------
Change in net interest income.................. $ 6,556 $ 2,523 $ 9,079
======= ======= =======
</TABLE>

Net interest income increased $9.1 million or 34% to $35.8 million for the
year ended December 31, 1999 from $26.7 million for the year ended December 31,
1998. This net increase resulted from an increase in interest income of
$20.9 million offset by an increase in interest expense of $11.8 million. The
net impact of the above changes was a 10 basis point increase in net interest
margin.

The increase in interest income resulted from an expansion of the balance
sheet. The equity obtained in the $26 million private placement completed in
March 1999 allowed us to expand the

19
<PAGE>
average balance sheet with deposits that had been in third-party sweeps. Our
average interest-earning assets increased 27% compared to the same period in
1998.

Interest expense increased due to a 32% increase in average interest-bearing
liabilities. The increase was offset by a decrease in the average interest rates
that we paid from 4.80% to 4.36% between periods.

INCOME TAXES

Taxes for the year ended December 31, 1999 were $10.8 million, up from
$9.3 million a year ago. The overall effective tax rate for the period was 32%,
which compares to 36% for the prior year. The year-to-year decrease resulted
from the restructuring of corporate entities for state tax planning purposes.

FINANCIAL CONDITION

INVESTMENT PORTFOLIO

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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
SECURITIES HELD TO MATURITY:
Mortgage-backed securities....................... $1,824,653 $1,464,816
Federal agency securities........................ 277,324 227,030
State and political subdivisions................. 75,418 63,871
Foreign government securities.................... 7,585 7,638
---------- ----------
Total securities held to maturity.............. $2,184,980 $1,763,355
========== ==========

SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities....................... $ 464,790 $ 239,132
Federal agency securities........................ 52,992 52,310
Corporate debt................................... 46,460 47,875
State and political subdivisions................. 78,688 36,293
---------- ----------
Total securities available for sale............ $ 642,930 $ 375,610
========== ==========
</TABLE>

The investment portfolio is used to invest depositors' funds and provide a
secondary source of earnings for us. In addition, we use the investment
portfolio to secure open positions at securities clearing institutions in
connection with its custody services. The portfolio is comprised of 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 FHLBB, municipal securities, corporate
debt securities, and foreign government bonds issued by the Canadian provinces
of Ontario and Manitoba.

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

20
<PAGE>
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.

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

We invest 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.

The book value and weighted average yield of our securities held to maturity
at September 30, 2000, by effective maturity, are reflected in the following
table (Dollars in thousands):

<TABLE>
<CAPTION>
YEARS
-----------------------------------------------------------------------------------------
UNDER 1 1 TO 5 5 TO 10 OVER 10
------------------- --------------------- -------------------- --------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- ---------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities......... $13,512 6.01% $1,036,706 6.92% $566,983 7.21% $207,451 7.31%
Federal agency securities.......... -- -- 101,516 7.11 175,809 7.41 -- --
State and political subdivisions... -- -- -- -- 3,939 5.62 71,479 5.42
Foreign government securities...... -- -- 7,585 6.84 -- -- -- --
------- ---------- -------- --------
Total securities held to
maturity....................... $13,512 6.01% $1,145,807 6.93% $746,731 7.25% $278,930 6.83%
======= ========== ======== ========
</TABLE>

The book value and weighted average yield of our securities available for
sale at September 30, 2000 by effective maturity, are reflected in the following
table (Dollars in thousands):

<TABLE>
<CAPTION>
YEARS
--------------------------------------------------------------------------------------
UNDER 1 1 TO 5 5 TO 10 OVER 10
------------------- -------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities............. $ -- -- $424,381 7.08% $33,269 7.77% $ 7,140 7.70%
Federal agency securities.............. -- -- 52,992 5.96 -- -- -- --
Corporate debt......................... -- -- 24,228 4.31 49,574 5.02 1,079 5.10
State and political subdivisions....... 3,807 4.18% -- -- -- -- 46,460 5.64
------ -------- ------- -------
Total securities available for
sale............................... $3,807 4.18% $501,601 6.82% $82,843 6.13% $54,679 5.90%
====== ======== ======= =======
</TABLE>

21
<PAGE>
LOAN PORTFOLIO

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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Loans to mutual funds.................................... $ 77,596 $ 44,369
Loans to individuals..................................... 32,555 65,010
Loans to not-for-profit organizations.................... 13 13
-------- --------
110,164 109,392
Less: allowance for loan losses.......................... (100) (100)
-------- --------
Net loans................................................ $110,064 $109,292
======== ========
Floating Rate............................................ $110,151 $109,379
Fixed Rate............................................... 13 13
-------- --------
$110,164 $109,392
======== ========
</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 us for the borrower. All unsecured lines of credit may, in the event
of a default, be collateralized at our option by securities held in custody by
us for those mutual funds. Loans to mutual funds also include advances that we
make to certain mutual fund clients pursuant to the terms of our custody
agreements with those clients to facilitate securities transactions and
redemptions.

At September 30, 2000, our 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.

Our credit loss experience has been excellent. There have been no loan
charge-offs or adverse credit actions in our history. It is our 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. At September 30, 2000, there were no loans on non-accrual,
greater than 90 days past due or troubled debt restructurings. Although
virtually all of our loans are fully collateralized with freely tradable
securities, management recognizes some credit risk inherent in the loan
portfolio, and has recorded an allowance for loan losses of $0.1 million at
September 30, 2000. This amount is not allocated to any particular loan, but is
intended to absorb any risk of loss inherent in the loan portfolio. Management
actively monitors the loan portfolio and the underlying collateral and regularly
assesses the adequacy of the allowance for loan losses.

MARKET RISK: OVERVIEW

The active management of market risk is integral to our operations. The
principal objective of our interest rate risk management function is to evaluate
the interest rate risk included in certain balance sheet accounts, determine the
level of appropriate risk given our business focus, operating environment,
capital and liquidity requirements and performance objectives and manage the
risk consistent with Board approved guidelines.

We administer and oversee the investment risk management process primarily
through two oversight bodies: The board of directors and the Asset and Liability
Committee ("ALCO"). Our board of directors reviews, on a quarterly basis, our
asset/liability position, including simulations of the effect on our capital of
various interest rate scenarios. ALCO is a senior management committee

22
<PAGE>
consisting of the Chief Executive Officer, the Chief Financial Officer, the
Executive Vice President and members of the Treasury function and others who are
responsible for the day-to-day management of market risk. ALCO meets on a
bi-weekly basis to provide detailed oversight of investment risk, including
market risk.

The extent of the movement of interest rates, higher or lower, is an
uncertainty that could have a negative impact on our earnings. We have
investment guidelines that define the overall framework for managing market and
other investment risks, including accountabilities and controls over these
activities. In addition, we have specific investment policies that delineate
investment limits and strategies that are appropriate, given liquidity, surplus
and regulatory requirements.

In the normal course of business, our financial position is routinely
subjected to a variety of risks, including market risks associated with interest
rate movements. We regularly assess these risks and have established policies
and business practices to protect against the adverse effects of these and other
potential exposures. We recognize that effective management of interest rate
risk includes an understanding of when adverse changes in interest rates will
flow through the statement of income and comprehensive income. Accordingly, we
will manage our position to monitor exposure to net interest income over both a
one year planning horizon and a longer term strategic horizon. In order to
manage this interest rate risk, we have established that we will follow a policy
limit stating that projected net interest income over the next 12 months will
not be reduced by more than 10% given a change in interest rates of up to 200
basis points (+ or -) over 12 months.

Our primary tool in managing interest rate risk in this manner is an income
simulation model wherein we project the future net interest income derived from
the most current projected balance sheet using a variety of interest rates
scenarios. The model seeks to adjust for cash flow changes arising from the
changing interest rates for mortgage prepayments, callable securities and
adjustable rate securities. We also utilize interest rate swap agreements to
manage interest rate risk. Interest rate swap contracts involve an agreement
with a counterparty to exchange cash flows based on an underlying interest rate
index. The effect of these agreements was to lengthen short-term variable rate
liabilities into longer-term fixed rate liabilities.

The results of the sensitivity analysis as of September 30, 2000 and
September 30, 1999, indicated that an upward shift of interest rates by 200
basis points would result in a reduction in projected net interest income of
9.12% and 8.18%, respectively, versus the policy limit of 10%. Conversely, a
downward shift of 200 basis points would result in an increase in projected net
interest income of 7.07% and 6.36%, respectively.

Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes requires the making of certain
assumptions that may tend to oversimplify the manner in which actual yield and
costs respond to changes in market interest rates. Assumptions are the
underlying factors that drive the interest rate risk measurement system which
include interest rate forecasts, client liability funding, mortgage prepayment
assumptions and portfolio yields. The model assumes that the composition of our
interest sensitive assets and liabilities existing at the beginning of a period
will change periodically over the period being measured. The model also assumes
that a particular change in interest rates is reflected uniformly across the
yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the model provides an indication
of our interest rate risk exposure at a particular point in time, such
measurement is not intended to and does not provide a precise forecast of the
effect of changes in market interest rates on our net interest income and will
differ from actual results. The results of this modeling are monitored by
management and presented to the board of directors, quarterly.

23
<PAGE>
MARKET RISK: RE-PRICING RISK

We, like all financial intermediaries, are subject to several types of
interest rate risk. Rapid changes in interest rates could adversely affect our
profitability by causing changes in the market value of our assets and its net
interest income. Re-pricing 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 interest earning assets and the amount of interest bearing
liabilities that could experience changes in interest rates in the same time
frame, we attempt to reduce the risk of significant adverse effects on net
interest income caused by interest rate changes. We do not attempt to match each
earning asset with a specific interest bearing liability. Instead, as shown in
the table below, we aggregate all of our 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.

We seek 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 contracts. Interest rate contracts are used to hedge
against large rate swings and changes in the shape of the yield curve. We use
interest rate swap contracts to hedge against rising interest rates and changes
in the shape of the yield curve. Our current strategy is to use such contracts
to offset increases in interest expense related to customer deposits and other
client funding sources including repurchase agreements.

Interest rate contracts involve elements of credit and market risk, which
are not reflected in our consolidated financial statements. Such instruments are
entered into for hedging (as opposed to investment or speculative) purposes. We
periodically monitor the financial stability of our counterparties according to
prudent investment guidelines and established procedures. There can be no
assurance that such portfolio actions will adequately limit interest rate risk.

24
<PAGE>
The following table presents the re-pricing schedule for our interest
earning assets and interest bearing liabilities at September 30, 2000 (Dollars
in thousands):

<TABLE>
<CAPTION>
WITHIN SIX TO ONE YEAR
THREE THREE TO TWELVE TO OVER FIVE
MONTHS SIX MONTHS MONTHS FIVE YEARS YEARS TOTAL
---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Federal funds sold......... $ 90,000 $ -- $ -- $ -- $ -- $ 90,000
Investment securities(2)... 1,369,260 333,526 360,331 451,760 313,033 2,827,910
Loans--variable rate....... -- -- -- 13 -- 13
Loans--fixed rate.......... 110,051 -- -- -- -- 110,051
---------- --------- -------- -------- -------- ----------
Total interest-earning
assets................. $1,569,311 $ 333,526 $360,331 $451,773 $313,033 $3,027,974
Interest-bearing liabilities:
Demand deposit accounts.... $ 2,400 $ -- $ -- $ -- $ -- $ 2,400
Savings accounts........... 1,373,303 -- -- -- -- 1,373,303
Time deposit accounts...... 10,000 -- -- -- -- 10,000
Interest rate contracts.... (570,000) 60,000 130,000 380,000 -- --
Short term borrowings...... 1,204,245 -- -- -- -- 1,204,245
---------- --------- -------- -------- -------- ----------
Total interest-bearing
liabilities............ $2,019,948 $ 60,000 $130,000 $380,000 $ -- $2,589,948
---------- --------- -------- -------- -------- ----------
Net interest sensitivity
gap during the
period................. $ (450,637) $ 273,526 $230,331 $ 71,773 $313,303 $ 438,026
========== ========= ======== ======== ======== ==========
Cumulative gap........... $ (450,637) $(177,111) $ 53,220 $124,993 $438,026
========== ========= ======== ======== ========
Interest sensitive assets as
a percent of interest
sensitive liabilities
(cumulative)............... 77.69% 91.48% 102.41% 104.83% 116.91%
========== ========= ======== ======== ========
Interest sensitive assets as
a percent of total assets
(cumulative)............... 49.49% 60.01% 71.38% 85.62% 95.50%
========== ========= ======== ======== ========
Net interest sensitivity gap
as a percent of total
assets..................... (14.21)% 8.63% 7.26% 2.26% 9.87%
========== ========= ======== ======== ========
Cumulative gap as a percent
of total assets............ (14.21)% (5.59)% 1.68% 3.94% 13.81%
---------- --------- -------- -------- --------
</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 effective maturity.

25
<PAGE>
MARKET RISK: BASIS RISK

We are also exposed to basis risk from interest rate movements which arise
when variable rate assets and liabilities are tied to different market indices.
We hold investment securities that are indexed to U.S. Treasury rates, LIBOR and
to the Prime rate, while its liabilities are primarily indexed to the Federal
Funds overnight rate. We constantly analyze and modify our simulation
assumptions to incorporate projections of all relevant rate indices.

MARKET RISK: LIQUIDITY

Liquidity represents an institution's ability 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 us, these obligations arise from the withdrawals
of deposits and the payment of operating expenses.

Our primary sources of liquidity include cash and cash equivalents, federal
funds sold, new deposits, short-term borrowings, interest payments on securities
held to maturity and available for sale, 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 our management of liquid assets and the
ability to generate liquidity through liability funds, management believes that
we maintain overall liquidity sufficient to meet our depositors' needs, to
satisfy our operating requirements and to fund the payment of an anticipated
annual cash dividend of approximately $0.06 per share.

Our ability to pay dividends on the common stock may depend on the receipt
of dividends from Investors Bank. In addition, we may not pay dividends on our
common stock if we are in default under agreements entered into in connection
with the sale of our Capital Securities. Any dividend payments by Investors Bank
are subject to certain restrictions imposed by the Massachusetts Commissioner of
Banks. We paid an annual dividend of $0.06 per share to our stockholders for
2000 (approximately $1.8 million based upon 29,825,675 shares outstanding as of
September 30, 2000).

We have informal borrowing arrangements with various bank counterparties.
Each counterparty has agreed to make funds available to us at the Federal funds
overnight rate. The aggregate amount of these borrowing arrangements as of
September 30, 2000 was $525 million. Each bank may terminate its arrangement at
any time and is under no contractual obligation to provide us with requested
funding. Our borrowings under these arrangements are typically on an overnight
basis. We believe that if these banks were unable to provide funding, a
satisfactory alternative source of funding would be available to us. We cannot
be certain, however, that such funding will be available. Lack of availability
of liquid funds could have a material adverse impact on our operations.

We also have Master Repurchase Agreements in place with various broker
counterparties. Each broker has agreed to make funds available to us at various
rates in exchange for collateral consisting of marketable securities. The
aggregate amount of these borrowing arrangements at September 30, 2000 was
$2 billion.

We also have a borrowing arrangement with the FHLBB. We may borrow amounts
determined by prescribed collateral levels and the amount of FHLBB stock we
hold. We are required to hold FHLBB stock equal to no less than (i) 1% of our
outstanding residential mortgage loan principal (including mortgage pool
securities), (ii) 0.3% of total assets, or (iii) total advances from the FHLBB,
divided by a leverage factor of 20. The aggregate amount of borrowing available
to us under this arrangement at September 30, 2000 was $862 million.

26
<PAGE>
Our cash flows are comprised of three primary classifications: cash flows
from operating activities, investing activities, and financing activities. Net
cash provided by operating activities was $44.5 million for the nine months
ended September 30, 2000. Net cash used for investing activities, consisting
primarily of the excess of purchases of investment securities over proceeds from
maturities of investment securities and decrease in federal funds sold was
$639 million for the nine months ended September 30, 2000. Net cash provided by
financing activities, consisting primarily of net activity in deposits and
short-term borrowings, was $574 million for the nine months ended September 30,
2000.

CAPITAL RESOURCES

Historically, we have financed our operations principally through internally
generated cash flows. We incur capital expenditures for furniture, fixtures and
miscellaneous equipment needs. We lease microcomputers through operating leases.
Capital expenditures have been incurred and leases entered into on an
as-required basis, primarily to meet our growing operating needs. As a result,
our capital expenditures were $5.8 million and $3 million for the nine months
ended September 30, 2000 and 1999, respectively.

Stockholders' equity at September 30, 2000 was $164.7 million, an increase
of $27.9 million or 20%, from $136.8 million at December 31, 1999. The ratio of
stockholders' equity to assets decreased to 5.20% at September 30, 2000 from
5.36% at December 31, 1999.

The Federal Reserve Board ('FRB') has adopted a system using internationally
consistent risk-based capital adequacy guidelines to evaluate the capital
adequacy of banks and bank holding companies. Under the risk-based capital
guidelines, different categories of assets are assigned different risk weights,
based generally upon the perceived credit risk of the asset. These risk weights
are multiplied by corresponding asset balances to determine a 'risk-weighted'
asset base. Some off-balance sheet items, 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.

FRB and Federal Deposit Insurance Corporation ('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 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.

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<PAGE>
The following table summarizes our Tier I and total capital ratios at
September 30, 2000 (Dollars in thousands):

<TABLE>
<CAPTION>
AMOUNT RATIO
---------- --------
<S> <C> <C>
Tier I capital.......................................... $ 158,420 14.39%
Tier I capital minimum requirement...................... 44,032 4.00%
---------- -----
Excess Tier I capital................................... $ 114,388 10.39%
========== =====
Total capital........................................... $ 158,520 14.40%
Total capital minimum requirement....................... 88,064 8.00%
========== =====
Excess total capital.................................... $ 70,456 6.40%
========== =====
Risk adjusted assets, net of intangible assets.......... $1,100,795
==========
</TABLE>

The following table summarizes Investors Bank's Tier I and total capital
ratios at September 30, 2000 (Dollars in thousands):

<TABLE>
<CAPTION>
AMOUNT RATIO
---------- --------
<S> <C> <C>
Tier I capital.......................................... $ 155,387 14.13%
Tier I capital minimum requirement...................... 43,978 4.00%
========== =====
Excess Tier I capital................................... $ 111,409 10.13%
========== =====
Total capital........................................... $ 155,487 14.14%
Total capital minimum requirement....................... 87,957 8.00%
---------- -----
Excess total capital.................................... $ 63,530 6.14%
========== =====
Risk adjusted assets, net of intangible assets.......... $1,099,457
==========
</TABLE>

In addition to the risk-based capital guidelines, the FRB and the FDIC use a
"Leverage Ratio" as an additional tool to evaluate capital adequacy. The
Leverage Ratio is defined to be a company's Tier I capital divided by its
adjusted total average assets. The Leverage Ratio adopted by the federal banking
agencies requires a ratio of 3.0% for top rated banking institutions. All other
banking institutions will be expected to maintain a Leverage Ratio of 4.0% to
5.0%. The computation of the risk-based capital ratios and the Leverage Ratio
requires that our capital and that of Investors Bank be reduced by most
intangible assets. Our Leverage Ratio at September 30, 2000 was 5.40%, which is
in excess of regulatory requirements. Investors Bank's Leverage Ratio at
September 30, 2000 was 5.30%, which is in excess of regulatory requirements.

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<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 (Dollars in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
----------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
---------- --------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Federal funds sold and other.... $ 44,591 $ 2,037 6.09% $ 35,661 $ 1,273 4.76%
Investment securities(1)........ 2,442,909 120,878 6.60% 1,609,894 69,871 5.79%
Loans(2)........................ 123,231 4,400 4.76% 75,674 2,460 4.33%
---------- -------- ------ ---------- ------- ------
Total interest earning
assets...................... 2,610,731 $127,315 6.50% 1,721,229 $73,604 5.70%
======== ====== ======= ======
Allowance for loan losses....... (100) (100)
Non-interest-earning assets..... 143,049 131,874
---------- ----------
Total assets.................. $2,753,680 $1,853,003
========== ==========
INTEREST BEARING LIABILITIES:
Deposits:
Demand........................ $ 4,664 $ 70 2.00% $ 42,185 $ 1,144 3.62%
Savings....................... 1,130,979 40,271 4.75% 844,809 27,814 4.39%
Time.......................... 11,830 544 6.13% 8,859 325 4.89%
Short term borrowings........... 1,087,027 45,003 5.52% 593,292 19,479 4.38%
---------- -------- ------ ---------- ------- ------
Total interest bearing
liabilities................... 2,234,500 85,888 5.12% 1,489,145 48,762 4.37%
======== ====== ======= ======
Non-interest bearing liabilities
Demand deposits............... 185,096 103,001
Savings....................... 53,333 39,420
Non-interest bearing time
deposits.................... 69,434 65,000
Other liabilities............. 35,708 18,129
---------- ----------
Total liabilities............... 2,578,071 1,714,695
Trust preferred stock........... 24,227 24,199
Equity.......................... 151,382 114,109
---------- ----------
Total liabilities and equity.... $2,753,680 $1,853,003
========== ==========
Net interest income............. $ 41,427 $24,842
======== =======
Net interest margin(3).......... 2.12% 1.92%
====== ======
Average interest rate
spread(4)..................... 1.38% 1.33%
====== ======
Ratio of interest-earning assets
to interest-bearing
liabilities................... 116.84% 115.59%
====== ======
</TABLE>

------------------------

(1) Average yield on available for sale securities is based on amortized cost.

(2) Average yield on demand loans includes accrual and non-accrual loan
balances.

(3) Net interest income divided by total interest-earning assets.

(4) Yield on interest-earning assets less rate paid on interest-bearing
liabilities.

29
<PAGE>
BUSINESS

GENERAL

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

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

We provide a broad range of services to financial asset managers, such as
mutual fund complexes, investment advisors, banks and insurance companies. We
think of these services in two categories: core services and value-added
services. Our core services include global custody and multicurrency accounting.
Our value-added services include mutual fund administration, securities lending,
foreign exchange and cash management.

At September 30, 2000, we provided services for approximately $289 billion
in net assets, including approximately $18 billion of foreign assets.

PENDING ACQUISITION OF CHASE ADVISOR CUSTODY UNIT

On November 28, 2000, Investors Bank agreed to purchase the advisor custody
unit of The Chase Manhattan Bank. This unit provides institutional custody
services to accounts holding approximately $27 billion in assets as of
October 31, 2000. These accounts consist of individual accounts, trusts,
endowments and corporate accounts whose assets are managed by third-party
investment advisors.

Pursuant to the terms of the asset purchase agreement, we will pay to Chase,
in two cash installments, a total purchase price of up to $42 million plus the
book value of loans to clients that totaled approximately $38 million at
October 31, 2000. The amount of the second installment will depend on client
retention.

The closing of the purchase is subject to customary closing conditions and
regulatory approvals. Subject to the satisfaction of the foregoing conditions,
we expect that the closing of the purchase will occur in the first quarter of
2001. We expect the client accounts to be converted to our custody system in
mid-2001.

The transaction will be accounted for as a purchase. We expect the
acquisition to be accretive to earnings per share beginning in mid-2001 and for
the full fiscal year, assuming the successful integration of staff, systems and
facilities by mid-2001.

INDUSTRY OVERVIEW

Asset managers manage and invest the financial assets entrusted to them.
They do so using a broad range of financial products, including mutual funds,
unit investment trusts, separate accounts, variable annuities and other products
that pool together money from many investors. Asset servicing companies like
ours perform various services for asset managers and the pooled financial
products they sponsor.

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<PAGE>
SUSTAINED FINANCIAL ASSET GROWTH. Growth in financial assets has been
strong over the past ten years. Factors driving this growth are an aging
population, the privatization of retirement systems and the increased popularity
of pooled investment products, including mutual funds. These trends are expected
to continue. The total amount of U.S. financial assets held in mutual funds,
life insurance companies, private pension funds and bank personal trust accounts
grew to $15.4 trillion at December 31, 1999 from $4.5 trillion in 1989, a
compounded annual growth rate of 13%. Mutual funds, a primary market for our
services, hold a large portion of the money invested in pooled investment
vehicles. The U.S. mutual fund market has grown at a compounded annual growth
rate of more than 19% since 1989, and held over $6 trillion in assets at
December 31, 1999. The following table presents U.S. financial assets, including
mutual funds, at December 31, 1999 and December 31, 1989 (Dollars in billions):

<TABLE>
<CAPTION>
COMPOUND
DECEMBER 31, DECEMBER 31, ANNUAL
1999 1989 GROWTH RATE
------------ ------------ -----------
<S> <C> <C> <C>
U.S. FINANCIAL ASSETS
Mutual Funds.......................... $ 6,299.70 $1,066.80 19.43%
Life Insurance Companies.............. 3,067.90 1,245.50 9.43
Private Pension Funds................. 4,959.30 1,634.30 11.74
Bank Personal Trusts and Estates...... 1,092.30 515.10 7.81
---------- ---------
Total............................... $15,419.20 $4,461.70 13.27%
========== =========
</TABLE>

SOURCE: FEDERAL RESERVE BANK

CONSOLIDATION AND OUTSOURCING TRENDS. Another important factor affecting
the industry is the consolidation in the number of asset servicing providers.
During the past ten years, a number of small and mid-size asset servicers
consolidated with larger service providers or divested their asset servicing
operations to focus their resources on core businesses. Since the early 1990's,
more than 25 service providers have consolidated their operations with other
companies. This consolidation has concentrated the industry around a smaller
number of providers, many of which are specialists, including us, and presents
us with increasing opportunities for growth.

Asset servicing is viewed differently by asset management organizations
depending on their operational philosophy. The majority of asset managers hire
third parties to provide custody services. Some use more than one custodian to
foster cost reduction through competition. Large asset managers may have enough
assets to justify the cost of providing in-house facilities to handle
accounting, administration and transfer agency services. Smaller asset managers
generally hire third parties to handle accounting, administration and transfer
agency services in addition to custody. Keeping abreast of developments like
Internet data delivery, Y2K, the Euro, decimalization of stock prices and
compressed settlement cycles has forced significant increases in technology
spending across the financial services industry. We also believe that this
increase in spending requirements has accelerated the pace at which asset
managers outsource back office operations to asset servicers.

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

- Access to data from world markets as a result of more powerful and
affordable information processing power

- The ability to send and receive large volumes of information almost
instantly through widely dispersed communication networks

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<PAGE>
- Timely on-line access to electronic information on security positions,
prices and price shifts that facilitates on-line currency trading,
indexing of assets, real time arbitrage, and hedging through the use of
derivative securities.

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

COMPLEX INVESTMENT PRODUCTS. Asset managers create different investment
structures in an effort to capture efficiencies of larger pools of assets. One
innovative example of this is the master-feeder structure. In the master-feeder
structure, one or more investment vehicles (the 'feeder funds') with identical
investment objectives pool their assets in the common portfolio of a separate
investment vehicle (the 'master fund'). This structure permits each of the
feeder funds to be sold to a separate target market and through a different
distribution channel. The feeder fund, if it were a stand-alone fund, might not
be large enough to support its operating costs. The feeder funds benefit from
economies of scale available to the larger pool of assets invested in the master
fund.

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

Another innovation in the mutual fund industry is the advent of exchange
traded funds, or ETFs. ETFs are single shares of stock that replicate an index
and are traded on a national securities exchange, usually the American Stock
Exchange. Unlike investing in a conventional index mutual fund, investing in an
ETF allows investors to buy and sell shares throughout the trading day at market
prices. ETFs also offer potential tax efficiencies. According to an industry
source:

- Assets invested in ETFs are expected to grow at a 30% to 50% average
annual rate over the next five years

- ETF assets are expected to reach $200 billion over the next five years.

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

OUR STRATEGY

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

MAINTAIN TECHNOLOGICAL EXPERTISE. One of our core strategies is to maintain
our technological expertise. The asset servicing industry requires the
technological capability to support a wide range of global security types,
currencies, and complex portfolio structures. Asset servicers must also maintain
the telecommunications flexibility to support the diversity of global
communications

32
<PAGE>
standards. Technological change creates opportunities for product
differentiation and cost reduction.

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

- Custody

- Securities movement and control

- Portfolio accounting

- Multicurrency general ledger accounting

- Pricing

- Net asset value calculation

- Multi-tier and multi-manager processing

- ETF processing

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

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

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

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

MAINTAIN EXPERTISE IN COMPLEX PRODUCTS. Another of our core strategies is
to maintain our strength in the rapidly growing area of complex investment
products. We have developed expertise in servicing multi-tiered and
multi-managed funds, limited partnerships and, most recently, exchange traded
funds. We also have expertise in servicing the more complicated fund of funds
and offshore fund structures. Because the design of FACTS allows us to effect
modifications or enhancements quickly, we are able to respond rapidly to the
systems requirements of complex structures.

- We were recently chosen to be the service provider for a family of
exchange traded funds, launched in May 2000, which held approximately $4
billion in assets as of September 30, 2000.

- We service over $33 billion of assets managed by The Common Fund for
Nonprofit Organizations, which uses a multi-manager structure. The Common
Fund's structure includes 80 managers covering 37 funds.

33
<PAGE>
- We also service the Eaton Vance Tax Managed Funds, a five tier structure
composed of twenty registered investment companies, registered
partnerships, private partnerships, limited liability companies and real
estate investment trusts.

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

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

SERVICE OFFERINGS

We provide a broad range of services to financial asset managers, such as
mutual fund complexes, investment advisors, banks and insurance companies. We
think of these services in two groupings: core services and value-added
services. The core asset services we provide to our clients are global custody
and multicurrency accounting. Value-added services we provide to clients, based
upon their individual needs, include:

- Mutual fund administration

- Securities lending

- Foreign exchange

- Cash management

- Performance management

- Institutional transfer agency

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

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

34
<PAGE>
The following is a description of the various services we offer.

CORE SERVICES

GLOBAL CUSTODY. Global custody entails overseeing the safekeeping of
securities for clients and settlement of portfolio transactions. Our domestic
net assets under custody have grown from $22 billion at October 31, 1990 to
$271 billion at September 30, 2000. At September 30, 2000, our foreign net
assets under custody totaled approximately $18 billion.

In order to service our clients worldwide, we established a network of
global subcustodians in 93 markets. Since we do not have our own branches in
these countries, we are able to operate in the foreign custody arena with
minimal fixed costs, while our clients benefit from the ability to use a single
custodian, Investors Bank, for all of their international investment needs.

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

VALUE ADDED SERVICES

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

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

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

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

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

35
<PAGE>
INSTITUTIONAL TRANSFER AGENCY. Transfer agency encompasses shareholder
recordkeeping and communications. We provide these services only to
institutional clients with smaller numbers of outstanding shareholders or
omnibus positions of retail shareholders.

INVESTMENT ADVISORY SERVICES. The Bank acts as investment adviser to the
Merrimac Master Portfolio, an open-end management investment company registered
under the Investment Company Act of 1940. The portfolio currently consists of a
series of four master funds in a master-feeder structure. The Merrimac Cash
Portfolio and the Merrimac U.S. Government Portfolio are sub-advised by
Allmerica Asset Management, Inc. The Merrimac Treasury Portfolio and the
Merrimac Treasury Plus Portfolio are sub-advised by M&I Investment Management
Corp. At September 30, 2000, the total net assets of the portfolio approximated
$1.7 billion. The portfolio's master funds serve as investment vehicles for five
domestic feeder funds and one offshore feeder fund which we have created and
whose shares are sold to institutional investors.

LINES OF CREDIT. We offer credit lines to our clients for the purpose of
leveraging portfolios and covering overnight cash shortfalls. We do not conduct
consumer-banking operations. At September 30, 2000, we had gross loans
outstanding to clients of approximately $110 million, which represented
approximately 3.5% of our 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. We have never had a loan loss. Other than a loan made to a non-profit
association for purposes of the Community Reinvestment Act, all loans are
secured, or may be secured, by marketable securities and are due on demand.

SALES, MARKETING AND CLIENT SUPPORT

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

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

SIGNIFICANT CLIENTS

Our largest current client, Eaton Vance, accounted for 10%, 9%, 7% and 7% of
our net operating revenues for the years ended December 31, 1997, 1998 and 1999
and the nine months ended September 30, 2000, respectively. No other single
client of ours represented more than 10% of net operating revenues during these
periods.

SOFTWARE SYSTEMS AND DATA CENTER

We must have the capability to provide daily and periodic reports of asset
accounting and performance, and to provide measurement and analytical data to
asset managers on-line on a real time basis. To help us achieve these goals, our
asset servicing operations are supported by sophisticated computer technology.
We receive vast amounts of information across a worldwide computer network. That
information covers a wide range of global security types and complex

36
<PAGE>
portfolio structures in various currencies. The information needs to be
processed and then used for system-wide updating and reporting.

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

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

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

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

Our mainframe processing is provided by Electronic Data Systems, or EDS,
located in Plano, Texas. By outsourcing mainframe processing, we focus our
resources on systems development and minimize our capital investment in
large-scale computer equipment. EDS offers us state-of-the-art computer products
and services to which we 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 related costs over multiple
users. We also receive the benefit of the continuing investment by EDS in its
computer hardware.

Our current agreement with EDS obligates EDS to provide us with
comprehensive data processing services and obligates us to utilize EDS's
services for substantially all of our data processing requirements. We are
billed monthly for these services on an as-used basis in accordance with a
predetermined pricing schedule for specific products and services. EDS began

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<PAGE>
providing services to us in December 1990. Our current agreement with EDS is
scheduled to expire on December 31, 2005. EDS also provides us with mainframe
disaster recovery services.

We maintain a comprehensive disaster recovery plan. The plan identifies
teams to manage disaster situations and re-establish a functioning operational
environment. Under the plan, if necessary, we are able to relocate employees and
resume operations quickly.

The securities industry is moving to a Trade Date +1 (T+1) settlement cycle
where all trades will be settled on the next business day. We have begun making
systems infrastructure and functional modifications required to provide straight
through processing capabilities in a T+1 environment. A comprehensive
development and implementation plan is in place to assure that all industry
imposed deadlines are met. We believe that we can accomplish the transition to
the T+1 environment without adversely affecting our financial results,
operations or the services we provide to our clients.

COMPETITION

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

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

We believe that our size and responsiveness to client needs provide the
asset management industry with an asset servicing alternative to superregional
and money center banks and other administration providers. While consolidation
within the industry may adversely affect our ability to retain clients that have
been acquired, consolidation also creates opportunity for us as prospective
clients review their relationships with existing service providers. In addition,
consolidation among large financial institutions may enable us to acquire, at a
reasonable price, asset servicing businesses that do not fit within the core
focus of these new, consolidated financial institutions.

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<PAGE>
INTELLECTUAL PROPERTY

Our success is dependent upon our software development methodology and other
intellectual property rights that we have developed and own, including FACTS. We
rely on a combination of trade secret, nondisclosure and other contractual
arrangements and technical measures, and copyright and trademark laws to protect
our proprietary rights. We generally enter into confidentiality agreements with
our employees and consultants. We also limit access to and distribution of our
proprietary information. There can be no assurance that the steps we take in
this regard will be adequate to deter misappropriation of our proprietary
information or that we will be able to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights. Furthermore,
these protections may not preclude competitors from developing products and
services with functionality or features similar to ours. In addition, effective
copyright, trademark and other trade protection may not be available in certain
international markets that we service.

Although we do not believe that our services infringe on the intellectual
property rights of others, we cannot be certain that such a claim will not be
asserted against us in the future.

REGULATION AND SUPERVISION

Investors Financial is a federally-registered bank holding company.
Investors Bank is a federally-insured banking institution. We operate in a
highly regulated environment. We are strictly limited as to the types of
activities in which we can engage. We are also limited in the types of
securities and assets we may hold. We are also subject to specific minimum
capital requirements, which address both our liquidity and the risk-profile of
our asset base. Our compliance with these capital requirements is discussed in
the Management's Discussion and Analysis section above. Failure to satisfy any
of the foregoing requirements can result in remedial action by our primary bank
regulators. We are primarily regulated by the Federal Reserve Board, the FDIC
and by the Massachusetts Commissioner of Banks.

If we engage in impermissible activities, or hold impermissible securities
or assets, these bank regulatory agencies may compel us to immediately cease the
activity or dispose of the security or asset, without regard to the adverse
consequences that may result from such cessation or disposition. If we fail to
maintain the required capital, whether because of our own actions or because of
general economic factors, our activities may be curtailed, we may be forced to
raise capital or dispose of assets, and our ability to pay dividends or provide
other capital outlays (including in connection with acquisitions) may be limited
or eliminated. In more extreme cases, we could become subject to very stringent
oversight and control by our regulators, and potentially even placed into
receivership, whether or not we are technically insolvent. Furthermore, because
we have not elected financial holding company status under the federal
Gramm-Leach-Bliley Act, our range of permissible activities and investments is
more limited than banking organizations that have elected that status. This may
place us at a competitive disadvantage with respect to those organizations that
have opted to become financial holding companies and are permitted to engage in
a broader range of activities.

EMPLOYEES

On September 30, 2000, we had 1,750 employees. We maintain a five-week
professional development program for entry level staff. Successful completion of
the program is required of most newly hired employees. This training program is
supplemented by ongoing education on systems and technological developments and
innovations, the industry and our client base.

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

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<PAGE>
LITIGATION

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

The summons states only that the Fund's claim is for unspecified damages
arising from breach of contract, misrepresentation and breach of warranty,
negligence and breach of duty of care, and breach of fiduciary duty, among
others. The Fund's claims have not yet been set forth in detail in any court
filing delivered to us. We are investigating this matter. We have notified our
insurers and intend to defend ourselves vigorously. While, as stated above, the
Fund's claims have not been set forth in detail, based on our investigation
through November 30, 2000, our management does not expect this matter to have a
material adverse effect on our results of operations and financial condition.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

GENERAL. Our common stock is not subject to call for redemption. Holders of
the common stock do not have preemptive rights with respect to any additional
shares of our stock that may be issued. The rights, preferences and privileges
of holders of the common stock are subject to, and may be adversely affected by,
the rights of the holders of shares of both our series A junior participating
preferred stock and any other series of our preferred stock which we may
designate and issue in the future. Currently, there are no shares of preferred
stock outstanding.

VOTING RIGHTS. Each holder of common stock has one vote in respect of each
share of common stock held of record on our books for the election of directors
and on all matters submitted to a vote of our stockholders. Holders of common
stock have no right to cumulative voting in the election of directors.
Consequently, at each annual meeting of stockholders, the holders of a majority
of the common stock will be able to elect all of the successors of the class of
directors whose terms expire at that meeting.

DIVIDENDS. The holders of common stock are entitled to such dividends as
may be declared from time to time by our board of directors out of funds legally
available for that purpose.

LIQUIDATION. In the event of any dissolution, liquidation or winding up of
our affairs, whether voluntary or involuntary, subject to the rights of any
class of Preferred Stock outstanding at the time of the dissolution, liquidation
or winding up, and after payment of all of our debts and liabilities, holders of
common stock shall be entitled to receive all of our remaining assets of
whatever kind available for distribution to stockholders ratably in proportion
to the number of shares of common stock held by them respectively.

AMENDMENT. The rights of holders of the common stock may be amended by the
vote of seventy-five percent of the voting power of all of the then outstanding
shares of our capital stock entitled to vote generally in the election of
directors, voting together as a single class.

DELAWARE LAW AND IMPORTANT CHARTER AND BY-LAW PROVISIONS

We are subject to the provisions of Section 203 of the Delaware General
Corporations Law, or DGCL. Section 203 generally prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transactions in which the person became an interested stockholder, unless the
interested stockholder attained that status with the approval of the board of
directors or unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
our voting stock.

Our charter provides for the division of the board of directors into three
classes as nearly equal in size as possible with staggered three-year terms. Any
director may be removed without cause only by the vote of at least 75% of the
shares entitled to vote for the election of directors.

Our by-laws provide that for nominations for the board of directors or for
other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder must first have given timely notice thereof in
writing to our Secretary. To be timely, a stockholder's notice generally must be
delivered not less than 60 days nor more than 90 days prior to an annual
meeting. With respect to special meetings, notice must generally be delivered
not more than 90 days prior to such a meeting and not later than the later of
60 days prior to such meeting or 10 days following

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<PAGE>
the day on which we first publicly announce the meeting. The notice must
contain, among other things, information about the stockholder delivering the
notice and, as applicable, background information about each nominee or a
description of the proposed business to be brought before the meeting.

Our charter empowers our board of directors, when considering a tender offer
or merger or acquisition proposal, to take into account factors in addition to
potential economic benefits to stockholders. These factors may include
(i) comparison of the proposed consideration to be received by stockholders with
the then current market price of our capital stock, our estimated current value
in a freely negotiated transaction and our estimated future value as an
independent entity; (ii) the impact of such a transaction on our employees,
suppliers and customers and its effect on the communities in which we operate;
and (iii) our ability to fulfill our objectives under applicable statutes and
regulations.

The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
control of Investors Financial.

Our charter contains provisions permitted under the DGCL relating to the
liability of directors. These provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. Our charter also contains provisions indemnifying our directors and
officers to the fullest extent permitted by the DGCL. We believe that these
provisions will assist us in attracting and retaining qualified individuals to
serve as directors.

Our charter provides that any action required or permitted to be taken by
our stockholders may be taken only at a duly called annual or special meeting of
the stockholders, and that special meetings may be called only by the Chairman
of the board of directors, or our President. These provisions could have the
effect of delaying, until the next annual stockholders' meeting, stockholder
actions which are favored by the holders of a majority of our outstanding voting
securities. These provisions may also discourage another person or entity from
making a tender offer for our common stock, because that person or entity, even
if it acquired a majority of our outstanding voting securities, would be able to
take action as a stockholder (such as electing new directors or approving a
merger) only at a duly called stockholders' meeting, and not by written consent.

The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless that corporation's certificate
of incorporation or by-laws, as the case may be, requires a greater percentage.
Our charter requires the affirmative vote of the holders of at least 75% of our
outstanding voting stock to amend or repeal any of the foregoing Charter
provisions, and to reduce the number of authorized shares of common stock,
class A common stock and preferred stock. A 75% vote is also required to amend
or repeal our by-laws. Our by-laws may be amended or repealed by a majority vote
of the board of directors. This 75% stockholder vote would be in addition to any
separate class vote that might in the future be required pursuant to the terms
of any preferred stock that might be outstanding at the time any such amendments
are submitted to stockholders.

SERIES A JUNIOR PREFERRED STOCK PURCHASE RIGHTS

Pursuant to our rights agreement, dated as of September 25, 1995, as amended
on June 17, 1998 and August 15, 2000, or rights plan, each share of the common
stock has associated with it one-quarter of a right. Each whole right entitles
the holder to purchase from us one one-hundredth of a share of series A junior
participating preferred stock, or series A stock, at a purchase price of

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<PAGE>
$540 per one one-hundredth of a share of series A stock, subject to adjustment.
The rights plan provides for equitable adjustment of the purchase price in the
event of a stock split, stock dividend, combination or reclassification of the
series A stock.

The rights will be exercisable only if

- a person or group acquires beneficial ownership of 15% or more of our
outstanding common stock,

- a person or group announces a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by that
person or group of 15% or more of our outstanding common stock, or

- a person owning 10% or more of our common stock whose ownership is
determined by the board of directors to be reasonably likely to cause a
material adverse impact on our business or prospects or to pressure us to
take action to benefit such person as opposed to us is declared by the
board of directors to be an adverse person (the earlier of such dates
being called the distribution date). Until a right is exercised, the
holder thereof will have no rights as a stockholder based on the right.
Until the distribution date (or earlier redemption or expiration of the
rights), the rights will be transferred with and only with the common
stock. By their terms, the rights expire on the close of business on
August 15, 2005.

In the event that

- any person or group acquires 20% or more of our outstanding common stock
in the aggregate,

- a person owning 10% or more of our common stock is determined by the board
of directors to be an adverse person, or

- while there is an acquiring person, such person engages in certain self
dealing transactions or such person's stock holdings increase by 1% or
more due to a recapitalization,

each holder of a right, other than rights beneficially owned by the acquiring
person or the adverse person, will thereafter have the right to receive upon
exercise that number of shares of common stock having a market value of two
times the aggregate amount of cash consideration paid by a rights holder to
exercise that number of rights required to purchase one share of series A stock.
In the event that, while there is an Acquiring Person, we are acquired in a
business combination transaction or 50% or more of our assets are sold, each
holder of a right will thereafter have the right to receive upon exercise that
number of shares of common stock of the acquiring entity which at the time of
the transaction will have a market value of two times the purchase price.

At any time after any person becomes an acquiring person or an adverse
person, and prior to the acquisition by that person or group of 50% or more of
our outstanding common stock, our board of directors may cause the rights (other
than rights owned by that person or group) to be exchanged, in whole or in part,
for common stock at an exchange rate of four (4) shares of common stock per
right.

Our board of directors may redeem the rights in whole at a price of $.01 per
right, until such time as the rights are exercisable for shares of common stock.

Until a distribution date occurs, the board of directors may amend the terms
of the rights, with the exception of the redemption price, the final expiration
date, the purchase price or the number of one one-hundredths of a share of
series A stock for which a right is exercisable, each of which terms may not be
amended or supplemented at any time. After the occurrence of a distribution
date, the board of directors has a more limited ability to amend or supplement
the terms of the rights, as set forth in the rights.

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<PAGE>
The rights have anti-takeover effects, in that they will cause substantial
dilution to a person or group that attempts to acquire a significant interest in
the Registrant on terms not approved by the board of directors.

SERIES A STOCK

Pursuant to a certificate of designation filed on October 27, 1995, the
board of directors designated 100,000 shares of the preferred stock as shares of
series A stock. Currently, none of these shares are issued and outstanding.

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<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth our directors and executive officers, their
ages, and the positions currently held by them with us. Executive officers are
appointed by, and serve at the discretion of, the board of directors. Each
executive officer is a full time employee. There is no family relationship
between any of our executive officers or directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Kevin J. Sheehan............... 49 Chairman of the Board, President and Chief Executive Officer
Michael F. Rogers.............. 43 Executive Vice President
Karen C. Keenan................ 38 Senior Vice President and Chief Financial Officer
Robert D. Mancuso.............. 39 Senior Vice President--Marketing and Client Management
Edmund J. Maroney.............. 44 Senior Vice President--Technology
John E. Henry.................. 36 Senior Vice President, General Counsel and Secretary
James M. Oates................. 54 Director
Thomas P. McDermott............ 65 Director
Robert B. Fraser............... 72 Director
Frank B. Condon, Jr............ 65 Director
Donald G. Friedl............... 67 Director
Phyllis S. Swersky............. 49 Director
</TABLE>

Mr. Sheehan is Chairman of the Executive Committee of which Messrs. Oates,
Condon and McDermott are also members. Mr. Oates is Chairman of the Compensation
Committee of which Messrs. Condon and McDermott are also members. Mr. McDermott
is Chairman of the Audit Committee of which Mr. Fraser and Ms. Swersky are also
members. Mr. Condon is Chairman of the Nominating Committee of which
Mr. McDermott and Mr. Oates are also members. The board of directors and
executive officers of Investors Bank are identical to the board of directors and
executive officers of Investors Financial.

MR. SHEEHAN has served as a director since 1990 and as President since
June 1992. He has been Chief Executive Officer and Chairman of the board of
directors since June 1995. Prior to joining us in May 1990 with our acquisition
of the Financial Products Services Division of the Bank of New England,
Mr. Sheehan was a Senior Vice President at the Bank of New England.

MR. ROGERS has been Executive Vice President since September 1993, and has
had responsibility for all operating areas since 1990. Prior to joining us in
May 1990 with our acquisition of the Financial Products Services Division of
Bank of New England, Mr. Rogers was Vice President at the Bank of New England.

MS. KEENAN has been Senior Vice President and Chief Financial Officer since
June 1995. Ms. Keenan has served as Vice President since September 1992. She
joined us in August 1989 as an Operations Manager in the mutual fund group, and
became Senior Audit Officer in May 1990. She was Treasurer from July 1991 to
May 1994. Prior to joining us, Ms. Keenan worked for Arthur Andersen & Co., a
public accounting firm.

MR. MANCUSO has been Senior Vice President--Marketing and Client Management
since September 1993. He joined the Company in September 1992. Prior to joining
us, Mr. Mancuso was Eastern Region Director of Sales for PRJ Associates, a
software development firm.

MR. MARONEY has been Senior Vice President--Technology since July 1991.
Mr. Maroney served as a Systems Manager in the custody department prior to
becoming Senior Vice President. Prior to joining us in May 1990 with our
acquisition of the Financial Products Services Division of the Bank of New
England, he was Vice President at the Bank of New England.

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<PAGE>
MR. HENRY has been General Counsel since February 1996, Secretary since
January 1997 and Senior Vice President since April 2000. Prior to joining us,
Mr. Henry was an associate at the Boston law firm of Testa, Hurwitz & Thibeault,
LLP from 1991.

MR. OATES has been a director since June 1995. Mr. Oates has been Chairman
of IBEX Capital Markets, LLC since 1996 and has been the managing director of
the Wydown Group, a consulting firm specializing in start-ups, turn-arounds and
defining growth strategies since 1994. Mr. Oates served as President and Chief
Executive Officer of Neworld Bancorp Incorporated from 1984 to 1994. Mr. Oates
is also a director of Connecticut River Bancorp, Inc., Stifel Financial
Corporation, Phoenix Investment Partners, Ltd., Plymouth Rubber Company and
Command Systems, as well as twenty-five Phoenix Mutual Funds and six AIB Govett
Funds.

MR. MCDERMOTT has been a director since June 1995. He has been Managing
Director of TPM Associates, a consulting firm, since January 1994. He served as
Managing Partner, New England Area of Ernst & Young LLP from 1989 to 1993.
Mr. McDermott is also a director of ACCION International and the Pioneer
Institute of Public Policy Research.

MR. FRASER has been a director since June 1996. Mr. Fraser was Chairman of
the Boston law firm of Goodwin, Procter & Hoar llp from 1984 to 1997 and serves
as a director of several charitable organizations.

MR. CONDON has been a director since April 1986. From July 1982 to
July 1993, he was Chief Executive Officer and President, and from July 1993 to
April 1997 he was Chief Executive Officer and Chairman of Woodstock Corporation,
a Boston-based investment management firm and of its wholly owned subsidiary,
Woodstock Service Corporation, a provider of financial services. Mr. Condon also
serves as a Director of Big Sandy Management Company.

MR. FRIEDL has been a director since February 1996. Mr. Friedl has been
Managing Director of AquaBio Products Sciences, Inc., a marine biotechnology
company, since 1997. He was the Chairman, President and Chief Executive Officer
of All Seasons Services, Inc., a commercial food and vending company, from 1986
until January 1997. Mr. Friedl currently serves as a director of Classic
Foods, Inc. and Custom Foods, Inc. Mr. Friedl also serves on the Advisory Board
of Internet Commerce Services Corp.

MS. SWERSKY has been a director since February 1996. She has been President
of The Meltech Group, a consulting firm specializing in business advisory
services for high-growth potential businesses, since 1995. She was the President
of The Net Collaborative, Inc., an Internet systems integration company, from
1996 to 1997. She served as President of Work/Family Directions, Inc., a
provider of employee benefits programs, from 1992 through 1995. Prior to 1992,
she was Executive Vice President and Chief Financial Officer of AICorp, Inc., a
computer software company.

A director may be removed for cause, which is generally defined under
Delaware law as an event of a substantial nature which directly affects the
rights and interests of a company's stockholders, such as disclosing trade
secrets of the company or embezzling corporate funds, by a vote of at least a
majority of the shares of our capital stock entitled to vote in the election of
directors. A director may be removed without cause by a vote of at least
seventy-five percent of the shares of our capital stock entitled to vote in the
election of directors.

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<PAGE>
UNDERWRITING

Investors Financial and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co. is the
representative of the underwriters.

<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................

---------
Total................................................... 1,200,000
=========
</TABLE>

If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
180,000 shares from Investors Financial to cover such sales. They may exercise
that option for 30 days. If any shares are purchased pursuant to this option,
the underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Investors Financial. Such amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase 180,000 additional shares.

<TABLE>
<CAPTION>
Paid by Investors Financial
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................ $ $
Total................................................ $ $
</TABLE>

Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from
the initial price to public. If all the shares are not sold at the initial price
to public, the representatives of the underwriters may change the offering price
and the other selling terms.

Investors Financial and its directors and executive officers have agreed
with the underwriters not to dispose of or hedge any of their common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus continuing through the date 90 days
after the date of this prospectus, except with the prior written consent of the
representatives. This agreement does not apply to the issuance of common stock
by Investors Financial under any existing employee benefit plans.

The common stock is quoted on the Nasdaq National Market under the symbol of
"IFIN".

In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from Investors Financial in the offering.
The underwriters may close out any covered short position by either exercising
their option to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the covered short
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through

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<PAGE>
the overallotment option. "Naked" short sales are any sales in excess of such
option. The underwriters must close out any naked short position by purchasing
shares in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward pressure on the
price of the common stock in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of various bids for or purchases of common stock made by the underwriters in the
open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.

Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of Investors
Financial common stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the common stock. As
a result, the price of the common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.

A prospectus in electronic format may be made available on the Internet web
sites maintained by one or more of the lead managers of this offering and may
also be made available on Internet web sites maintained by other underwriters or
securities dealers. The underwriters may agree to allocate a number of shares
for sale to their online brokerage account holders. Any Internet distributions
will be allocated by the lead managers to underwriters that may make Internet
distributions on the same basis as other allocations. In addition, shares may be
sold by the underwriters to securities dealers who resell shares to online
brokerage account holders.

Investors Financial estimates that its share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $ .

Investors Financial has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.

The underwriters and their affiliates have in the past provided, and may in
the future from time to time provide, investment banking services and general
financing and banking to Investors Financial or one or more of its affiliates,
for which they may receive customary fees. Among other things, Goldman, Sachs &
Co. acted as financial advisor to, and received a customary fee from us in
connection with the acquisition of the Advisor Custody Unit of The Chase
Manhattan Bank.

VALIDITY OF COMMON STOCK

The validity of the shares of common stock offered hereby will be passed
upon for Investors Financial by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts, and for the underwriters by Sullivan & Cromwell, New York, New
York. As of the date of this prospectus, certain attorneys with the firm of
Testa, Hurwitz & Thibeault, LLP beneficially own an aggregate of 8,000 shares of
our common stock.

EXPERTS

The consolidated financial statements incorporated in this prospectus by
reference from our Annual Report on Form 10-K for the year ended December 31,
1999 have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of that firm given upon their authority
as experts in accounting and auditing.

48
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION

We file reports, proxy statements and other information with the Securities
and Exchange Commission (SEC). You may read and copy these reports, proxy
statements and other information at the SEC's public reference facilities in New
York, New York. Please call the SEC at (800) SEC-0330 for further information on
these facilities. Our filings are also available at the SEC's Web site at
http://www.sec.gov. This information also can be inspected at the offices of
Nasdaq Operations, 1735 K Street, N.W., Washington, DC 20006.

The SEC allows us to "incorporate by reference" into this prospectus
information in the documents we file with the SEC, which means that we can
disclose important information to you by referring you to those documents. The
information incorporated by reference is considered to be a part of this
prospectus, and information that we file later with the SEC will automatically
update and supersede previously filed information. We incorporate by reference
the documents listed below that we have filed with the SEC and any additional
documents we file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until this offering is complete:

- Annual Report on Form 10-K for the fiscal year ended December 31, 1999;

- Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;

- Quarterly Report on Form 10-Q for the quarter ended June 30, 2000;

- Quarterly Report on Form 10-Q for the quarter ended September 30, 2000;

- Definitive Proxy Statement dated March 10, 2000;

- Current Report on Form 8-K dated August 15, 2000; and

- Current Report on Form 8-K dated December 1, 2000.

Any statement contained in this prospectus or in a document incorporated or
deemed incorporated by reference in this prospectus shall be deemed modified or
superseded for purposes of this prospectus to the extent that a statement
contained herein or in any other subsequently filed document modifies or
supersedes that statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus.

You may request a copy of these filings at no cost, by writing or calling us
at our principal executive offices located at the following address:

Investors Financial Services Corp.
200 Clarendon Street
Boston, MA 02116
Attention: Gail Simard
Telephone: (617) 937-6700

We will not provide exhibits to a document unless they are specifically
incorporated by reference in that document.

We filed a registration statement with the SEC on Form S-3 under the
Securities Act of 1933 relating to the common stock offered by this prospectus.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement, certain portions having been omitted from this prospectus in
accordance with the rules and regulations of the SEC. Statements contained in
this prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; reference is made in each instance to
the copy of such contract or document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. For further information with respect to us and the common stock
offered hereby, we refer investors to the registration statement, the exhibits
thereto and the financial statements, notes and schedules filed as a part
thereof.

49
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999.................. F-2

Condensed Consolidated Statements of Income and
Comprehensive Income
Nine months ended September 30, 2000 and 1999............. F-3

Condensed Consolidated Statement of Stockholder's Equity
Nine months ended September 30, 2000...................... F-4

Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999............. F-5

Notes to Condensed Consolidated Financial Statements........ F-6
</TABLE>

F-1
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

SEPTEMBER 30, 2000 AND DECEMBER 31, 1999

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 16,891 $ 37,624
Federal funds sold.......................................... 90,000 150,000
Securities held to maturity (approximate fair value of
$2,153,072 and $1,730,745 at September 30, 2000 and
December 31, 1999, respectively).......................... 2,184,980 1,763,355
Securities available for sale............................... 642,930 375,610
Non-marketable equity securities............................ 15,000 15,000
Loans, less allowance for loan losses of $100 at September
30, 2000 and December 31, 1999............................ 110,064 109,292
Accrued interest and fees receivable........................ 47,932 40,332
Equipment and leasehold improvements, less accumulated
depreciation of $9,897 and $8,615 at September 30, 2000
and December 31, 1999, respectively....................... 12,796 10,337
Goodwill, net............................................... 34,468 39,776
Other assets................................................ 15,721 11,754
---------- ----------
Total Assets................................................ $3,170,782 $2,553,080
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand.................................................... $ 243,246 $ 240,303
Savings................................................... 1,422,403 1,237,104
Time...................................................... 75,000 75,000
---------- ----------
Total deposits.......................................... 1,740,649 1,552,407

Securities sold under repurchase agreements................. 1,143,491 819,034
Short-term borrowings....................................... 60,754 1,000
Other liabilities........................................... 36,919 19,583
---------- ----------
Total liabilities....................................... 2,981,813 2,392,024
---------- ----------
Commitments and contingencies (see Note 9)

Company-obligated, mandatorily redeemable, preferred
securities of subsidiary trust holding solely junior
subordinated deferrable interest debentures of the
Company................................................... 24,239 24,218
---------- ----------

Stockholders' Equity:
Preferred stock, par value $0.01 (shares authorized:
1,000,000; issued and outstanding: 0 at September 30, 2000
and December 31, 1999).................................... -- --
Common stock, par value $0.01 (shares authorized: 40,000,000
at September 30, 2000 and 20,000,000 at December 31, 1999;
issued and outstanding: 29,825,675 at September 30, 2000
and 14,610,154 at December 31, 1999)...................... 298 146
Surplus..................................................... 92,425 87,320
Deferred compensation....................................... (306) (689)
Retained earnings........................................... 76,232 53,542
Accumulated other comprehensive loss, net................... (3,919) (3,481)
Treasury stock, par value $0.01 (10,814 shares at September
30, 2000 and
December 31, 1999)........................................ -- --
---------- ----------
Total stockholders' equity.............................. 164,730 136,838
---------- ----------
Total Liabilities and Stockholders' Equity.................. $3,170,782 $2,553,080
========== ==========
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

F-2
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- --------------
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased under resale
agreements.............................................. $ 2,037 $ 1,273
Investment securities held to maturity and available for
sale.................................................... 120,878 69,871
Loans..................................................... 4,400 2,460
-------- --------
Total interest income................................... 127,315 73,604
-------- --------
Interest expense:
Deposits.................................................. 40,885 29,283
Short-term borrowings..................................... 45,003 19,479
-------- --------
Total interest expense.................................. 85,888 48,762
-------- --------
Net interest income..................................... 41,427 24,842

Non-interest income:
Asset servicing fees...................................... 119,206 97,404
Computer service fees..................................... 359 367
Other operating income.................................... 1,201 518
-------- --------
Net operating revenue................................... 162,193 123,131

OPERATING EXPENSES:
Compensation and benefits................................. 76,360 60,372
Technology and telecommunications......................... 16,538 11,140
Occupancy................................................. 8,008 6,061
Transaction processing services........................... 7,447 6,784
Depreciation and amortization............................. 3,367 2,835
Travel and sales promotion................................ 2,599 1,733
Professional fees......................................... 2,059 2,554
Amortization of goodwill.................................. 1,201 1,330
Insurance................................................. 598 572
Other operating expenses.................................. 6,637 5,126
-------- --------
Total operating expenses................................ 124,814 98,507
-------- --------

INCOME BEFORE INCOME TAXES AND MINORITY INTEREST............ 37,379 24,624

Provision for income taxes.................................. 12,016 7,880
Minority interest expense, net of income taxes.............. 1,191 1,245
-------- --------
NET INCOME.................................................. 24,172 15,499
-------- --------
Other comprehensive income, net of tax benefit of ($205) and
($1,015), respectively:
Unrealized loss on securities:
Unrealized holding losses arising during the period..... (438) (1,803)
-------- --------
Other comprehensive loss.................................. (438) (1,803)
-------- --------
COMPREHENSIVE INCOME........................................ $ 23,734 $ 13,696
======== ========
BASIC EARNINGS PER SHARE.................................... $ 0.81 $ 0.54
======== ========
DILUTED EARNINGS PER SHARE.................................. $ 0.78 $ 0.53
======== ========
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

F-3
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2000

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON DEFERRED RETAINED COMPREHENSIVE TREASURY
STOCK SURPLUS COMPENSATION EARNINGS LOSS STOCK TOTAL
--------- -------- -------------- --------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999........ $146 $87,320 $(689) $53,542 $(3,481) $ -- $136,838
Amortization of deferred
compensation.................... -- -- 383 -- -- -- 383
Exercise of stock options......... 3 2,606 -- -- -- -- 2,609
Tax benefit from exercise of
options......................... -- 2,499 -- -- -- -- 2,499
Net income........................ -- -- -- 24,172 -- -- 24,172
Stock dividend, two-for-one
split........................... 149 -- -- (149) -- -- --
Cash dividend, $0.045 per share... -- -- -- (1,333) -- -- (1,333)
Change in accumulated other
comprehensive loss, net......... -- -- -- -- (438) -- (438)
---- ------- ----- ------- ------- ---------- --------
BALANCE, SEPTEMBER 30, 2000....... $298 $92,425 $(306) $76,232 $(3,919) $ -- $164,730
==== ======= ===== ======= ======= ========== ========
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

F-4
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 24,172 $ 15,499
--------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 4,568 4,165
Amortization of deferred compensation..................... 383 383
Amortization of premiums on securities, net of accretion
of discounts............................................ 2,795 4,719
Deferred income taxes..................................... -- (1,014)
Changes in assets and liabilities:
Accrued interest and fees receivable.................... (7,600) (8,686)
Other assets............................................ 2,845 482
Other liabilities....................................... 17,336 10,954
--------- ---------
Total adjustments..................................... 20,327 11,003
========= =========
Net cash provided by operating activities............... 44,499 26,502
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale... 59,406 68,747
Proceeds from maturities of securities held to maturity..... 174,873 268,198
Purchases of securities available for sale.................. (328,622) (87,189)
Purchases of securities held to maturity.................... (598,041) (874,196)
Purchases of non-marketable equity securities............... -- (7,374)
Net decrease in federal funds sold.......................... 60,000 --
Net increase in loans....................................... (772) (73,614)
Purchases of equipment and leasehold improvements........... (5,805) (3,014)
========= =========
Net cash used for investing activities.................. (638,961) (708,442)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits............................. 2,943 45,316
Net increase in time and savings deposits................... 185,299 254,463
Net increase in short-term borrowings....................... 384,211 383,275
Proceeds from exercise of stock options..................... 2,609 1,492
Proceeds from issuance of common stock...................... -- 26,000
Cash dividends to shareholders.............................. (1,333) (851)
--------- ---------
Net cash provided by financing activities............... 573,729 709,695
========= =========
NET (DECREASE)/INCREASE IN CASH AND DUE FROM BANKS.......... (20,733) 27,755
--------- ---------
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD................ 37,624 18,775
--------- ---------
CASH AND DUE FROM BANKS, END OF PERIOD...................... $ 16,891 $ 46,530
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 83,315 $ 47,659
========= =========
Cash paid for income taxes................................ $ 11,309 $ 5,943
========= =========
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

F-5
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

1. DESCRIPTION OF BUSINESS

Investors Financial Services Corp. ("IFSC") provides asset servicing for the
financial services industry through its wholly owned subsidiaries, Investors
Bank & Trust Company (the "Bank") and Investors Capital Services, Inc. IFSC
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 ("FRB"), the Office of the Commissioner of Banks of
the Commonwealth of Massachusetts and the Federal Deposit Insurance Corporation
("FDIC").

As used herein, the defined term "the Company" shall mean IFSC together with
Investors Capital Services, Inc, and the Bank and its domestic and foreign
subsidiaries.

On October 1, 1998, the Bank acquired the domestic institutional trust and
custody business ("the Business") of BankBoston, N.A. Under the terms of the
purchase agreement, the Bank paid approximately $48 million to BankBoston as of
the closing and subsequently paid an additional $4.9 million based upon client
retention and business performance. The acquisition was accounted for using the
purchase method of accounting. In connection with the acquisition, the Bank also
entered into an outsourcing agreement with BankBoston under which the Bank would
provide custodial and certain other services for BankBoston's domestic and
international private banking and institutional asset management businesses. As
a result of the early termination of the outsourcing agreement and the Bank's
custody agreement with the BankBoston-sponsored 1784 Funds, we received a total
of $11.4 million in termination fees. The Bank does not anticipate a material
impact on net income due to the termination of either agreement.

On March 26, 1999, the Company completed the issuance and sale of 1,800,000
shares of Common Stock at $14.50 per share in a private placement to one
investor. The net capital raised in the private placement was used to support
the Company's balance sheet growth.

On October 29, 1999, the Bank entered into an agreement with Sanwa Bank
California, pursuant to which the Bank agreed to purchase the right to provide
institutional custody and related services to accounts managed by the Trust
Company of the West. The Bank completed the purchase on March 10, 2000. The
accounts subject to the agreement totaled approximately $4.6 billion in assets
at March 10, 2000. The transaction was accounted for as a purchase.

On May 15, 2000, the Board of Directors of the Company declared a
two-for-one stock split in the form of a 100% stock dividend payable June 15,
2000 to stockholders of record on May 31, 2000.

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four areas
causing difficulties in implementation. The Company has appointed a team to
implement SFAS 133 on a global basis. The Company will adopt SFAS 133 and the
corresponding amendments under SFAS 138 on January 1, 2001. The Company's
SFAS 133 team is currently determining the impact of SFAS 133 and is not
anticipating a significant impact on the consolidated results of operations and
financial position.

F-6
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

2. INTERIM FINANCIAL STATEMENTS

The condensed consolidated interim financial statements of the Company and
subsidiaries as of September 30, 2000 and for the nine-month periods ended
September 30, 2000 and 1999 have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as permitted by such rules and
regulations. All adjustments, consisting of normal recurring adjustments, have
been included. Management believes that the disclosures are adequate to present
fairly the financial position, results of operations and cash flows at the dates
and for the periods presented. It is suggested that these interim financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's latest annual report on Form 10-K. Results for
interim periods are not necessarily indicative of those to be expected for the
full fiscal year.

All share numbers in this report have been restated, where applicable, to
reflect the two-for-one stock split paid June 15, 2000.

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

3. LOANS

Loans consist of demand loans to custody clients of the Company, including
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. In addition, there have been no loan charge-offs or
recoveries during the nine months ended September 30, 2000 and the year ended
December 31, 1999. Loans are summarized as follows (Dollars in thousands):

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
Loans to mutual funds............................ $ 77,596 $ 44,369
Loans to individuals............................. 32,555 65,010
Loans to not-for-profit institutions............. 13 13
-------- --------
110,164 109,392
Less allowance for loan losses................... 100 100
-------- --------
Total............................................ $110,064 $109,292
======== ========
</TABLE>

The Company had commitments to lend of approximately $208 million and
$160 million at September 30, 2000 and December 31, 1999, respectively. The
terms of these commitments are similar to the terms of outstanding loans.

F-7
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

4. GOODWILL

Goodwill related to the Company's acquisition of the BankBoston Business
pursuant to a purchase and sale agreement dated July 17, 1998 is summarized as
follows (Dollars in thousands):

<TABLE>
<CAPTION>
FOR THE NINE FOR THE
MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ ------------------
<S> <C> <C>
Goodwill, beginning of period............ $39,776 $43,860
Plus contingent payment.................. 255 4,672
Less termination fees.................... (4,362) (7,000)
Less accumulated amortization............ (1,201) (1,756)
------- -------
Goodwill, end of period.................. $34,468 $39,776
======= =======
</TABLE>

Under the terms of the purchase agreement with BankBoston, N.A., the Bank
paid approximately $44 million, attributable to goodwill, to BankBoston as of
the closing of the transaction on October 1, 1998 and paid an additional amount
of approximately $4.9 million based upon client retention and business
performance. In connection with the acquisition, the Bank also entered into an
outsourcing agreement with BankBoston under which the Bank would provide
custodial and certain other services for BankBoston's domestic and international
private banking and institutional asset management businesses. As a result of
the early termination of the outsourcing agreement and the Bank's custody
agreement with the BankBoston-sponsored 1784 Funds, we received a total of
$11.4 million in termination fees.

5. DEPOSITS

Time deposits at September 30, 2000 and December 31, 1999 include
non-interest bearing amounts of approximately $65 million at both dates.

All time deposits had a minimum balance of $100,000 and a maturity of less
than three months at September 30, 2000 and December 31, 1999.

6. SHORT-TERM BORROWINGS

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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
Federal funds purchased.......................... $60,000 $ --
Treasury, tax and loan account................... 754 1,000
------- ------
Total............................................ $60,754 $1,000
======= ======
</TABLE>

The Company has a borrowing arrangement with the Federal Home Loan Bank of
Boston ("FHLBB"), which is utilized on an overnight basis to satisfy temporary
funding requirements. There were no outstanding advances under this agreement at
September 30, 2000 or December 31, 1999.

The rate on the outstanding balance of federal funds purchased from other
banks at September 30, 2000 was 6.69%.

F-8
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

The Company receives federal tax deposits from clients as agent for the FRB
and accumulates these deposits in the Treasury, tax and loan account. The FRB
charges the Company interest at the Federal funds rate on such deposits. The
interest rate on the outstanding balance was 6.40% at September 30, 2000 and
5.46% at December 31, 1999.

7. STOCKHOLDERS' EQUITY

As of September 30, 2000, the Company has authorized 1,000,000 shares of
Preferred Stock and 40,000,000 shares of Common Stock, all with a par value of
$0.01 per share.

At the Annual Meeting of Shareholders of the Company held on April 18, 2000,
Shareholders approved an increase in the number of authorized shares of Common
Stock from 20,000,000 to 40,000,000. On May 2, 2000, the Company filed an
amendment to its Certificate of Incorporation increasing the number of
authorized shares of Common Stock to 40,000,000. Such shares are available for
general corporate purposes as determined by the Company's Board of Directors.

On May 15, 2000, the Board of Directors approved a two-for-one stock split
in the form of a 100% stock dividend to shareholders of record on May 31, 2000.
The dividend was paid on June 15, 2000. A total of 14,858,146 shares of common
stock were issued in connection with the split. On February 16, 1999, the Board
of Directors approved a two-for-one stock split in the form of a 100% stock
dividend to shareholders of record on March 1, 1999. The dividend was paid on
March 17, 1999. A total of 13,595,946 shares of common stock were issued in
connection with the stock split. The par value of these additional shares was
capitalized by a transfer from retained earnings to common stock. The stock
splits did not cause any change in the $0.01 par value per share of the common
stock or in total stockholders' equity.

F-9
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

7. STOCKHOLDERS' EQUITY

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

Under the terms of the Amended and Restated 1995 Stock Plan, the Company may
grant options to purchase up to a maximum of 4,640,000 shares of Common Stock to
certain employees, consultants, directors and officers. The options may be
awarded as incentive stock options (employees only), non-qualified stock
options, stock awards or opportunities to make direct purchases of stock. Of the
4,640,000 shares of Common Stock authorized for issuance under the plan, 875,726
were available for grant at September 30, 2000.

The terms of the Amended and Restated 1995 Non-Employee Director Stock
Option Plan provide for the grant of options to non-employee directors to
purchase up to a maximum of 400,000 shares of Common Stock. Pursuant to the
terms of the Plan, options to purchase 10,000 shares of Common Stock were
awarded on November 8, 1995 to each director. 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 Amended and Restated 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 Amended and Restated 1995
Non-Employee Director Stock Option Plan and the incentive stock options under
the Amended and Restated 1995 Stock Plan may not be less than the fair market
value at the date of the grant. The exercise price of the non-qualified options
under the Amended and Restated 1995 Stock Plan is determined by the compensation
committee of the Board of Directors. All options become exercisable as specified
by the Compensation Committee at the date of the grant.

In November 1995, the Company granted 456,000 shares of Common Stock to
certain officers of the Company under the 1995 Stock Plan. These grants were
subject to the Company's right to repurchase the shares if the officers'
employment with the Company terminated. The Company's right to repurchase the
shares lapsed over a five-year period. On March 31, 1998, the Company
repurchased 8,000 unvested shares for $0.08 million under the terms of the
Amended and Restated 1995 Stock Plan. By November 2000, all remaining shares
outstanding under these grants were vested.

On May 29, 1998, the Company granted 40,000 shares of Common Stock to an
officer of Investors Capital Services, Inc. This grant is subject to the
Company's right to repurchase the shares if the officer's employment with the
Company terminates. The Company's right to repurchase the shares lapses in five
equal annual installments beginning one year from the date of grant.

F-10
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

The Company has recorded deferred compensation of $0.3 million and
$0.7 million at September 30, 2000 and December 31, 1999 respectively, related
to the grants described in the previous two paragraphs.

Under the terms of the 1997 Employee Stock Purchase Plan, the Company may
issue up to 560,000 shares of Common Stock pursuant to the exercise of
nontransferable options granted to participating employees. The 1997 Employee
Stock Purchase Plan permits eligible employees to purchase up to 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. The payment periods
consist of two six-month periods, January 1 through June 30 and July 1 through
December 31.

A summary of option activity under the Amended and Restated 1995
Non-Employee Director Stock Option Plan and the Amended and Restated 1995 Stock
Plan is as follows:

<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1999................ 2,960,334 $13
Granted......................................... 211,346 23
Exercised....................................... (765,262) 8
Canceled........................................ (53,850) 15
---------
Outstanding at September 30, 2000............... 2,352,568 $15
=========
Outstanding and exercisable at September 30,
2000.......................................... 1,123,958
=========
</TABLE>

<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1998................ 2,811,244 $ 9
Granted......................................... 213,710 15
Exercised....................................... (578,940) 6
Canceled........................................ (38,652) 10
---------
Outstanding at September 30, 1999............... 2,407,362 $10
=========
Outstanding and exercisable at September 30,
1999.......................................... 1,358,434
=========
</TABLE>

F-11
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

A summary of activity under the 1997 Employee Stock Purchase Plan is as
follows (Number of shares):

<TABLE>
<CAPTION>
FOR THE NINE FOR THE
MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
Total shares available under the Plan, beginning
of period...................................... 357,354 433,604
Issued at June 30.............................. (34,466) (42,494)
Issued at December 31.......................... -- (33,756)
------- -------
Total shares available under the Plan, end of
period......................................... 322,888 357,354
======= =======
</TABLE>

During the six months ended June 30, 2000, the purchase price of the stock
was $21.00 or 90% of the average market value of the Common Stock on the first
business day of the payment period ending June 30, 2000.

During the year ended December 31, 1999, the purchase price of the stock was
$13.75 and $17.50, or 90% of the average market value of the Common Stock on the
first business day of the payment period ending June 30, 1999 and December 31,
1999, respectively.

EARNINGS PER SHARE--Under SFAS No. 128, the Company is required to disclose
a reconciliation of Basic EPS and Diluted EPS for the periods ended
September 30, 2000 and 1999 as follows (Dollars in thousands, except share
data):

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Income available to common stockholders.......... $ 24,172 $ 15,499
----------- -----------
Basic average shares............................. 29,653,926 28,440,272
----------- -----------
Dilutive effect of stock options............... 1,476,430 1,055,710
Diluted average shares........................... 31,130,356 29,495,982
----------- -----------
Earnings per share
Basic.......................................... $ 0.81 $ 0.54
=========== ===========
Diluted........................................ $ 0.78 $ 0.53
=========== ===========
</TABLE>

8. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

LINES OF CREDIT--At September 30, 2000, the Company had commitments to
individuals and mutual funds under collateralized open lines of credit totaling
$277 million, against which $69 million in loans were drawn. The credit risk
involved in issuing lines of credit is essentially the same as that involved in
extending loan facilities. The Company does not anticipate any loss as a result
of these lines of credit.

INTEREST-RATE CONTRACTS--The contractual or notional amounts of swap
agreements, which are derivative financial instruments, held by the Company at
September 30, 2000 and 1999 were

F-12
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

$630 million and $500 million, respectively. Interest rate contracts involve an
agreement with a counterparty to exchange cash flows based on an underlying
interest rate index. A swap agreement involves the exchange of a series of
interest payments, either at a fixed or variable rate, based upon the notional
amount without the exchange of the underlying principal amount. The Company's
exposure from these interest rate contracts results from the possibility that
one party may default on its contractual obligation. The Company has never
experienced terminations by counterparties of interest rate swaps. Credit risk
is limited to the positive fair value of the derivative financial instrument,
which is significantly less than the notional value. During the first nine
months of 2000, 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 36 months. The weighted-average fixed-payment
rate was 6.12% at September 30, 2000. Variable-interest payments received are
indexed to the one month London Interbank Offering Rate and the overnight
Federal Funds rate. At September 30, 2000, the weighted-average rate of variable
market-indexed interest payment obligations to the Company was 6.58%. The effect
of these agreements was to lengthen short-term variable rate liabilities into
longer-term fixed rate liabilities. These contracts had no carrying value and
the fair value was approximately $0.3 million at September 30, 2000.

9. COMMITMENTS AND CONTINGENCIES

RESTRICTIONS ON CASH BALANCES--The Company is required to maintain certain
average cash reserve balances. The reserve balance requirement with the FRB as
of September 30, 2000 was $19.2 million. In addition, another cash balance in
the amount of $2.7 million was pledged to secure clearings with a depository
institution, Depository Trust Company, as of September 30, 2000.

LEASE COMMITMENTS--Minimum future commitments on non-cancelable operating
leases at September 30, 2000 were as follows (Dollars in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDING BANK PREMISES EQUIPMENT
------------------ ------------- ---------
<S> <C> <C>
2000............................................... $ 2,505 $ 435
2001............................................... 11,656 1,126
2002............................................... 11,656 554
2003............................................... 11,632 194
2004 and beyond.................................... 52,533 --
</TABLE>

Total rent expense was $10.8 million and $8.2 million for the nine months
ended September 30, 2000 and 1999, respectively.

On September 20, 1995, the Company entered into a five-year service
agreement with Electronic Data Systems ("EDS") expiring on December 31, 2000.
The agreement has since been extended five years to December 31, 2005. Under the
terms of the agreement, the Company agreed to pay certain monthly service fees
based on usage. Service expense under this contract was $3.2 million for the
nine months ended September 30, 2000 and $2.7 million for the nine months ended
September 30, 1999.

CONTINGENCIES--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

F-13
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

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 September 30, 2000 that are material to the
consolidated financial position or results of operations of the Company.

10. 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 adverse effect on the Company's and the Bank's results of
operations and financial condition. 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 I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of
September 30, 2000, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.

As of September 30, 2000, the most recent notification from the FDIC
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 following table.
There are no conditions or events since that notification that management
believes have changed the

F-14
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

Company's or the Bank's category. The following table presents the capital
ratios for the Company and the Bank as of September 30, 2000 and December 31,
1999 (Dollars in thousands):

<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 2000:
Total Capital (to Risk Weighted
Assets--the Company).................... $158,520 14.40% $ 88,064 8.00% N/A N/A
Total Capital (to Risk Weighted
Assets--the Bank)....................... $155,487 14.14% $ 87,957 8.00% $109,946 10.00%
Tier I Capital (to Risk Weighted
Assets--the Company).................... $158,420 14.39% $ 44,032 4.00% N/A N/A
Tier I Capital (to Risk Weighted
Assets--the Bank)....................... $155,387 14.13% $ 43,978 4.00% $ 65,967 6.00%
Tier I Capital (to Average Assets--the
Company)................................ $158,420 5.40% $117,434 4.00% N/A N/A
Tier I Capital (to Average Assets--the
Bank)................................... $155,387 5.30% $117,375 4.00% $146,719 5.00%

AS OF DECEMBER 31, 1999:
Total Capital (to Risk Weighted
Assets--the Company).................... $124,861 14.97% $ 66,726 8.00% N/A N/A
Total Capital (to Risk Weighted
Assets--the Bank)....................... $121,947 14.66% $ 66,567 8.00% $ 83,209 10.00%
Tier I Capital (to Risk Weighted
Assets--the Company).................... $124,761 14.96% $ 33,363 4.00% N/A N/A
Tier I Capital (to Risk Weighted
Assets--the Bank)....................... $121,847 14.64% $ 33,283 4.00% $ 49,925 6.00%
Tier I Capital (to Average Assets--the
Company)................................ $124,761 5.46% $ 91,382 4.00% N/A N/A
Tier I Capital (to Average Assets--the
Bank)................................... $121,847 5.34% $ 91,310 4.00% $114,138 5.00%
</TABLE>

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

11. SEGMENT REPORTING

The Company does not utilize segment information for internal reporting as
management views the Company as one segment. The following represents net
operating revenue by geographic area

F-15
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 IS UNAUDITED)

for the nine months ended September 30, 2000 and 1999, and long-lived assets by
geographic area as of September 30, 2000 and December 31, 1999 (Dollars in
thousands):

<TABLE>
<CAPTION>
NET OPERATING REVENUE
---------------------
FOR THE NINE MONTHS LONG-LIVED ASSETS
ENDED SEPTEMBER 30, ------------------------------
GEOGRAPHIC --------------------- SEPTEMBER 30, DECEMBER 31,
INFORMATION: 2000 1999 2000 1999
------------ --------- --------- -------------- -------------
<S> <C> <C> <C> <C>
United States.............................. $156,489 $117,681 $46,918 $49,625
Ireland.................................... 4,016 3,546 272 338
Canada..................................... 1,629 1,823 74 150
Cayman Islands............................. 59 81 -- --
-------- -------- ------- -------
Total...................................... $162,193 $123,131 $47,264 $50,113
======== ======== ======= =======
</TABLE>

No one customer accounted for 10% of the Company's consolidated net
operating revenues for the nine months ended September 30, 2000 and 1999.

The following represents the Company's asset servicing fees by service line
for the nine months ended September 30, 2000 and 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
ASSET SERVICING FEES BY SERVICE LINES: 2000 1999
-------------------------------------- --------- --------
<S> <C> <C>
Custody, accounting, transfer agency, and
administration........................................ $ 94,208 $78,631
Cash management......................................... 8,423 8,618
Securities lending...................................... 7,783 5,156
Foreign exchange........................................ 7,600 3,806
Investment advisory..................................... 1,192 1,193
-------- -------
Total................................................... $119,206 $97,404
======== =======
</TABLE>

F-16
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.

---------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary............. 1
Risk Factors................... 6
Forward-Looking Statements..... 8
Use of Proceeds................ 9
Price Range of Common Stock and
Dividend History............. 9
Dividend Policy................ 9
Capitalization................. 10
Selected Consolidated Financial
and Operating Data........... 11
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................... 12
Business....................... 30
Description of Capital Stock... 41
Management..................... 45
Underwriting................... 47
Validity of Common Stock....... 48
Experts........................ 48
Where You Can Find Additional
Information.................. 49
Index to Consolidated Financial
Statements................... F-1
</TABLE>

1,200,000 Shares

INVESTORS FINANCIAL
SERVICES CORP.

Common Stock

------------------

[LOGO]

------------------

GOLDMAN, SACHS & CO.

Representative of the Underwriters

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered.
Investors Financial will pay all of these expenses.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 24,501
NASD filing fee.............................................
Nasdaq listing fee..........................................
Printing expenses...........................................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Transfer agent fees and expenses............................
Miscellaneous...............................................
TOTAL................................................... $
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Delaware General Corporation Law and Investors Financial's Certificate
of Incorporation provide for indemnification of Investors Financial's directors
and officers for liabilities and expenses that they may incur in those
capacities. In general, directors and officers are indemnified with respect to
actions taken in good faith in a manner reasonably believed to be in, or not
opposed to, the best interests of Investors Financial, and with respect to any
criminal action or proceeding, actions that the indemnitee had no reasonable
cause to believe were unlawful. We refer you to Investors Financial's
Certificate of Incorporation and By-laws filed as Exhibits 3.1 and 3.2,
respectively, to Investors Financial's Registration Statement on Form S-1 (File
No. 33-95980).

Investors Financial maintains directors' and officers' liability insurance
to insure our directors and certain officers against certain liabilities and
expenses which arise out of or in connection with their capacities as directors
and officers.

Reference is also made to the underwriting agreement, which is filed as
Exhibit 1.1 to this registration statement.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS.

(a) See the Exhibit Index included immediately preceding the exhibits to
this registration statement.

(b) All schedules are not required under the instructions relating to the
applicable accounting regulations of the SEC or are inapplicable, and therefore
have been omitted.

ITEM 17. UNDERTAKINGS.

The registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (and, where appropriate, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.

II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to
be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of
1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.

II-2
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Boston, Massachusetts on December 5, 2000.

<TABLE>
<S> <C> <C>
INVESTORS FINANCIAL SERVICES CORP.

By: /s/ KEVIN J. SHEEHAN
-----------------------------------------
Kevin J. Sheehan
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD
</TABLE>

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 Karen C.
Keenan, 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 pre-effective and post-effective amendments to this
registration statement and any other registration statement filed pursuant to
the provisions of Rule 462 under the Securities Act 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 Act of
1933 and all requirements of the SEC.

Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
President, Chief Executive
/s/ KEVIN J. SHEEHAN Officer and Chairman
------------------------------------------- (Principal Executive December 5, 2000
Kevin J. Sheehan Officer)

Senior Vice President and
/s/ KAREN C. KEENAN Chief Financial Officer
------------------------------------------- (Principal Financial December 5, 2000
Karen C. Keenan Officer and Principal
Accounting Officer)

/s/ JAMES M. OATES
------------------------------------------- Director December 5, 2000
James M. Oates
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ THOMAS P. MCDERMOTT
------------------------------------------- Director December 5, 2000
Thomas P. McDermott

/s/ ROBERT B. FRASER
------------------------------------------- Director December 5, 2000
Robert B. Fraser

/s/ FRANK B. CONDON, JR.
------------------------------------------- Director December 5, 2000
Frank B. Condon, Jr.

/s/ DONALD G. FRIEDL
------------------------------------------- Director December 5, 2000
Donald G. Friedl

/s/ PHYLLIS S. SWERSKY
------------------------------------------- Director December 5, 2000
Phyllis S. Swersky
</TABLE>

II-4
<PAGE>
EXHIBIT INDEX

(A) EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
<C> <C> <S>
***1.1 -- Form of Underwriting Agreement.

*4.1 -- Specimen certificate representing the common stock.

*4.2 -- Shareholders' Rights Agreement.

***5.1 -- Opinion of Testa, Hurwitz & Thibeault, LLP, counsel to
Investors Financial

**23.1 -- Consent of Deloitte & Touche LLP

***23.2 -- Consent of Testa, Hurwitz & Thibeault, LLP, counsel to
Investors Financial (included in Exhibit 5.1).

**24.1 -- Power of attorney (included on signature page).
</TABLE>

------------------------

* Filed as an exhibit to the registrant's Registration Statement on Form S-1
(Registration Number 33-95980) or amendments thereto and incorporated herein
by reference.

** Filed herewith

*** To be filed by amendment

II-5