UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, DC 20549

FORM 10-K10-K/A
Amendment No. 1

Commission File Number 0-26996

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

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

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

None

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

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

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

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

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

        The aggregate market value of Common Stock held by non-affiliates of the registrant was $2,062,923,818$1,807,090,067 based on the last reported sale price of $33.54$29.03 on The Nasdaq National Market on June 30, 20022003 as reported by Nasdaq.

        As of January 31, 2003,November 11, 2004, there were 64,860,83766,462,871 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        The registrant intends to filefiled a definitive Proxy Statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2002.2003. Portions of such Proxy Statement are incorporated by reference in Part III.

INVESTORS FINANCIAL SERVICES CORP.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

EXPLANATORY NOTE

        This Amendment to Investors Financial Services Corp.'s Annual Report on Form 10-K for the year ended December 31, 2003 includes restated financial statements as of December 31, 2003 and 2002, and for the years ended December 31, 2003, 2002 and 2001. This restatement relates to our application of Statement of Financial Accounting Standard No. 91,Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases ("FAS 91").

        The principal application of FAS 91 to our financial statements is in determining the accounting treatment of premiums paid and discounts realized on our purchase of securities backed by mortgages and other loans. Historically, we had applied the prospective method to determine the amortization of premiums and the accretion of discounts for the securities in our investment portfolio. Our management and Audit Committee have determined that the retrospective method is the appropriate method under FAS 91 to determine the amortization of premiums and the accretion of discounts for certain of our securities.

        This application of FAS 91 results in the following changes in reported income before income taxes for the periods presented in this report:

•

an increase in income before income taxes of approximately $1.0 million for the year ended December 31, 2003;



•

a decrease in income before income taxes of approximately $2.3 million for the year ended December 31, 2002; and



•

a decrease in income before income taxes of approximately $8.5 million for the year ended December 31, 2001.

        This application of FAS 91 also results in changes to other comprehensive income, net of tax, as well as other changes in our disclosures regarding our portfolio. Other comprehensive income, net of tax, increased on a cumulative basis by $4.9 million, $5.9 million and $6.1 million as of December 31, 2003, 2002 and 2001, respectively.

        The following tables summarize the effect of the restatement on our consolidated financial statements for the years ended December 31, 2003, 2002 and 2001 (Dollars in thousands, except per share data):

        In addition, the weighted-average yield on federal agency securities held to maturity in the maturity table in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Report has been restated to correct clerical errors as follows:

        This Report, as amended, covers the year ended December 31, 2003 and was originally filed on February 20, 2004. This Report has been amended to restate certain financial statements and related financial results only and does not reflect events after the filing of the original report and does not modify or update disclosures as originally filed, except as required to reflect the effect of the restatement. Contemporaneously with the filing of this Report, we have also filed:

•

an amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2004; and



•

an amended Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2004.

        Our Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 should be referenced for our current disclosures.

PART I

ITEM 1. BUSINESS.

General

        Unless otherwise indicated or unless the context requires otherwise, all references in this Report to "Investors Financial," "we," "us," "our," or similar references mean Investors Financial Services Corp., together with our subsidiaries. "Investors Bank" or the "Bank" will be used to mean our subsidiary, Investors Bank & Trust Company, alone.

        We provide a broad range of services to financial asset managers, such as mutual fund complexes, investment advisors, family offices, banks and insurance companies. We define these services as core services and value-added services. Our core services include global custody, multicurrency accounting and mutual fund administration. Our value-added services include securities lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment advisory services, lines of credit, middle office outsourcing, and brokerage and transition management services. At December 31, 2003, we provided services for approximately $1.1 trillion in net assets, including approximately $177 billion of foreign net assets.

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, Sacramento, Toronto, Dublin and the Cayman Islands.

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

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

Overview 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, multicurrency accounting and mutual fund administration. Our value-added services include securities lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment advisory services, lines of credit, and brokerage services. At December 31, 2002, we provided services for approximately $785 billion in net assets, including approximately $86 billion of foreign net assets.

the Asset Servicing 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 back and middle office services for asset managers and the pooled financial products they sponsor.sponsor, allowing asset managers to focus on core competencies such as product development and distribution. In turn, asset servicing companies like ours provide non-core services such as the third-party safekeeping of assets and administrative services that also give investors more confidence in the integrity of their investments. The following discussion sets forth our view of the key drivers in today's asset servicing industry.

        Historical Financial Asset Growth.    While the rate of financial assets have declinedasset value growth decreased slightly in recent years, over the past ten years growth in financial assets under management has been strong. Factors driving this growth areinclude an aging population, the privatization of retirement systems and the increased popularity of pooled investment products includingsuch as mutual funds. The total amount of U.S. financial assets held in mutual funds, life insurance companies, private pension funds and bank personal trust accounts was $14.9$13.9 trillion at December 31, 2001,2002, up from $5.4$5.9 trillion in 1991,1992, a compounded annual growth rate of over 10%approximately 9%. Mutual funds, a primary market for our services, hold a large portion of the money invested in pooled investment vehicles. Despite the above-mentioned recent declines, the U.S. mutual fund market has grown at a compounded annual growth rate of more than 16%approximately 14% since 1991, and

2

structure. In the master-feeder structure, one or more investment vehicles (the "feeder funds") with identical investment objectives pool their assets in the common portfolio of a separate investment vehicle (the "master fund"). This structure permits each of the feeder funds to be sold to a separate target market or through a different distribution channel. The feeder fund, if it were a stand-alone fund, might not be large enough to support its operating costs. The feeder funds benefit from the economies of scale available to the larger pool of assets invested in the master fund.

        In addition, a growing number of mutual funds have been structured as multi-class funds or as multi-manager funds in order to address the differing requirements and preferences of potential investors. Multi-class arrangements allow an investment company to sell interests in a single investment portfolio to separate classes of stockholders. In this environment, investors have the option of purchasing multi-class fund shares with the sales loadcommission 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, globally, ETF assets grew 35%39% from approximately $104.8$142 billion at year end in 2002 to $198 billion at year-end in 2001 to $141.6 billion in 2002.2003.

        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 addedvalue-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. In order to continue to grow our business, we pursue our core strategies.

        Maintain Our Technological Expertise.    One of our core strategies is to commit the necessary capital and resources to maintain our technological expertise. The asset servicing industry requires the technological capability to support a wide range of global security types, currencies, and complex portfolio structures. Asset servicers must also maintain the telecommunications flexibility to support the diversity of global communications standards. Technological change creates opportunities for product differentiation and cost reduction.

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

•

Custody



•

Securities movement and control



•

Portfolio accounting



•

Multicurrency general ledger accounting

•

Pricing



•

Net asset value calculation



•

Multi-class and multi-manager processing



•

ETF processing

4

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

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

        The FACTS architecture also enables us to modify the system quickly. Rapid modifications 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 minimizes our capital investment in large-scale computer hardware, gives us access to state-of-the-art mainframe technology, and provides virtually unlimited capacity and disaster recovery services. Our relationship with EDS also assures greater predictability of our processing expenses.

        Maintain Our Expertise in Complex Products.    Another of our core strategies is to maintain our strength in the rapidly growing area of complex investment products. We have developed expertise in servicing master-feeder and multi-managed funds, limited partnerships and 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.

        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 Our Services.    We believe that our strong client relationships provide opportunities to cross-sell value-added services to broaden our customer relationships. Many of our clients 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 retail mutual funds and a series of mutual funds to offer variable annuity products. 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 us for value-added services like foreign exchange or cash management. We target expanding these relationships by increasing the number of services provided for each client.

5

Service Offerings

        We provide a broad range of services to financial asset managers, such as mutual fund complexes, investment advisors, family offices, banks and insurance companies. We think of these services in two groupings: core services and value-added services.

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

        Fees charged for core services vary from client to client based on the volumevalue of assets processed, the number of securities held and portfolio transactions. Generally, fees are billed to our clientclients monthly in arrears and, upon their approval, charged directly to their account. Fees charged for core services reflect the price-sensitivityprice sensitivity of the market for such services. Fees charged for value-added services reflect a more favorable pricing environment for us, and we can increase activity in these areas without a necessarily proportionate increase in personnel or other resources. We also derive net interest income by investing cash balances that our clients leave on deposit with us. Our share of earnings from these investments is viewed as part of the total compensation that our clients pay us for servicing their assets.

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

Core Services

        Global Custody.    Global custody entails overseeing the safekeeping of securities for clients and settlement of portfolio transactions. Our domestic net assets processed have grown from $22 billion at October 31, 1990 to $699 billion$1.1 trillion at December 31, 2002.2003. At December 31, 2002,2003, our foreign net assets processed totaled approximately $86$177 billion.

        In order to service our clients worldwide, we have established a network of global subcustodians in 9799 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.

        Mutual Fund Administration.    Mutual fund administration services include management reporting, regulatory reporting, compliance monitoring, tax accounting and return preparation, and partnership administration. In addition to these ongoing services, we also provide mutual fund start-up consulting services, which typically includesinclude 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.

6

Value-Added Services

        Securities Lending.    Securities lending involves the lending of clients' securities to brokers and other institutions for a fee. Receipt of securities lending fees improves a client's return on the underlying securities. We act as agent for our clients for both international and domestic securities lending services. 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.non-base currency to U.S.base dollars. By using us rather than a third partythird-party foreign exchange bank to perform these functions, clients can reduce the amount of time spent coordinating currency delivery and monitoring delivery failures and claims.

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

        Investment Advisory Services.    The Bank acts as investment advisor to the Merrimac Master Portfolio, an open-end investment management company registered under the Investment Company Act of 1940. The portfolio currently consists of a series of six master funds in a master-feeder structure. The Merrimac Cash Portfolio, the Merrimac Prime Portfolio and the Merrimac U.S. Government Portfolio are subadvised by Lincoln Capital Fixed Income Management Company, LLC. The Merrimac Treasury Portfolio and the Merrimac Treasury Plus Portfolio are subadvised by M&I Investment Management Corp. The Merrimac Municipal Portfolio is subadvised by ABN AMRO Asset Management (USA) LLC. At December 31, 2003, the total net assets of the portfolio approximated $7.0 billion. The portfolio's master funds serve as investment vehicles for seven domestic feeder funds and two offshore feeder funds whose shares are sold to institutional investors.

        Middle Office Outsourcing.    We also provide middle office outsourcing services to clients. Middle office outsourcing services represent the tasks that need to be performed for financial asset managers after they have initiated a particular trade to ensure accurate and timely trade processing and communications to any party who needs to receive the trades. We perform some or all of the following functions for our outsourcing clients: trade operations management, settlements, portfolio and fund accounting, fund administration, cash management, reconciliation, corporate actions, tax reclaims and tax filings, performance measurement, broker performance, and vendor data management.

        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.managers in a customized format.

        Institutional Transfer Agency.    Transfer agency encompasses shareholder recordkeeping and communications. We provide these services only to institutional clients with a small number of shareholder accounts or omnibus positions of retail shareholders.

        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 five 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. The Merrimac Municipal Portfolio is sub-advised by ABN AMRO Asset Management (USA) LLC. At December 31, 2002, the total net assets of the portfolio approximated $7.0 billion. The portfolio's master funds serve as investment vehicles for six domestic feeder funds and two offshore feeder funds, 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, covering overnight cash shortfalls and other borrowing needs. We do not conduct consumer-bankingretail banking operations. At December 31, 2002,2003, we had gross loans outstanding to clients of approximately $144$200 million, which represented approximately 2% of our total assets. The interest rates charged on the Bank's loans are indexed to either the Prime rate or the Federal Funds rate. We have never had a loan loss. All loans are secured, or may be secured, by marketable securities and virtually all loans to individually managed account customers are due on demand, other than a loan made to a non-profit association for the purposes of the Community Reinvestment Act. We earn commitment fees on the unused portion of certain redemption lines of credit to mutual fund clients. These commitment fees are calculated as a percentage of the total line of credit.demand.

        Brokerage services.and Transition Management Services.    In 2002, we began offering introducing broker-dealer services to clients by accepting customer orders, which we have elected to clear through a clearing broker-dealer. The clearing broker-dealer processes and settles customer transactions and maintains detailed customer

7

records. This allows us to use the back office processing of the clearing brokerbroker-dealer while earning a commission on trades executed on behalf of clients. Transition management services are designed to assist the process of moving a portfolio from one asset manager to another in as seamless a manner as possible. Components of these services include planning and customizing a strategy for the transition, conducting performance analysis, and executing the transition in an efficient, risk-managed fashion. The brokerage services we offer do not include margin accounts, short selling or market making activities. The results of this operation were not material to our financial condition and operating results as of and for the year ended December 31, 2002.

Sales, Marketing and Client Support

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

        In order to service existing clients, client management staff based in our Boston, New York and Dublin offices provide client support. Each client is assigned a client manager responsible for the client's overall satisfaction. The client manager is usually a senior professional with extensive industry experience 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.

        Financial information regarding our geographic reporting can be found in Note 20 to21 of our Notes to Consolidated Financial Statements included in this Annual Report.

Significant Clients

        Barclays Global Investors, N.A. ("BGI") accounted for approximately 16.8% and 13.5%16.4% of our consolidated net operating revenues for each of the years ended December 31, 20022003 and 2001, respectively.2002. No single client of ours represented more than 10% of net operating revenues for the year ended December 31, 2000, and no client other than BGI accounted for more than 10%5% of our net operating revenues for the years ended December 31, 2002 or 2001.2003 and 2002.

Software Systems and Data Center

        Our business requires that we provide daily and periodic reports of asset accounting and performance, and provide measurement and analytical data to asset managers on-line on a real time basis. To help us meet these requirements, our asset servicing operations are supported by sophisticated

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

        The integrated nature of the FACTS architecture allows us to effect modifications and enhancements quickly. Swift modifications and enhancements result in increased processing quality and

8

efficiency for our clients. TheyThese modifications and enhancements 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 that are necessary for asset administrators to remain competitive and to create information delivery mechanisms that add value to the information available as part of clearing and settling transactions. 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 gather by processing client assets. We have developed a comprehensive suite of standardized data extracts and reports and created automated interfaces that allow our clients to access the full range of custody and fund accounting data. We have also developed interfaces that allow our clients to connect electronically with our host systems and access data collected from clearance and settlement transactions in multiple currencies. Through these information-sharing tools, we are better equipped to supplement our custody and accounting services with foreign exchange services, and asset and transaction reporting and monitoring services. Electronic linkages also position us to respond quickly to client requests.

        We use the Internet as a means to communicate with clients and external parties. 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.clients. 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 and 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, access to which we could not otherwise afford, 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 alla significant amount 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.

        Each year we spend approximately 18-20% of revenue on technology. Because of our relationship with EDS and our system architecture, we are able to focus the majority of our technology spend on development, rather than support or infrastructure.

        Our trust processing services are provided by SEI Investments Company, located in Oaks, Pennsylvania. SEI is a global provider of asset management and investment technology solutions. We pay certain monthly service fees based upon usage. Our current agreement with SEI is schedulescheduled to expire on December 31, 2005.

        We maintainInvestors Bank maintains a comprehensive disasterBusiness Continuity Plan ("BCP"). The program has been developed to comply with guidelines issued by various regulatory and industry bodies such as the Federal Financial Institutions Examination Council ("FFIEC"). The planning process begins with a business impact analysis which isolates critical business processes and determines their recoverability under various disruption scenarios. In addition to maintaining regional backup facilities for all offices, Bank locations are geographically diverse in order to allow recovery plan. The plan identifies teamsof essential functions to manage disaster situationsanother location in the event of a wide spread disruption. In 2003, BCP staff conducted over 80 different tests to ensure technology infrastructure, facilities, and re-establishstaff could respond and recover in a functioning operational environment. The plan provides for us to be able to relocate employees and resume operations quickly, if necessary.disaster.

        The securities industry is moving to a straight-through-processing environment where all trades will flow directly from a client's trading platform to our own system to produce a net asset value calculation. We have begun makingmade substantial progress in completing the systems infrastructure and functional modifications required to provide straight-through-processing capabilities. We believe that we can accomplish the transition to a full straight-through-processing environment without adversely affecting our financial results, operations or the services we provide to our clients.

9

Competition

        We operate in a highly competitive environment in all areas of our business. Many of our competitors, including State Street Bank and Trust Company, JP Morgan Chase, and The Bank of New York, Citigroup, Mellon, and PNC, possess substantially greater financial and marketing resources than we do and process a greater amount of financial assets. 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. Accordingly, the Gramm-Leach-Bliley Act may significantly change the competitive environment in which we conduct business. Other competitive factors include technological advancement and flexibility, breadth of services provided and quality of service. We believe that we compete favorably in these categories.

        Competition in the asset servicing industry, especially over the past decade, has compressedimpacted both pricing and margins ofin core services like global custody services and trustee services. Partially offsetting this trendmore competitive pricing environment is the development of new services that have higher margins. Our continuous investment in technology has permitted us to offer value-added services to clients, such as middle-officemiddle office outsourcing, performance measurement, securities lending and foreign exchange, all on a global basis and at competitive prices. Technological evolution and service innovation have enabled us to generate additional revenue to offset price pressurecompetitive pricing in maturing service lines.

        We believe that our size, commitment to technology development and enhancement, and responsiveness to client needs provide the asset management industry with a very attractive asset servicing alternative to superregional andlarge money center banks and other asset servicers. As our competitors grow even larger through acquisition, we believe that our customized and highly responsive service offerings become even more attractive. While consolidation within the industry may adversely affect our ability to retain clients that have been acquired, it also creates opportunity for us as prospective clients review their relationships with existing service providers. 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.

Employees

        On December 31, 2002,2003, we had 2,5912,413 employees. We maintain a professional development program for entry level staff. Successful completion of the program is required of most newly hired employees. This training program is supplemented by ongoing education on systems and technological developments and innovations, the industry and our client base.

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

10

Regulation and Supervision

        In addition to the generally applicable state and federal laws governing businesses and employers, we are further regulated by federal and state laws and regulations applicable to financial institutions and their parent companies. Furthermore, the operations of our securities broker affiliate, Investors Securities Services, Inc., are subject to federal and state securities laws, as well as the rules of both the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. ("NASD"). Virtually all aspects of our operations are subject to specific requirements or restrictions and general regulatory oversight. State and federal banking laws have as their principal objective the maintenance of the safety and soundness of financial institutions and the federal deposit insurance system, the protection of consumers or classes of consumers or the furtherance of broad public policy goals, rather than the specific protection of stockholders of a bank or its parent company.

        Several of the more significant statutory and regulatory provisions applicable to banks and bank holding companies ("BHC") to which Investors Financial and its subsidiaries are subject are described more fully below, together with certain statutory and regulatory matters concerning Investors Financial and its subsidiaries. The description of these statutory and regulatory provisions does not purport to be complete and is qualified in its entirety by reference to the particular statutory or regulatory provision. Any change in applicable law or regulation may have a material effect on Investors Financial's business, prospects and operations, as well as those of its subsidiaries.

Investors Financial

        General.    As a registered BHC, Investors Financial is subject to regulation under the Bank Holding Company Act of 1956, as amended ("BHCA"), and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System ("FRB") and by the Massachusetts Commissioner of Banks ("Commissioner.") We are required to file a report of our operations with, and are subject to examination by, the FRB and the Commissioner. The FRB has the authority to issue orders to BHCs to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the FRB. The FRB is also empowered to assess civil money penalties against companies or individuals who violate the BHCA or orders or regulations thereunder, to order termination of non-bankingnonbanking activities of non-bankingnonbanking subsidiaries of BHCs and to order termination of ownership and control of a non-bankingnonbanking subsidiary by a BHC.

        BHCA—ActivitiesBHCA-Activities and Other Limitations.    The BHCA prohibits a BHC from acquiring substantially all the assets of a bank or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, BHC or savings association, or increasing such ownership or control of any bank, BHC or savings association, or merging or consolidating with any BHC without prior approval of the FRB. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally authorizes adequately capitalized and managed BHCs, as determined by the FRB, to acquire banks located in any state, possibly subject to certain state-imposed age and deposit concentration limits, and also generally authorizes interstate mergers and to a lesser extent, interstate branching. In addition, as discussed more fully below, Massachusetts law imposes certain approval requirements with respect to acquisitions by a BHC of certain banking institutions and to mergers of BHCs.

        Unless a BHC becomes a financial holding company ("FHC") under the Gramm-Leach-Bliley Act of 1999 ("GLBA") (as discussed below), the BHCA also prohibits a BHC from acquiring a direct or indirect interest in or control of more than 5% of the voting sharessecurities of any company that is not a bank or a BHC and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except that it may engage in and may own shares of companies engaged in certain activities the FRB determined to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. In makingBefore permitting a BHC to make such determinations,an investment, the FRB is required to weigh the expected benefit to

the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests or unsound banking practices. In addition, as discussed more fully below, Massachusetts law imposes certain

11

approval requirements with respect to acquisitions by a BHC of certain banking institutions and to mergers of BHCs.

        The GLBA established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit BHCs that qualify and elect to be treated as FHCs to engage in a range of financial activities broader than would be permissible for traditional BHCs, such as Investors Financial, that have not elected to be treated as FHCs. "Financial activities" is broadly defined to include not only banking, insurance and securities activities, but also merchant banking and additional activities that the FRB, in consultation with the Secretary of the Treasury, determines to be financial in nature or incidental to such financial activities, or that the FRB determines to be complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In sum, the GLBA permits a BHC that qualifies and elects to be treated as a FHC to engage in a significantly broader range of financial activities than BHCs, such as Investors Financial, that have not elected FHC status.

        In order to elect to become a FHC and thus engage in a broader range of financial activities, a BHC, such as Investors Financial, must meet certain tests and file an election form with the FRB. To qualify, all of a BHC's subsidiary banks must be well-capitalized (as discussed below under "Investors Bank") and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities, each of the BHC's banks must have been rated "satisfactory" or better in its most recent federal Community Reinvestment Act ("CRA") evaluation.

        A BHC that elects to be treated as a FHC may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the FRB which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. At this time, Investors Financial has not elected, and has not otherwise determined whether it will elect, to become a FHC.

        Capital Requirements.    The FRB has adopted capital adequacy guidelines, which it uses in assessing the adequacy of capital in examining and supervising a BHC and in analyzing applications upon which it acts. The FRB's capital adequacy guidelines generally require BHCs to maintain total capital equal to 8% of total risk-adjusted assets and off-balance sheet items (the "Total Risk-Based Capital Ratio"), with at least 50% of that amount consisting of Tier 1 or core capital and the remaining amount consisting of Tier 2 or supplementary capital. Tier 1 capital for BHCs generally consists of the sum of common stockholders' equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier 1 capital), less goodwill and other non-qualifyingnonqualifying intangible assets. Tier 2 capital generally consists of hybrid capital instruments, perpetual debt and mandatory convertible debt securities; perpetual preferred stock, which is not eligible to be included as Tier 1 capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan and lease losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics.

        In addition to the risk-based capital requirements, the FRB requires BHCs to maintain a minimum leverage capital ratio of Tier 1 capital (defined by reference to the risk-based capital guidelines) to its average total consolidated assets (the "Leverage Ratio") of 3.0%. Total average consolidated assets for this purpose does not include, for example, goodwill and any other intangible assets and investments that the FRB determines should be deducted from Tier 1 capital. The FRB has announced that the 3.0% Leverage Ratio requirement is the minimum for the top-rated BHCs without any supervisory, financial or operational weaknesses or deficiencies or those, which are not experiencing or anticipating

significant growth. All other BHCs are required to maintain a minimum Leverage Ratio of 4.0%. BHCs

12

with supervisory, financial, operational or managerial weaknesses, as well as BHCs that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels. Because we anticipate significant future growth, we will be required to maintain a Leverage Ratio of 4.0% or higher.

        We currently are in compliance with both the Total Risk-Based Capital Ratio and the Leverage Ratio requirements, and our management expects these ratios to remain in compliance with the FRB's capital adequacy guidelines. (Separate, but substantially similar, capital adequacy guidelines under Federal Deposit Insurance Corporation ("FDIC") regulations apply to the Bank, as discussed more fully below.) At December 31, 2002,2003, our Total Risk-Based Capital Ratio and Leverage Ratio were respectively, 15.51%17.62% and 5.50%.5.36%, respectively.

        U.S. bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision ("Basel Committee"), currently are considering changes to the risk-based capital adequacy framework, which ultimately could affect the appropriate capital guidelines, including changes (such as those relating to lending to registered broker-dealers) that are of particular relevance to banks, such as the Bank, that engage in significant securities activities. Among other things, the Basel Committee rules, which are expected to be proposed formally for public comment in the next 6 months and are expected to become effective around 2006, would add operational risk as a third component to the denominator of the risk-capital calculation, which currently includes onlyin addition to credit and market risks. We are monitoring the status and progress of the Basel Committee rules and the related impact, if any, on our operations and are preparing for their implementation.

        Limitations on Acquisitions of Common Stock.    The federal Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a BHCdepository institution or a depository institution holding company unless the FRB has been given at least 60 days to review, public notice has been provided, and the FRB does not object to the proposal. Under a rebuttable presumption established by the FRB, the acquisition of 10% or more of a class of voting securities of a BHC,depository institution or depository institution holding company, such as us, with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), would, under the circumstances set forth in the presumption, constitute the acquisition of control of the BHC.depository institution or a depository institution holding company. In addition, any company, as that term is broadly defined in the statute, would be required to obtain the approval of the FRB under the BHCA before acquiring 25% (5% in the case of an acquirer that is a BHC) or more of any class of voting securities of a bank or BHC or a savings association, or otherwise obtaining control or a controlling influence over that BHC.such an institution.

        Massachusetts Law.    Investors Financial is also considered a BHC for purposes of Massachusetts law due to the manner in which it acquired the Bank. Accordingly, we have registered with the Commissioner and are obligated to make reports to the Commissioner. Further, as a Massachusetts BHC, Investors Financial may not acquire all or substantially all of the assets of a banking institution, merge or consolidate with any other BHC or acquire direct or indirect ownership or control of any voting stock in any other banking institution if it will own or control more than 5% thereof without the prior consent of the Massachusetts Board of Bank Incorporation. As a general matter, however, the Commissioner does not rule upon or regulate the activities in which a BHC or theirits nonbank subsidiaries engage.

        Cash Dividends.    FRB policy provides that a bank or a BHC generally should not maintain its existing rate of cash dividends on common stock unless the organization's net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality and overall financial condition. FRB policy further provides that a BHC should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of bank

subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the BHC's ability to serve as a source of strength.

13

        Source of Strength.    FRB policy requires BHCs to serve as sources of financial and managerial strength to their subsidiary banks and, in connection therewith, to stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and to maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks in a manner consistent with FRB policy. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act ("FDIA"), the FDIC can hold any FDIC- insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the "default" of a commonly controlled FDIC-insured depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution "in danger of default." Accordingly, Investors Financial is expected to commit resources to the Bank in circumstances where it might not do so absent such policy.

        Disclosure Controls and Procedures.    The Sarbanes-Oxley Act of 2002, ("Sarbanes-Oxley") implements a broad range of corporate governance and related rulemaking by the Securities and Exchange Commission ("SEC"), which effect sweeping corporate disclosure and financial reporting reform, generally requireaccounting measures for public companies to focus on their disclosure controls and procedures. As a result thereof, public(including publicly-held bank holding companies such as Investors Financial, now mustthe Company) designed to promote honesty and transparency in corporate America. Sarbanes-Oxley's principal provisions, many of which have disclosure controlsbeen interpreted through regulations released in 2003, provide for and procedures in placeinclude, among other things:

•

The creation of an independent accounting oversight board;



•

Auditor independence provisions which restrict nonaudit services that accountants may provide to their audit clients;



•

Additional corporate governance and make certain disclosures about them in their periodic SEC filings (i.e., Forms 10-K and 10-Q) and theirresponsibility measures, including the requirement that the chief executive officersofficer and chief financial officers mustofficer of a public company certify in these filings that they are responsible for developingfinancial statements;



•

The forfeiture of bonuses or other incentive-based compensation and evaluating disclosure controls and procedures and discloseprofits from the resultssale of an evaluation conductedissuer's securities by them withindirectors and senior officers in the 90-daytwelve-month period precedingfollowing initial publication of any financial statements that later require restatement;



•

An increase in the filingoversight of, and enhancement of certain requirements relating to, audit committees of public companies and how they interact with the Company's independent auditors;



•

Requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer;



•

Requirements that companies disclose whether at least one member of the relevant form, amongaudit committee is a "financial expert" (as such term is defined by the SEC) and if not, why not;



•

Expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods;



•

A prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions, such as the Bank, on nonpreferential terms and in compliance with other things.bank regulatory requirements;



•

Disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; and



•

A range of enhanced penalties for fraud and other violations.

        We are monitoring the status of other related ongoing rulemaking by the SEC and other regulatory entities. Currently, management believes that we are in compliance with the rulemaking promulgated to date.

Investors Bank

        General.    The Bank is subject to extensive regulation and examination by the Commissioner and the FDIC, which insures the Bank's deposits to the maximum extent permitted by law, and to certain requirements established by the FRB. The federal and state laws and regulations which are applicable to banks regulate among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of certain deposited funds and the nature and amount of and collateral for certain loans.

        FDIC Insurance Premiums.    The Bank pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Bank Insurance Fund-member institutions. The FDIC has established a risk-based premium system under which the FDIC classifies institutions based on their capital ratios and on other relevant information and generally assesses higher rates on those institutions that tend to pose greater risks to the federal deposit insurance funds. FDIA does not require the FDIC to charge all banks deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels. However, as a result of general economic conditions and recent bank failures, it is possible that the ratio of deposit insurance reserves to insured deposits could fall below the minimum ratio that FDIA requires, which would result in the FDIC setting deposit insurance assessment rates sufficient to increase deposit insurance reserves to the required ratio. We cannot predict whether the FDIC will be required to increase deposit insurance assessments above their current levels.

        Capital Requirements.    The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered banks, which, like the Bank, are not members of the Federal Reserve System. These requirements are substantially similar to those adopted by the FRB regarding BHCs, as described above.

        Moreover, the federal banking agencies have promulgated substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the Federal Deposit Insurance Act, as amended ("FDIA").FDIA. Under the regulations, a bank generally shall be deemed to be:

•*

"well capitalized" if it has a total risk-based capital ratio of 10.0% or greater, has a Tier 1 risk-based capital ratio of 6.0% or greater, has a leverage ratio of 5.0% or greater and is not subject to any written agreement, order, capital directive or prompt corrective action directive;



•*

"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, a leverage ratio of 4.0% or greater (3.0% under certain circumstances) and does not meet the definition of a "well capitalized" bank;

14

•*

"undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0% under certain circumstances),;



•*

"significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a leverage ratio that is less than 3.0%,; and



•*

"critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.

        An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate FDIC regional director within 45 days of the date that the institution

receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. An institution, which is required to submit a capital restoration plan, must concurrently submit a performance guaranty by each company that controls the institution. A critically undercapitalized institution generally is to be placed in conservatorship or receivership within 90 days unless the FDIC formally determines that forbearance from such action would better protect the deposit insurance fund.

        Immediately upon becoming undercapitalized, an institution becomes subject to the provisions of Section 38 of the FDIA, including for example, (i) restricting payment of capital distributions and management fees, (ii) requiring that the FDIC monitor the condition of the institution and its efforts to restore its capital, (iii) requiring submission of a capital restoration plan, (iv) restricting the growth of the institution's assets and (v) requiring prior approval of certain expansion proposals.

        At December 31, 2002,2003, the Bank was deemed to be a well capitalizedwell-capitalized institution for the above purposes. Bank regulators may raise capital requirements applicable to banking organizations beyond current levels. We are unable to predict whether higher capital requirements will be imposed and, if so, at what levels and on what schedules. Therefore, we cannot predict what effect such higher requirements may have on us. As is discussed above, the Bank would be required to remain a well-capitalized institution at all times if we elected to be treated as ana FHC.

        Brokered Deposits.    Section 29 of the FDIA and FDIC regulations generally limit the ability of an insured depository institution to accept, renew or roll over any brokered deposit depending on the institution's capital category. These restrictions have not had a material impact on the Bank's operations because the Bank historically has not relied upon brokered deposits as a source of funding. At December 31, 2002,2003, the Bank did not have any brokered deposits.

        Transactions with Affiliates.    Sections 23A and 23B of the Federal Reserve Act, which apply to the Bank, are designed primarily to protect against a depository institution suffering losses in certain transactions with affiliates, which includes Investors Financial and other subsidiaries of Investors Financial. For example, the Bank is subject to certain restrictions on loans to us, on investment in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower and on the issuance of a guarantee or letter of credit on our behalf. The Bank also is subject to certain restrictions on most types of transactions with us, requiring that the terms of such transactions be substantially equivalent to terms to similar transactions with non-affiliates.nonaffiliates. The FRB recently adopted a final rule, which will becomebecame effective April 1, 2003, to implement comprehensively Sections 23A and 23B of the Federal Reserve Act. This new rule, among other things, specifies that derivative transactions are subject to Section 23B (including use of daily marks and two way collateralization) but generally not to Section 23A, except derivatives in which the bank provides credit protection to a nonbank affiliate on behalf of an affiliate will be treated as a guarantee for purposes of Section 23A, and requires banks to establish policies and procedures (which the Bank has established)

15

to monitor credit exposure to affiliates. The FRB intendsrule treats derivatives in which a bank provides credit protection to propose in the near future regulationsa nonaffiliate with respect to treat derivatives that are the functional equivalentan obligation of a loan to an affiliate as a guarantee of an obligation of an affiliate subject to Section 23A.regulation under the rule.

        Activities and Investments of Insured State-Chartered Banks.    Section 24 of the FDIA generally limits the activities as principal and equity investments of FDIC-insured, state-chartered banks, such as the Bank, to those that are permissible for national banks. In 1999, the FDIC substantially revised its regulations implementing Section 24 of the FDIA to ease the ability of FDIC-insured, state-chartered banks to engage in certain activities not permissible for national banks, and to expedite FDIC review of bank applications and notice to engage in such activities.

        Further, the GLBA permits national banks and state banks, to the extent permitted under state law, to establish a financial subsidiary to engage in certain new activities which are permissible for

subsidiaries of an FHC. Further, it expressly preserves the ability of national banks and state banks to retain all existing subsidiaries. In order to form a financial subsidiary, a national bank or state bank and each of its depository institution affiliates must be well-capitalized and suchwell-managed. Such banks would bethat establish a financial subsidiary will become subject to certain capital deduction, risk management and affiliate transaction rules, among other things.requirements. Also, the FDIC's final rules governing the establishment of financial subsidiaries adopt the position that activities that a national bank could only engage in through a financial subsidiary, such as securities underwriting, only may be conducted in a financial subsidiary by a state nonmember bank. However, activities that a national bank could not engage in through a financial subsidiary, such as real estate development or investment, continue to be governed by the FDIC's standard activities rules. Moreover, to mirror the FRB's actions with respect to state member banks, the final rules provide that a state bank subsidiary that engages only in activities that the bank could engage in directly (regardless of the nature of the activities) will not be deemed to be a financial subsidiary.

        CRA.    The CRA requires the FDIC to assess an institution's record of helping to meet the credit needs of the local communities in which the institution is chartered, consistent with the institution's safe and sound operation, and to take this record into account when evaluating certain applications.

        Massachusetts has also enacted a similar statute that requires the Commissioner to evaluate the Bank's performance in helping to meet the credit needs of its entire community and to take that record into account in considering certain applications. For purposes of the CRA, the Bank has been designated as a "wholesale institution" by the Commissioner and as a "special purpose" institution by the FDIC. The wholesale institution designation reflects the nature of our business as other than a retail financial institution and prescribes CRA review criteria applicable to the Bank's particular type of business. As a part of the CRA program, the Bank is subject to periodic CRA examinations by the Commissioner (but not the FDIC because special purpose institutions are exempt from such FDIC review) and maintains comprehensive records of its CRA activities for this purpose. Management believes the Bank is currently in compliance with all CRA requirements.

        Customer Information Security.    The FDIC and other bank regulatory agencies have adopted final guidelines for establishing standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the "Guidelines"). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information; and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

        Privacy.    The FDIC and other regulatory agencies have published final privacy rules pursuant to provisions of the GLBA ("Privacy Rules"). The Privacy Rules, which govern the treatment of nonpublic personal information about consumers by financial institutions, require a financial institution to provide notice to customers (and other consumers in some circumstances) about its privacy policies and

16

practices, describe the conditions under which a financial institution may disclose nonpublic personal information to nonaffiliated third parties and provide a method for consumers to prevent a financial institution from disclosing that information to most nonaffiliated third parties by "opting-out" of that disclosure, subject to certain exceptions.

        USA Patriot Act.    The USA Patriot Act of 2001 (the "USA Patriot Act"), designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system, has significant implications for depository institutions, broker-dealers and other businesses involved in the transfer of money. The USA Patriot Act, together with the implementing regulations of various federal regulatory agencies, require financial institutions, including the Bank, to implement additional or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance,

suspicious activity and currency transaction reporting and due diligence on customers. They also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB (and other federal banking agencies) to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHCA or the Bank Merger Act. Management believes that we are currently in compliance with all currently effective requirements prescribed by the USA Patriot Act and all applicable final implementing regulations.

        Massachusetts Law—Dividends.Law-Dividends.    Under Massachusetts law, the board of directors of a trust company, such as the Bank, may declare from "net profits" cash dividends no more often than quarterly, provided that there is no impairment to the trust company's capital stock. Moreover, prior Commissioner approval is required if the total of all dividends declared by a trust company in any calendar year would exceed the total of its net profits for that year combined with its retained net profits for the previous two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. These restrictions on the Bank's ability to declare and to pay dividends may restrictlimit Investors Financial's ability to pay dividends to its stockholders. We cannot predict future dividend payments of the Bank at this time.

        Regulatory Enforcement Authority.    The enforcement powers available to federal and state banking regulators include, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Under certain circumstances federal and state law require disclosure and reports of certain criminal offenses and also final enforcement actions by the federal banking agencies.

        Transfer Agency.    In order to serve as transfer agent to our clients that execute transactions in publicly-traded securities, we must register with the SEC as a transfer agent under the Exchange Act. As a registered transfer agent, we are subject to certain reporting and record keepingrecordkeeping requirements. Currently, management believes that we are in compliance with these registration, reporting and record keepingrecordkeeping requirements.

        Regulation of Investment Companies.    Certain of our mutual fund and unit investment trust clients are regulated as "investment companies" as that term is defined under the Investment Company Act of 1940, as amended (the "ICA"), and are subject to examination and reporting requirements applicable to the services we provide.

        The provisions of the ICA and the regulations promulgated thereunder prescribe the type of institution which may act as a custodian of investment company assets, as well as the manner in which a custodian administers the assets in its custody. Because we serve as custodian for a number of our

17

investment company clients, these regulations require, among other things, that we maintain certain minimum aggregate capital, surplus, and undivided profits. Additionally, arrangements between us and clearing agencies or other securities depositories must meet ICA requirements for segregation of assets, identification of assets and client approval. Future legislative and regulatory changes in the existing laws and regulations governing custody of investment company assets, particularly with respect to custodian qualifications, may have a material and adverse impact on us. Currently, management believes we are in compliance with all minimum capital and securities depository requirements. Further, we are not aware of any proposed or pending regulatory developments, which, if approved, would adversely affect the ability of us to act as custodian to an investment company.

        Investment companies are also subject to extensive record keepingrecordkeeping and reporting requirements. These requirements dictate the type, volume and duration of the record keepingrecordkeeping we undertake, either in our role as custodian for an investment company or as a provider of administrative services to an investment company. Further, we must follow specific ICA guidelines when calculating the net asset value of a client mutual fund. Consequently, changes in the statutes or regulations governing record keepingrecordkeeping and reporting or valuation calculations will affect the manner in which we conduct our operations.

        New legislation or regulatory requirements could have a significant impact on the information reporting requirements applicable to our clients and may in the short term adversely affect our ability to service those clients at a reasonable cost. Any failure by us to provide such support could cause the loss of customers and have a material adverse effect on our financial results. Additionally, legislation or regulations may be proposed or enacted to regulate us in a manner which may adversely affect our financial results.

        Other Securities Laws Issues.    The GLBA amended the federal securities laws to eliminate the blanket exceptions that banks traditionally have had from the definition of "broker" and "dealer" for a "bank." In February 2003, the SEC extended the temporary exemption from the definition of "dealer" for banks until September 30, 2003 and, in May 2002,April 2003, it extended the temporary exemption from the definition of "broker" until MayNovember 12, 2003.2004. In February 2003, the SEC also issued final rules that, among other things, adopt amendments to its rule granting an exemption to banks from dealer registration forde minimis riskless principal transactions, and to its rule that defines terms used in the bank exception to dealer registration for asset-backed transactions and it adopted a new exemption for banks from the definition of broker and dealer under the Exchange Act for certain securities lending transactions. Banks not falling within the specific exemptions provided by the new law may have to register with the SEC as a broker or a dealer or both and become subject to SEC jurisdiction. We do not expect these new rules to have a material effect on us, as we recently formed a registered broker and dealerbroker-dealer subsidiary.

        The GLBA also amended the federal securities laws to eliminate the blanket exceptions that banks traditionally have had from the definition of "investment adviser." With respect to investment adviser registration, the GLBA requires a bank that acts as investment adviser to a registered investment company to register as an investment adviser or to conduct such advisory activities through a separately identifiable department or division of the bank so registered. Accordingly, the Bank furnishes investment advice to registered investment companies through a separately identifiable department or division of the Bank that is registered with the SEC as an investment adviser. Federal and state laws impose onerous obligations on registered investment advisers, including fiduciary duties, recordkeeping requirements and disclosure obligations. Currently, management believes that we are in compliance with these requirements.

        Future Legislation.    Changes to the laws and regulations in the states and countries where Investors Financial and its subsidiaries transact business can affect the operating environment of BHCs and their subsidiaries in substantial and unpredictable ways. We cannot accurately predict whether those changes in laws and regulations will occur, and, if they do occur, the ultimate effect they would have upon our financial condition or results of operation.

18

Selected Statistical Information

Deposits

        The following table represents the average balance and weighted-average yield earned on deposits (Dollars in thousands):

Short-Term and Other Borrowings

        The following tables reflect the amounts outstanding and weighted average interest rates of the primary components of short-term and other borrowings as of and for the years ended December 31, 2002, 2001 and 2000 (Dollars in thousands):

        For the year ended December 31, 2002, maturities on Federal Home Loan Bank of Boston ("FHLBB") advances ranged from overnight to September 2006. For the year ended December 31, 2001, maturities on FHLBB advances ranged from overnight to February 2005. During the year ended December 31, 2000, maturities on FHLBB advances ranged from overnight to August 2000.

19

Availability of Filings

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

1)

Our Annual Reports on Form 10-K;



2)

Our Quarterly Reports on Form 10-Q; and

3)

Our Current Reports on Form 8-K.8-K; and



4)

Our Proxy Statement.

        You may also access, free of charge, copies of the following corporate governance documents in the Investor Relations section of our web site at www.ibtco.com.

1)

Our Code of Conduct;



2)

Our Corporate Governance Guidelines;



3)

Our Audit Committee Charter;



4)

Our Nominating and Corporate Governance Committee Charter; and



5)

Our Compensation Committee Charter.

        We post these documents on our web site as soon as reasonably practicable after we file or furnish them electronically with or to the Securities and Exchange Commission.Commission or, in the case of the corporate governance documents, as soon as reasonably practical after material amendment. The information contained on our web site is not incorporated by reference into this document and should not be considered a part of this Annual Report. Our web site address is included in this document as an inactive textual reference only.

20

ITEM 2.    PROPERTIES.

        The following table provides certain summary information with respect to the principal properties that we leased as of December 31, 2002:

*

Pursuant to the terms of the contract, this lease can be terminated without penalty in 2013.

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

ITEM 3.    LEGAL PROCEEDINGS.

        On January 31, 2003, we were named in a class action lawsuit alleging, among other things, violations of California wage and hour laws at our Sacramento and Walnut Creek facilities. The lawsuit was filed in the Superior Court of California, County of Sacramento. While we are in the early stages of investigating this complaint, we believe that we have complied at all times with applicable law and we intend to defend this lawsuit vigorously. We do not yet know the amount of damages that the plaintiffs are seeking to recover. However, the defense of class action lawsuits can be costly and time consuming, and can divert the attention of management. A determination that we violated applicable wage and hour laws could have a material adverse effect on our business, financial condition and results of operations.

        In 2002, the Bank received from the Commonwealth of Massachusetts Department of Revenue ("DOR") an assessment for additional state excise taxes of approximately $10.9 million plus interest and penalties with respect to the Bank's tax years ended December 31, 1999, December 31, 2000 and December 31, 2001.

        The DOR contends that dividend distributions to the Bank by Investors Funding Corp. ("IFC"), a real estate investment trust 99.9% owned by the Bank, are fully taxable in Massachusetts. We believe, after consultation with our advisors, that the Massachusetts statute that provides for a dividend received deduction equal to 95% of certain dividend distributions applies to the distributions made by IFC to the Bank. Accordingly, no provision has been made in our financial statements for the amounts assessed or additional amounts that might be assessed in the future.

        We have been informed that the DOR has sent similar assessments to numerous other financial institutions in Massachusetts that reported a deduction for dividends received from a real estate investment trust on their 1999, 2000 and 2001 Massachusetts financial institution excise tax returns. Because the legal issues raised are identical for all of the financial institutions involved, we are acting together with those institutions to appeal the assessments and to pursue all available means to defend

21

ITEM 6. SELECTED FINANCIAL DATA.

        The following table contains certain of our consolidated financial and statistical information, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our Consolidated Financial Statements and Notes to Consolidated Financial Statements, and other financial information appearing elsewhere in this Annual Report. (Dollars in thousands, except per share and employee data).

(1)

Effective July 1, 2003, the Company adopted provisions of SFAS 150, which resulted in a reclassification of the trust preferred securities from mezzanine financing to liabilities. As such, interest expense associated with the trust preferred securities was reclassified to net interest income.

(2)

All numbers shown in this table have been restated to reflect reclassifications related to Emerging Issues Task ForceEITF No. 01-14, "Income Statement Characterization of Reimbursements Received for Out-Of-Pocket Expenses Incurred." Refer to "Significant Accounting Policies" included in Management's Discussion and Analysis of Financial Condition and Results of Operations for further information.01-14.

(2)(3)

All numbers shown in this table have been restated to reflect the two-for-one stock splits paid March 17, 1999, June 15, 2000 and June 14, 2002, where applicable.

(3)(4)

Effective October 1, 2003, the Company adopted the provisions of FIN 46 (revised December 2003), which resulted in the deconsolidation of Investors Capital Trust I, the trust that holds the trust preferred securities.

(5)

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 $0.06$0.07 per share subject to regulatory requirements. Refer to "Market Risk: Liquidity" included in Management's Discussion and Analysis of Financial Condition and Results of Operations for further information.

(4)(6)

Refer to "Capital Resources" included within Management's Discussion and Analysis of Financial Condition and Results of Operations for further information.

(5)(7)

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, institutional transfer agency, investment advisory services, lines of credit, middle office outsourcing and brokerage and transition management services.

24

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

Overview

        You should read the following discussion together with our Consolidated Financial Statements and related Notes to Consolidated Financial Statements, which are included elsewhere in this Annual Report. The following discussion contains forward-looking statements that reflect plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

Recent Developments

        On October 21, 2004, our Audit Committee, in consultation with management, determined to amend its Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and the subsequent Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004 to restate the financial statements (the "relevant financial statements") and related information contained therein. Our restatement arises from the application of Statement of Financial Accounting Standards No. 91,Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases ("FAS 91").

        The principal application of FAS 91 to our financial statements is in determining the accounting treatment of premiums paid and discounts realized on our purchase of securities backed by mortgages and other loans. Historically, we had applied the prospective method to determine the amortization of premiums and the accretion of discounts for the securities in our investment portfolio. Our management and Audit Committee have determined that the retrospective method is the appropriate method under FAS 91 to determine the amortization of premiums and the accretion of discounts for certain of our securities.

        This application of FAS 91 results in the following changes in reported income before income taxes for the periods presented in this Report:

•

an increase in income before income taxes of approximately $1.0 million for the year ended December 31, 2003;



•

a decrease in income before income taxes of approximately $2.3 million for the year ended December 31, 2002; and



•

a decrease in income before income taxes of approximately $8.5 million for the year ended December 31, 2001.

        This application of FAS 91 also results in changes to other comprehensive income, net of tax, as well as other changes in our disclosures regarding our portfolio, including net interest margin during the periods listed above.

Overview

        We provide a broad range ofasset administration services for the financial services industry through our wholly-owned subsidiary, Investors Bank & Trust Company. We provide core services and value-added services to a variety of financial asset managers. Thesemanagers, including mutual fund complexes, investment advisors, family offices, banks and insurance companies. Core services include our core services, global custody, multicurrency accounting and mutual fund administration, as well as our value-addedadministration. Value-added services such asinclude securities lending, foreign exchange, cash management, performance measurement, institutional transfer agency, investment advisory services, lines of credit, middle office outsourcing and brokerage and transition management services. We have offices located in the United States, Ireland, Canada, and the Cayman Islands with a vast subcustodian global network established to accommodate the international needs of our clients. At December 31, 2002,2003, we provided services for approximately $785 billion$1.1 trillion in net assets, including approximately $86$177 billion ofin foreign net assets.

        On October 1, 1998,We grow our business by selling our services to new clients and by further penetrating our existing clients. We believe that we acquired the domestic institutional trust and custody business of BankBoston, N.A. Under the termsservice less than 10% of the purchase agreement,assets managed by our existing clients, and we paid approximately $48 millionhave traditionally achieved significant success in growing client relationships. Our ability to BankBoston asservice new clients and expand our relationships with existing clients depends on our provision of superior client service. Our growth is also affected by overall market conditions, the closingregulatory environment for us 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 agreementour clients and the 1784 Funds custody agreement, we received a totalsuccess of $11.4 million in termination fees.our clients marketing their products.

        We have not experienced a material impactderive our asset servicing revenue from providing these core and value-added services. We derive our net interest income by investing the cash balances our clients leave on net income due to the terminationdeposit with us. Our share 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 madeearnings from these investments is viewed as part of the integration process undertaken in connection with the merger of BankBoston with Fleet Bank, N.A.

        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 Report have been restated to reflect the two-for-one stock split paid March 17, 1999, where applicable.

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

        On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and the corresponding amendments and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." On adoption of these new accounting standards, we recorded a transition adjustment recognizing an after tax reduction in Other Comprehensive Income ("OCI") of $3.9 million. In conjunction with the adoption, we elected to reclassify approximately $402 million of securities from held to maturity to available for sale, which further reduced OCI, net of tax, by approximately $1.4 million.

        On February 1, 2001, we completed the issuance and sale of 1,624,145 shares of Common Stock at $71.62 per share in a public offering. A portion of the proceeds was used to fund the acquisition of the

25

advisor custody unit of The Chase Manhattan Bank. The remaining proceeds were used for the assumption of the U.S. asset administration unit of Barclays Global Investors, N.A. and for working capital.

        On February 1, 2001, we purchased the operations of the advisor custody unit of The Chase Manhattan Bank ("Chase"). This unit provided institutional custody services to individual accounts holding approximately $27 billion in assets as of February 1, 2001. 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 paid to Chase at the closing of the transaction approximately $31.5 million of the total purchase price, plus another $39.8 million in exchange for the book value of loans to its clients. Under the terms of the asset purchase agreement, we are not obligated to make any further purchase price payments to Chase. The transaction was accounted for as a purchase.

        On May 1, 2001, we assumed the operations of the U.S. asset administration unit of Barclays Global Investors, N.A. ("BGI"), a large international institutional investment manager. The unit, located in Sacramento, California, provides custody, fund accounting and other operations functions for BGI's clients. The transaction was accounted for as a purchase.

        The events of September 11, 2001 did not have a material effect on our financial condition or results of operations.

        On April 23, 2002, the Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend payable to stockholders of record as of May 24, 2002. The dividend was paid on June 14, 2002.

        On January 31, 2003, we were named in a class action lawsuit alleging, among other things, violations of California wage and hour laws at our Sacramento and Walnut Creek facilities. The lawsuit was filed in the Superior Court of California, County of Sacramento. While we are in the early stages of investigating this complaint, we believecompensation that we have complied at all times with applicable law and we intend to defend this lawsuit vigorously. We do not yet know the amount of damages that the plaintiffs are seeking to recover. However, the defense of class action lawsuits can be costly and time consuming, and can divert the attention of management. A determination that we violated applicable wage and hour laws could have a material adverse effect on our business, financial condition and results of operations.

        In 2002, the Bank received from the Commonwealth of Massachusetts Department of Revenue ("DOR") an assessment for additional state excise taxes of approximately $10.9 million plus interest and penalties with respect to the Bank's tax years ended December 31, 1999, December 31, 2000 and December 31, 2001.

        The DOR contends that dividend distributions to the Bank by Investors Funding Corp. ("IFC"), a real estate investment trust 99.9% owned by the Bank, are fully taxable in Massachusetts. We believe, after consultation with our advisors, that the Massachusetts statute that provides for a dividend received deduction equal to 95% of certain dividend distributions applies to the distributions made by IFC to the Bank. Accordingly, no provision has been made in our financial statements for the amounts assessed or additional amounts that might be assessed in the future.

        We have been informed that the DOR has sent similar assessments to numerous other financial institutions in Massachusetts that reported a deduction for dividends received from a real estate investment trust on their 1999, 2000 and 2001 Massachusetts financial institution excise tax returns. Because the legal issues raised are identical for all of the financial institutions involved, we are acting together with those institutions to appeal the assessments and to pursue all available means to defend our position vigorously. In addition, the Massachusetts legislature is considering retroactive legislation

26

that may affect the outcome of our dispute with the DOR. Assessed amounts ultimately paid, if any, would be deductible expenses for federal income tax purposes.

Revenue and Expense Overview

        We derive our revenue from financial asset servicing. Although interest income and noninterest income are reported separately for financial statement presentation purposes, we believe our clients view the pricing of ourpay us for servicing their assets. Our service offerings are priced on a bundled basis. In establishing a fee structure for a specific client, management analyzeswe analyze 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, weexpenses. We believe net operating revenue (net interest income plus noninterest income) and net income are the most meaningful measures of our financial results. Net

        As an asset administration services company, the amount of net operating revenue increased 21% to $438 million in 2002 from $361 million in 2001. Net income increased 37% to $68.9 million in 2002 from $50.2 million in 2001.

        Noninterest income consists primarily of fees for financial asset servicing andthat we generate is principally derived from global custody, multicurrency accounting, mutual fund administration and institutional transfer agency services for financial asset managersimpacted by overall market conditions, client activity, and the assets they control. Our clients pay fees based onprevailing interest rate environment. Over the volumecourse of the past year, we have benefited from the appreciation of the market values of assets processed, portfolio transactions, income collected and whether otherwe service for our clients. A significant portion of our core services revenue is based upon the amount of assets under administration. As market values of underlying assets fluctuate, so will our revenue. We have managed this volatility by offering a tiered pricing structure for our asset-based fees. As asset values increase, the basis point fee is reduced for the incremental assets. Many of our value-added services such as foreign exchange, securities lendingare transactional based, and we receive a fee for each transaction processed. We have also continued to experience net interest margin compression in this low interest rate environment because we have little room to reduce further the rates we pay on our interest-bearing liabilities, yet high volumes of prepayments in our investment portfolio have caused us to reinvest these cash management are needed. Asset-based fees are usually chargedflows in lower-yielding assets.

        In 2003, we settled a tax assessment with the Commonwealth of Massachusetts. In March 2003, a retroactive change in the Commonwealth of Massachusetts tax law disallowed a dividends received deduction taken by the Bank on dividends it had received since 1999 from a sliding scale and are subjectwholly-owned real estate investment trust. During the second quarter of 2003, we settled this disputed tax assessment with the Massachusetts Department of Revenue, agreeing to minimum fees.pay approximately 50% of the liability. As such, when the assets in a portfolio under custody grow as a result of changesthis change in market values or cash inflows,tax law, we recorded an additional state tax expense of approximately $7.2 million, net of federal income tax benefit, in 2003. Despite the additional tax expense, we were still able to generate a 37% growth in net income for the year ended December 31, 2003 when compared to the same period in the prior year.

        We continue to remain focused on our fees may be a smaller percentage of those assets. Conversely, as asset values fall, our revenue decreasessales efforts, prudent expense management and increasing efficiency. These goals are complicated by the marginal rate chargedneed to build infrastructure to support our rapid growth, by the need to maintain state-of-the-art systems and by the need to retain and motivate our high caliber workforce.

        In our 2003 earnings releases, we reported operating income and per share information that exclude the effect of the state tax assessment settlement previously discussed above. We believe that operating earnings provide a more meaningful presentation of the results of operations because they do not include the one-time tax charge which was unrelated to our operations. The following table presents a reconciliation between earnings presented on the face of our sliding scale pricing model. As a result, as asset values decrease, fees will decrease, but at a smaller percentage thanStatement of Income and the asset value decrease.

        If the valuenon-GAAP measure of equity assets held by our clients were to increase or decrease by 10%, we estimate currently that this, by itself, would cause a corresponding change of approximately 3%net operating income referenced in our earnings releases (Dollars in thousands, except per share. Ifshare data):

GAAP Earnings

Pro Forma Operating Earnings

(1)

Provision for income taxes for the valueyear ended December 31, 2003 excludes a $7.2 million charge, net of fixedfederal income assets held by our clients were totax benefit, that resulted from a retroactive change in the Commonwealth of Massachusetts tax law enacted in the first quarter of 2003 and the Company's subsequent settlement of the resulting tax assessment with the Massachusetts Department of Revenue. The effect of the exclusions is an increase or decrease by 10%, we estimate currently that this, by itself, would cause a corresponding change of approximately 2% in our earnings per share. In practice,basic and diluted earnings per share do not track precisely to the value of the equity or fixed income markets because conditions present in a market decline may generate offsetting increases in other revenue items. For example, market volatility often results in increased transaction fee revenue. Also, market declines may result in increased interest income and sweep fee income as clients move larger amounts of assets into cash management vehicles that we offer. As a result, our earnings have remained strong despite the recent steep declines in the broad equity markets. However, there can be no assurance that these offsetting revenue increases will continue.

        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 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. We also rely on an established network of global subcustodians in order to service our clients worldwide, which is reflected in our transaction processing service expense.

$0.11.

SignificantCritical Accounting Policies

        Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions. We have identified the following accounting policies that, as a result of the complexities of the underlying accounting standards and operations involved, could result in significant changes to our consolidated financial condition or results of operations under different conditions or using different assumptions. Certain amounts inSenior management has discussed these critical accounting policies with the prior periods' financial statements have been reclassified to conform to the current year's presentation.audit committee.

        Derivative Financial Instruments—We do not purchase derivative financial instruments for trading purposes. We use derivative instruments to manage exposures to interest rate risks. We routinely enter into interest rate swap agreements in which we pay a fixed interest rate and receive a floating interest rate. These transactions are designed to hedge a portion of our liabilities. By entering into a pay-fixed/receive-floating interest rate swap, a portion of these liabilities is effectively converted to a fixed rate liability for the term of the interest rate swap agreement. We also enter into fixed price purchase contracts that are designed to hedge the variability of the consideration to be paid for the purchase of investment securities. By entering into these contracts, we are fixing the price to be paid at a future date for certain investment securities. At December 31, 2002, we had $432.6 million of fixed price purchase contracts outstanding to purchase investment securities with an associated unrealized gain of $1.9 million. The unrealized gain is included within the other assets category on our consolidated balance sheet. See "Market Risk" and Note 15 to our consolidated financial statements filed with this Annual Report for an evaluation of the potential impact of these instruments on our operating results.

        On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted, which established accounting and reporting standards for derivative instruments. We also adopted SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the change in the fair value of the derivative and the item being hedged will be recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in OCI. Ineffective portions of changes, as determined in accordance with SFAS No. 133, in the fair value of the cash flow hedges are recognized in earnings. For derivatives that do not qualify as hedges, changes in their fair value are recognized in earnings.

Hedge accounting requires that we measure the changes in fair value of derivatives designated as hedges as compared to changes in expected cash flows of the underlying hedged transactions for each reporting period. This process involves the estimation of the expected future cash flows of hedged transactions. Interest rate swaps are valued using a nationally recognized swap valuation model. The LIBOR (London InterBank Offered Rate) curve in this model

serves as the basis for computing the market value of the swap portfolio. If interest rates increase, the swaps would gain in value. Conversely, if interest rates decrease, there would be a corresponding decline in the market value of the swaps portfolio. Changes in conditions or the occurrence of unforeseen events could affect the timing of the recognition of changes in fair value of certain hedging derivatives. The measurement of fair value is based upon market values, however, in the absence of quoted market values, measurement involves valuation estimates. These estimates are based on methodologies deemed appropriate in theunder existing circumstances. However, the use of alternative assumptions could have a significant effect on estimated fair value.

        Hedge ineffectiveness, determined in accordance with SFAS No. 133, had an insignificant impact on earnings for the years ended December 31, 2002 and 2001. No cash flow hedges were dedesignated or discontinued for the years ended December 31, 2002 and 2001.

28

        We enter into foreign exchange contracts with clients and strive to enter 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 to asset servicing fees. Unrealized gains (losses) resulting from purchases and sales of foreign exchange contracts are included within the respective other assets and other liabilities categories on our consolidated balance sheet. Unrealized gains in other assets were $4.4 million and $6.3 million as of December 31, 2002 and 2001, respectively. Unrealized losses in other liabilities were $4.5 million and $6.8 million as of December 31, 2002 and 2001, respectively. The foreign exchange contracts have been reduced by balances with the same counterparty where a master netting agreement exists.

Stock-Based Compensation—We account for stock-based compensation using the intrinsic value-based method of Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," as allowed under SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." Under APB No. 25, no compensation cost is recognized if the option exercise price is equal to the fair market price of the common stock on the date of the grant. If stock-based compensation were recognized, stock options would be valued at grant date using the Black-Scholes valuation model and compensation costs would be recognized by one of the three methods of transition as allowed by SFAS No. 148. The Black-Scholes option-pricing model uses assumptions including the expected life of an option, the expected volatility of the underlying stock and an assumed risk-free interest rate. The expected life of an option and the volatility of the underlying stock determine a majority of the value of an option and its ultimate compensation cost. As such, the longer the option life or the higher the volatility of the underlying stock, the higher the value of the option and the higher the related compensation cost to the Company. For more information regarding the financial impact of our stock option plans, see Note 12 of our Notes to Consolidated Financial Statements included with this Annual Report.

        Defined Benefit Pension Assumptions—Each fiscal year, we must assess and select the discount rate, compensation increase percentage and average return on plan assets assumptions in order to project our benefit obligations under our defined benefit plans. The discount rate is based on the weighted averageweighted-average yield on high quality fixed income investments that are expected to match the plan's projected cash flows. The compensation increase percentage is based upon management's current and expected salary increases. The average return on plan assets is based on the expected return on the plan's current investment portfolio, which can reflect the historical returns of the various asset classes. For the fiscal year ended December 31, 2002 those percentages2003, the discount rate, compensation increase and average return on plan assets were 6.75%6.25%, 3.75% and 8.50%, respectively. The discount rate at December 31, 20022003 was lower than that at December 31, 20012002 by 75 basis points0.50% due to a decline in interest rates, and the compensation increase percentage was 125 basis points lower thanequal to the prior year due to a decline in current and projected annualas assumptions on compensation increases. These changes are expected to increase net periodic pension expense in 2003 by an immaterial amount.increases remain consistent. The rate of return on plan assets of 8.50% has remained consistent with the prior year as the historical long-term return on plan assets has been consistent with the estimated rate. In addition, this increase in expense is expected to be partially offset by an increase in the projectedincremental return on plan assets as a result of our $3.4additional $3.0 million maximum tax deductible contribution made in 2002.2003. Net periodic pension expense for 20022003 was $0.6$1.0 million and is expected to be $0.8approximately $1.4 million in fiscal year 2003.2004.

        The discount rate and compensation increase percentage assumptions for our non-qualified,nonqualified, unfunded, supplemental retirement plan, which covers certain employees, are the same as those of our defined benefit pension plan. The net periodic expense for 20022003 for the supplemental retirement plan was $1.7$2.4 million and is expected to be $1.9approximately $2.5 million in fiscal year 2003.2004.

Capitalized Software Costs—Capitalized software costs are accounted for under the method prescribed by AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," ("SOP 98-1") and are included within the furniture, fixtures and equipment component. Capitalized software costs are amortized over the estimated useful life of a given project, which can range from 3 to 5 years. Our policy is to capitalize costs relating to systemNew Accounting Principles

29

development projects that provide significant functionality enhancements. Assets are placed        In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in serviceother contracts and depreciation and/for hedging activities under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, resulting in more consistent reporting of contracts as either derivatives or amortization commences when successful testing has been achieved. Please see the "Capital Resources" section of this Report regarding capitalized software expenditures made during the years ended December 31, 2002hybrid instruments. SFAS No. 149 was effective for contracts entered into or modified after June 30, 2003, and 2001.

Impairment of Long-Lived Assets—Long-lived assetsis applied on a prospective basis. We have evaluated our financial accounting and reporting for all derivative instruments and found them to be held and used are reviewed on a quarterly basis to determine whether any changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The evaluation process includes a review of each asset class for further economic benefit or changes in external market conditions or other factors. Technological assets are reviewed to determine whether they are still in service. If long-lived assets are determined to be impaired, they are written-down to their net realizable value. During the years ended December 31, 2002 and 2001, our analyses indicated that there was no impairment of our long-lived assets.

New Accounting Principles—On January 1, 2002, we adoptedconsistent with SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes APB No. 17, "Intangible Assets."149.

        In May 2003, the FASB issued SFAS No. 142 addresses how intangible assets that are acquired individually or150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 requires an issuer to classify financial instruments within its scope as a group of other assets (but not those acquiredliability (or an asset in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. This statement affects the accounting of premiums, includes guidelines for the determination, measurement and testing of impairment, and requires disclosure of information about goodwill and other intangible assets in the years subsequent to their acquisition that was not previously required.some circumstances). This Statement eliminatesprovides that these instruments must be classified as liabilities in the amortization of goodwill and requires that goodwill be reviewed at least annually for impairment or when any event occurs that could give rise to impairment. This Statement affects all goodwill recognized on our consolidated balance sheet regardlessand recorded at fair value. We adopted the provisions of when the assets were initially recorded. Uponthis Statement effective July 1, 2003. The adoption of SFAS No. 142, we ceased amortization of the $80 million goodwill assetthis Statement did not have a material impact on our consolidated balance sheet. As of December 31, 2002 there was no impairment of goodwill.financial position.

        In November 2001, the FASB issued Emerging Issues Task Force ("EITF") No. 01-14, "Income Statement Characterization of Reimbursements Received for Out-Of-Pocket Expenses Incurred." This guidance requires companies to recognize the reimbursement of client-related expenses as revenue and the costs as operating expense. Client reimbursements for out-of-pocket expenses are reflected in fee revenue in the accompanying financial statements. Prior periods have been reclassified to reflect this presentation. The increases to fee revenue and operating expense as a result of this guidance were $9.4 million, $8.3 million and $7.5 million for the years ended December 31, 2002, 2001 and 2000, respectively.

        In November 2002,January 2003, the FASB issued Interpretation No. 45, "Guarantor's46 (revised December 2003),Consolidation of Variable Interest Entities, an Interpretation of Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others."Research Bulletin ("ARB") 51. This interpretation elaborates on disclosuresaddresses consolidation by business enterprises of variable interest entities ("VIE"). This