<PAGE>
 
________________________________________________________________________________

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                   FORM 10-Q
(MARK ONE)
   [X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                 For the Quarterly period ended March 31, 1997

                                       or

   [_]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                 For the Transition period from _____ to _____

                         Commission File Number 0-26996
                                        
                       INVESTORS FINANCIAL SERVICES CORP.
             (Exact name of registrant as specified in its charter)


           DELAWARE                                       04-3279817
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)

             89 SOUTH STREET, P.O. BOX 1537, BOSTON, MA 02205-1537
          (Address of principal executive offices, including Zip Code)

                                (617) 330-6700
             (Registrant's telephone number, including area code)

                          ____________________________

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

          As of April 30, 1997, there were 6,124,976 shares of Common Stock
outstanding and 320,336 shares of Class A Common Stock outstanding.

________________________________________________________________________________

<PAGE>
 
                       INVESTORS FINANCIAL SERVICES CORP.

                                     INDEX
                                     -----

<TABLE>
<CAPTION>
 
PART I       FINANCIAL INFORMATION                                              Page
                                                                                ----
<S>                                                                       <C>
 
         ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
                   Consolidated Balance Sheets
                     December 31, 1996 (audited) and
                     March 31, 1997 (unaudited)                                  3
 
                   Consolidated Income Statements (unaudited)
                     Three months ended March 31, 1996 and 1997                  4
 
                   Statement of Stockholder's Equity (unaudited)
                     Three months ended March 31, 1997                           5
 
                   Consolidated Statements of Cash Flows (unaudited)
                     Three months ended March 31, 1996 and 1997                  6
 
                   Notes to Condensed Consolidated Financial Statements          7
 
         ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL            16
                     CONDITION AND RESULTS OF OPERATIONS
 
PART II            OTHER INFORMATION
 
         ITEM 2.   RECENT SALES OF UNREGISTERED SECURITIES                      28

         ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES                                                                      29


</TABLE> 

                                       2
<PAGE>
 
<TABLE>
<CAPTION>
 
INVESTORS FINANCIAL SERVICES CORP.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND  MARCH 31, 1997
____________________________________________________________________________________________________________________________________

 
                                                                                 DECEMBER 31,                   MARCH 31,
ASSETS                                                                               1996                          1997
                                                                                   (audited)                   (unaudited)
<S>                                                                           <C>                           <C>
Cash and due from banks                                                        $   19,226,453               $   23,082,951
Federal funds sold and securities purchased under resale agreements               120,000,000                       -
Securities held to maturity (approximate market values of
     $460,182,579 and $648,999,683 at December 31, 1996
     and March 31, 1997, respectively)                                            460,009,923                  652,449,979
Securities available for sale                                                     271,120,964                  304,235,614
Nonmarketable equity securities                                                       967,400                    5,476,600 
Loans, less allowance for loan losses of $100,000 at
     December 31, 1996 and March 31, 1997                                          66,236,889                   76,608,227
Accrued interest and fees receivable                                               16,366,171                   20,183,133
Equipment and leasehold improvements, net                                           5,243,974                    5,141,450
Other assets                                                                        5,289,873                    7,111,667
                                                                               --------------               --------------
TOTAL ASSETS                                                                     $964,461,647               $1,094,289,621
                                                                               ==============               ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
 
LIABILITIES:
     Deposits:
          Demand                                                               $  264,914,614               $  283,528,047
          Savings                                                                 276,602,295                  280,262,692
          Time                                                                     55,000,000                   60,000,000
                                                                               --------------               --------------
              Total deposits                                                      596,516,909                  623,790,739

Short-term borrowings                                                             296,820,752                  365,181,507
Other liabilities                                                                   9,264,676                   16,349,003
                                                                               --------------               --------------
              Total liabilities                                                   902,602,337                1,005,321,249
                                                                               --------------                -------------
 Company obligated mandatorily preferred securities of subsidiary trust                -                        24,244,743
                                                                               --------------                -------------
Stockholders' equity:
     Class A common stock                                                               3,595                        3,240
     Common stock                                                                      60,848                       61,213
     Surplus                                                                       54,352,812                   54,369,302
     Deferred compensation                                                         (1,687,675)                  (1,577,950)
     Retained earnings                                                              8,480,431                   11,173,111
     Net unrealized gain on securities  available for sale                            649,299                      694,713
                                                                               --------------               --------------
 Total stockholders' equity                                                        61,859,310                   64,723,629
                                                                               --------------               --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       $964,461,647               $1,094,289,621
                                                                               ==============               ==============
See notes to consolidated financial statements.
</TABLE>

                                       3
<PAGE>
 
<TABLE>
<CAPTION>
 
INVESTORS FINANCIAL SERVICES CORP.

CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
THREE MONTHS ENDED  MARCH 31, 1996 AND 1997
____________________________________________________________________________________________________________________________________

                                                                                 MARCH 31,                      MARCH 31,
                                                                                   1996                           1997
<S>                                                                      <C>                            <C>
OPERATING REVENUE:
Interest income:
     Federal funds sold and securities purchased
         under resale agreements                                            $      444,544                 $     675,747
     Other short-term investments                                                    6,448                         -
Investment securities held to maturity and available for sale                    5,095,690                    13,691,446
     Loans                                                                         418,031                       664,409
                                                                            --------------                 -------------
         Total interest income                                                   5,964,713                    15,031,602
                                                                            --------------                 -------------
Interest expense:
     Deposits                                                                      977,919                     4,445,602
     Short-term borrowings                                                       1,044,958                     4,129,864
                                                                            --------------                 -------------
         Total interest expense                                                  2,022,877                     8,575,466
                                                                            --------------                 -------------
         Net interest income                                                     3,941,836                     6,456,136
 
Provision for loan losses                                                           21,047                        -
                                                                            --------------                 -------------
         Net interest income after provision for loan losses                     3,920,789                     6,456,136
 
Noninterest income:
     Asset administration fees                                                  12,797,364                    17,625,593
     Computer service fees                                                         124,043                       116,460
     Other operating income                                                         20,343                        17,767
     Gain on sale of security available for sale                                     2,448                        -
                                                                            --------------                 -------------
         Net operating revenue                                                  16,864,987                    24,215,956
OPERATING EXPENSES:
     Compensation of officers and employees                                      7,436,913                     9,820,726
     Pension and other employee benefits                                         1,350,761                     1,647,409
     Occupancy                                                                   1,161,231                     1,088,480
     Equipment                                                                   1,306,380                     1,618,642
     Insurance                                                                     305,083                       181,759
     Subcustodian fees                                                             821,815                     1,438,498
     Depreciation and amortization                                                 310,870                       388,339
     Professional fees                                                             554,146                       916,728
     Travel and sales promotion                                                    199,449                       331,503
     Other operating expenses                                                    1,070,800                     1,881,589
                                                                            --------------                 -------------
         Total operating expenses                                               14,517,448                    19,313,673
                                                                            --------------                 -------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST                                 2,347,539                     4,902,283

Provision for income taxes                                                         927,277                     1,822,219
Minority interest expense, net of income taxes                                     -                             258,498
NET INCOME                                                                  $    1,420,262                $    2,821,566
                                                                            ==============                ==============
 
WEIGHTED AVERAGE SHARES OUTSTANDING                                              6,493,614                     6,558,441
                                                                            ==============                ==============

EARNINGS PER SHARE                                                                   $0.22                         $0.43
</TABLE> 
 
 
See notes to consolidated financial statements.

                                       4
<PAGE>
 
<TABLE> 
<CAPTION> 


INVESTORS FINANCIAL SERVICES CORP.
 
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED  MARCH 31, 1997
____________________________________________________________________________________________________________________________________


                                                                                                             NET
                                                                                                          UNREALIZED
                                                                                                           GAIN ON
                                                                                                          INVESTMENT
                                           CLASS A                                                        SECURITIES 
                                           COMMON     COMMON                   DEFERRED      RETAINED      AVAILABLE
                                            STOCK     STOCK      SURPLUS     COMPENSATION    EARNINGS       FOR SALE      TOTAL
<S>                                      <C>       <C>        <C>          <C>           <C>             <C>        <C>  
BALANCE, DECEMBER 31, 1996                 $3,595    $60,848   $54,352,812   $(1,687,675)  $ 8,480,431    $649,299   $61,859,310
 
Conversion of class A to common stock        (355)       355                                                                   -
Amortization of deferred compensation                                            109,725                                 109,725
Exercise of stock options                                 10        16,490                                                16,500
Net income                                                                                   2,821,566                 2,821,566
Payment of dividend                                                                           (128,886)                 (128,886)
Change in net unrealized gain on
   securities available for sale                                                                            45,414        45,414
                                           ------    -------   -----------   -----------   -----------    --------   -----------
 
BALANCE,  MARCH 31, 1997                   $3,240    $61,213   $54,369,302   $(1,577,950)  $11,173,111    $694,713   $64,723,629
                                           ======    =======   ===========   ===========   ===========    ========   ===========
</TABLE>
See notes to consolidated financial  statements

                                       5
<PAGE>
 
<TABLE> 
<CAPTION> 

INVESTORS FINANCIAL SERVICES CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED  MARCH 31, 1996 AND 1997
____________________________________________________________________________________________________________________________________

 
                                                                                 MARCH 31,                MARCH 31,
                                                                                   1996                     1997
<S>                                                                          <C>                      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                   $   1,420,262            $   2,821,566
                                                                             -------------            -------------
Adjustments to reconcile net income to net cash provided by
operating activities:
     Depreciation and amortization                                                 310,870                  388,339
     Amortization of deferred compensation                                         106,162                  109,725
     Provision for loan losses                                                      21,047                 -
     Amortization of premiums on securities, net of accretion of discounts         539,813                  771,189
     Deferred income taxes                                                         -                         16,879
     Gain on sale of securities available for sale                                  (2,448)                -
     Changes in assets and liabilities:
          Accrued interest and fees receivable                                  (2,905,922)              (3,816,962)
          Other assets                                                            (103,761)              (1,821,794)
          Other liabilities                                                      3,919,632                7,126,236
                                                                             -------------            -------------
 
              Total adjustments                                                  1,885,393                2,773,612
                                                                             -------------            -------------
              Net cash provided by operating activities                          3,305,655                5,595,178
                                                                             -------------            -------------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale                        3,874,545               26,279,300
Proceeds from maturities of securities held to maturity                          7,068,248               14,698,733
Proceeds from sale of securities available for sale                              5,010,591                 -
Purchases of securities available for sale                                     (26,978,069)             (59,892,284)
Purchases of securities held to maturity                                      (161,988,205)            (207,425,019)
Purchase of nonmarketable equity securities                                        -                     (4,509,200)
Net decrease in time deposits due from banks                                     1,000,000                 -
Net (increase) decrease in federal funds sold and securities
     purchased under resale agreements                                         (35,000,000)             120,000,000
Net increase in loans                                                          (13,822,640)             (10,371,338)
Payments for purchases of equipment and leasehold improvements                    (106,433)                (285,814)
                                                                             -------------            -------------

              Net cash used for investing activities                          (220,941,963)            (121,505,622)
                                                                             -------------            -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits                                                199,049,687               18,613,432
Net increase in time and savings deposits                                          298,620                8,660,397
Net increase in short-term borrowings                                           25,396,899               68,360,756
Stock issuance costs                                                                87,693                 (755,257)
Proceeds from exercise of stock options                                            -                         16,500
Proceeds from preferred stock                                                      -                     25,000,000
Dividends paid                                                                     -                       (128,886)
                                                                             -------------            -------------
              Net cash provided by financing activities                        224,832,899              119,766,942
                                                                             -------------            -------------
NET INCREASE IN CASH AND DUE FROM BANKS                                          7,196,591                3,856,498
 
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD                                    21,898,903               19,226,453
                                                                             -------------            -------------
CASH AND DUE FROM BANKS, END OF PERIOD                                       $  29,095,494            $  23,082,951
                                                                             =============            =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest                                                       $   1,794,000            $   8,601,000
                                                                             =============            =============
 
Cash paid for income taxes                                                   $   1,228,000            $     503,000
                                                                             =============            =============
 
See notes to consolidated financial statements.
</TABLE>

                                       6
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED  MARCH 31, 1996
AND 1997 IS UNAUDITED)
________________________________________________________________________________


 1. DESCRIPTION OF BUSINESS

    Investors Financial Services Corp. ("IFSC") provides asset administration
    services for the financial services industry through its wholly owned
    subsidiary, Investors Bank & Trust Company (the "Bank"). The Bank provides
    domestic and global custody, multicurrency accounting, institutional
    transfer agency, performance measurement, foreign exchange, securities
    lending, and mutual fund administration and investment advisory services to
    a variety of financial asset managers, including mutual fund complexes,
    investment advisors, banks and insurance companies. IFSC and the Bank are
    subject to regulation by the Federal Reserve Board of Governors, the Office
    of the Commissioner of Banks of the Commonwealth of Massachusetts and the
    Federal Deposit Insurance Corporation .

    As used herein, the defined term "the Company" shall mean IFSC together with
    the Bank from the date of the share exchange discussed below and shall mean
    the Bank prior to that date.

    On November 8, 1995, the business operations of the Company were separated
    from its former parent, Eaton Vance Corp. ("EVC"), by means of a tax-free,
    pro rata distribution of EVC's ownership interest in the Company to the EVC
    stockholders (the "Spin-off Transaction"). Immediately prior to the Spin-off
    Transaction, all of the stockholders of the Bank exchanged their 1,000,000
    shares of the Bank's capital stock for a combination of 3,418,573 shares of
    Common Stock and 611,427 shares of Class A Common Stock ("Class A Stock") of
    a newly formed bank holding company formed for the purpose of facilitating
    the Spin-off Transaction. For financial reporting purposes, the exchange has
    been accounted for as if it occurred on November 1, 1995. Subsequent to the
    completion of the Spin-off Transaction, IFSC sold 2,300,000 additional
    shares of its Common Stock in an initial public offering at an offering
    price of $16.50 per share. The net effect of this transaction was an
    increase in the Company's consolidated capital of approximately $34,000,000.

    In December 1995, the Company changed its fiscal year end from October 31 to
    December 31.

2.  INTERIM FINANCIAL STATEMENTS

    The consolidated interim financial statements of the Company and
    consolidated subsidiaries as of March 31, 1997 and for the  three-month
    periods ended March 31, 1996 and 1997 have been prepared by the Company,
    without audit, pursuant to the rules and regulations of the Securities
    and Exchange Commission.  Certain information and footnote disclosures
    normally included in annual financial statements prepared in accordance
    with generally accepted accounting principles have been condensed or
    omitted as permitted by such rules and regulations.  All adjustments,
    consisting of normal recurring adjustments, have been included.
    Management believes that the disclosures are adequate to present fairly
    the financial position, results of operations and cash flows at the dates
    and for the periods presented.  It is suggested that these interim
    financial statements  be read in conjunction with the financial
    statements and the notes thereto included in the Company's latest annual
    report on Form 10-K.  Results for interim periods are not necessarily
    indicative of those to be expected for the full fiscal year.

    Certain amounts from the prior year have been reclassified to conform to
    current year presentation.

                                       7
<PAGE>
 
3. SECURITIES
<TABLE>
<CAPTION>

    Carrying amounts and approximate market values of securities are summarized as follows as of December 31, 1996:
 
                                     CARRYING             UNREALIZED         UNREALIZED              APPROXIMATE
       HELD TO MATURITY               VALUE                 GAINS              LOSSES               MARKET VALUE
 <S>                              <C>                   <C>               <C>                    <C>
Mortgage-backed securities        $414,664,590           $1,973,263          $1,750,168             $414,887,685
Federal Agency securities           37,517,495               49,546             224,972               37,342,069
Foreign government securities        7,827,838              124,987              -                     7,952,825
                                  ------------           ----------          ----------             ------------

Total                             $460,009,923           $2,147,796          $1,975,140             $460,182,579
                                  ============           ==========          ==========             ============
 
 
                                     AMORTIZED            UNREALIZED         UNREALIZED              CARRYING
       AVAILABLE FOR SALE              COST                 GAINS              LOSSES                  VALUE
 
U.S. Treasury securities          $ 40,107,999           $  151,304          $        3             $ 40,259,300
Mortgage-backed securities         229,930,801            1,086,092             155,229              230,861,664
                                  ------------           ----------          ----------             ------------
 
Total                             $270,038,800           $1,237,396          $  155,232             $271,120,964
                                  ============           ==========          ==========             ============
 
 
Carrying amounts and approximate market values of securities are summarized as follows as of March 31, 1997:

                                     CARRYING             UNREALIZED         UNREALIZED              APPROXIMATE
       HELD TO MATURITY               VALUE                 GAINS              LOSSES               MARKET VALUE
<S>                                 <C>            <C>          <C>          <C>
State and political subdivisions  $ 33,325,563           $        -          $  993,364             $ 32,332,199
Mortgage-backed securities         532,884,781            2,196,130           3,951,330              531,129,581
Federal Agency securities           78,425,764               58,001             697,712               77,786,053
Foreign government securities        7,813,871                    -              62,021                7,751,850
                                  ------------           ----------          ----------             ------------

Total                             $652,449,979           $2,254,131          $5,704,427             $648,999,683
                                  ============           ==========          ==========             ============
  
                                      AMORTIZED           UNREALIZED         UNREALIZED                CARRYING
AVAILABLE FOR SALE                      COST                GAINS              LOSSES                   VALUE
 
U.S. Treasury securities          $ 40,049,633           $   40,631          $   71,539             $ 40,018,725
Mortgage-backed securities         263,117,192            1,427,226             327,529              264,216,889
                                  ------------           ----------          ----------             ------------

Total                             $303,166,825           $1,467,857          $  399,068             $304,235,614
                                  ------------           ----------          ----------             ------------
</TABLE>

                                       8
<PAGE>
 
3.  SECURITIES (CONTINUED)

    Nonmarketable equity securities at March 31, 1997 consisted of $5,477,000 of
    stock of the Federal Home Loan Bank of Boston (the "FHLBB").  As a member of
    the FHLBB, the Company is required to invest in $100 par value stock of the
    FHLBB in an amount equal to the greater of (i) 1% of its outstanding
    residential mortgage loan principal (including mortgage pool securities),
    (ii) 0.3% of total assets, and (iii) total advances from the FHLBB, divided
    by a leverage factor of 20.  If and when FHLBB stock is redeemed, the
    Company will receive an amount equal to the par value of the stock.

    The carrying amounts and approximate market values of securities by
    effective maturity are as follows:

<TABLE>
<CAPTION>
    
                                                DECEMBER 31, 1996               MARCH 31, 1997
                                             CARRYING      APPROXIMATE     CARRYING      APPROXIMATE
       HELD TO MATURITY                       VALUE       MARKET VALUE      VALUE       MARKET VALUE
 
<S>                                    <C>             <C>             <C>            <C>
    Due within one year                   $ 19,052,213   $ 18,873,837     $          -   $          -
    Due from one to five years             114,459,070    113,819,081      137,036,412    135,358,295
    Due five years up to ten years         240,620,332    241,016,881      364,058,100    362,789,141
    Due after ten years                     85,878,308     86,472,780      151,355,467    150,852,247
                                          ------------   ------------     ------------   ------------

Total                                     $460,009,923   $460,182,579     $652,449,979   $648,999,683
                                          ============   ============     ============   ============
 
 
                                                DECEMBER 31, 1996               MARCH 31, 1997
                                             AMORTIZED      CARRYING       AMORTIZED      CARRYING
AVAILABLE FOR SALE                            COST           VALUE          COST           VALUE
 
    Due within one year                   $ 19,964,080   $ 20,046,800     $ 20,053,119   $ 20,093,750
    Due from one to five years             213,758,992    214,525,641      244,802,622    245,479,611
    Due five years up to ten years          36,315,728     36,548,523       38,311,084     38,662,253
                                          ------------   ------------     ------------   ------------
Total                                     $270,038,800   $271,120,964     $303,166,825   $304,235,614
                                          ============   ============     ============   ============
</TABLE>

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

    There were no sales of securities available for sale during the three months
    ended March 31, 1997.

    The carrying value of securities pledged amounted to approximately
    $362,000,000 and $408,000,000 at December 31, 1996 and March 31, 1997,
    respectively.  Securities are pledged primarily to secure public funds and
    clearings with other depository institutions.

 4. LOANS

    Loans consist of demand loans with individuals and not-for-profit
    institutions located in the greater Boston, Massachusetts metropolitan
    area and loans to mutual fund clients.  The loans to mutual funds include
    lines of credit and advances pursuant to the terms of the custody
    agreements between the Company and those mutual fund clients to
    facilitate securities transactions and redemptions.  Generally, the loans
    are, or may be, in the event of default, collateralized with marketable
    securities held by the Company as custodian.  There were no impaired or
    nonperforming loans at December 31, 1996 or March 31, 1997.  In addition,
    there have been no loan charge-offs or recoveries during the three months
    ended March 31, 1996 and 1997.  Loans consisted of the following at
    December 31, 1996 and March 31, 1997:

                                       9
<PAGE>
 

4.  LOANS (CONTINUED)
<TABLE> 
<CAPTION> 
 
                                                     DECEMBER 31,          MARCH 31,
                                                         1996                1997
<S>                                              <C>                  <C>
    Loans to individuals                            $23,448,999           $17,837,098
    Loans to not-for-profit institutions                 12,500                12,500
    Loans to mutual funds                            42,875,390            58,858,629
                                                    -----------           -----------
                                                     66,336,889            76,708,227
    Less allowance for loan losses                      100,000               100,000
                                                    -----------           -----------
    Total                                           $66,236,889           $76,608,227
                                                    ===========           ===========
</TABLE>

The Company had commitments to lend of approximately $37,128,000 and $58,005,000
at December 31, 1996 and March 31, 1997, respectively. The terms of these
commitments are similar to the terms of outstanding loans.


5.  EQUIPMENT AND LEASEHOLD IMPROVEMENTS

The major components of equipment and leasehold improvements are as follows at
December 31, 1996 and March 31, 1997:

<TABLE>
<CAPTION>

                                                       DECEMBER 31,            MARCH 31,
                                                          1996                   1997
<S>                                                 <C>                   <C>
    Furniture, fixtures and equipment                   $8,516,450            $7,572,020
    Leasehold improvements                                 744,395               755,559
                                                        ----------            ----------
    Total                                                9,260,845             8,327,579
    Less accumulated depreciation and amortization       4,016,871             3,186,129
                                                        ----------            ----------
    Equipment and leasehold improvements, net           $5,243,974            $5,141,450
                                                        ==========            ==========
</TABLE>
6.  DEPOSITS

    Time deposits at December 31, 1996 and March 31, 1997 include
    noninterest-bearing amounts of approximately $55,000,000 and $60,000,000,
    respectively.

    All time deposits had a minimum balance of $100,000 and a maturity
    of less than three months at December 31, 1996 and March 31, 1997.

7. SHORT-TERM BORROWINGS

    The major components of short-term borrowings are as follows at
    December 31, 1996 and March 31, 1997:

<TABLE>
<CAPTION>
                                                       DECEMBER 31,            MARCH 31,
                                                           1996                  1997
<S>                                                  <C>                   <C>
    Repurchase agreements                               $296,421,201          $335,011,449
    FHLBB advance                                               -               30,000,000
    Treasury, Tax and Loan account                           399,551               170,058
                                                        ------------          ------------
    Total                                               $296,820,752          $365,181,507
                                                        ============          ============
</TABLE>

                                       10
<PAGE>
 
7.  SHORT-TERM BORROWINGS (CONTINUED)

    The Company enters into repurchase agreements whereby securities
    are sold by the Company under agreements to repurchase.  The Company had
    liabilities under these agreements of $296,421,201 and $335,011,499 at
    December 31, 1996 and March 31, 1997 respectively.  The interest
    rate on the outstanding agreements at December 31, 1996 was 5.91% and all
    agreements matured on January 2, 1997.  The interest rates on the
    outstanding agreements at March 31, 1997 ranged from 5.68% to 5.85% and all
    agreements matured by April 1, 1997.  The following securities were pledged
    under these agreements at December 31, 1996 and March 31, 1997:

<TABLE>
<CAPTION>
                                      DECEMBER 31, 1996                MARCH 31, 1997
                                   CARRYING      APPROXIMATE        CARRYING      APPROXIMATE
                                    VALUE        MARKET VALUE         VALUE       MARKET VALUE
<S>                           <C>            <C>                <C>             <C>    
U.S. Treasury securities        $ 37,249,940    $ 37,249,940      $ 37,017,795   $ 37,017,795
Federal Agency securities         25,000,000      24,803,950        25,000,000     24,543,700
Mortgage-backed securities       245,689,672     246,777,873       284,522,070    286,001,337
                                ------------    ------------      ------------   ------------
Total                           $307,939,612    $308,831,763      $346,539,865   $347,562,832
                                ============    ============      ============   ============
</TABLE>

    The Company has a borrowing arrangement with the FHLBB which is utilized on
    an overnight basis to satisfy temporary funding requirements. The Company
    had liabilities under this agreement of $0 at December 31, 1996 and
    $30,000,000 at March 31, 1997. The interest rate on the outstanding balance
    at March 31, 1997 was 7.03%.

    The Company receives federal tax deposits from clients as agent for the
    Federal Reserve Bank and accumulates these deposits in the Treasury, Tax and
    Loan account. The Federal Reserve Bank charges the Company interest at the
    Federal Funds rate on such deposits. The Company had liabilities under this
    agreement of $399,551 at December 31, 1996 and $170,058 at 31, 1997. The
    interest rates on the outstanding balance at December 31, 1996 and March 31,
    1997 were 5.10% and 5.67%, respectively.

8.  COMPANY OBLIGATED MANDATORILY PREFERRED SECURITIES OF SUBSIDIARY TRUST

    On January 31, 1997, the Company completed the issuance and sale of
    $25,000,000 in 9.77% Capital Securities (the "Capital Securities"). The
    Capital Securities were issued by Investors Capital Trust I (the "Trust"), a
    Delaware statutory business trust sponsored by the Company. The proceeds of
    the Capital Securities were invested in 9.77% Junior Subordinated Debentures
    (the "Debentures") issued by the Company. The Debentures will mature on
    February 1, 2027 except that such maturity may under certain circumstances
    be advanced. The Company has guaranteed all of the Trust's obligations under
    the Capital Securities to the extent that the Trust has funds available to
    meet such obligations. The guarantee constitutes an unsecured obligation of
    the Company and is subordinate and ranks junior in right of payment to all
    senior indebtedness of the Company.

 9. STOCKHOLDERS' EQUITY

    The Company  has authorized 1,000,000 shares of Preferred Stock, 650,000
    shares of Class A Common Stock and 20,000,000 shares of Common Stock, all
    with a par value of $.01 per share.  At December 31, 1996 and March 31,
    1997, there were no preferred shares issued or outstanding.  There were
    359,545 and 323,973 shares of Class A Common Stock and 6,084,767 and
    6,121,339 Common Stock issued and outstanding at December 31, 1996 and March
    31, 1997, respectively.  The Common Stock and Class A Common Stock are
    identical except that the Class A Common Stock has ten votes per share and
    automatically converts into Common Stock upon transfer and under certain
    other circumstances.

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

    Under the terms of the 1995 Stock Plan, the Company may grant options to
    purchase up to a maximum of 560,000 shares of Common Stock to certain
    employees, consultants, directors and officers.  The options may be awarded
    as incentive stock options (employees only), nonqualified stock options,
    stock awards or opportunities to make direct purchases of stock.

                                       11
<PAGE>
 
9.  STOCKHOLDERS' EQUITY (CONTINUED)

    In November 1995, the Company granted 114,000 shares of Common Stock to
    certain officers of the Company under the 1995 Stock Plan. Of these grants,
    105,000 shares vest in sixty equal monthly installments, and the remainder
    vest in five equal annual installments. Upon termination of employment, the
    Company has the right to repurchase all unvested shares at a price equal to
    the fair market value at the date of the grant. The Company has recorded
    deferred compensation of $1,687,675 and $1,577,950 December 31, 1996 and
    March 31, 1997, respectively, pursuant to these grants.

    Under the terms of the 1995 Non-Employee Director Stock Option Plan, as
    amended at the Company's 1997 Annual Meeting of Stockholders, the Company
    may grant options to non-employee directors to purchase up to a maximum of
    100,000 shares of Common Stock. Options to purchase 2,500 shares of Common
    Stock were awarded at the date of initial public offering to each director.
    Subsequently, any director elected or appointed after such date will receive
    an automatic initial grant of options to purchase 2,500 shares upon becoming
    a director. Thereafter, each director will receive an automatic grant of
    options to purchase 2,500 shares effective upon each one-year anniversary of
    the date of such director's original grant. Additionally, directors may
    elect to receive options to acquire shares of the Company's Common Stock in
    lieu of such director's cash retainer. Any election is subject to certain
    restrictions under the 1995 Non-Employee Director Stock Option Plan. The
    number of shares of stock underlying the option is equal to the quotient
    obtained by dividing the cash retainer by the value of an option on the date
    of grant as determined using the Black-Scholes model.

    The exercise price of options under the 1995 Non-Employee Director Stock
    Option Plan and the incentive options under the 1995 Stock Plan may not be
    less than fair market value at the date of the grant.  The exercise price of
    the nonqualified options from the 1995 Stock Plan is determined by the
    compensation committee of the Board of Directors. All options become
    exercisable as specified at the date of the grant.

    The 1997 Employee Stock Purchase Plan was adopted by the Board of Directors
    on January 14, 1997 and subsequently approved by the stockholders at the
    Company's 1997 Annual Meeting. The Company has authorized the issuance of
    140,000 shares of Common Stock pursuant to the exercise of nontransferable
    options granted to participating employees. The 1997 Purchase Plan permits
    eligible employees to purchase up to 1,000 shares of Common Stock per
    payment period, subject to limitations provided by Section 423(b) of the
    Internal Revenue Code, through accumulated payroll deductions. The purchases
    are made twice a year at a price equal to the lesser of (i) 90% of the
    average market value of the Common Stock on the first business day of the
    payment period, or (ii) 90% of the average market value of the Common Stock
    on the last business day of the payment period. Annual payments periods
    consist of two six-month periods, January 1 through June 30 and July 1
    through December 31.

    A summary of option activity under all plans is as follows:

<TABLE>
<CAPTION>
                                                              NUMBER OF    EXERCISE PRICE
                                                               SHARES        PER SHARE
 
<S>                                                          <C>         <C>
          Outstanding at December 31, 1996                     345,150    $16.50 - $26.125
          Granted                                               11,104    $27.50 - $34.25
          Exercised                                             (1,000)       $16.50
          Expired                                                  -             -
                                                              ----------
          Outstanding at March 31, 1997                        355,254    $16.50 -   $34.25
                                                              ==========
          Exercisable at March 31, 1997                         83,543
                                                              ==========
 
</TABLE>

    In February, 1997, the FASB issued Statement of Financial Accounting
    Standards ("SFAS") No. 128, "Earnings per Share", effective for financial
    statements for both interim and annual periods ending after December 15,
    1997. Pursuant to SFAS No. 128 requirements, the Company has calculated
    earnings per share for the quarters ended March 31, 1996 and 1997. The
    following table illustrates earnings per share calculated pursuant to SFAS
    No. 128:

                                       12
<PAGE>
 
9.  STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
 
                                         QUARTER ENDED                              QUARTER ENDED
                                         MARCH 31, 1996                             MARCH 31, 1997
                              ----------------------------------------   ---------------------------------------
                                                            Per Share                                  Per Share
                                Income         Shares        Amount        Income         Shares         Amount
<S>                         <C>            <C>           <C>             <C>             <C>          <C>
Basic Earnings per Share      $1,420,262      6,444,312  $     0.22       $2,821,566     6,444,534     $     0.44
                                                         ==========                                    ==========
Dilutive Effect of Options                       49,302                                    113,907
                                              _________                                   _________
Diluted Earnings Per Share    $1,420,262      6,493,614  $     0.22       $2,821,566     6,558,441     $     0.43
                              ==========      =========  ==========       ==========     =========     ==========
</TABLE>

    Basic earnings per share were computed by dividing net income by the sum of
    the weighted average shares of Common Stock and Class A Common Stock
    outstanding during the periods.  Diluted earnings per share included stock
    options using the treasury stock method to the extent that the average share
    price exceeds the exercise price.

10. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

    LINES OF CREDIT - At March 31, 1997, the Company had commitments to
    individuals under collateralized open lines of credit totaling $85,413,700,
    against which $27,409,106 in loans was drawn. The credit risk involved in
    issuing lines of credit is essentially the same as that involved in
    extending loan facilities. The Company does not anticipate any loss as a
    result of these lines of credit.

    INTEREST-RATE CONTRACTS - The following table summarizes the contractual or
    notional amounts of derivative financial instruments held by the Company at
    March 31, 1997:

            Interest rate contracts:
                     Swap agreements             $200,000,000
                     Floor contracts             $30,000,000

    Interest rate contracts involve an agreement with a counterparty to exchange
    cash flows based on an underlying interest rate index. An interest rate
    floor is a contract purchased from a counterparty which specifies a minimum
    interest rate for the specified period of time. A swap agreement involves
    the exchange of a series of interest payments, either at a fixed or variable
    rate, based upon the notional amount without the exchange of the underlying
    principal amount. The Company's exposure from these interest rate contracts
    results from the possibility that the other party may default on its
    contractual obligation, so-called counterparty risk. Credit risk is limited
    to the positive market value of the derivative financial instrument, which
    is significantly less than the notional value. The positive market value of
    the interest rate contracts was $454,241 at March 31, 1997.


11. COMMITMENTS AND CONTINGENCIES

    RESTRICTIONS ON CASH BALANCES - The Company is required to maintain certain
    average cash reserve balances with the Federal Reserve Bank. The reserve
    balance requirement as of March 31, 1997 was $22,708,000. In addition, other
    cash balances in the amount of $1,391,679 were pledged to secure clearings
    with a depository institution as of March 31, 1997.

    LEASE COMMITMENTS - Minimum future commitments on noncancelable operating
    leases at March 31, 1997 were as follows:

<TABLE>
<CAPTION>
 
                                                 Bank
    Fiscal Year Ending                         Premises           Equipment
<S>                                         <C>                 <C>
    1997                                       $ 3,197,158          $981,385
    1998                                         4,873,331           896,378
    1999                                         4,873,331           560,448
    2000                                         4,873,331            20,790
    2001 and beyond                             31,154,658                 -
</TABLE>


    Total rent expense was $1,559,000 and $1,568,611 for the three months
    ended  March 31, 1996 and 1997, respectively.

                                       13
<PAGE>
 
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

    On February 1, 1996, the Company entered into a five year facility
    management agreement with a third party provider of duplicating and delivery
    services. Under the terms of the agreement, the Company agreed to pay
    certain minimum annual charges, subject to increases due to certain usage
    thresholds. Service expense under this contract was $108,074 for the three
    months ended March 31, 1997. No service expense was recognized during the
    comparable 1996 period.

    CONTINGENCIES - The Company provides domestic and global custody,
    multicurrency accounting, institutional transfer agency, performance
    measurement, foreign exchange, securities lending, mutual fund
    administration and investment advisory services to a variety of financial
    asset managers, including mutual fund complexes, investment advisors, banks
    and insurance companies. Assets under custody and management, held by the
    Company in a fiduciary capacity, are not included in the consolidated
    balance sheets since such items are not assets of the Company. Management
    conducts regular reviews of its fiduciary responsibilities and considers the
    results in preparing its consolidated financial statements. In the opinion
    of management, there are no contingent liabilities at March 31, 1997 that
    are material to the consolidated financial position or results of operations
    of the Company.

12. FOREIGN EXCHANGE CONTRACTS

    The Company enters into foreign exchange contracts with clients and
    simultaneously enters into matched positions with another bank. These
    contracts are subject to market value fluctuations in foreign currencies.
    Gains and losses from such fluctuations are netted and recorded as an
    adjustment of asset administration fees. A summary of foreign exchange
    contracts outstanding at December 31, 1996 and March 31, 1997 is as follows
    (in thousands):

<TABLE>
<CAPTION>
 
                                       DECEMBER 31, 1996                               MARCH 31, 1997
                              -----------------------------------          -----------------------------------
                                                       UNREALIZED                                   UNREALIZED
CURRENCY                       PURCHASES    SALES      GAIN/LOSS            PURCHASES    SALES      GAIN/LOSS
<S>                          <C>        <C>           <C>                 <C>          <C>         <C>   
Japan (Yen)                   $ 40,828   $ 40,828           -               $ 37,159    $ 37,159         -
France (Franc)                   1,093      1,093           -                  9,521       9,521         -
Germany (Mark)                   2,118      2,118           -                  5,877       5,877         -
United Kingdom (Pound)           1,873      1,873           -                  5,530       5,530         -
Hong Kong (Dollar)               1,807      1,807           -                  3,543       3,543         -
Indonesia (Rupiah)                 198        198           -                  1,750       1,750         -
Netherlands (Guilder)              918        918           -                  1,615       1,615         -
Spain (Peseta)                      85         85           -                  1,489       1,489         -
Switzerland (Franc)                  -          -           -                  1,302       1,302         -
Canada (Dollar)                      -          -           -                  1,196       1,196         -
South Africa (Rand)                222        222           -                  1,166       1,166         -
Malaysia (Ringgit)               6,009      6,009           -                  1,157       1,157         -
Italy (Lira)                        51         51           -                  1,072       1,072         -
Other currencies                 1,944      1,944           -                  5,280       5,280         -
                              --------   --------        --------           --------    --------     ----------
                              $ 57,146   $ 57,146           -               $ 77,657    $ 77,657         -
                              ========   ========        ========           ========    ========     ========== 
</TABLE> 
<TABLE> 
<CAPTION> 
    The maturity of contracts outstanding as of March 31, 1997 is as follows:

                 Maturity                      Purchases       Sales
<S>                                           <C>            <C> 
                 April 1997                    $ 67,481       $67,481
                 May 1997                         2,535         2,535
                 June 1997                        5,141         5,141
                 August 1997                      2,500         2,500
</TABLE> 
 

                                       14
<PAGE>
 
13. REGULATORY MATTERS

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

    Quantitative measures established by regulation to ensure capital adequacy
    require the Bank to maintain minimum amounts and ratios (set forth in the
    table below) of total and Tier 1 capital (as defined in the regulations) to
    risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
    average assets (as defined). Management believes, as of March 31, 1997, that
    the Bank meets all capital adequacy requirements to which it is subject.

    As of December 21, 1996, the most recent notification from the Federal
    Deposit Insurance Corporation categorized the Bank as well capitalized under
    the regulatory framework for prompt corrective action. To be categorized as
    well capitalized the Bank must maintain minimum total risk-based, Tier 1
    risk-based, and Tier 1 leverage ratios as set forth in the table. There are
    no conditions or events since that notification that management believes
    have changed the institution's category. The following table presents the
    capital ratios for the Bank. The capital ratios for the Company are
    substantially similar to those of the Bank. 

<TABLE>
<CAPTION>
 
 
                                                                                To Be Well
                                                           Minimum          Capitalized Under
                                                         For Capital        Prompt Corrective
                                      Actual          Adequacy Purposes     Action Provisions
                             -----------------------------------------------------------------
                                  Amount     Ratio      Amount     Ratio      Amount     Ratio
                                  ------     -----      ------     -----      ------     -----
<S>                            <C>           <C>     <C>           <C>     <C>           <C>
As of March 31, 1997:
 
Total Capital
  (to Risk Weighted Assets)     $87,990,206  31.30%   $22,491,911   8.00%   $28,114,889  10.00%
Tier I Capital
  (to Risk Weighted Assets)     $87,890,206  31.26%   $11,245,956   4.00%   $16,868,933   6.00%
Tier I Capital
  (to Average Assets)           $87,890,206   8.04%   $43,726,099   4.00%   $54,657,623   5.00%
 
As of December  31, 1996:
 
Total Capital
  (to Risk Weighted Assets)     $60,818,485  24.71%   $19.691,528   8.00%   $24,614,410  10.00%
Tier I Capital
  (to Risk Weighted Assets)     $60,718,485  24.67%   $ 9,845,764   4.00%   $14,768,646   6.00%
Tier I Capital
  (to Average Assets)           $60,718,485   9.65%   $25,155,710   4.00%   $31,444,637   5.00%
 
</TABLE>

    Under Massachusetts law, trust companies such as the Bank may only pay
    dividends out of "net profits" and only to the extent that such payments
    will not impair the Bank's capital stock and surplus account. If, prior to
    declaration of a dividend, the Bank's capital stock and surplus accounts do
    not equal at least 10% of its deposit liabilities, then prior to the payment
    of the dividend, the Bank must transfer from net profits to its surplus
    account the amount required to make its surplus account equal to either (i)
    together with capital stock, 10% of deposit liabilities, or (ii) subject to
    certain adjustments, 100% of capital stock.

                                       15
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

OVERVIEW

         The following discussion and analysis of the financial condition and
 results of operations of the Company should be read in conjunction with the
 Company's Condensed Consolidated Financial Statements and related notes, which
 are included elsewhere in this Report. The Company, through its wholly owned
 subsidiary, Investors Bank & Trust Company, provides domestic and global
 custody, multicurrency accounting, institutional transfer agency, performance
 measurement, foreign exchange, securities lending, mutual fund administration
 and investment advisory services to a variety of financial asset managers,
 including 54 mutual fund complexes, investment advisors, banks and insurance
 companies. Currently, the Company provides financial asset administration
 services for assets totaling approximately $131 billion, including
 approximately $10 billion of foreign assets. The Company also engages in
 private banking transactions, including secured lending and deposit accounts.

         In November 1996, the Bank executed agreements with the Merrimac Master
 Portfolio and the Merrimac Funds, newly formed master-feeder investment
 companies (the "Funds"), pursuant to which the Company has agreed to act as
 investment advisor to the Funds. At the same time, the Company engaged the Bank
 of New York to act as sub-advisor to manage the investments of the Funds. In
 addition to acting as advisor to the Funds, the Bank has entered into
 agreements to provide custody, fund accounting, administration, transfer agency
 and certain other related services to the Funds. Currently, the Funds have two
 operating master funds, the Merrimac Cash Portfolio and the Merrimac Treasury
 Portfolio, and three operating feeder funds, the Merrimac Cash Fund, the
 Merrimac Global Cash Fund and the Merrimac Treasury Fund. The Merrimac feeder
 funds offer shares only to institutions and other "accredited investors" (as
 that term is defined in Rule 501(a) under the Securities Act of 1933) and
 invest all of their assets in the Merrimac master funds. The Funds may add
 additional feeder funds and master funds in the future.

         On January 31, 1997, the Company completed the issuance and sale of
 $25,000,000 in 9.77% Capital Securities (the "Capital Securities"). The Capital
 Securities were issued by Investors Capital Trust I, a Delaware statutory
 business trust sponsored by the Company. The capital raised in the offering,
 along with existing capital and earnings generated in the future, will be used
 to support the Company's balance sheet growth resulting from deposits expected
 to be obtained from asset administration clients. The Capital Securities
 qualify as Tier 1 capital under the capital guidelines of the Federal Reserve.
 Under current Federal Reserve guidelines, no more than 25% of the Company's
 Tier 1 capital may comprise Capital Securities and other capital securities and
 cumulative preferred stock of the Company. See "Part II- Recent Sales of
 Unregistered Securities."

         The Company derives its revenues from financial asset administration
 services and private banking transactions. Although interest income and
 noninterest income are reported separately for financial statement presentation
 purposes, the Company's clients view the pricing of the Company's asset
 administration and banking service offerings on a bundled basis. In
 establishing a fee structure for a specific client, management analyzes the
 expected revenue and related expenses, as opposed to separately analyzing fee
 income and interest income and related expenses for each from such
 relationship. Accordingly, management believes net operating revenue (net
 interest income plus noninterest income) and net income are meaningful measures
 of financial results. Revenue generated from asset administration and other
 fees and interest income increased 44% from $16,865,000 in the first three
 months of 1996 to $24,216,000 in the first three months of 1997.

         Noninterest income consists primarily of fees for financial asset
 administration and is principally derived from custody, multicurrency
 accounting, transfer agency and administration services for financial asset
 managers and the assets they control. The Company's clients pay fees based on
 the volume of assets under custody, the number of securities held and portfolio
 transactions, income collected and whether other value-added services such as
 foreign exchange, securities lending and performance measurement are needed.
 Asset-based fees are usually charged on a sliding scale. As such, when the
 assets in a portfolio under custody grow as a result of changes in market
 values or cash inflows, the Company's fees may be a smaller percentage of those
 assets. Fees for individually managed accounts, such as custodial, trust and
 portfolio accounting services for individuals, investment advisors, private
 trustees, financial planners, other banks and fiduciaries, and other
 institutions are also included in noninterest income.

         Net interest income represents the difference between income generated
 from interest-earning assets and expense on interest-bearing liabilities.
 Interest-bearing liabilities are generated by the Company's clients who, in the
 course of their financial asset management, generate cash balances which they
 deposit on a short-term basis with the Company. The

                                       16
<PAGE>
 
 Company invests these cash balances and remits a portion of the earnings on
 these investments to its clients. The Company's share of earnings from these
 investments is viewed as part of the total package of compensation paid to the
 Company from its clients for performing asset administration services.

 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

         From time to time, information provided by the Company, statements made
 by its employees or information included in its filings with the Securities and
 Exchange Commission (including this Form 10-Q) may contain statements which are
 not historical facts, so-called "forward-looking statements," and which involve
 risks and uncertainties. The Company's actual future results may differ
 significantly from those stated in any forward-looking statements. Factors that
 may cause such differences include, but are not limited to, the factors
 discussed below. Each of these factors, and others, are discussed from time to
 time in the Company's filings with the Securities and Exchange Commission.

         The Company's future results may be subject to substantial risks and
 uncertainties. Because certain fees charged by the Company for its services,
 including fees for the provision of investment advisory and other services to
 the Merrimac Funds and the Merrimac Master Portfolios, are based on the market
 values of assets processed, such fees and the Company's quarterly and annual
 operating results are sensitive to changes in interest rates, declines in stock
 market values, and investors seeking alternatives to the investment offerings
 of the Company's clients. Also, the Company's interest-related services, along
 with the market value of the Company's investments, may be adversely affected
 by rapid changes in interest rates. In addition, many of the Company's client
 engagements are, and in the future are likely to continue to be, terminable
 upon 60 days notice. Also, the Company relies on certain intellectual property
 protections to preserve its intellectual property rights. Any invalidation of
 the Company's intellectual property rights or lengthy and expensive defense of
 those rights could have a material adverse affect on the Company. The segment
 of the financial services industry in which the Company is engaged is extremely
 competitive. Certain current and potential competitors of the Company are more
 established and benefit from greater market recognition and have substantially
 greater financial, development and marketing resources than the Company.

         The Company's quarterly and annual operating results are affected by a
 wide variety of factors that could materially adversely affect revenues and
 profitability, including: the timing of the commencement or termination of
 client engagements, the rate of net inflows and outflows of investor funds in
 the debt and equity-based investment vehicles offered by the Company's clients,
 the introduction and market acceptance of new services by the Company and
 changes or anticipated changes in economic conditions. Because the Company's
 operating expenses are relatively fixed, any unanticipated shortfall in
 revenues in a quarter may have an adverse impact on the Company's results of
 operations for that quarter. As a result of the foregoing and other factors,
 the Company may experience material fluctuations in future operating results on
 a quarterly or annual basis which could materially and adversely affect its
 business, financial condition, operating results and stock price.

 STATEMENT OF OPERATIONS

 Comparison of Operating Results for the Quarters Ended March 31, 1997 and 1996

 Noninterest Income

         Noninterest income increased $4,816,000 to $17,760,000 for the quarter
 ended March 31, 1997 from $12,944,000 for the prior period. Noninterest income
 consists of the following items:

<TABLE>
<CAPTION>
 
                                                           For the Quarters Ended
                                                                 March 31,
                                                       ------------------------------    -------------------
                                                         1996                 1997             Change
                                                       --------             --------     -------------------
                                                           (Dollars in thousands)
<S>                                                  <C>                   <C>          <C>
Asset administration fees                              $ 12,798             $ 17,626             38%
Computer service fees                                       124                  116             (6)
Other operating income                                       20                   18            (10)
Gain on sale of security available for sale                   2                  -                -
                                                       --------             --------
Total Noninterest Income                               $ 12,944             $ 17,760             37%
                                                       ========             ========
</TABLE>

                                       17
<PAGE>
 
         Asset administration fees increased due principally to higher levels of
 assets processed.  Assets processed is the total dollar value of financial
 assets on the reported date for which the Company provides one or more of the
 following services:  custody, multicurrency accounting, institutional transfer
 agency, performance measurement, foreign exchange, securities lending, mutual
 fund administration and investment advisory services.  Total assets processed
 increased to $131 billion at March 31, 1997 from $100 billion at March 31,
 1996.  Of the $31 billion net increase in assets processed during the period,
 approximately 26% of the increase reflects assets processed for new clients,
 and the remainder of the of the increase reflects growth of assets processed
 for existing clients.  The remainder of the growth in asset administration fees
 was due to the net expansion of relationships with existing clients, increased
 use of the Company's foreign exchange and securities lending services, and
 advisory fees related to the Merrimac Funds.

         Computer service fees consist of amounts charged by the Company to
 Eaton Vance for data processing services related to individual accounts managed
 by Eaton Vance. Other operating income consists of miscellaneous transaction-
 oriented private banking fees.


 Operating Expenses

         Total operating expenses increased by $4,797,000 to $19,314,000 for the
 quarter ended March 31, 1997 compared to $14,517,000 for the quarter ended
 March 31, 1996. The components of operating expenses were as follows:


<TABLE>
<CAPTION>
 
 
                                     For the Quarters Ended
                                            March 31,
                                     ----------------------        --------
                                         1996       1997            Change
                                     ----------   --------         --------
                                     (Dollars in thousands)
<S>                                    <C>        <C>            <C>
Compensation                          $ 7,437    $ 9,821              32%
Pension and other employee benefits     1,351      1,647              22
Occupancy                               1,161      1,088              (6)
Equipment                               1,306      1,619              24
Insurance                                 305        182             (40)
Subcustodian fees                         822      1,438              75
Depreciation and amortization             311        388              25
Professional fees                         554        917              66
Travel and sales promotion                199        332              67
Other operating expenses                1,071      1,882              76
                                     ----------  --------
Total Operating Expenses              $14,517    $19,314              33%
                                     ==========  ========
 
</TABLE>

         Compensation of officers and employees increased by $2,384,000 or 32%
from quarter to quarter due to several factors. The average number of employees
increased 25% to 852 during the quarter ended March 31, 1997 from 680 during the
same period in 1996. This increase relates primarily to the increase in new
client relationships and to the expansion of existing client relationships
during the period. In addition, compensation expense related to the Company's
management incentive plan increased because of the increase in earnings in the
first quarter of 1997 compared to the first quarter of 1996. The remainder of
the increase in compensation expense resulted from salary increases.

         Pension and other employee benefits increased to $1,647,000 for the
quarter ended March 31, 1997 from $1,351,000 for the same period in 1996. The
22% increase was due principally to increased payroll taxes attributable to the
increase in compensation expense. In addition, the Company recognized costs
associated with establishing a defined benefit retirement plan for the Company's
Dublin subsidiaries, including approximately $90,000 of expense recognized for
employees' service for prior years.

         Equipment expense consists of operating lease payments for
microcomputers and fees charged by Electronic Data Systems for mainframe data
processing and data storage services provided to the Company. These expenses
vary with the level of assets processed by the Company. The $313,000 increase
between periods is due principally to the growth in assets processed.

                                       18
<PAGE>
 
         Insurance expense decreased 40% from $305,000 for the quarter ended
March 31, 1996 to $182,000 for the quarter ended March 31, 1997 due to the
renegotiation, in May 1996, of the Company's coverage for errors and omissions
liability, directors and officers liability and blanket bond.

         Subcustodian expense increased $616,000 to $1,438,000 for the quarter
ended March 31, 1997 from $822,000 for the quarter ended March 31, 1996. This
increase resulted from the increase in foreign assets processed, which are
typically subject to higher subcustodian fees than domestic assets processed,
from $7.5 billion at March 31, 1996 to $9.9 billion at March 31, 1997, and from
the movement by clients into emerging markets with higher cost structures.

         Depreciation and amortization expense increased $77,000 between periods
due to purchases of furniture, equipment, and capitalized software in late 1996
and in 1997.

         Professional fees increased $363,000 to $917,000 for the quarter ended
March 31, 1997 from $554,000 for the quarter ended March 31, 1996. This increase
results primarily from the Company's increased use of contract programmers to
perform systems development work.

         Travel and sales promotion expense increased $133,000 to $332,000 for
the quarter ended March 31, 1997 from $199,000 for the quarter ended March 31,
1996 due to increased travel to the foreign subsidiaries.

         Other operating expenses include fees for daily market pricing data,
recruiting costs, telephone and office supplies expense, and temporary help.
These expenses increased $811,000 to $1,882,000 for the quarter ended March 31,
1997 from $1,071,000 for the quarter ended March 31, 1996. Fees for daily market
pricing data, which vary with the level of assets processed, increased by
$71,000 during the period. Recruiting costs and costs of temporary help
accounted for $349,000 of the quarterly increase; this increase relates to the
tight labor market caused by a period of low unemployment in Massachusetts
during the first quarter of 1997. Other expenses such as telephone and office
supplies vary with staffing levels. Expenses relating to these items represented
$142,000 of the quarterly increase. Additionally, $108,000 of the increase
related to the Company's decision to outsource its mailroom and photocopy
facility in February, 1996; expenses related to these services were included in
compensation prior to that time. Approximately $119,000 of the increase relates
to annual maintenance fees related to software used to generate automated
financial statements for the Company's clients as part of its expanded mutual
fund administration services.

Net Interest Income

         Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities or changes in
interest rates for the quarter ended March 31, 1997 compared to the same period
in 1996.


<TABLE>
<CAPTION>
 
                                      Change   Change
                                      Due to   Due to
                                      Volume    Rate     Net
                                      ------   ------  --------
                                       (Dollars in thousands)
<S>                                   <C>      <C>      <C>
INTEREST-EARNING ASSETS
Fed funds sold and
    interest-earning deposits         $  240   $ (15)   $  225
Investment securities                  8,713    (117)    8,596
Loans                                    324     (78)      246
                                      ------   ------   ------
Total interest-earning assets          9,277    (210)    9,067
 
INTEREST-BEARING LIABILITIES
Deposits                               3,270     196     3,466
Borrowings                             3,119     (32)    3,087
                                      ------   ------   ------
Total interest-bearing liabilities     6,389     164     6,553
                                      ------   ------   ------
Change in net interest income         $2,888   $(374)   $2,514
                                      ======   ======   ======
</TABLE>

                                       19
<PAGE>
 
         Net interest income increased $2,514,000 or 64% to $6,456,000 for the
quarter ended March 31, 1997 from $3,942,000 for the same period in 1996. This
net increase resulted from an increase in interest income of $9,067,000 offset
in part by an increase in interest expense of $6,553,000. The net impact of the
above changes was a 165 basis point decrease in net interest margin.

         The increase in interest income resulted primarily from a higher level
of interest earning assets. As discussed above, the elimination of the CEBA
asset growth restriction has allowed the Company to accept deposits from clients
which it had historically directed to other financial institutions. The
Company's average assets for the quarter ended March 31, 1997 increased
$610,550,000 or 151% compared to the same period in 1996. This growth primarily
resulted from an increase in average interest earning assets of $592,713,000.

         Interest expense increased $6,553,000 due primarily to a $541,632,000
increase in deposits and short term borrowings for the quarter ended March 31,
1997 compared to the same period in 1996. Also, to a lesser extent, interest
expense increased due to an increase in the average interest rate paid by the
Company from 4.66% to 4.80% during the period.

Income Taxes

         The Company's earnings were taxed on the federal level at 35% for the
1997 and 1996 periods. State taxes on the gross earnings from the Company's
portfolio of investment securities, held by a wholly-owned subsidiary, were
assessed at the tax rate for Massachusetts securities corporations of 1.32%.
State taxes on the remainder of the Company's taxable income were assessed at
the tax rate for Massachusetts banks of 11.32%. The provision for income taxes
for the quarter ended March 31, 1997 increased by $895,000 over the same period
in 1996. The overall effective tax rate decreased to 37.2% for the quarter ended
March 31, 1997, from 39.5% for the same period in 1996. The decrease in the
effective tax rate is due to the Company's investment in municipal securities in
the first quarter of 1997.

FINANCIAL CONDITION

Investment Portfolio

The following table summarizes the Company's investment portfolio
for the dates indicated:
<TABLE>
<CAPTION>
 
                                       December 31,                March 31,
                                           1996                      1997
                                     --------------              -----------
                                               (Dollars in thousands)
<S>                                  <C>                      <C>
SECURITIES HELD TO MATURITY:
State and political subdivisions       $       -                 $   33,325
Mortgage-backed securities               414,665                    532,885
Federal Agency securities                 37,517                     78,426
Foreign government securities              7,828                      7,814
                                       ---------                 ----------
Total securities held to maturity      $ 460,010                   $652,450
                                       =========                 ==========

SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities               $  40,259                 $   40,019
Mortgage-backed securities               230,862                    264,217
                                       ---------                 ----------
Total securities available for sale    $ 271,121                 $  304,236
                                       =========                 ==========
</TABLE>

         The investment portfolio is used to invest depositors' funds and
provide a secondary source of earnings for the Company. In addition, the Company
uses the investment portfolio to secure open positions at securities clearing
institutions in connection with its custody services. The portfolio is composed
of U.S. Treasury securities, mortgage-backed securities issued by the Federal
National Mortgage Association ("FNMA" or "Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("FHLMC" or "Freddie Mac"), and Federal Agency callable
bonds issued by FHLMC and the Federal Home Loan Bank of

                                       20
<PAGE>
 
Boston (the "FHLBB"), municipal securities, and foreign government bonds issued
by the Canadian provinces of Ontario and Manitoba.

         The Company invests in mortgage-backed securities and Federal Agency
callable bonds to supplement its portfolio of U.S. Treasury securities and
increase the total return of the investment portfolio. Mortgage-backed
securities generally have a higher yield than U.S. Treasury securities due to
credit risk and prepayment risk. Credit risk results from the possibility that a
loss may occur if a counterparty is unable to meet the terms of a contract.
Prepayment risk results from the possibility that changes in interest rates may
cause mortgage securities to be paid off prior to their maturity dates. Federal
Agency callable bonds generally have a higher yield than U.S. Treasury
securities due to credit risk and call risk. Credit risk results from the
possibility that the Federal Agency issuing the bonds may be unable to meet the
terms of the bond. Call risk results from the possibility that fluctuating
interest rates and other factors may result in the exercise of the call option
by the Federal Agency. Credit risk related to mortgage-backed securities and
Federal Agency callable bonds is substantially reduced by payment guarantees and
credit enhancements.

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

         The Company invests in foreign government bonds in order to generate
foreign source income to maximize the use of the foreign tax credit. The foreign
government bonds are denominated in U.S. dollars to avoid foreign currency risk.
These bonds are subject to credit risk.

         The book value and weighted average yield of the Company's securities
held to maturity at March 31, 1997, by effective maturity, are reflected in the
following table.

<TABLE>
<CAPTION>
                                                                        Weighted
                                                             Book        Average
                                                             Value        Yield 
                                                         -------------  --------
<S>                                                      <C>          <C>     
                   Due within one year                     $       -            
                   Due from one to five years                137,036        6.68%
                   Due after five years up to ten years      364,058        6.84%
                   Due after ten years                       151,356        6.36%
                                                           ---------  
                   Total securities                        $ 652,450
                                                           =========
</TABLE>
The book value and weighted average yield of the Company's securities available
for sale at March 31, 1997, by effective maturity, are reflected in the
following table.
<TABLE>
<CAPTION>
 
                                                                       Weighted
                                                             Book       Average
                                                             Value       Yield
                                                           ---------   --------
<S>                                                         <C>        <C>
                   Due within one year                      $ 20,094      6.35%
                   Due from one to five years                245,480      6.86%
                   Due after five years up to ten years       38,662      7.05%
                                                            --------
                   Total securities                         $304,236
                                                            ========
</TABLE>
The maturities of mortgage backed securities have been allocated on the above
tables as described in Note 3 of the Notes to Condensed Consolidated Financial
Statements.

                                       21
<PAGE>
 
Loan Portfolio

 The following table summarizes the Company's loan portfolio for the dates
indicated:
<TABLE>
<CAPTION>
 
                                               December 31,   March 31,             
                                                   1996          1997              
                                                 ----------  ----------             
                                                (Dollars in thousands)             
<S>                                         <C>            <C>                     
Loans to individuals                                $23,449     $17,837             
Loans to not-for-profit organizations                    13          13             
Loans to mutual funds                                42,875      58,858             
                                                 ----------  ----------             
                                                     66,337      76,708             
Less:  allowance for loan losses                       (100)       (100)
                                                 ----------  ----------             
Net loans                                           $66,237     $76,608             
                                                                                   
Floating Rate                                       $66,324     $76,695             
Fixed Rate                                               13          13             
                                                 ----------  ----------             
                                                    $66,337     $76,708             
                                                 ==========  ==========             
</TABLE>

         Virtually all loans to individually managed account customers are
written on a demand basis, bear variable interest rates tied to the prime rate
and are fully secured by liquid collateral, primarily freely tradable securities
held in custody by the Company for the borrower. Since December 1995, the
Company has entered into agreements to provide up to an aggregate of $40 million
under lines of credit to mutual fund clients. These unsecured lines of credit
may, in the event of a default, be collateralized at the Company's option by
securities held in custody by the Company for those mutual funds. Loans to
mutual funds also include advances by the Company to certain mutual fund clients
pursuant to the terms of the custody agreements between the Company and those
clients. The advances facilitate securities transactions and redemptions
involving those mutual funds and are fully collateralized by liquid collateral,
primarily freely tradable securities held in custody by the Company for those
mutual funds.

         At March 31, 1997, the Company's only lending concentrations which
exceeded 10% of total loans were revolving lines of credit to mutual fund
clients as discussed above. These loans were made in the ordinary course of
business on the same terms and conditions prevailing at the time for comparable
transactions. The Company also had a lending relationship at March 31, 1997 with
Landon T. Clay, an officer of Eaton Vance and a principal stockholder of the
Company, representing two loans aggregating $1,200,000 in principal amount.
These loans to Mr. Clay were made in the ordinary course of business on the same
terms and conditions prevailing at the time for comparable transactions with
unrelated third parties. Each of these loans was secured with non-voting common
stock of Eaton Vance.

         The Company's credit loss experience has been excellent. There have
been no loan chargeoffs in the history of the Company. It is the Company's
policy to place a loan on non-accrual status when either principal or interest
becomes 60 days past due and the loan's collateral is not sufficient to cover
both principal and accrued interest. As of March 31, 1997, there were no past
due loans, troubled debt restructurings, or any loans on nonaccrual status.
Although virtually all of the Company's loans are fully collateralized with
freely tradable securities, management recognizes some credit risk inherent in
the loan portfolio, and has recorded an allowance for loan losses of
approximately $100,000 at March 31, 1997. This amount is not allocated to any
particular loan, but is intended to absorb any risk of loss inherent in the loan
portfolio. Management actively monitors the loan portfolio and the underlying
collateral and regularly assesses the adequacy of the allowance for loan losses.


INTEREST RATE SENSITIVITY

         Interest rate risk arises when an earning asset matures or when its
rate of interest changes in a time frame different from that of the supporting
interest-bearing liability. By seeking to minimize the difference between the
amount of earning assets and the amount of interest-bearing liabilities that
could change interest rates in the same time frame, the Company attempts to
reduce the risk of significant adverse effects on net interest income caused by
interest rate changes. The Company does not attempt to match each earning asset
with a specific interest-bearing liability. Instead, as shown in the table
below, it aggregates all of its earning assets and interest-bearing liabilities
to determine the difference between these in specific time 

                                       22
<PAGE>
 
frames. This difference is known as the rate-sensitivity gap. A positive gap
indicates that more earning assets than interest-bearing liabilities mature in a
time frame, and a negative gap indicates the opposite. Maintaining a balanced
position will reduce risk associated with interest rate changes, but it will not
guarantee a stable interest rate spread because the various rates within a time
frame may change by differing amounts and change in different directions.

         The Company seeks to manage interest rate risk by investment portfolio
actions designed to address the interest rate sensitivity of asset cash flows in
relation to liability cash flows. Portfolio actions used to manage interest rate
risk include managing the effective duration of the portfolio securities and
utilizing interest rate floors and interest rate swaps. Interest rate floors and
interest rate swaps involve elements of credit and market risk which are not
reflected in the Company's consolidated financial statements. Such instruments
are entered into for hedging (as opposed to investment or speculative) purposes.
There can be no assurance that such portfolio actions will adequately limit
interest rate risk.

                                       23
<PAGE>
 
         The following table presents the repricing schedule for the Company's
interest earning assets and interest bearing liabilities at March 31, 1997:
<TABLE>
<CAPTION>
 
                                             Within       Over Three    Over Six    Over One
                                              Three         to Six     to Twelve     Year to    Over Five
                                             Months         Months       Months    Five Years     Years       Total
                                          -----------   -------------  ---------  -----------  ----------  -----------
                                                                     (Dollars in thousands)
<S>                                       <C>            <C>           <C>         <C>          <C>         <C>
Interest earning assets (1):

   Investment securities (2)              $   381,768     $ 164,467     $177,327     $129,656    $103,468   $  956,686
   Loans - fixed rate                                                                      13                       13
   Loans - variable rate                       76,695                                                           76,695
                                          -----------     ---------     --------     --------    --------   ----------
       Total interest earning assets          458,463       164,467      177,327      129,669     103,468    1,033,394
                                          -----------     ---------     --------     ---------   --------   ----------
  
Interest bearing liabilities:
   Demand deposit accounts                    110,961                                                          110,961
   Savings accounts                           280,263                                                          280,263
   Interest rate contracts                   (180,000)       50,000       80,000       50,000                        0
   Short term borrowings                      365,181                                                          365,181
                                          -----------     ---------     --------     --------    --------   ----------
       Total interest bearing                 
        liabilities                           576,405        50,000       80,000       50,000           0      756,405
                                          -----------     ---------     --------     --------    --------   ----------
  
       Net interest sensitivity gap
       during the period                   ($ 117,942)    $ 114,467     $ 97,327     $ 79,669    $103,468   $  276,989
                                          ===========     =========     ========     ========    ========   ==========
 
       Cumulative gap                      ($ 117,942)    ($  3,475)    $ 93,852     $173,521    $276,989
                                          ===========     =========     ========     ========    ========   
 
 
Interest sensitive assets as a
   percent of interest sensitive
   liabilities (cumulative)                     79.54%        99.45%      113,29%      122.94%     136.62%
 
Interest sensitive assets as a
   percent of total assets
   (cumulative)                                 41.90%        56.93%       73.13%       84.98%      94.44%
 
 
Net interest sensitivity gap as a
   percent of total assets                     (10.78%)       10.46%        8.89%        7.28%       9.46%
 
Cumulative gap as a percent
   of total assets                             (10.78%)       (0.32%)       8.58%       15.86%      25.31%
---------------------------------
</TABLE>
 
(1)  Adjustable rate assets are included in the period in which interest rates
     are next scheduled to adjust rather than in the period in which they are
     due. Fixed rate loans are included in the period in which they are
     scheduled to be repaid.

(2)  Mortgage-backed securities are included in the pricing category that
     corresponds with their effective maturity.

                                       24
<PAGE>
 
LIQUIDITY

         Liquidity represents the ability of an institution to meet present and
 future financial obligations through either the sale or maturity of existing
 assets or the acquisition of additional funds through liability management. For
 a financial institution such as the Company, these obligations arise from the
 withdrawals of deposits and the payment of operating expenses.

         The Company's primary sources of liquidity include cash and cash
 equivalents, federal funds sold, demand loans to individuals, new deposits,
 short term borrowings, interest payments on securities held to maturity and
 available for sale, fees collected from asset administration clients, and the
 capital raised from the sale of the Capital Securities.  Asset liquidity is
 also provided by managing the duration of the investment portfolio.  As a
 result of the Company's management of liquid assets and the ability to generate
 liquidity through liability funds, management believes that the Company
 maintains overall liquidity sufficient to meet its depositors' needs, to
 satisfy its operating requirements and to fund the payment of an anticipated
 annual cash dividend of approximately $.08 per share.

         The Company's ability to pay dividends on the Common Stock and Class A
 Common Stock depends on the receipt of dividends from Investors Bank & Trust
 Company.  Any dividend payments by Investors Bank & Trust Company are subject
 to certain restrictions imposed by the Massachusetts Commissioner of Banks.
 Subject to regulatory requirements, Investors Bank & Trust Company expects to
 pay an annual dividend to the Company, which the Company expects to pay to its
 stockholders, currently estimated to be in an amount equal to $.08 per share of
 outstanding Common Stock and Class A Common Stock (approximately $515,625 based
 upon 6,445,312 shares outstanding as of March 31, 1997).

         At March 31, 1997, cash and cash equivalents were 2% of total assets.
 At March 31, 1997, approximately $20 million or 2% of total interest earning
 assets mature within a one year period.

         The Company has informal borrowing arrangements with various
 counterparties whereby each counterparty has agreed to make funds available to
 the Company at the Federal funds overnight rate. The aggregate amount of these
 borrowing arrangements is $86 million. Each bank may terminate its arrangement
 at any time and is under no contractual obligation to provide requested funding
 to the Company. The Company's borrowings under these arrangements are typically
 on an overnight basis. The Company believes that if these banks were unable to
 provide funding as described above, a satisfactory alternative source of
 funding would be available to the Company.

         The Company also has Master Repurchase Agreements in place with various
 counterparties whereby each broker has agreed to make funds available to the
 Company at various rates in exchange for collateral consisting of marketable
 securities. The aggregate amount of these borrowing arrangements is $425
 million.

         The Company also has a borrowing arrangement with the FHLBB whereby the
 Company may borrow amounts determined by prescribed collateral levels and the
 amount of FHLBB stock held by the Company.  The minimum amount of FHLBB stock
 held by the Company is required to be the greater (i) 1% of its outstanding
 residential mortgage loan principal (including mortgage pool securities), (ii)
 0.3% of total assets, (iii) total advances from the FHLBB, divided by a
 leverage factor of 20.  The aggregate amount of borrowing available to the
 Company under this arrangement at March 31, 1997 was $481 million.

         The Company's cash flows are comprised of three primary
 classifications: cash flows from operating activities, investing activities,
 and financing activities. Cash flows provided by operating activities were
 $3,306,000 and $5,595,000 for the quarters ended March 31, 1996 and 1997,
 respectively. Net cash used by investing activities, consisting primarily of
 purchases of investment securities and proceeds from maturities of investment
 securities, was $220,942,000 and $121,506,000 for the quarters ended March 31,
 1996 and 1997, respectively. Net cash provided by financing activities was
 $224,833,000 and $119,767,000 for the quarters ended March 31, 1996 and 1997,
 respectively. Net cash from financing activities in both periods consisted
 primarily of net activity in deposits, but also included, during the 1997
 period, the issuance of the Capital Securities.

                                       25
<PAGE>
 
 CAPITAL RESOURCES

         Historically, the Company has financed its operations primarily through
 internally generated cash flows.  The Company incurs capital expenditures for
 furniture, fixtures and miscellaneous equipment needs.  The Company leases
 microcomputers through operating leases.  Such capital expenditures have been
 incurred and such leases entered into on an as-required basis, primarily to
 meet the growing operating needs of the Company.  As a result, the Company's
 capital expenditures were $106,000 and $286,000 for the quarters ended March
 31, 1996 and 1997, respectively.

         On January 31, 1997, the Company completed the issuance and sale of
 $25,000,000 in 9.77% Capital Securities.  The capital raised in the offering,
 along with existing capital and earnings generated in the future, will be used
 to support the Company's balance sheet growth resulting from deposits expected
 to be obtained from asset administration clients.

         Stockholders' equity at March 31, 1997 was $64,724,000, an increase of
 $2,865,000 or 4.6%, from $61,859,000 at December 31, 1996.  The ratio of
 stockholders' equity to assets decreased to 5.91% at March 31, 1997 from 6.41%
 at December 31, 1996 due to the significant increase in assets.  The Capital
 Securities, net of issuance costs of $755,000, combined with stockholders'
 equity comprise the Company's total capitalization.

         The Federal Reserve Board has adopted a system using internationally
 consistent risk-based capital adequacy guidelines to evaluate the capital
 adequacy of banks and bank holding companies.  Under the risk-based capital
 guidelines, different categories of assets are assigned different risk weights,
 based generally upon the perceived credit risk of the asset.  These risk
 weights are multiplied by corresponding asset balances to determine a "risk-
 weighted" asset base. Certain off-balance sheet items, which previously were
 not expressly considered in capital adequacy computations, are added to the
 risk-weighted asset base by converting them to a balance sheet equivalent and
 assigning them the appropriate risk weight.

         Federal Reserve Board and FDIC guidelines require that banking
 organizations have a minimum ratio of total capital to risk-adjusted assets and
 off balance sheet items of 8.0%. Total capital is defined as the sum of "Tier
 I" and "Tier II" capital elements, with at least half of the total capital
 required to be Tier I. Tier I capital includes, with certain restrictions, the
 sum of common stockholders' equity, noncumulative perpetual preferred stock, a
 limited amount of cumulative perpetual preferred stock, and minority interests
 in consolidated subsidiaries, less certain intangible assets. Tier II capital
 includes, with certain limitations, subordinated debt meeting certain
 requirements, intermediate-term preferred stock, certain hybrid capital
 instruments, certain forms of perpetual preferred stock, as well as maturing
 capital instruments and general allowances for loan losses.

         The following table summarizes the Bank's Tier I and total capital
 ratios at March 31, 1997:

 <TABLE>
<CAPTION>
 
                                              March 31, 1997
                                           ---------------------
                                            Amount         Ratio
                                         -----------      ---------
                                            (Dollars in thousands)
<S>                                     <C>          <C>
Tier I capital                           $   87,890        31.3%
Tier I capital minimum requirement           11,246         4.0%
                                         ----------    ---------
Excess Tier I capital                    $   76,644        27.3%
                                         ==========    =========
 
Total capital                            $   87,990        31.3%
Total capital minimum requirement            22,492         8.0%
                                         ----------    ---------
Excess total capital                     $   65,498        23.3%
                                         ==========    =========
Risk adjusted assets, net of
    intangible assets                    $  281,149
                                         ==========
 
 
</TABLE>

         In addition to the risk-based capital guidelines, the Federal Reserve
 Board and the FDIC use a "Leverage Capital Ratio" as an additional tool to
 evaluate capital adequacy. The Leverage Capital Ratio is defined to be a
 company's Tier I capital divided by its adjusted total assets. The Leverage
 Capital Ratio adopted by the federal banking

                                       26
<PAGE>
 
 agencies requires a ratio of 3.0% Tier I capital to adjusted average total
 assets for top rated banking institutions. All other banking institutions will
 be expected to maintain a Leverage Capital Ratio of 4.0% to 5.0%. The
 computation of the risk-based capital ratios and the Leverage Capital Ratio
 requires that the capital of the Company be reduced by most intangible assets.
 The Bank's Leverage Capital Ratio at March 31, 1997 was 8.04%, which is in
 excess of regulatory requirements. The capital ratios of the Company are
 substantially similar to those of the Bank.

         The following tables present average balances, interest income and
 expense, and yields earned or paid on the major categories of assets and
 liabilities for the periods indicated.

<TABLE>
<CAPTION>
 
 
                                            Three Months Ended March 31, 1996     Three Months Ended March  31, 1997
                                        ----------------------------------------------------------------------------
                                            Average                   Average       Average                 Average
                                            Balance      Interest    Yield/Cost     Balance     Interest  Yield/Cost
                                        ----------------------------------------------------------------------------
<S>                                       <C>           <C>         <C>           <C>           <C>       <C>
INTEREST-EARNING ASSETS
Fed funds sold and securities
    purchased under resale agreements        $ 33,264       $  445         5.35%   $   51,544    $   676        5.25%
Interest-earning deposits                         505            6         4.75%            -          -           -
Investment securities                         305,127        5,096         6.68%      839,559     13,692        6.52%
Loans                                          22,759          418         7.35%       63,265        664        4.20%
                                            ---------     --------     ---------    ---------   ---------   --------
Total interest-earning assets                 361,655        5,965         6.60%      954,368     15,032        6.30%
                                                          --------     ---------                ---------   --------
Allowance for loan losses                         (49)                                   (100)
Noninterest-earning assets                     42,899                                  60,787
                                           ----------                              ---------- 
Total assets                                 $404,505                              $1,015,055
                                           ==========                              ==========
 
INTEREST-BEARING LIABILITIES
Deposits:
   Demand                                    $ 76,941          909         4.73%   $  119,986      1,462        4.87%
   Savings                                     13,009           72         2.21%      253,387      2,985        4.71%
Short Term Borrowings                          83,536        1,042         4.99%      341,745      4,129        4.83%
                                             --------    ---------     ---------   ----------  ---------    ---------
Total interest-bearing liabilities            173,486        2,023         4.66%      715,118      8,576        4.80%
                                                         ---------     ---------   ----------  ---------    ---------
Noninterest bearing liabilities
   Demand deposits                            126,930                                 161,048
   Noninterest bearing time deposits           45,000                                  48,944
   Other liabilities                            7,502                                  10,813
                                             --------                               --------- 
Total liabilities                             352,918                                 935,923
Trust Preferred Stock                               -                                  15,894
Equity                                         51,587                                  63,238
                                            ---------                              ---------- 
Total liabilities and equity                 $404,505                              $1,015,055
                                            =========                              ==========
 
Net interest income                                      $  3,942                               $  6,456
                                                         ========                               =========
 
Net interest margin (1)                                                    4.36%                                2.71%
Average interest rate spread (2)                                           1.94%                                1.50%
Ratio of interest-earning assets to                                       208.5%                               133.5%
   interest-bearing liabilities
----------------------------------------
</TABLE>
 
(1) Net interest income divided by  total interest-earning assets
(2) Yield on interest-earning assets less rate paid on interest-bearing
    liabilities

                                       27
<PAGE>
 
 PART II - OTHER INFORMATION

 ITEM 2.  RECENT SALES OF UNREGISTERED SECURITIES

    On January 31, 1997, the Company completed the issuance and sale of
 $25,000,000 in 9.77% Capital Securities.  The Capital Securities were issued by
 Investors Capital Trust I, a Delaware statutory business trust sponsored by the
 Company.  The sale of the Capital Securities was underwritten by Keefe,
 Bruyette & Woods, Inc. ("Keefe"), pursuant to which Keefe received compensation
 in the amount of $562,500.  The Capital Securities were sold only to "Qualified
 Institutional Buyers" (as defined in Rule 144A under the Securities Act of 1933
 (the "Act") and institutional "accredited investors" (as defined in Rule
 501(a)(1), (2), (3) or (7) under the Act) pursuant to the exemption provided by
 Section 4(2) of the Act.

 ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 a.  Exhibit 11.1:   Statement of Computation of Earnings Per Share:
<TABLE>
<CAPTION>
 
                                                                  Three Months Ended March 31,
                                                           ----------------------------------------
                                                               1996                         1997
                                                           -------------                 ----------
                                                              (in thousands, except per share data)
<S>                                                        <C>                        <C> 
Net income                                                  $  1,420                      $  2,822
 
 
Weighted average number of common shares outstanding           6,444                         6,444
  
Dilutive effect of common equivalent shares of stock    
  options and warrants                                            50                           114
 
Weighted average number of common and                     ------------                  -----------
  common equivalent shares outstanding                      $  6,494                         6,558
                                                          ============                  ===========
Net income per share (1)                                    $    .22                      $    .43
                                                          ============                  ===========
</TABLE>
 
    (1)  Primary and fully diluted income per share are the same for all
         periods presented

b.  On January 27, 1997, the Company filed a Current Report on Form 8-K
    reporting the then proposed sale of the Capital Securities described under
    "Item 2. Recent Sales of Unregistered Securities". The Company did not file
    any other Current Reports on Form 8-K during the two months ended March 31,
    1997.

                                       28
<PAGE>
 
                                   SIGNATURES


 Pursuant to the requirements of the Securities Exchange Act of 1934, the
 registrant has duly caused this report to be signed on its behalf by the
 undersigned thereunto duly authorized.


                                  INVESTORS FINANCIAL SERVICES CORP.



 Date: May 5, 1997                By:  /s/ Kevin J. Sheehan
                                       ---------------------
                                       Kevin J. Sheehan
                                       Chairman, President and Chief
                                       Executive Officer
 


                                  By:  /s/ Karen C. Keenan
                                       --------------------
                                       Karen C. Keenan
                                       Chief Financial Officer
                                       (Principal Financial and Accounting
                                       Officer)

                                       29