INVESTORS FINANCIAL SERVICES CORP, S-3/A, 2001-01-19

INVESTORS FINANCIAL SERVICES CORP
S-3/A, 2001-01-19
INVESTMENT ADVICE

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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 19, 2001

REGISTRATION NO. 333-51278
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--------------------------------------------------------------------------------

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

FORM S-3/A
AMENDMENT NO. 2
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) 937-6700
(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. / /
--------------------

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.
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<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 JANUARY 19, 2001.

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 January 18, 2001 was
$64.75 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.

A.G. EDWARDS & SONS, INC.

KEEFE, BRUYETTE & WOODS, INC.

WILLIAM BLAIR & COMPANY

PUTNAM LOVELL SECURITIES INC.

------------------
<PAGE>
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 December 31, 2000, we provided services for approximately $303 billion in
net assets, including approximately $18 billion of foreign assets. For the year
ended December 31, 2000, our operating revenue was $220.9 million and our net
income was $33.6 million. Between 1996 and 2000, our operating revenue and net
income grew at compounded annual rates of 30% and 45%, 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
under management 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

1
<PAGE>
same period, our assets serviced grew to $290 billion from $8 billion, a
compounded annual growth rate of 43%.

- 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 ongoing consolidation has concentrated the industry around
a smaller number of providers 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 like ourselves.

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. Approximately 45% of
the assets we service are in complex products. 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 the Barclays
Global Investors iShares family of exchange traded funds, launched in
May 2000, that held approximately $6 billion in assets as of
December 31, 2000.

- We service over $31 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. We seek to expand these
relationships by increasing the number of services provided for each
client.

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. We may issue shares of our common stock in connection with future
acquisitions.

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 31,112,711 shares
offering...................................

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:

- 29,912,711 shares of common stock outstanding at December 31, 2000; and

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

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

- 2,896,662 shares of common stock issuable upon exercise of stock options
outstanding at December 31, 2000, with a weighted average exercise price
of $27 per share; and

- 705,130 shares of common stock available for grant at December 31, 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." The consolidated statement of operations data and the
consolidated balance sheet data as of the year-end dates through the fiscal year
ended December 31, 1999 are derived from our consolidated financial statements
previously filed with the SEC. For the year ended December 31, 2000, the
consolidated financial information was derived from unaudited consolidated
financial statements. 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 YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net interest income.................... $ 58,818 $ 35,773 $ 26,694 $ 26,173 $ 17,944
Non-interest income.................... 162,041 133,761 98,856 82,638 59,187
------------ ------------ ------------ ------------ ------------
Net operating revenues................. 220,859 169,534 125,550 108,811 77,131
Operating expenses..................... 169,040 135,815 99,584 87,362 64,613
------------ ------------ ------------ ------------ ------------
Income before income taxes and minority
interest............................. 51,819 33,719 25,966 21,449 12,518
Income taxes........................... 16,655 10,790 9,348 7,382 4,852
Minority interest expense.............. 1,588 1,661 1,563 1,437 --
------------ ------------ ------------ ------------ ------------
Net income............................. $ 33,576 $ 21,268 $ 15,055 $ 12,630 $ 7,666
============ ============ ============ ============ ============
PER SHARE DATA (1):
Basic earnings per share............... $ 1.13 $ 0.74 $ 0.56 $ 0.48 $ 0.29
============ ============ ============ ============ ============
Diluted earnings per share............. $ 1.08 $ 0.72 $ 0.55 $ 0.46 $ 0.29
============ ============ ============ ============ ============
Dividends per share.................... $ 0.06 $ 0.04 $ 0.03 $ 0.02 $ 0.01
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Total assets at end of period.......... $ 3,811,115 $ 2,553,080 $ 1,465,508 $ 1,460,447 $ 965,394
AVERAGE BALANCE SHEET DATA:
Interest earning assets................ $ 2,753,814 $ 1,837,963 $ 1,443,487 $ 1,167,361 $ 575,662
Total assets........................... 2,899,408 1,970,702 1,542,765 1,236,519 628,893
Total deposits......................... 1,551,880 1,150,814 845,093 594,768 377,219
Preferred securities................... 24,231 24,203 24,174 22,252 --
Common stockholders' equity............ 155,809 118,622 81,456 68,370 56,137
SELECTED FINANCIAL RATIOS:
Return on average equity............... 21.5% 17.9% 18.5% 18.5% 13.7%
Return on average assets............... 1.2% 1.1% 1.0% 1.0% 1.2%
Common equity as % of total assets..... 5.4% 6.0% 5.3% 5.5% 8.9%
Dividend payout ratio (2).............. 5.6% 5.6% 5.5% 4.3% 3.4%
Tier 1 capital ratio (3)............... 13.4% 15.0% 15.3% 29.2% 24.6%
Leverage ratio (3)..................... 5.2% 5.5% 4.6% 6.4% 9.7%
Non-interest income as % of net
operating income..................... 73.4% 78.9% 78.7% 75.9% 76.7%
OTHER STATISTICAL DATA:
Assets processed at end of period
(4).................................. $303,236,286 $290,162,547 $244,935,314 $139,418,241 $122,563,400
Employees at end of period............. 1,779 1,507 1,258 1,028 827
</TABLE>

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

(1) 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.

(2) 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 $.08 per share subject to regulatory requirements. Refer
to "Market Risk: Liquidity" included in the Management's Discussion and
Analysis section for further information.

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

(4) 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.

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 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.

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. Integration of acquisitions is complicated and frequently
presents unforeseen difficulties and expenses which can affect whether and when
a particular acquisition will be accretive to our earnings per share. Any future
acquisitions will present similar challenges.

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.

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. Fluctuations in interest rates or the securities
markets can also lead to investors seeking alternatives to the investment
offerings of our clients, which could result in a lesser amount of assets
processed and correspondingly lower fees. Also, our net interest income is
earned by investing depositors' funds 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.

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

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

6
<PAGE>
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY.

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

WE MAY INCUR SIGNIFICANT COSTS DEFENDING INFRINGEMENT CLAIMS.

We are aware of a complaint filed in federal court claiming that we and
others are infringing a patent allegedly covering the creation and trading of
certain securities, including exchange traded funds. As we are in the
preliminary stages of assessing the allegations in the complaint, we cannot be
sure that we will prevail in the defense of this claim. Any patent litigation
would be costly and could divert the attention of management. If we were found
to infringe the patent, we would have to pay damages and would be ordered to
cease any infringing activity or seek a license under the patent. We cannot be
sure that we will be able to obtain a license on a timely basis or on reasonable
terms, if at all. As a result, any determination of infringement could have a
material adverse effect upon our business, financial condition and results of
operations. We may become subject to similar infringement claims in the future.

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; and

- The rate of net inflows and outflows of investor funds in the investment
vehicles offered by our clients.

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 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 other comparable terms or the negative of those 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 or changing expectations.

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 $72.9 million at the estimated
public offering price of $64.75 per share (the closing price of the common stock
on January 18, 2001), 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 $83.9 million. 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 per share 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.................................. 96.00 51.56 0.0150

2001
First quarter (through January 18).............. 86.38 62.25 --
</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 December 31, 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 $64.75
per share (the closing price of the common stock on January 18, 2001), after
deducting the estimated underwriting discount and offering expenses. You should
read this information together with our unaudited consolidated financial
statements and the notes to the financial statements included in this prospectus
(Dollars in thousands).

<TABLE>
<CAPTION>
DECEMBER 31, 2000
------------------------
ACTUAL AS ADJUSTED
--------- ------------
<S> <C> <C>
Company-obligated, mandatorily redeemable, preferred
securities of subsidiary trust holding solely junior
subordinated deferrable interest debentures............... $ 24,246 $ 24,246

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, 29,912,711 shares; as
adjusted, 31,112,711 shares........................... 299 311

Surplus..................................................... 95,007 167,928

Deferred compensation....................................... (247) (247)
Retained earnings........................................... 85,188 85,188
Accumulated other comprehensive loss, net................... (1,439) (1,439)

Treasury stock, par value $0.01 (29,628 shares)............. -- --

Total shareholders' equity.............................. 178,808 251,741

Total capitalization........................................ $203,054 $275,987

Regulatory Capital Ratios (2):
Tier 1 Risk-Based Capital Ratio............................. 13.38% 18.90%
Total Risk-Based Capital Ratio.............................. 13.39% 18.90%
Leverage Ratio.............................................. 5.16% 7.36%
</TABLE>

---------

(1) The table above excludes:

- 2,896,662 shares of common stock issuable upon exercise of stock options
outstanding at December 31, 2000, with a weighted average exercise price
of $27 per share; and

- 705,130 shares of common stock available for grant at December 31, 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 and the
consolidated balance sheet data as of the year-end dates through the fiscal year
ended December 31, 1999 are derived from our consolidated financial statements
previously filed with the SEC. For the year ended December 31, 2000, the
consolidated financial information was derived from unaudited consolidated
financial statements. 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).

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

(1) 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.

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

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 a broad range of services to a variety of financial asset
managers. These services include our core services, global custody and
multicurrency accounting, as well as our value-added services, such as mutual
fund administration, securities lending, foreign exchange, cash management,
performance measurement, institutional transfer agency and investment advisory
services. At December 31, 2000, we provided services for approximately
$303 billion in net assets, including approximately $18 billion of foreign
assets.

On May 29, 1998 we acquired AMT Capital Services, Inc. a New York based firm
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. 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 provided custodial services for BankBoston's private banking and
institutional asset management businesses. In 2000, the outsourcing agreement
and a custody agreement with the BankBoston-sponsored 1784 Funds were
terminated. As a result of the early termination of the outsourcing agreement
and the 1784 Funds custody agreement, we received a total of $11.4 million in
termination fees. We have not experienced and 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.

12
<PAGE>
On March 10, 2000, we acquired the right to provide institutional custody
and related services for accounts managed by the Trust Company of the West,
formerly serviced by Sanwa Bank California. The accounts subject to the
agreement totaled approximately $4.6 billion in assets.

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

On November 28, 2000, we agreed to purchase the advisor custody unit of The
Chase Manhattan Bank. This unit provided 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. Under 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 upon 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.

On January 1, 2001, we adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
and the corresponding amendments under SFAS 138. The cumulative effect of
adoption reduced other comprehensive income, net of tax, by approximately
$3.9 million. In conjunction with the adoption, we elected to reclassify
approximately $339 million of securities from held to maturity to available for
sale which further reduced other comprehensive income, net of tax, by
approximately $0.8 million.

REVENUE AND EXPENSE OVERVIEW

We derive our revenue 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 the relationship. Accordingly, we believe 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 30% to
$221 million in 2000 from $170 million in 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. If the value of fixed income assets
held by our clients were to increase or decrease by 10%, we estimate that this,
by itself, would cause a corresponding change of approximately 3% in our
earnings per share.

13
<PAGE>
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.

STATEMENT OF OPERATIONS

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

NON-INTEREST INCOME

Non-interest income was $162.0 million in 2000, up 21% from 1999.
Non-interest income consists of the following items (Dollars in thousands):

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
2000 1999 CHANGE
--------- --------- --------
<S> <C> <C> <C>
Asset servicing fees......................... $159,538 $132,478 20%
Computer service fees........................ 478 488 (2)
Other operating income....................... 2,025 795 155
-------- --------
Total non-interest income.................... $162,041 $133,761 21%
======== ========
</TABLE>

Asset servicing fees were $159.5 million in 2000, up 20% from 1999. The
largest component of asset servicing fees is asset-based fees, which increased
due to the increase in assets processed. Assets processed is the total dollar
value of financial assets on the reported date for which we provide one or more
of the following services: global custody, multicurrency accounting, mutual fund
administration, securities lending, foreign exchange, cash management,
performance management, and institutional transfer agency. Total assets
processed increased $13 billion to $303 billion at December 31, 2000 from
$290 billion at December 31, 1999. This net increase includes several components
(Dollars in billions):

<TABLE>
<CAPTION>
Expansion of existing client relationships. $ 54
<S> <C>
Sales to new clients........................................ 2
Reintegration of BankBoston to Fleet........................ (41)
Fund flows and market gain/loss............................. (2)
----
Net increase in assets processed............................ $ 13
</TABLE>

Another significant portion of the increase in asset servicing fees resulted
from our success in marketing value-added services, such as foreign exchange and
securities lending. Also, asset servicing fees include $0.7 million of
transaction fees related to exchange-traded funds.

Other operating income consists of dividends received relating to our
Federal Home Loan Bank of Boston ("FHLBB") stock investment and miscellaneous
fees for systems consulting services. The increase in other operating income
resulted from an increase in FHLBB stock dividend income due

14
<PAGE>
to an increase in our average investment in FHLBB stock during the year ended
December 31, 2000 and increased income from consulting services performed for
our clients.

OPERATING EXPENSES

Total operating expenses were $169.0 million in 2000, up 24% from 1999. The
components of operating expenses were as follows (Dollars in thousands):

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
2000 1999 CHANGE
--------- --------- --------
<S> <C> <C> <C>
Compensation and benefits.................... $104,387 $ 83,302 25%
Technology and telecommunications............ 22,181 15,744 41
Occupancy.................................... 11,003 8,032 37
Transaction processing services.............. 9,792 9,234 6
Depreciation and amortization................ 4,743 3,911 21
Travel and sales promotion................... 3,713 2,551 46
Professional fees............................ 2,290 3,573 (36)
Amortization of goodwill..................... 1,576 1,756 (10)
Insurance.................................... 805 769 5
Other operating expenses..................... 8,550 6,943 23
-------- --------
Total operating expenses..................... $169,040 $135,815 24%
======== ========
</TABLE>

Compensation and benefits expense was $104.4 million in 2000, up 25% from
1999 due to several factors. The average number of employees increased 15% to
1,641 during the year ended December 31, 2000 from 1,423 for the year ended
December 31, 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 $2.4 million between years because of the
increase in earnings subject to incentive payments in 2000. Benefits, including
payroll taxes, group insurance plans, retirement plan contributions and tuition
reimbursement, increased $2.8 million for the year ended December 31, 2000. This
increase was due principally to increased payroll taxes attributable to the
increase in compensation expense.

Technology and telecommunications expense was $22.2 million in 2000, up 41%
from 1999. Our use of contract programmers to perform systems development
projects accounted for $3.0 million of the increase. Increased hardware,
software and telecommunications expenditures needed to support the growth in
assets processed accounted for $2.8 million of the increase. Expenses related to
outsourced network monitoring and help desk service, which commenced in 2000,
along with mainframe data processing, disaster recovery and other outsourced
services accounted for $0.8 million of the increase.

Occupancy expense was $11.0 million in 2000, up 37% from 1999. This increase
was primarily due to increased rent resulting from the expansion of our office
space in Boston at the current market rental rates.

Depreciation and amortization expense was $4.7 million in 2000, up 21% from
1999. This increase resulted from 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. This expense was $3.7 million in 2000, up 46% from 1999,
due to the increased level of business activity this year.

15
<PAGE>
Professional fees were $2.3 million in 2000, down 36% from 1999 primarily
due to nonrecurring consulting services during 1999 related to the integration
of the BankBoston acquisition and tax planning.

Amortization of goodwill expense was $1.6 million, down 10% from 1999. The
decrease results from the net decrease in goodwill due to client retention
payments and termination fees in 2000. See details in the "Overview" section.

Other operating expenses were $8.6 million in 2000, up 23% from 1999. Other
operating expenses include fees for recruiting, office supplies, temporary help
and various fees assessed by the Massachusetts Banking Commission. Recruiting
expenses and temporary help accounted for approximately $0.4 million of the
increase while 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 and changes in
interest rates for the year ended December 31, 2000 compared to the year ended
December 31, 1999. 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, 2000 VS
DECEMBER 31, 1999
------------------------------
CHANGE CHANGE
DUE TO DUE TO
VOLUME RATE NET
-------- -------- --------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Fed funds sold and other.................................. $ 2,009 $ 664 $ 2,673
Investment securities..................................... 55,112 15,180 70,292
Loans..................................................... 1,747 431 2,178
------- ------- -------
Total interest-earning assets............................. $58,868 $16,275 $75,143
------- ------- -------
INTEREST-BEARING LIABILITIES
Deposits.................................................. $14,886 $ 3,887 $18,773
Borrowings................................................ 25,228 8,097 33,325
------- ------- -------
Total interest-bearing liabilities........................ $40,114 $11,984 $52,098
------- ------- -------
Change in net interest income............................... $18,754 $ 4,291 $23,045
======= ======= =======
</TABLE>

Net interest income was $58.8 million in 2000, up 64% from 1999. This net
increase resulted from an increase in interest income of $75.1 million net of an
increase in interest expense of $52.1 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 to
2.14% in 2000, up 19 basis points from 1999.

Average interest-earning assets, primarily investment securities, were
$2.8 billion in 2000, up 50% from 1999. Funding for the asset growth was
provided by an increase in average short-term borrowings, primarily client
repurchase agreements, of $475 million and an increase in average client
deposits of $401 million. The effect of changes in volume of interest-earning
assets and interest-bearing liabilities was an increase in net interest income
of approximately $18.8 million in 2000.

16
<PAGE>
Average yield on interest earning assets was 6.60% in 2000, up 80 basis
points from 1999. The average rate that we paid on interest-bearing liabilities
was 5.20% in 2000, up 75 basis points from 1999. The increase in rates reflects
the higher interest rate environment in 2000 compared with 1999. The effect on
net interest income due to changes in rates was an increase of approximately
$4.3 million during the fiscal year ended December 31, 2000.

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>
YEAR ENDED DECEMBER 31, 2000 YEAR ENDED DECEMBER 31, 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............. $ 74,683 $ 4,691 6.28% $ 40,904 $ 2,018 4.93%
Investment securities (1)................ 2,558,030 171,111 6.69% 1,712,253 100,819 5.89%
Loans (2)................................ 121,101 5,943 4.91% 84,806 3,765 4.44%
---------- -------- ------ ---------- -------- ------
Total interest-earning assets............ 2,753,814 181,745 6.60% 1,837,963 106,602 5.80%
-------- ------ -------- ------
Allowance for loan losses................ (100) (100)
Non-interest-earning assets.............. 145,694 132,839
---------- ----------
Total assets............................. $2,899,408 $1,970,702
========== ==========

INTEREST-BEARING LIABILITIES
Deposits:
Demand................................. $ 4,115 $ 82 1.99% $ 33,256 $ 1,178 3.54%
Savings................................ 1,217,129 59,035 4.85% 889,832 39,281 4.41%
Time................................... 11,261 702 6.23% 11,574 587 5.07%
Short term borrowings.................... 1,131,287 63,108 5.58% 657,405 29,783 4.53%
---------- -------- ------ ---------- -------- ------
Total interest-bearing liabilities....... 2,363,792 122,927 5.20% 1,592,067 70,829 4.45%
-------- ------ -------- ------
Non-interest-bearing liabilities:
Demand deposits........................ 194,694 117,117
Savings................................ 54,919 34,035
Non-interest bearing time deposits..... 69,762 65,000
Other liabilities...................... 36,201 19,658
---------- ----------
Total liabilities........................ 2,719,368 1,827,877
Trust Preferred Securities............... 24,231 24,203
Equity................................... 155,809 118,622
---------- ----------
Total liabilities and equity............. $2,899,408 $1,970,702
========== ==========
Net interest income...................... $ 58,818 $ 35,773
======== ========
Net interest margin (3).................. 2.14% 1.95%
====== ======
Average interest rate spread (4)......... 1.40% 1.35%
====== ======
Ratio of interest-earning assets to
Interest-bearing liabilities........... 116.50% 115.45%
====== ======
</TABLE>

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

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

(2) Average yield/cost on loans includes accrual and nonaccrual 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.

INCOME TAXES

Income taxes were $16.7 million in 2000, up 54% from 1999, consistent with
the increased level of pre-tax income. The overall effective tax rate remained
at 32% for both years.

17
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

NON-INTEREST INCOME

Non-interest income was $133.8 million in 1999, up 35% from 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 were $132.5 million in 1999, up 37% from 1998 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. Another significant portion of the increase
in asset servicing fees resulted from our success in marketing value-added
services such as cash management and securities lending.

OPERATING EXPENSES

In 1999 total operating expenses were $135.8 million, up 36% from 1998. The
components of operating expenses are 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 was $83.3 million, up 35% from 1998 due to
several factors. The average number of employees increased 25% to 1,423 during
the year ended December 31, 1999 from 1,139 in 1998. This increase relates to
new 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 $2.4 million for the year ended
December 31, 1999 from the same period in 1998.

18
<PAGE>
Technology and telecommunication fees were $15.7 million, up 44% from 1998.
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.

Transaction processing services expense was $9.2 million, up 27% from 1998.
The increase relates primarily to an increase in subcustodian fees driven by
growth in foreign assets processed for clients.

Occupancy expense was $8.0 million, up 15% from 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 was $3.9 million, up 47% from 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 were $3.6 million, up 125% from 1998. The increase in
professional fees relates primarily to consulting services related to the
integration of the BankBoston business and tax planning.

Travel and sales promotion expense was $2.6 million, up 33% from 1998 due
primarily to increased travel relating to the integration of the BankBoston
business.

Amortization of goodwill expense was $1.8 million, up 297% from 1998. 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. The increase relates to the full year amortization of the
resulting goodwill from the acquisition, which is being amortized over its
estimated useful life.

Other operating expenses were $6.9 million, up 37% from 1998. Recruiting
costs accounted for $0.9 million of the increase due to the growth of our
staffing needs. The growth in assets processed resulted in an overall increase
in operating expenses.

19
<PAGE>
NET INTEREST INCOME

Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities and changes in
interest rates for the year ended December 31, 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 average balance sheet with deposits that had
been invested 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 between periods in the
average interest rates that we paid from 4.80% to 4.36%.

INCOME TAXES

Taxes for the year ended December 31, 1999 were $10.8 million, up from
$9.3 million in 1998. The overall effective tax rate for the period was 32%,
which compares to 36% for 1998. The year-to-year decrease resulted from a
reduction in state taxes due to the restructuring of corporate entities.

20
<PAGE>
FINANCIAL CONDITION

INVESTMENT PORTFOLIO

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

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
SECURITIES HELD TO MATURITY:
Mortgage-backed securities......................... $1,900,301 $1,464,816
Federal agency securities.......................... 311,809 227,030
State and political subdivisions................... 79,618 63,871
Foreign government securities...................... 7,566 7,638
---------- ----------
Total securities held to maturity.................. $2,299,294 $1,763,355
========== ==========

SECURITIES AVAILABLE FOR SALE:
Mortgage-backed securities......................... $ 550,465 $ 239,132
State and political subdivisions................... 122,235 52,310
Federal agency securities.......................... 54,129 47,875
Corporate debt..................................... 45,504 36,293
---------- ----------
Total securities available for sale................ $ 772,333 $ 375,610
========== ==========
</TABLE>

Our 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 our 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 FHLB, 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 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.

21
<PAGE>
The book value and weighted average yield of our securities held to maturity
at December 31, 2000 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......... $11,208 5.72% $1,128,883 6.97% $521,578 7.38% $238,632 7.29%

Federal agency
securities......... -- -- 118,842 7.19 192,967 7.50 -- --
State and political
subdivisions....... -- -- -- -- 3,985 5.62 75,633 5.44
Foreign government
securities......... 5,043 6.84 2,523 6.85 -- -- -- --
------- ---------- -------- --------
Total securities held
to maturity........ $16,251 6.07% $1,250,248 6.99% $718,530 7.41% $314,265 6.84%
======= ========== ======== ========
</TABLE>

The book value and weighted average yield of our securities available for
sale at December 31, 2000 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.......... $ -- -- $494,436 7.44% $ 48,744 7.99% $ 7,285 7.70%
State and political
subdivisions........ 3,397 4.19% 28,074 4.33 89,637 4.92 1,127 5.10

Federal agency
securities.......... -- -- 54,129 5.96 -- -- -- --
Corporate debt........ -- -- -- -- -- -- 45,504 5.86
------ -------- -------- -------
Total securities
available for
sale................ $3,397 4.19% $576,639 7.15% $138,381 6.00% $53,916 6.09%
====== ======== ======== =======
</TABLE>

22
<PAGE>
LOAN PORTFOLIO

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

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Loans to mutual funds................................. $ 86,316 $ 44,369
Loans to individuals.................................. 43,016 65,010
Loans to others....................................... 37 13
-------- --------
$129,369 $109,392
Less: allowance for loan losses....................... (100) (100)
-------- --------
Net loans............................................. $129,269 $109,292
======== ========
Floating Rate......................................... $129,337 $109,379
Fixed Rate............................................ 32 13
-------- --------
$129,369 $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. Loans to mutual funds include unsecured lines of
credit that may, in the event of default, be collateralized at our option by
securities held in custody by us for those 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 December 31, 2000, our only lending concentrations, which exceeded 10% of
total loan balances, were the lines of credit to mutual fund clients discussed
above. These loans were made in the ordinary course of business on the same
terms and conditions prevailing at the time for comparable transactions.

Our credit loss experience has been excellent. There have been no loan
charge-offs 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. As of December 31, 2000, there were no loans on non-accrual
status, no loans greater than 90 days past due, and no troubled debt
restructurings. Although virtually all of our loans are fully collateralized
with freely tradable securities, management recognizes some credit risk inherent
in the loan portfolio, and has recorded an allowance for loan losses of
$0.1 million at December 31, 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

We engage in investment activities to serve clients' investment needs and
contribute to overall corporate earnings. 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. In the conduct of these activities, we are subject
to market risk. Market risk is the risk of an adverse financial impact from
changes in market prices, such as interest rates. The level of risk we assume is
a function of our overall objectives and liquidity needs, client requirements
and market volatility.

23
<PAGE>
The active management of market risk is integral to our operations. The
objective of interest rate sensitivity management is to provide sustainable net
interest revenue under various economic conditions. We manage the structure of
interest-earning assets and interest-bearing liabilities by adjusting the mix,
yields and maturity or repricing characteristics, based on market conditions.
Since client deposits and repurchase agreements, our primary sources of funds,
are predominantly short-term, we maintain a generally short-term structure for
our interest-earning assets, including money-market assets and investments. We
also use interest rate swap agreements to augment our management of interest
rate exposure. The effect of these agreements is to lengthen short-term
variable-rate liabilities into longer-term fixed-rate liabilities.

Our board of directors has set investment policies that define the overall
framework for managing interest rate sensitivity, including accountabilities and
controls over investment activities. These policies delineate investment limits
and strategies that are appropriate, given our liquidity and regulatory
requirements. For example, we have established a policy limit stating that
projected net interest income over the next 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. Each quarter, our board of directors reviews our investment
position, including simulations of the effect of various interest rate scenarios
on our capital.

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

The results of the income simulation model as of December 31, 2000 and 1999
indicated that an upward shift of interest rates by 200 basis points would
result in a reduction in projected net interest income of 9.47% and 9.01%,
respectively. Conversely, a downward shift of 200 basis points would result in
an increase in projected net interest income of 8.59% and 8.20%, respectively.

We also use gap analysis as a secondary tool to manage our interest rate
sensitivity. Gap analysis involves measurement of the difference in asset and
liability repricing on a cumulative basis within a specified time frame. A
positive gap indicates that more interest-earning assets than interest-bearing
liabilities mature in a time frame, and a negative gap indicates the opposite.
By seeking to minimize the amount of assets and liabilities that could reprice
in the same time frame, we attempt to reduce the risk of significant adverse
effects on net interest income caused by interest rate changes. As shown in the
table below, at December 31, 2000, interest-bearing liabilities repriced faster
than interest-earning assets, as has been typical for us. If all other variables
remained constant, in the short-term, falling interest rates would lead to net
interest revenue that is higher than it would have been; rising rates would lead
to lower net interest income. Other important determinants of net interest
income are rate levels, balance sheet growth and mix, and interest rate spreads.

24
<PAGE>
The following table presents the repricing schedule for our interest-earning
assets and interest-bearing liabilities at December 31, 2000 (Dollars in
thousands):

<TABLE>
<CAPTION>
WITHIN THREE SIX TO ONE YEAR
THREE TO SIX TWELVE TO FIVE OVER FIVE
MONTHS MONTHS MONTHS YEARS YEARS TOTAL
----------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning
assets (1):
Federal funds sold..... $ 450,000 $ -- $ -- $ -- $ -- $ 450,000
Investment
securities (2)....... 1,489,450 277,734 442,625 469,922 391,895 3,071,626
Loans --
variable-rate........ 129,237 -- -- -- -- 129,237
Loans -- fixed-rate.... -- -- -- 32 -- 32
----------- --------- --------- --------- --------- ----------
Total
interest-earning
assets............. 2,068,687 277,734 442,625 469,954 391,895 3,650,895
----------- --------- --------- --------- --------- ----------
Interest-bearing
liabilities:
Demand deposit
accounts............. 3,009 -- -- -- -- 3,009
Savings accounts....... 1,875,238 -- -- -- -- 1,875,238
Interest rate
contracts............ (500,000) 60,000 120,000 320,000 -- --
Short-term
borrowings........... 1,251,971 -- -- -- -- 1,251,971
----------- --------- --------- --------- --------- ----------
Total
interest-bearing
liabilities........ 2,630,218 60,000 120,000 320,000 -- 3,130,218
----------- --------- --------- --------- --------- ----------
Net interest
sensitivity gap
during the
period............. $ (561,531) $ 217,734 $ 322,625 $ 149,954 $ 391,895 $ 520,677
=========== ========= ========= ========= ========= ==========
Cumulative gap....... $ (561,531) $(343,797) $ (21,172) $ 128,782 $ 520,677
=========== ========= ========= ========= =========
Interest sensitive assets
as a percent of
interest sensitive
liabilities
(cumulative)........... 78.65% 87.22% 99.25% 104.11% 116.63%
=========== ========= ========= ========= =========
Interest sensitive assets
as a percent of total
assets (cumulative).... 54.28% 61.57% 73.18% 85.51% 95.80%
=========== ========= ========= ========= =========
Net interest sensitivity
gap as a percent of
total assets........... (14.73)% 5.71% 8.47% 3.93% 10.28%
=========== ========= ========= ========= =========
Cumulative gap as a
percent of total
assets................. (14.73)% (9.02)% (0.56)% 3.38% 13.66%
=========== ========= ========= ========= =========
</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 period that corresponds with
their effective maturity.

LIQUIDITY

Liquidity represents the ability of an institution to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management. For
a financial institution such as 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 this offering. As a

25
<PAGE>
result of our management of liquid assets and the ability to generate liquidity
through liability funds, management believes that we maintain overall liquidity
sufficient to meet our depositors' needs, to satisfy our operating requirements
and to fund the payment of an anticipated annual cash dividend of $0.08 per
share for 2001 (approximately $2.4 million based upon 29,912,711 shares
outstanding as of December 31, 2000).

Our ability to pay dividends on the common stock may depend on the receipt
of dividends from Investors Bank. Any dividend payments by Investors Bank are
subject to certain 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 certain agreements entered into in connection with the sale of our
Capital Securities. The Capital Securities were issued by Investors Capital
Trust I, a Delaware statutory business trust sponsored by us, and qualify as
Tier I capital under the capital guidelines of the Federal Reserve.

We have informal borrowing arrangements with various counterparties. Each
counterparty has agreed to make funds available to us at the Federal funds
overnight rate. The aggregate amount of these borrowing arrangements as of
December 31, 2000 was $540 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 cannot be certain, however, that such funding will be available. Lack
of availability of liquid funds could have a material adverse impact on our
operations.

We also have Master Repurchase Agreements in place with various
counterparties. Each broker has agreed to make funds available to us at various
rates in exchange for collateral consisting of marketable securities. The
aggregate amount of these borrowing arrangements at December 31, 2000 was
$2.0 billion.

We also have a borrowing arrangement with the FHLBB. We may borrow amounts
determined by prescribed collateral levels and the amount of FHLBB stock we
hold. We are required to hold FHLBB stock equal to no less than (i) 1% of our
outstanding residential mortgage loan principal (including mortgage pool
securities), (ii) 0.3% of total assets, or (iii) total advances from the FHLBB,
divided by a leverage factor of 20. The aggregate amount of borrowing available
to us under this arrangement at December 31, 2000 was $1.0 million.

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 $41.6 million for the year ended
December 31, 2000. Net cash used for investing activities, consisting primarily
of the excess of purchases of investment securities over proceeds from
maturities of investment securities, was $1.3 billion for the year ended
December 31, 2000. Net cash provided by financing activities, consisting
primarily of net activity in deposits and short-term borrowings, was
$1.2 billion for the year ended December 31, 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 $9.5 million and $3.4 million for the years ended
December 31, 2000 and 1999, respectively.

Stockholders' equity at December 31, 2000 was $178.8 million, up 31%, from
1999. The ratio of stockholders' equity to assets decreased to 4.7% at
December 31, 2000 from 5.4% at December 31, 1999.

26
<PAGE>
The FRB has adopted a system using internationally consistent risk-based
capital adequacy guidelines to evaluate the capital adequacy of banks and bank
holding companies. Under the risk-based capital guidelines, different categories
of assets are assigned different risk weights, based generally upon the
perceived credit risk of the asset. These risk weights are multiplied by
corresponding asset balances to determine a "risk-weighted" asset base. Some
off-balance sheet items are added to the risk-weighted asset base by converting
them to a balance sheet equivalent and assigning them the appropriate risk
weight.

FRB and FDIC guidelines require that banking organizations have a minimum
ratio of total capital to risk-adjusted assets and off-balance sheet items of
8.0%. Total capital is defined as the sum of "Tier 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.

The following table summarizes our Tier I and total capital ratios at
December 31, 2000 (Dollars in thousands):

<TABLE>
<CAPTION>
AMOUNT RATIO
---------- --------
<S> <C> <C>
Tier I capital.......................................... $ 170,399 13.38%
Tier I capital minimum requirement...................... 50,923 4.00%
---------- -----
Excess Tier I capital................................... $ 119,476 9.38%
========== =====
Total capital........................................... $ 170,499 13.39%
Total capital minimum requirement....................... 101,847 8.00%
---------- -----
Excess total capital.................................... $ 68,652 5.39%
========== =====
Risk adjusted assets, net of intangible assets.......... $1,273,084
==========
</TABLE>

The following table summarizes Investors Bank's Tier I and total capital
ratios at December 31, 2000 (Dollars in thousands):

<TABLE>
<CAPTION>
AMOUNT RATIO
---------- --------
<S> <C> <C>
Tier I capital.......................................... $ 166,750 13.11%
Tier I capital minimum requirement...................... 50,867 4.00%
---------- -----
Excess Tier I capital................................... $ 115,883 9.11%
========== =====
Total capital........................................... $ 166,850 13.12%
Total capital minimum requirement....................... 101,735 8.00%
---------- -----
Excess total capital.................................... $ 65,115 5.12%
========== =====
Risk adjusted assets, net of intangible assets.......... $1,271,686
==========
</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 average total assets. The Leverage Ratio adopted by the federal banking
agencies requires a ratio of 3.0% Tier I capital to adjusted average total
assets for top-rated banking institutions. All other banking institutions are
expected to maintain a Leverage Ratio of 4.0% to 5.0%. The computation of the
risk-based capital ratios and the Leverage Ratio

27
<PAGE>
requires that our capital and that of Investors Bank be reduced by most
intangible assets. Our Leverage Ratio at December 31, 2000 was 5.16%, which is
in excess of regulatory minimums. Investors Bank's Leverage Ratio at
December 31, 2000 was 5.05%, which is also in excess of regulatory minimums. See
"Business -- Regulation and Supervision" for further information.

28
<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- which was founded in 1969 as a banking subsidiary
of Eaton Vance Corp. Eaton Vance is an investment management firm. In 1995, we
reorganized as a bank holding company, were spun-off to the stockholders of
Eaton Vance and completed our initial public offering.

We provide 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 December 31, 2000, we provided services
for approximately $303 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 provided 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 invest and manage the financial assets entrusted to them.
They do so using a broad range of financial products, including mutual funds,
unit investment trusts, separate accounts, variable annuities and other products
that pool together money from many investors. Asset servicing companies like
ours perform various services for asset managers and the pooled financial
products they sponsor.

SUSTAINED FINANCIAL ASSET GROWTH. Growth in financial assets under
management 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

29
<PAGE>
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
ANNUAL
DECEMBER 31, 1999 DECEMBER 31, 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 ongoing consolidation has concentrated the industry around a
smaller number of providers 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 provide 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 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.

- 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.

30
<PAGE>
Asset servicers use technology as a competitive tool to deliver precise and
functional information to asset managers. Technology also allows asset servicers
to offer more value-added services such as performance measurement. Examples of
analytical tools used in performance measurement include reports showing
time-weighted return, performance by sector, and time-weighted return by sector.

COMPLEX INVESTMENT PRODUCTS. Asset managers create different investment
structures in an effort to capture efficiencies of larger pools of assets. One
innovative example of this is the master-feeder structure. In the master-feeder
structure, one or more investment vehicles (the "feeder funds") with identical
investment objectives pool their assets in the common portfolio of a separate
investment vehicle (the "master fund"). This structure permits each of the
feeder funds to be sold to a separate target market or through a different
distribution channel. The feeder fund, if it were a stand-alone fund, might not
be large enough to support its operating costs. The feeder funds benefit from
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 securities that replicate an index and are
traded on a national securities exchange, usually the American Stock Exchange.
Unlike investing in a conventional index mutual fund, investing in an ETF allows
investors to buy and sell shares throughout the trading day at market prices.
ETFs also offer potential tax efficiencies. According to an industry source,
assets invested in ETFs are expected to grow at a 30% to 50% average annual rate
over the next five years, reaching between $200 billion and $500 billion.

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.

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 standards. Technological change creates opportunities for product
differentiation and cost reduction.

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Our Fund Accounting and Custody Tracking System, or FACTS, is a single
integrated technology platform that combines our 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 master-feeder and
multi-managed funds, limited partnerships and, most recently, ETFs. We also have
expertise in servicing the more complicated fund of funds and offshore fund
structures. Because the design of FACTS allows us to effect modifications or
enhancements quickly, we are able to respond rapidly to the systems requirements
of complex structures.

- We were recently chosen to be the service provider for the Barclays Global
Investors iShares, a family of exchange traded funds, launched in
May 2000, that held approximately $6 billion in assets as of December 31,
2000.

- We service over $31 billion of assets managed by The Common Fund for
Nonprofit Organizations, which uses a multi-manager structure. The
CommonFund's structure includes 83 managers covering 21 funds.

- 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.

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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 for each client.

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.

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

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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
$285 billion at December 31, 2000. At December 31, 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 ongoing 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.

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.

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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 December 31, 2000, the total net assets of the portfolio approximated
$1.9 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 December 31, 2000, we had gross loans
outstanding to clients of approximately $129 million, which represented
approximately 3% 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, client management staff based in our
Boston, New York and Dublin offices provide client support. Each client is
assigned a client manager responsible for the client's overall satisfaction. The
client manager is usually a senior professional with extensive industry
experience and works with the client on designing new products and specific
systems requirements, providing consulting support, anticipating the client's
needs and coordinating service delivery.

SIGNIFICANT CLIENTS

No single client of ours represented more than 10% of net operating revenues
for the years ended December 31, 2000 and 1999.

SOFTWARE SYSTEMS AND DATA CENTER

Our business requires that we 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 meet these requirements,
our asset servicing operations are supported by sophisticated computer
technology. We receive vast amounts of information across a worldwide computer
network. That information covers a wide range of global security types and
complex portfolio structures in various currencies. The information must be
processed and then used for system-wide updating and reporting.

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

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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. 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. 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 use the Internet as a means to communicate with clients and external
parties. Through the implementation of our strategic Internet plan, our goal is
to position ourselves to take advantage of Internet technologies while providing
secure value-added services to our clients 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 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 could not otherwise afford 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' 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 providing
services for us in December 1990. Our current agreement with EDS is scheduled to
expire on December 31, 2005. EDS also provides us with mainframe disaster
recovery services.

We maintain a comprehensive disaster recovery plan. The plan identifies
teams to manage disaster situations and re-establish a functioning operational
environment. The plan provides for us to be able to relocate employees and
resume operations quickly, if necessary.

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.

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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 revenue 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.

INTELLECTUAL PROPERTY

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

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.

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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 December 31, 2000, we had 1,779 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.

LITIGATION

We are aware that a complaint was filed on January 16, 2001 naming us and
numerous other parties, including Barclays Global Investors, State Street Bank
and Merrill Lynch, as defendants in a patent infringement action filed in the
United States District Court for the Northern District of Illinois Eastern
Division. While we have not been served with the complaint, the plaintiff,
Mopex, Inc., provided us with a copy of the complaint in a letter dated
January 18, 2001 in which it indicated its desire to license the patent in issue
"at a favorable royalty rate prior to substantial involvement with the Court."
This letter alleges that the patent covers the creation and trading of certain
securities, including the Barclays iShares exchange traded funds. The complaint
seeks injunctive relief, recovery of reasonable attorney fees, unspecified
damages, including interest and costs, and requests that those damages be
trebled.

While we do not offer or sell the securities discussed in the complaint, we
provide certain custody, accounting or other administrative services for the
Barclays iShares family of exchange traded funds. Barclays is one of the
defendants named in the complaint. Under our service agreements with Barclays,
Barclays has agreed to indemnify us against certain claims and losses arising
from our relationship. As we are in the preliminary stages of assessing the
allegations in the complaint, we cannot be sure that we will prevail in the
defense of this claim or that indemnification will be available to us under our
agreements with Barclays. Any patent litigation would be costly and could divert
the attention of management. If we were found to infringe the patent, we would
have to pay damages and would be ordered to cease any infringing activity or
seek a license under the patent. We cannot be sure that we will be able to
obtain a license on a timely basis or on reasonable terms, if at all. As a
result, any determination of infringement could have a material adverse effect
upon our business, financial condition and results of operations.

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

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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 trading counterparty to the Fund. The
Fund is an investment vehicle organized in Dublin to invest in foreign exchange
contracts. A total of approximately $4.7 million had been invested in the Fund.
Most of that money was lost prior to the Fund's closing to subscriptions in
June 1999.

In January 2001, ITC, IFS and the other defendants named in the plenary
summons received a statement of claim alleging 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. We continue
to investigate this matter. We have notified our insurers and intend to defend
ourselves vigorously. Based on our investigation through December 31, 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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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 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
Corporation 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
transaction 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 the day on which we first
publicly announce the meeting. The notice must contain, among other

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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 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 be required in the future 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 $540
per one one-hundredth of a share of series A stock, subject to adjustment. The
rights plan

41
<PAGE>
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.

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
us 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.

42
<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............ 40 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............. 68 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.

43
<PAGE>
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.

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 1 Mind, Inc., Connecticut River Bancorp, Inc., Connecticut
River Bank, Stifel Financial Corporation, Phoenix Investment Partners, Ltd.,
Plymouth Rubber Company and Command Systems, as well as twenty-five Phoenix
Mutual 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.

44
<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......................................
A.G. Edwards & Sons, Inc.................................
Keefe, Bruyette & Woods, Inc.............................
William Blair & Company, L.L.C...........................
Putnam Lovell Securities Inc.............................
---------
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 or in
connection with one or more acquisitions involving the issuance of an amount of
the Company's securities that in the aggregate constitutes less than or equal to
10 percent of the Company's outstanding share capital, provided that any persons
receiving the Company's securities in an acquisition agree not to dispose of or
hedge the securities through the date 90 days after the date of this prospectus.

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

45
<PAGE>
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 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 $493,282.

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 Investors
Financial in connection with the acquisition of the advisor custody unit of The
Chase Manhattan Bank.

46
<PAGE>
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. Certain legal matters in connection with this offering will be
passed upon 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.

WHERE YOU CAN FIND MORE 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.

47
<PAGE>
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: Investor Relations
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.

48
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 2000 and 1999............ F-3

Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000 and 1999.................... F-4

Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000 and 1999................................ F-5

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

F-1
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

DECEMBER 31, 2000 AND 1999 (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 30,489 $ 37,624
Federal funds sold and securities purchased under resale
agreements................................................ 450,000 150,000
Securities held to maturity (approximate fair value of
$2,287,602 and $1,730,745 at December 31, 2000 and
December 31, 1999 respectively)........................... 2,299,294 1,763,355
Securities available for sale............................... 772,333 375,610
Non-marketable equity securities............................ 15,000 15,000
Loans, less allowance for loan losses of $100 at
December 31, 2000 and December 31, 1999................... 129,269 109,292
Accrued interest and fees receivable........................ 48,003 40,332
Equipment and leasehold improvements, net................... 15,086 10,337
Goodwill, net............................................... 34,094 39,776
Other assets................................................ 17,547 11,754
---------- ----------
TOTAL ASSETS................................................ $3,811,115 $2,553,080
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand.................................................... $ 362,946 $ 240,303
Savings................................................... 1,903,938 1,237,104
Time...................................................... 65,000 75,000
---------- ----------
Total deposits.......................................... 2,331,884 1,552,407
Securities sold under repurchase agreements................. 1,251,725 819,034
Short-term borrowings....................................... 246 1,000
Other liabilities........................................... 24,206 19,583
---------- ----------
Total liabilities....................................... 3,608,061 2,392,024
---------- ----------
Commitments and contingencies (See Note 15)
Company-obligated, mandatorily redeemable, preferred
securities of subsidiary trust holding solely junior
subordinated deferrable interest debentures of the
Company................................................... 24,246 24,218
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 (shares authorized:
1,000,000; issued and outstanding: 0 in 2000 and in
1999)..................................................... -- --
Common stock, par value $0.01 (shares authorized:
40,000,000; issued and outstanding: 29,912,711 in 2000 and
29,220,308 in 1999)....................................... 299 146
Surplus..................................................... 95,007 87,320
Deferred compensation....................................... (247) (689)
Retained earnings........................................... 85,188 53,542
Accumulated other comprehensive loss, net................... (1,439) (3,481)
Treasury stock, par value $0.01 (10,814 shares in 2000 and
1999)..................................................... -- --
---------- ----------
Total stockholders' equity.............................. 178,808 136,838
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $3,811,115 $2,553,080
========== ==========
</TABLE>

See Notes to Consolidated Financial Statements

F-2
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

YEARS ENDED DECEMBER 31, 2000 AND 1999 (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
OPERATING REVENUE:
Interest income:
Federal funds sold and securities purchased
under resale agreements............................... $ 4,691 $ 2,018
Investment securities held to maturity and
available for sale.................................... 171,111 100,819
Loans................................................... 5,943 3,765
-------- --------
Total interest income................................. 181,745 106,602
-------- --------

Interest expense:
Deposits................................................ 59,819 41,046
Short-term borrowings................................... 63,108 29,783
-------- --------
Total interest expense................................ 122,927 70,829
-------- --------
Net interest income..................................... 58,818 35,773
-------- --------

Non-interest income:
Asset servicing fees...................................... 159,538 132,478
Computer service fees..................................... 478 488
Other operating income.................................... 2,025 795
-------- --------
Net operating revenue..................................... 220,859 169,534
-------- --------

OPERATING EXPENSES
Compensation and benefits................................. 104,387 83,302
Technology and telecommunications......................... 22,181 15,744
Occupancy................................................. 11,003 8,032
Transaction processing services........................... 9,792 9,234
Depreciation and amortization............................. 4,743 3,911
Travel and sales promotion................................ 3,713 2,551
Professional fees......................................... 2,290 3,573
Amortization of goodwill.................................. 1,576 1,756
Insurance................................................. 805 769
Other operating expenses.................................. 8,550 6,943
-------- --------
Total operating expenses................................ 169,040 135,815
-------- --------

INCOME BEFORE INCOME TAXES AND MINORITY INTEREST............ 51,819 33,719
Provision for income taxes.................................. 16,655 10,790
Minority interest expense, net of income taxes.............. 1,588 1,661
-------- --------

NET INCOME.................................................. 33,576 21,268
-------- --------
Other comprehensive income, net of tax of $962 and $(960),
respectively..............................................
Unrealized gain/(loss) on securities:
Unrealized holding gains/(losses) arising during the
period................................................ 2,042 (1,706)
-------- --------
Other comprehensive income/(loss)....................... 2,042 (1,706)
-------- --------

COMPREHENSIVE INCOME........................................ $ 35,618 $ 19,562
======== ========

BASIC EARNINGS PER SHARE.................................... $ 1.13 $ 0.74
======== ========

DILUTED EARNINGS PER SHARE.................................. $ 1.08 $ 0.72
======== ========
</TABLE>

See Notes to Consolidated Financial Statements

F-3
<PAGE>

INVESTORS FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
YEARS ENDED DECEMBER 31, 2000 AND 1999 (DOLLARS IN THOUSANDS)

COMMON TREASURY COMMON DEFERRED RETAINED
SHARES SHARES STOCK SURPLUS COMPENSATION EARNINGS
---------- --------- --------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998............. 6,722,050 4,000 $ 67 $57,705 $(1,198) $33,484

Amortization of deferred
compensation......................... -- -- -- -- 509 --
Exercise of stock options.............. 196,945 -- 2 2,281 -- --
Additions to treasury stock............ (6,814) 6,814 -- -- -- --
Tax benefit from exercise of options... -- -- -- 1,343 -- --
Common stock issuance.................. 900,000 -- 9 25,991 -- --
Net income............................. -- -- -- -- -- 21,268
Stock dividend, two-for-one split...... 6,797,973 -- 68 -- -- (68)
Cash dividend, $0.04 per share......... -- -- -- -- -- (1,142)
Change in accumulated other
comprehensive income/(loss), net..... -- -- -- -- -- --
---------- ------ ---- ------- ------- -------
BALANCE, DECEMBER 31, 1999............. 14,610,154 10,814 146 87,320 (689) 53,542

Amortization of deferred
compensation......................... -- -- -- -- 442 --
Exercise of stock options.............. 444,411 -- 4 3,844 -- --
Tax benefit from exercise of options... -- -- -- 3,843 -- --
Net income............................. -- -- -- -- -- 33,576
Stock dividend, two-for-one split...... 14,858,146 -- 149 -- -- (149)
Cash dividend, $0.06 per share......... -- -- -- -- -- (1,781)
Change in accumulated other
comprehensive income/(loss), net..... -- -- -- -- -- --
---------- ------ ---- ------- ------- -------
BALANCE, DECEMBER 31, 2000............. 29,912,711 10,814 $299 $95,007 $ (247) $85,188
========== ====== ==== ======= ======= =======

<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY
INCOME (LOSS) STOCK TOTAL
--------------- --------- ---------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1998............. $(1,775) $ -- $ 88,283
Amortization of deferred
compensation......................... -- -- 509
Exercise of stock options.............. -- -- 2,283
Additions to treasury stock............
Tax benefit from exercise of options... -- -- 1,343
Common stock issuance.................. -- -- 26,000
Net income............................. -- -- 21,268
Stock dividend, two-for-one split...... -- -- --
Cash dividend, $0.04 per share......... -- -- (1,142)
Change in accumulated other
comprehensive income/(loss), net..... (1,706) -- (1,706)
------- ------ --------
BALANCE, DECEMBER 31, 1999............. (3,481) -- 136,838
Amortization of deferred
compensation......................... -- -- 442
Exercise of stock options.............. -- -- 3,848
Tax benefit from exercise of options... -- -- 3,843
Net income............................. -- -- 33,576
Stock dividend, two-for-one split...... -- -- --
Cash dividend, $0.06 per share......... -- -- (1,781)
Change in accumulated other
comprehensive income/(loss), net..... 2,042 -- 2,042
------- ------ --------
BALANCE, DECEMBER 31, 2000............. $(1,439) $ -- $178,808
======= ====== ========
</TABLE>

See Notes to Consolidated Financial Statements

F-4
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

YEARS ENDED DECEMBER 31, 2000 AND 1999 (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 33,576 $ 21,268
----------- -----------
Adjustments to reconcile net income to net cash provided
by/ (used for) operating activities:
Depreciation and amortization............................. 6,319 5,667
Amortization of deferred compensation..................... 442 509
Amortization of premiums on securities, net of accretion
of discounts............................................ 3,090 5,636
Deferred income taxes..................................... (224) 489
Changes in assets and liabilities:
Accrued interest and fees receivable.................... (7,671) (9,337)
Other assets............................................ 755 3,734
Other liabilities....................................... 5,286 5,915
----------- -----------
Total adjustments..................................... 7,997 12,613
----------- -----------
Net cash provided by operating activities............... 41,573 33,881
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale... 88,008 81,038
Proceeds from maturities of securities held to maturity..... 246,908 321,230
Purchases of securities available for sale.................. (482,973) (116,707)
Purchases of securities held to maturity.................... (784,691) (1,144,943)
Purchase of non-marketable equity securities................ -- (7,374)
Net increase in federal funds sold.......................... (300,000) (150,000)
Net increase in loans....................................... (19,977) (55,000)
Purchases of equipment and leasehold improvements........... (9,464) (3,387)
----------- -----------
Net cash used for investing activities.................. (1,262,189) (1,075,143)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits............................. 122,643 67,096
Net increase in time and savings deposits................... 656,834 580,007
Net increase in short-term borrowings....................... 431,937 385,866
Proceeds from exercise of stock options..................... 3,848 2,283
Proceeds from issuance of common stock...................... -- 26,000
Dividends paid.............................................. (1,781) (1,142)
----------- -----------
Net cash provided by financing activities............. 1,213,481 1,060,110
----------- -----------
(DECREASE) INCREASE IN CASH AND DUE FROM BANKS.............. (7,135) 18,849

CASH AND DUE FROM BANKS, BEGINNING OF YEAR.................. 37,624 18,775
----------- -----------
CASH AND DUE FROM BANKS, END OF YEAR........................ $ 30,489 $ 37,624
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 118,568 $ 69,613
=========== ===========
Cash paid for income taxes.................................. $ 18,154 $ 10,265
=========== ===========
</TABLE>

See Notes to Consolidated Financial Statements

F-5
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

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. The
Company provides 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. IFSC and the Bank
are subject to regulation by the Federal Reserve Board of Governors, the Office
of the Commissioner of Banks of the Commonwealth of Massachusetts and the
Federal Deposit Insurance Corporation.

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

On February 16, 1999, the Board of Directors of the Company declared a
two-for-one stock split in the form of a 100% stock dividend payable March 17,
1999 to stockholders of record on March 1, 1999. All share numbers have been
restated to reflect the two-for-one stock split paid March 17, 1999, where
applicable.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of the Company and its domestic and foreign subsidiaries. All
significant intercompany accounts and transactions have been eliminated.

CUSTODY AND TRUST ASSETS -- Asset servicing fees, including securities
lending and foreign exchange services and computer services fees, are recorded
on the accrual basis.

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

SECURITIES -- The Company classifies all equity securities that have readily
determinable fair values and all investments in debt securities into one of
three categories, as follows:

- Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held to maturity and reported at
amortized cost.

F-6
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.

- All other debt and equity securities are classified as available for sale
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported in other comprehensive income.

- The specific identification method is used to determine gains and losses
on sales of securities.

FAIR VALUE OF FINANCIAL INSTRUMENTS -- Statement of Financial Accounting
Standards ("SFAS") No. 107 requires the disclosure of the estimated fair value
of financial instruments, whether or not recognized in the Company's
consolidated balance sheets, estimated using available market information or
other appropriate valuation methodologies.

The carrying amounts of cash and due from banks are a reasonable estimate of
their fair value. The fair value of securities owned is estimated based on
quoted market prices. Both loans (including commitments to lend) and deposits
(including time deposits) bear interest at variable rates and are subject to
periodic repricing. As such, the carrying amount of loans and deposits is a
reasonable estimate of fair value. The fair value of the Company's interest rate
contracts is estimated based on quoted market prices. The Company does not have
any other significant financial instruments.

LOANS -- Interest income on loans is recorded on the accrual basis. Losses
on loans are provided for under the allowance method of accounting. The
allowance is increased by provisions charged to operating expenses based on
amounts management considers necessary to meet probable and reasonably estimated
losses on loans.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- Equipment and leasehold improvements
are stated at cost, less accumulated depreciation and amortization. Depreciation
and amortization are provided on the straight-line method over the estimated
useful lives of the assets which range from three to seven years, and for
leasehold improvements over the lesser of the useful life or the life of the
lease.

LONG-LIVED ASSETS -- SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. In accordance with this Statement and Accounting Principles Board
Opinion, ("APB") No. 17, "Intangible Assets," the Company continues to evaluate
the amortization period that it assigns and the recoverability of the carrying
amount of the assets to determine whether later events and circumstances warrant
revised estimates of their assignments.

INCOME TAXES -- Income tax expense is based on estimated taxes payable or
refundable on a tax return basis for the current year and the changes in
deferred tax assets and liabilities during the year in accordance with SFAS
No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are
established for temporary differences between the accounting basis and the tax
basis

F-7
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the Company's assets and liabilities at enacted tax rates expected to be in
effect when the amounts related to such temporary differences are realized or
settled.

TRANSLATION OF FOREIGN CURRENCIES -- The functional currency of the
Company's foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses
realized from the settlement of foreign currency transactions, which were not
significant in the years ended December 31, 2000 and 1999 are included in other
operating expenses in the consolidated statements of income.

DERIVATIVE FINANCIAL INSTRUMENTS -- The Company does not purchase derivative
financial instruments for trading purposes. Interest rate swap agreements are
matched with specific financial instruments reported on the consolidated balance
sheet and periodic cash payments are accrued on a settlement basis.

The Company enters into foreign exchange contracts with clients and
simultaneously enters into a matched position with another bank. These contracts
are subject to market value fluctuations in foreign currencies. Gains and losses
from such fluctuations are netted and recorded as an adjustment of asset
servicing fees.

The Company's policy requires settlement accounting principles for interest
rate swaps in which net interest rate differentials to be paid or received are
recorded currently as adjustments to interest expense.

LIABILITIES -- SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities -- a replacement of FASB
Statement No. 125" provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. This
Statement revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but it carries over most of Statement 125's provisions without reconsideration.

STOCK-BASED COMPENSATION -- The Company accounts for stock-based
compensation using the intrinsic value-based method of APB No. 25, as allowed
under SFAS No. 123, "Accounting for Stock-Based Compensation."

EARNINGS PER SHARE -- In 1997, the Company adopted SFAS No. 128, "Earnings
per Share," and SFAS No. 129, "Disclosure of Information about Capital
Structure". SFAS No. 128 requires that entities with publicly held common stock
or potential common stock compute, present, and disclose earnings per share
based upon the Basic and/or Diluted earnings per share ("EPS"). Basic EPS were
computed by dividing net income by the weighted average number of common shares
outstanding during the year. Diluted EPS were computed by increasing the
weighted average number of common shares outstanding used in Basic EPS by the
number of additional common shares that would have been outstanding if the
dilutive common stock had been issued.

COMPREHENSIVE INCOME -- In 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS No. 130 requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive

F-8
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.

SEGMENT REPORTING -- In 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers.

EMPLOYEE BENEFIT PLANS -- In 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 132 revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans,
but requires additional information on changes in the benefit obligations and
fair values of plan assets.

NEW ACCOUNTING PRINCIPLES -- In June of 1998, the FASB issued 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. The Company adopted
SFAS 133 and the corresponding amendments under SFAS 138 on January 1, 2001. The
cumulative effect of adoption reduced other comprehensive income, net of tax, by
approximately $3.9 million. At that time, the Company reclassified approximately
$339 million of securities from held to maturity to available for sale which
further reduced other comprehensive income, net of tax, by approximately
$0.8 million.

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

3. ACQUISITIONS

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. The Business provides master trust and custody services to
endowments, pension funds, municipalities, mutual funds and other financial
institutions. 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 private banking and
institutional asset management businesses. In 2000, the outsourcing agreement
and a custody agreement with BankBoston-sponsored 1784 Funds were terminated. As
a result of the early termination of the outsourcing agreement and the 1784
Funds custody agreement, the Bank 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.

F-9
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

3. ACQUISITIONS (CONTINUED)

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

<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
-------------------
2000 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............................... (1,575) (1,756)
------- -------
Goodwill, end of period..................................... $34,094 $39,776
======= =======
</TABLE>

On March 10, 2000, the Bank acquired the right to provide institutional
custody and related services for accounts managed by the Trust Company of the
West, formerly serviced by Sanwa Bank California. The accounts subject to the
agreement totaled approximately $4.6 billion in assets.

On November 28, 2000, the Bank agreed to purchase the advisor custody unit
of The Chase Manhattan Bank. This unit provided 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, the Bank 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,
the Company expects that the closing of the purchase will occur in the first
quarter of 2001. The Company expects the client accounts to be converted to our
custody system in mid-2001. The transaction will be accounted for as a purchase.

F-10
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

4. SECURITIES

Amortized cost amounts and approximate fair values of securities are
summarized as follows as of December 31, 2000 (Dollars in thousands):

<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
HELD TO MATURITY COST GAINS (LOSSES) FAIR VALUE
---------------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Mortgage-backed securities............. $1,900,301 $ 6,021 $ (15,655) $1,890,667
Federal agency securities.............. 311,809 687 (4,124) 308,372
State and political subdivisions....... 79,618 2,487 (1,146) 80,959
Foreign government securities.......... 7,566 38 -- 7,604
---------- ---------- ----------- ----------
Total.................................. $2,299,294 $ 9,233 $ (20,925) $2,287,602
========== ========== =========== ==========
</TABLE>

<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
AVAILABLE FOR SALE COST GAINS (LOSSES) FAIR VALUE
------------------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Mortgage-backed securities............. $ 550,120 $ 2,804 $ (2,459) $ 550,465
State and political subdivisions....... 120,746 1,540 (51) 122,235
Federal agency securities.............. 54,541 -- (412) 54,129
Corporate debt......................... 49,362 -- (3,858) 45,504
---------- ----------- ---------- ----------
Total.................................. $ 774,769 $ 4,344 $ (6,780) $ 772,333
========== =========== ========== ==========
</TABLE>

Amortized cost amounts and approximate fair values of securities are
summarized as follows as of December 31, 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
HELD TO MATURITY COST GAINS (LOSSES) FAIR VALUE
---------------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Mortgage-backed securities.............. $1,464,816 $3,601 $(26,684) $1,441,733
Federal agency securities............... 227,030 84 (3,790) 223,324
State and political subdivisions........ 63,871 64 (5,890) 58,045
Foreign government securities........... 7,638 5 -- 7,643
---------- ------ -------- ----------
Total................................... $1,763,355 $3,754 $(36,364) $1,730,745
========== ====== ======== ==========
</TABLE>

<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
AVAILABLE FOR SALE COST GAINS (LOSSES) FAIR VALUE
------------------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Mortgage-backed securities.............. $240,300 $344 $(1,512) $239,132
Federal agency securities............... 54,538 -- (2,228) 52,310
Corporate debt.......................... 49,343 -- (1,468) 47,875
State and political subdivisions........ 36,868 1 (576) 36,293
-------- ---- ------- --------
Total................................... $381,049 $345 $(5,784) $375,610
======== ==== ======= ========
</TABLE>

Non-marketable equity securities at December 31, 2000 and 1999 consisted of
stock of the FHLBB. We are required to hold FHLBB stock equal to no less than
(i) 1% of our outstanding

F-11
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

4. SECURITIES (CONTINUED)

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

<TABLE>
<CAPTION>
DECEMBER 31, 2000
--------------------------
AMORTIZED APPROXIMATE
HELD TO MATURITY COST FAIR VALUE
---------------- ---------- -------------
<S> <C> <C>
Due within one year......................................... $ 16,251 $ 16,243
Due from one to five years.................................. 1,250,248 1,242,035
Due five years up to ten years.............................. 718,530 716,150
Due after ten years......................................... 314,265 313,174
---------- ----------
Total....................................................... $2,299,294 $2,287,602
========== ==========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 2000
--------------------------
AMORTIZED APPROXIMATE
AVAILABLE FOR SALE COST FAIR VALUE
------------------ ---------- -------------
<S> <C> <C>
Due within one year......................................... $ 3,396 $ 3,397
Due from one to five years.................................. 577,445 576,639
Due five years up to ten years.............................. 136,403 138,381
Due after ten years......................................... 57,525 53,916
---------- ----------
Total....................................................... $ 774,769 $ 772,333
========== ==========
</TABLE>

The maturity distributions of mortgage-backed securities have been allocated
over maturity groupings based upon actual pre-payments to date and anticipated
pre-payments based upon historical experience.

There were no sales of securities available for sale during the years ended
December 31, 2000 and 1999.

The carrying value of securities pledged amounted to approximately
$2.0 billion and $1.6 billion at December 31, 2000 and December 31, 1999,
respectively. Securities are pledged primarily to secure public funds and
clearings with other depository institutions.

5. LOANS

Loans consist of demand loans with individuals and not-for-profit
institutions located in the greater Boston, Massachusetts metropolitan area and
loans to mutual fund clients. The loans to mutual funds include lines of credit
and advances pursuant to the terms of the custody agreements between the Company
and those mutual fund clients to facilitate securities transactions and
redemptions. Generally, the loans are, or may be, in the event of default,
collateralized with marketable securities held by the Company as custodian.
There were no impaired or non-performing loans at December 31, 2000 and
December 31, 1999. In addition, there have been

F-12
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

5. LOANS (CONTINUED)
no loan charge-offs or recoveries during the years ended December 31, 2000 and
1999. Loans consisted of the following at December 31, 2000 and December 31,
1999 (Dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
Loans to mutual funds....................... $ 86,316 $ 44,369
Loans to individuals........................ 43,016 65,010
Loans to others............................. 37 13
-------- --------
129,369 109,392
Less allowance for loan losses.............. 100 100
-------- --------
Total....................................... $129,269 $109,292
======== ========
</TABLE>

The Company had commitments to lend of approximately $222 million and
$160 million at December 31, 2000 and December 31, 1999, respectively. The terms
of these commitments are similar to the terms of outstanding loans.

6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

The major components of equipment and leasehold improvements are as follows
at December 31, 2000 and December 31, 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
Furniture, fixtures and equipment........... $22,817 $17,603
Leasehold improvements...................... 2,832 1,349
------- -------
Total....................................... 25,649 18,952
Less accumulated depreciation and
amortization.............................. 10,563 8,615
------- -------
Equipment and leasehold improvements, net... $15,086 $10,337
======= =======
</TABLE>

The software costs capitalized under the AICPA Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," ("SOP 98-1"), are included within the furniture, fixtures and
equipment component.

7. DEPOSITS

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

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

F-13
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

8. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

The Company enters into repurchase agreements whereby securities are sold by
the Company under agreements to repurchase. Repurchase agreements were
$1.3 billion and $819 million at December 31, 2000 and 1999 respectively. The
interest rate on the outstanding agreements at December 31, 2000 ranged from
5.18% to 5.69% and all agreements matured by January 2, 2001. The interest rate
on the outstanding agreements at December 31, 1999 ranged from 3.06% to 6.06%
and all agreements matured on January 3, 2000.

The following securities were pledged under the repurchase agreements at
December 31, 2000 and December 31, 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 2000 DECEMBER 31, 1999
-------------------------- --------------------------
AMORTIZED APPROXIMATE AMORTIZED APPROXIMATE
COST FAIR VALUE COST FAIR VALUE
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Federal agency securities..... $ 144,382 $ 147,935 $177,598 $176,501
Mortgage-backed securities.... 1,159,381 1,166,434 681,482 680,818
---------- ---------- -------- --------
Total......................... $1,303,763 $1,314,369 $859,080 $857,319
========== ========== ======== ========
</TABLE>

The amounts outstanding at October 31, 2000 and December 31, 1999 were the
highest amounts outstanding at any month end during the years ended
December 31, 2000 and December 31, 1999, respectively. The balances at
October 31, 2000 and December 31, 1999 were $1.3 billion and $819 million,
respectively. The average balance during the years ended December 31, 2000 and
1999 were approximately $998 million and $572 million, respectively. There were
no balances with clients for which the amount at risk exceeded 10% of
stockholders' equity.

9. SHORT-TERM BORROWINGS

Short-term borrowings consisted of Treasury, Tax and Loan balances, which
were $0.2 million and $1.0 million at December 31, 2000 and 1999, respectively.

The Company receives federal tax deposits from clients as an agent for the
Federal Reserve Bank and accumulates these deposits in the Treasury, Tax and
Loan account. The Federal Reserve Bank charges the Company interest at the
Federal Funds rate on such deposits. The interest rate on the outstanding
balance at December 31, 2000 was 6.29%.

F-14
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

10. INCOME TAXES

The components of income tax expense are as follows for the years ended
December 31, 2000 and 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
Current:
Federal................................... $15,656 $ 9,160
State..................................... 300 393
Foreign................................... 68 (33)
------- -------
16,024 9,520
------- -------
Deferred:
Federal................................... (224) 450
State..................................... -- 39
Foreign................................... -- --
------- -------
(224) 489
------- -------
Total income taxes.......................... $15,800 $10,009
======= =======
</TABLE>

Differences between the effective income tax rate and the federal statutory
rates are as follows for the years ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
Federal statutory rate...................... 35.00% 35.00%
State income tax rate, net of federal
benefit................................... 0.40 .90
Foreign income taxes with different rates... -- (.11)
Tax-exempt income, net of disallowance...... (3.72) (4.47)
Other....................................... 0.32 .68
----- -----
Effective tax rate.......................... 32.00% 32.00%
===== =====
</TABLE>

F-15
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

10. INCOME TAXES (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities consist of the following at
December 31, 2000 and December 31, 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Employee benefit plans.................................... $ 828 $ 621
Securities available for sale............................. 779 1,904
Other..................................................... 210 210
------- -------
1,817 2,735
------- -------
Deferred tax liabilities:
Depreciation and amortization............................. (1,153) (1,170)
------- -------
Net deferred tax asset...................................... $ 664 $ 1,565
======= =======
</TABLE>

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

On January 31, 1997, a trust sponsored and wholly owned by the Company
issued $25 million in 9.77% Trust Preferred Securities (the "Capital
Securities"), the proceeds of which were invested by the trust in the same
aggregate principal amount of the Company's newly issued 9.77% Junior
Subordinated Deferrable Interest Debentures due February 1, 2027 (the "Junior
Subordinated Debentures"). The $25 million aggregate principal amount of the
Junior Subordinated Debentures represents the sole asset of the Trust. The
Company has guaranteed, on a subordinated basis, distributions and other
payments due on the Capital Securities (the "Guarantee"). The Guarantee, when
taken together with the Company's obligations under (i) the Junior Subordinated
Debentures; (ii) the indenture pursuant to which the Junior Subordinated
Debentures were issued; and (iii) the Amended and Restated Declaration of Trust
governing the Trust, constitutes a full and unconditional guarantee of the
Trust's obligations under the Capital Securities.

12. STOCKHOLDERS' EQUITY

As of December 31, 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

F-16
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

12. STOCKHOLDERS' EQUITY (CONTINUED)
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.

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. No
options were granted to consultants during the year ended December 31, 2000. Of
the 4,640,000 shares of Common Stock authorized for issuance under the plan,
276,096 were available for grant at December 31, 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. Of
the 400,000 shares of Common Stock authorized for issuance under the plan,
130,000 were available for grant at December 31, 2000.

The exercise price of options under the Amended and Restated 1995
Non-Employee Director Stock Option Plan and the incentive 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 from
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 4,000 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.

F-17
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

12. STOCKHOLDERS' EQUITY (CONTINUED)
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.

The Company has recorded deferred compensation of $0.3 million and
$0.7 million at December 31, 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 both the Amended and Restated 1995
Non-Employee Director Stock Option Plan and the Amended and Restated 1995 Stock
Plans is as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 1999
------------------------ ------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........... 2,960,334 $13 2,811,244 $ 9
Granted.................................... 827,271 57 876,610 20
Exercised.................................. (831,493) 8 (668,118) 6
Canceled................................... (59,450) 16 (59,402) 10
--------- ---------
Outstanding at end of year................. 2,896,662 $27 2,960,334 $13
========= =========
Outstanding and exercisable at year-end.... 1,394,800 1,341,948
========= =========
</TABLE>

F-18
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

12. STOCKHOLDERS' EQUITY (CONTINUED)

The following table summarizes information about stock options outstanding
at December 31, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT WEIGHTED-
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, AVERAGE
PRICES 2000 LIFE PRICE 2000 EXERCISE PRICE
--------------------- --------------- ------------ ---------- -------------- --------------
<C> <C> <S> <C> <C> <C>
$ 0-10 169,290 1.0 years $ 7 165,372 $ 7
10-20 1,296,638 6.9 12 719,880 13
20-50 817,959 8.3 22 441,449 22
50-90 612,775 9.8 69 68,099 69
--------- ---------
2,896,662 7.6 $27 1,394,800 $18
========= =========
</TABLE>

A summary of the 1997 Employee Stock Purchase Plan is as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Total shares available under the Plan beginning of
year................................................ 357,354 433,604
Issued at June 30..................................... (34,466) (42,494)
Issued at December 31................................. (23,854) (33,756)
------- -------
Total shares available under the Plan end of year..... 299,034 357,354
======= =======
</TABLE>

During the year ended December 31, 2000, the exercise price of the stock was
$21.00 and $36.25, or 90% of the average market value of the Common Stock on the
first business day of the payment period ending June 30, 2000 and December 31,
2000, respectively.

During the year ended December 31, 1999, the exercise 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.

EMPLOYEE STOCK-BASED COMPENSATION -- With respect to employee stock-based
compensation, the Company has adopted the disclosure-only requirements of SFAS
No. 123. Accordingly, no compensation cost has been recognized in the
accompanying financial statements for employee stock-based compensation awarded
under the three employee stock option plans because there was no intrinsic value
at the date of grant. If compensation cost had been determined for awards
granted under the employee stock option plans based on the fair value of the
awards at the date of grant in accordance with the provisions of SFAS No. 123,
the Company's

F-19
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

12. STOCKHOLDERS' EQUITY (CONTINUED)
net income and earnings per share for the years ended December 31, 2000 and
1999, respectively, would have decreased to the pro forma amounts indicated
below (Dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C> <C>
Net income................... As reported.................. $33,576 $21,268
Pro forma.................... 25,972 17,264

Basic earnings per share..... As reported.................. $ 1.13 $ 0.74
Pro forma.................... 0.87 0.61

Diluted earnings per share... As reported.................. $ 1.08 $ 0.72
Pro forma.................... 0.84 0.58
</TABLE>

The fair value of each option grant under the employee stock option plan was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions for the years ended December 31, 2000 and 1999,
respectively: an assumed risk-free interest rate of 4.92%, and 6.44%, an
expected life of ten and five years, an expected volatility of 67% and 44% and a
dividend yield of 0.08% and 0.17%.

The fair value of each option grant under the employee stock purchase plan
was estimated by computing the option discount which is the difference between
the average market value of the Company's Common Stock during the payment period
and the lesser of (i) 90% of the average market value of the Common Stock on the
first business day of the payment period, or (ii) 90% of the average market
value of the Common Stock on the last business day of the payment period.

EARNINGS PER SHARE -- Reconciliation from Basic EPS to Diluted EPS for years
ended December 31, 2000 and 1999 is as follows (Dollars in thousands, except per
share data):

<TABLE>
<CAPTION>
PER-SHARE
INCOME SHARES AMOUNT
-------- ---------- ----------
<S> <C> <C> <C>
DECEMBER 31, 2000
BASIC EPS
Income available to common stockholders................... $33,576 29,707,746 $1.13
=====
Dilutive effect of common equivalent shares of stock
options................................................. 1,323,481
----------
DILUTED EPS
Income available to common stockholders................... $33,576 31,031,227 $1.08
======= ========== =====
DECEMBER 31, 1999
BASIC EPS
Income available to common stockholders................... $21,268 28,618,580 $0.74
=====
Dilutive effect of common equivalent shares of stock
options................................................. 1,090,910
----------
DILUTED EPS
Income available to common stockholders................... $21,268 29,709,490 $0.72
======= ========== =====
</TABLE>

F-20
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

13. EMPLOYEE BENEFIT PLANS

PENSION PLAN -- The Company has a trusteed, noncontributory, qualified
defined benefit pension plan covering substantially all of its employees who
were hired before January 1, 1997. The benefits are based on years of service
and the employee's compensation during employment. The Company's funding policy
is to contribute annually the maximum amount, which can be deducted for federal
income tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for benefits expected to be earned in the
future.

The Company established a supplemental retirement plan in 1994 that covers
certain employees and pays benefits that supplements any benefits paid under the
qualified plan. The plan document was amended in April 2000 to eliminate the
compensation cap and include bonuses and commissions of the certain employees.
As a result of the plan amendment, the projected benefit obligation was
$3.8 million as of December 31, 2000 and $0.3 million as of December 31, 1999.
Benefits under the supplemental plan are generally based on compensation not
includable in the calculation of benefits to be paid under the qualified plan.
The total cost of this plan to the Company was approximately $0.8 million for
the year ended December 31, 2000, and $0.1 million for the year ended
December 31, 1999.

The following table sets forth the funded status and accrued pension cost
for the Company's qualified defined benefit pension plan (Dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation at beginning of year......... $ 8,563 $ 8,927
Service cost............................................ 672 775
Interest cost........................................... 660 604
Liability (gain)/loss................................... 287 (1,505)
Benefits paid........................................... (471) (238)
-------- -------
Projected benefit obligation at the end of the year....... $ 9,711 $ 8,563
======== =======
Change in assets:
Assets at the beginning of the year....................... $ 12,207 $10,348
Employer contributions.................................. -- 660
Actual return........................................... (133) 1,437
Benefits paid........................................... (471) (238)
-------- -------
Assets at the end of the year............................. $ 11,603 $12,207
======== =======
Funded status:
Projected benefit obligation............................ $ (9,711) $(8,563)
Fair value of plan assets............................... 11,603 12,207
-------- -------
Funded status........................................... 1,892 3,644
-------- -------
Unrecognized net transition asset....................... (223) (262)
Unrecognized prior service cost......................... 123 152
Unrecognized net gain................................... (2,494) (4,191)
-------- -------
Accrued pension cost.................................... $ (702) $ (656)
======== =======
</TABLE>

F-21
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

13. EMPLOYEE BENEFIT PLANS (CONTINUED)

Net pension cost included the following components for the years ended
December 31, 2000 and 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
Service cost -- benefits earned during the period........... $ 672 $ 775
Interest cost on projected benefit obligations.............. 660 604
Return on plan assets....................................... 133 (1,437)
Net amortization and deferral............................... (1,421) 448
------- -------
Net periodic pension cost................................... $ 44 $ 390
======= =======
</TABLE>

The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
Weighted average discount rate.............. 7.50% 7.50%
Rate of increase in future compensation
levels.................................... 5.00 5.00
Long-term rate of return on plan assets..... 8.50 8.50
</TABLE>

EMPLOYEE SAVINGS PLAN -- The Company sponsors a qualified defined
contribution employee savings plan covering substantially all employees who
elect to participate. The Company matches employee contributions to the plan up
to specified amounts. The total cost of this plan to the Company was
$1.3 million and $1.0 million in the years ended December 31, 2000 and 1999,
respectively.

14. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

LINES OF CREDIT -- At December 31, 2000, the Company had commitments to
individuals under collateralized open lines of credit totaling approximately
$279 million, against which approximately $57 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 derivative
financial instruments and swap agreements, held by the Company at December 31,
2000 and 1999 were approximately $560 million and $520 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 experienced no terminations by counterparties of
interest rate swaps designated as hedges. Credit risk is limited to the positive
fair value of the derivative financial instrument, which is significantly less
than the notional value. During 2000, the Company entered into agreements to
assume fixed-rate interest payments in exchange

F-22
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

14. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (CONTINUED)
for variable market-indexed interest payments. The original terms range from 12
to 36 months. The weighted-average fixed-payment rates were 6.27% at
December 31, 2000. Variable-interest payments received are indexed to one month
London Interbank Offered Rate ("LIBOR") and the overnight Federal Funds rate. At
December 31, 2000, the weighted-average rate of variable market-indexed interest
payment obligations to the Company was 6.26%. 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 $(5.3) million at December 31, 2000.

15. COMMITMENTS AND CONTINGENCIES

RESTRICTIONS ON CASH BALANCES -- The Company is required to maintain certain
average cash reserve balances. The reserve balance requirement with the Federal
Reserve Bank as of December 31, 2000 was approximately $26.0 million. In
addition, other cash balances in the amount of approximately $2.0 million were
pledged to secure clearings with a depository institution, Depository Trust
Company, as of December 31, 2000.

LEASE COMMITMENTS -- Minimum future commitments on non-cancelable operating
leases at December 31, 2000 were as follows (Dollars in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDING BANK PREMISES EQUIPMENT
------------------ --------------- -----------
<S> <C> <C>
2001.......................................... $11,678 $3,760
2002.......................................... 11,658 2,632
2003.......................................... 11,632 995
2004.......................................... 11,632 --
2005 and beyond............................... 42,360 --
</TABLE>

Total rent expense was approximately $15.0 million and $11.0 million for the
years ended December 31, 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 $4.2 million and
$3.8 million for the years ended December 31, 2000 and 1999, respectively.

CONTINGENCIES -- The Company provides 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.
Assets under custody and management, held by the Company in a fiduciary
capacity, are not included in the consolidated balance sheets since such items
are not assets of the Company. Management conducts regular reviews of its
fiduciary responsibilities and considers the results in preparing its
consolidated financial statements. In the opinion of management, there are no
contingent liabilities at December 31, 2000 that are material to the
consolidated financial position or results of operations of the Company.

F-23
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

16. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value and estimated fair value of financial instruments are as
follows at December 31, 2000 and 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
On-balance sheet amounts:
Cash and due from banks.................. $ 30,489 $ 30,489 $ 37,624 $ 37,624
Federal funds sold....................... 450,000 450,000 150,000 150,000
Securities held to maturity.............. 2,299,294 2,287,602 1,763,355 1,730,745
Securities available for sale............ 772,333 772,333 375,610 375,610
Loans.................................... 129,269 129,269 109,292 109,292
Deposits................................. 2,331,884 2,331,884 1,552,407 1,552,407

Off-balance sheet amounts:
Interest rate swap agreements (notional
amounts of $560 and $520 million at
December 31, 2000 and 1999)............ -- (5,326) -- 4,588
</TABLE>

The Company had commitments to lend at variable rates of $222 million and
$160 million at December 31, 2000 and December 31, 1999, respectively. The fair
value of these commitments at December 31, 2000 and December 31, 1999 was not
significant.

The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2000 and 1999. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been significantly revalued for purposes of
these consolidated financial statements since those dates and therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.

F-24
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

17. FOREIGN EXCHANGE CONTRACTS

A summary of foreign exchange contracts outstanding at December 31, 2000 and
December 31, 1999 is as follows (Dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------------------------- -------------------------------------
UNREALIZED UNREALIZED
CURRENCY PURCHASES SALES GAIN/LOSS PURCHASES SALES GAIN/LOSS
-------- ----------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
European Unit (EUR).. $143,836 $143,836 -- $ 72,427 $ 72,427 --
Japan (JPY).......... 72,022 72,022 -- 30,138 30,138 --
Switzerland (CHF).... 30,574 30,574 -- -- -- --
Australia (AUD)...... 14,229 14,229 -- -- --
Canada (CAD)......... 10,166 10,166 -- -- -- --
Britain (GBP)........ 9,676 9,676 -- 41,315 41,315
South Africa (ZAR)... 5,581 5,581 -- -- -- --
Hong Kong (HKD)...... 3,312 3,312 -- -- -- --
Other currencies..... 1,322 1,322 -- 216 216 --
-------- -------- ------- -------- -------- -------
$290,718 $290,718 -- $144,096 $144,096 --
======== ======== ======= ======== ======== =======
</TABLE>

The maturity of contracts outstanding as of December 31, 2000 is as follows
(Dollars in thousands):

<TABLE>
<CAPTION>
MATURITY PURCHASES SALES
-------- ----------- --------
<S> <C> <C>
January 2001.......................................... $95,625 $95,625
February 2001......................................... 79,081 79,081
March 2001............................................ 83,378 83,378
May 2001.............................................. 12,778 12,778
June 2001............................................. 19,856 19,856
</TABLE>

18. REGULATORY MATTERS

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

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of

F-25
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

18. REGULATORY MATTERS (CONTINUED)
December 31, 2000, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.

As of December 31, 2000, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Company and the Bank must maintain minimum
total risk based, Tier I risk based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the Company's or the Bank's category. The
following table presents the capital ratios for the Bank and the Company for the
years ended December 31, 2000 and December 31, 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES: PROVISIONS:
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 2000:
Total Capital
(to Risk Weighted Assets -- the
Company)............................. $170,499 13.39% $101,847 8.00% N/A N/A
(to Risk Weighted Assets -- the
Bank)................................ $166,850 13.12% $101,735 8.00% $127,169 10.00%
Tier I Capital
(to Risk Weighted Assets -- the
Company)............................. $170,399 13.38% $ 50,923 4.00% N/A N/A
(to Risk Weighted Assets -- the
Bank)................................ $166,750 13.11% $ 50,867 4.00% $ 76,301 6.00%
Tier I Capital
(to Average Assets -- the Company)..... $170,399 5.16% $132,218 4.00% N/A N/A
(to Average Assets -- the Bank)........ $166,750 5.05% $132,172 4.00% $165,215 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
(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
(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
(to Average Assets -- the Bank)........ $121,847 5.34% $ 91,310 4.00% $114,138 5.00%
</TABLE>

F-26
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

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

19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA):

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 2000 QUARTER QUARTER QUARTER QUARTER
---------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income...................................... $37,794 $41,967 $47,554 $54,430
Interest expense..................................... 24,837 28,937 32,114 37,039
Non-interest income.................................. 40,112 39,846 40,808 41,275
Operating expenses................................... 41,774 40,322 42,718 44,226
Income before income taxes and minority interest..... 11,295 12,554 13,530 14,440
Income taxes......................................... 3,632 4,036 4,348 4,639
Minority interest.................................... 397 397 397 397
Net income........................................... 7,266 8,121 8,785 9,404
Basic earnings per share............................. 0.25 0.27 0.29 0.32
Diluted earnings per share........................... 0.24 0.26 0.28 0.30
</TABLE>

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1999 QUARTER QUARTER QUARTER QUARTER
---------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income...................................... $20,210 $25,020 $28,374 $32,998
Interest expense..................................... 13,060 16,390 19,313 22,067
Non-interest income.................................. 31,633 32,352 34,304 35,472
Operating expenses................................... 30,927 32,832 34,749 37,307
Income before income taxes and minority interest..... 7,856 8,150 8,616 9,096
Income taxes......................................... 2,828 2,454 2,597 2,911
Minority interest.................................... 391 427 427 416
Net income........................................... 4,637 5,269 5,592 5,769
Basic earnings per share............................. 0.17 0.18 0.19 0.20
Diluted earnings per share........................... 0.17 0.18 0.18 0.19
</TABLE>

F-27
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

20. 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 for the years ended December 31, 2000 and
1999, and long-lived assets by geographic area for the years ended December 31,
2000 and 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
NET OPERATING
REVENUE LONG-LIVED
FOR THE YEAR ENDED ASSETS
DECEMBER 31, DECEMBER 31,
--------------------- -------------------
GEOGRAPHIC INFORMATION: 2000 1999 2000 1999
----------------------- --------- --------- -------- --------
<S> <C> <C> <C> <C>
United States...................... $213,056 $162,155 $48,878 $49,625
Ireland............................ 5,576 4,817 247 338
Canada............................. 2,147 2,461 55 150
Cayman Islands..................... 80 101 -- --
-------- -------- ------- -------
Total.............................. $220,859 $169,534 $49,180 $50,113
======== ======== ======= =======
</TABLE>

No one customer exceeded 10% of the Company's consolidated net operating
revenues for the year ended December 31, 2000 and 1999.

The following represents the Company's asset servicing fees by service line
for the years ended December 31, 2000 and 1999 (Dollars in thousands):

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
ASSET SERVICING FEES BY SERVICE LINE: 2000 1999
------------------------------------- --------- ---------
<S> <C> <C>
Custody accounting, transfer agency, and
administration...................................... $126,413 $106,642

Cash management....................................... 10,989 11,167

Foreign exchange...................................... 10,589 5,859

Securities lending.................................... 9,942 7,213

Investment advisory................................... 1,605 1,597
-------- --------

Total................................................. $159,538 $132,478
======== ========
</TABLE>

F-28
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

21. FINANCIAL STATEMENTS OF INVESTORS FINANCIAL SECURITIES CORP. (PARENT ONLY)

The following represents the separate condensed financial statements of IFSC
as of December 31, 2000 and 1999, and for the years ended December 31, 2000 and
1999 (Dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------- -------------------
<S> <C> <C>
STATEMENTS OF INCOME
Equity in undistributed income of bank
subsidiary...................................... $35,376 $22,748
Equity in undistributed income/(loss) of non-bank
subsidiaries.................................... (106) 83
Dividend income from non-bank subsidiaries........ 76 76
Management fee paid by non-bank subsidiaries...... 110 240
Interest expense on subordinated debt............. (2,518) (2,518)
Income tax benefit................................ 953 881
Operating expenses................................ (315) (242)
------- -------
Net income........................................ $33,576 $21,268
======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------- -------------------
<S> <C> <C>
BALANCE SHEETS
Assets:
Cash............................................ $ 2,712 $ 1,461
Investments in bank subsidiary.................. 199,405 158,142
Investments in non-bank subsidiaries............ 1,547 1,653
Receivable due from bank subsidiary............. 536 573
Receivable due from non-bank subsidiary......... 516 471
Income tax receivable........................... -- 417
Other assets.................................... 3 33
-------- --------
Total Assets...................................... $204,719 $162,750
======== ========
Liabilities and Stockholders' Equity
Liabilities
Accrued expenses................................ $ 48 $ 22
Payable due to non-bank subsidiary.............. 89 113
Other liabilities............................... -- 3
Subordinated debt............................... 25,774 25,774
-------- --------
Total Liabilities............................. 25,911 25,912
-------- --------
Stockholders' Equity
Common stock.................................... 299 146
Surplus......................................... 95,007 87,320
Deferred compensation........................... (247) (689)
Retained earnings............................... 85,188 53,542
Accumulated other comprehensive loss, net....... (1,439) (3481)
-------- --------
Total Stockholders' Equity.................... 178,808 136,838
-------- --------
Total Liabilities and Stockholders' Equity........ $204,719 $162,750
======== ========
</TABLE>

F-29
<PAGE>
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

YEARS ENDED DECEMBER 31, 2000 AND 1999

21. FINANCIAL STATEMENTS OF INVESTORS FINANCIAL SECURITIES CORP. (PARENT ONLY)
(CONTINUED) (DOLLARS IN THOUSANDS):

<TABLE>
<CAPTION>
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------- -------------------
<S> <C> <C>
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income...................................... $ 33,576 $ 21,268
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred compensation........... 440 510
Change in assets and liabilities:
Receivable due from bank subsidiary........... 37 (573)
Receivable due from non-bank subsidiary....... (45) 406
Income tax receivable......................... 417 (417)
Income tax payable............................ -- (1)
Payable due to non-bank subsidiary............ (24) (8)
Accrued expenses.............................. 26 (1)
Other assets.................................. 30 (30)
Other liabilities............................. (3) (15)
Equity in undistributed earnings of bank
subsidiary.................................... (35,376) (22,748)
Equity in undistributed earnings of non-bank
subsidiary.................................... 106 (83)
-------- --------
Total adjustments................................. (34,392) (22,960)
-------- --------
Net cash (used) by operating activities........... (816) (1,692)
-------- --------
Cash flows from investing activities:
Payments for investments in and advances to
subsidiary.................................... -- (26,000)
-------- --------
Net cash (used) by investing activities........... -- (26,000)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options......... 3,848 2,283
Proceeds from issuance of common stock.......... -- 26,000
Dividends paid.................................. (1,781) (1,142)
-------- --------
Net cash provided by financing activities......... 2,067 27,141
-------- --------
Net increase/(decrease) in cash and due from
banks........................................... 1,251 (551)
Cash and due from banks, beginning of period...... 1,461 2,012
-------- --------
Cash and due from banks, end of period............ $ 2,712 $ 1,461
======== ========
</TABLE>

F-30
<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................................. 29
Description of Capital Stock............. 40
Management............................... 43
Underwriting............................. 45
Validity of Common Stock................. 47
Experts.................................. 47
Where You Can Find More Information...... 47
Index to Consolidated Financial
Statements............................. F-1
</TABLE>

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

1,200,000 Shares

INVESTORS FINANCIAL
SERVICES CORP.

Common Stock

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

[LOGO]

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

GOLDMAN, SACHS & CO.
A.G. EDWARDS & SONS, INC.
KEEFE, BRUYETTE & WOODS, INC.
WILLIAM BLAIR & COMPANY
PUTNAM LOVELL SECURITIES INC.
Representatives 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............................................. 9,781
Nasdaq listing fee.......................................... 17,500
Printing expenses........................................... 150,000
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ 140,000
Transfer agent fees and expenses............................ 1,500
Miscellaneous............................................... --
--------
TOTAL................................................... $493,282
========
</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 January 18, 2001.

<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>

SIGNATURES

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 January 18, 2001
Kevin J. Sheehan Officer)

Senior Vice President and
/s/ KAREN C. KEENAN Chief Financial Officer
------------------------------------------------ (Principal Financial Officer January 18, 2001
Karen C. Keenan and Principal Accounting
Officer)

*
------------------------------------------------ Director January 18, 2001
James M. Oates

*
------------------------------------------------ Director January 18, 2001
Thomas P. McDermott

*
------------------------------------------------ Director January 18, 2001
Robert B. Fraser

*
------------------------------------------------ Director January 18, 2001
Frank B. Condon, Jr.

*
------------------------------------------------ Director January 18, 2001
Donald G. Friedl

*
------------------------------------------------ Director January 18, 2001
Phyllis S. Swersky
</TABLE>

<TABLE>
<S> <C>
* By: /s/ KEVIN J. SHEEHAN
------------------------------------
Kevin J. Sheehan
(Attorney-in-fact)
</TABLE>

II-3
<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

**** Previously filed