<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 June 30, 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)

          200 CLARENDON STREET, P.O. BOX 9130, BOSTON, MA 02117-9130
         (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 July 31, 1997, there were 6,131,174 shares of Common Stock
outstanding and 314,388 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 and
              June 30, 1997 (unaudited)                                        3
 
             Consolidated Income Statements  (unaudited)
              Six months ended June 30, 1996 and 1997                          4
 
             Consolidated Income Statements (unaudited)
              Three months ended June 30, 1996 and 1997                        5
 
             Statement of Stockholder's Equity (unaudited)
              Six months ended June 30, 1997                                   6
 
             Consolidated Statements of Cash Flows (unaudited)
              Six months ended June 30, 1996 and 1997                          7
 
             Notes to Condensed Consolidated Financial Statements              8
 
    ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION      17
             AND RESULTS OF OPERATIONS

PART II      OTHER INFORMATION

 
    ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                 33

SIGNATURES

</TABLE> 

                                       2

<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1997
-------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
 
                                           DECEMBER 31,       JUNE 30,
ASSETS                                         1996             1997
                                                            (unaudited)
 
<S>                                       <C>             <C>
Cash and due from banks                    $ 19,226,453    $    9,570,008
Federal funds sold and securities
 purchased under resale agreements          120,000,000        63,000,000
Securities held to maturity (approximate
 market values of $460,182,579 and 
 $719,500,877 at December 31, 1996
 and June 30, 1997, respectively)           460,009,923       716,907,576
Securities available for sale               271,120,964       324,279,511
Nonmarketable equity securities                 967,400         5,476,600
Loans, less allowance for loan
losses of $100,000 at December 31,
1996 and June 30, 1997                       66,236,889       102,427,199
Accrued interest and fees receivable         16,366,171        20,162,325
Equipment and leasehold improvements,         
 net                                          5,243,974         7,065,143
Other assets                                  5,289,873         7,787,674
                                           ------------    --------------
 
TOTAL ASSETS                               $964,461,647    $1,256,676,036
                                           ============    ==============
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
LIABILITIES:
 Deposits:
  Demand                                   $264,914,614    $  346,186,667
  Savings                                   276,602,295       344,764,512
  Time                                       55,000,000        50,000,000
                                           ------------    --------------
 
Total deposits                              596,516,909       740,951,179
 
Short-term borrowings                       296,820,752       409,123,917
Other liabilities                             9,264,676        13,731,989
                                           ------------    --------------
 
Total liabilities                           902,602,337     1,163,807,085
                                           ------------    --------------
 
 
 
Company obligated mandatorily preferred                                   
 securities of subsidiary trust                       -        24,216,332 
                                           ------------    --------------
 
STOCKHOLDERS' EQUITY:
Class A common stock                              3,595             3,190
Common stock                                     60,848            61,265
Surplus                                      54,352,812        54,371,363
Deferred compensation                        (1,687,675)       (1,468,225)
Retained earnings                             8,480,431        13,938,913
Net unrealized gain on securities                                         
 available for sale                             649,299         1,746,113 
                                           ------------    --------------
 
Total stockholders' equity                   61,859,310        68,652,619
                                           ------------    --------------
 
TOTAL LIABILITIES AND STOCKHOLDERS'                                       
 EQUITY                                    $964,461,647    $1,256,676,036 
                                           ============    ==============
</TABLE> 
See notes to condensed consolidated financial statements.
 
                                       3
 
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
-------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                            JUNE 30,         JUNE 30,
                                              1996              1997
<S>                                       <C>            <C>  
OPERATING REVENUE:
Interest income:
  Federal funds sold and securities
   purchased under resale agreements       $    664,027    $      843,520
  Other short-term investments                    6,448                 -
  Investment securities held to maturity     12,262,637        29,839,706
   and available for sale
  Loans                                         997,928         1,340,295
                                        ---------------   ---------------
 
    Total interest income                    13,931,040        32,023,521
                                        ---------------   ---------------
 
Interest expense:
  Deposits                                    3,070,457         9,459,602
  Short-term borrowings                       2,856,750         9,518,221
                                        ---------------   ---------------
 
    Total interest expense                    5,927,207        18,977,823
                                        ---------------   ---------------
 
    Net interest income                       8,003,833        13,045,698
 
Provision for loan losses                        49,114                 -
                                        ---------------   ---------------
 
    Net interest income after 
     provision for loan losses                7,954,719        13,045,698 
 
Noninterest income:
  Asset administration fees                  26,752,370        35,923,989
  Computer service fees                         246,610           233,831
  Other operating income                         36,284           143,969
  Gain on sale of security 
   available for sale                             6,273             7,110
                                        ---------------   ---------------
 
    Net operating revenue                    34,996,256        49,354,597
 
OPERATING EXPENSES:
  Compensation of officers and 
   employees                                 15,289,645        20,542,133
  Pension and other employee benefits         2,577,870         3,129,468
  Occupancy                                   2,213,942         2,209,790
  Equipment                                   2,635,769         3,383,657
  Insurance                                     588,022           365,580
  Subcustodian fees                           1,809,899         2,750,523
  Depreciation and amortization                 692,521           869,868
  Professional fees                           1,029,417         1,754,756
  Travel and sales promotion                    493,187           779,745
  Other operating expenses                    2,099,339         3,621,169
                                        ---------------   ---------------
 
    Total operating expenses                 29,429,611        39,406,689
                                        ---------------   ---------------
 
INCOME BEFORE INCOME TAXES AND MINORITY                                   
 INTEREST                                    5,566,645         9,947,908 
 
Provision for income taxes                    2,143,091         3,580,300
Minority interest expense, net of                                         
 income taxes                                         -           651,333 
                                        ---------------   ---------------
NET INCOME                                 $  3,423,554    $    5,716,275
                                        ===============   ===============
 
WEIGHTED AVERAGE SHARES OUTSTANDING           6,466,098         6,581,620
                                        ===============   ===============
 
EARNINGS PER SHARE                                $0.53             $0.87
                                        ===============   ===============
 
</TABLE> 

See notes to condensed consolidated  financial statements.


                                       4
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1996 AND 1997
-------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                 JUNE 30,         JUNE 30,
                                                   1996              1997

<S>                                        <C>             <C>  
OPERATING REVENUE:
Interest income:
Federal funds sold and securities
 purchased under resale agreements         $    219,483    $      167,773
Investment securities held to maturity        
 and available for sale                       7,166,947        16,148,260
Loans                                           579,897           675,886
                                        ---------------    --------------
                                                           
Total interest income                         7,966,327        16,991,919
                                        ---------------    --------------
                                                           
Interest expense:                                          
Deposits                                      2,092,538         5,014,000
Short-term borrowings                         1,811,792         5,388,357
                                        ---------------    --------------
                                                           
Total interest expense                        3,904,330        10,402,357
                                        ---------------    --------------
                                                           
Net interest income                           4,061,997         6,589,562
                                                           
Provision for loan losses                        28,067                 -
                                        ---------------    --------------
                                                           
Net interest income after provision                        
 for loan losses                              4,033,930         6,589,562
                                                           
Noninterest income:                                        
 Asset administration fees                   13,955,006        18,316,614
 Computer service fees                          122,567           117,371
 Other operating income                          15,941           107,984
 Gain on sale of security                                  
  available for sale                              3,825             7,110 
                                        ---------------    --------------
                                                           
Net operating revenue                        18,131,269        25,138,641
                                                           
OPERATING EXPENSES:                                        
 Compensation of officers and employees       7,852,732        10,721,407
 Pension and other employee benefits          1,227,109         1,482,059
 Occupancy                                    1,052,711         1,121,310
 Equipment                                    1,329,389         1,765,015
 Insurance                                      282,939           183,821
 Subcustodian fees                              988,084         1,312,025
 Depreciation and amortization                  381,651           481,529
 Professional fees                              475,271           838,028
 Travel and sales promotion                     293,738           448,242
 Other operating expenses                     1,028,539         1,739,580
                                        ---------------    --------------
                                                           
    Total operating expenses                 14,912,163        20,093,016
                                        ---------------    --------------
                                                           
INCOME BEFORE INCOME TAXES AND MINORITY       3,219,106         5,045,625
 INTEREST                                                  
                                                           
Provision for income taxes                    1,215,814         1,758,081
Minority interest expense, net of                     -           392,835
 income taxes                           ---------------    --------------
NET INCOME                                 $  2,003,292    $    2,894,709
                                        ===============    ==============
                                                           
WEIGHTED AVERAGE SHARES OUTSTANDING           6,465,369         6,601,254
                                        ===============    ==============
 
EARNINGS PER SHARE                                $0.31             $0.44
                                        ===============    ============== 
</TABLE> 
See notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
 INVESTORS FINANCIAL SERVICES CORP.

 CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
 SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
 
 
                                                                                                             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       (405)       405                                                                      -
Amortization of deferred compensation                                           219,450                                    219,450
Exercise of stock options                                12        18,551                                                   18,563
Net income                                                                                   5,716,275                   5,716,275
Payment of dividend                                                                           (257,793)                   (257,793)
Change in net unrealized gain on
   securities available for sale                                                                           1,096,814     1,096,814
                                       ----------  ---------  -----------   ------------   ------------   -----------  -----------
 
BALANCE,  JUNE 30, 1997                   $3,190    $61,265   $54,371,363   $(1,468,225)   $13,938,913    $1,746,113   $68,652,619
                                       ==========  =========  ===========   ============  =============  ============  ===========
 
See notes to condensed consolidated financial statements.
</TABLE>

                                       6
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
-----------------------------------------------------------------------
<TABLE> 
<CAPTION> 
 
                                              JUNE 30,        JUNE 30,
                                                1996            1997
<S>                                       <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                $   3,423,554   $   5,716,275
                                          --------------  -------------
Adjustments to reconcile net income to
 net cash provided by
operating activities:
Depreciation and amortization                   692,521         869,868
Amortization of deferred compensation           210,662         219,450
Provision for loan losses                        49,114               -
Amortization of premiums on securities,       
 net of accretion of discounts                1,186,515       1,618,885
Deferred income taxes                           104,932          16,879
Gain on sale of securities available          
 for sale                                        (6,273)         (7,110)
Loss on disposal of fixed assets                 15,211               -
Changes in assets and liabilities:
Accrued interest and fees receivable         (3,957,800)     (3,796,154)
Other assets                                 (1,885,238)     (2,497,800)
Other liabilities                             4,868,499       3,943,084
                                          --------------  -------------
 
Total adjustments                             1,278,143         367,102
                                          --------------   ------------
 
Net cash provided by operating                                          
 activities                                   4,701,697       6,083,377 
                                          --------------   ------------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities     
 available for sale                          11,409,626      42,026,107
Proceeds from maturities of securities     
 held to maturity                            19,612,591      33,985,925
Proceeds from sale of securities         
 available for sale                          15,041,451       5,002,734
Purchases of securities available for    
 sale                                      (104,767,586)    (99,507,745)
Purchases of securities held to maturity   (244,401,767)   (291,570,831)
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                    (60,000,000)     57,000,000
Net increase in loans                       (63,224,534)    (36,190,311)
Purchases of equipment and leasehold                                     
 improvements                                (2,591,750)     (2,691,036) 
                                          -------------   -------------
 
Net cash used for investing activities     (427,921,969)   (296,454,357)
                                          -------------   -------------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits             273,957,387      81,272,053
Net increase in time and savings          
 deposits                                    11,417,715      63,162,217
Net increase in short-term borrowings       142,600,098     112,303,164
Stock issuance costs                             35,192        (783,668)
Proceeds from exercise of stock options           5,148          18,562
Proceeds from issuance of preferred       
 stock                                                -      25,000,000
Dividends paid                                  (64,440)       (257,793)
                                          -------------   -------------
Net cash provided by financing                                          
 activities                                 427,951,100     280,714,535 
                                          -------------   -------------
 
NET INCREASE (DECREASE) IN CASH AND DUE   
 FROM BANKS                                   4,730,828      (9,656,445)
 
CASH AND DUE FROM BANKS, BEGINNING OF                                   
 PERIOD                                      21,898,903      19,226,453 
                                          -------------   -------------
 
CASH AND DUE FROM BANKS, END OF PERIOD    $  26,629,731   $   9,570,008
                                          =============   =============
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION:
Cash paid for interest                    $   5,420,000   $  18,876,000
                                          =============   =============
Cash paid for income taxes                $   2,915,000   $   3,611,000
                                          =============   =============
</TABLE> 
See notes to condensed consolidated financial statements.

                                       7
<PAGE>
 
    INVESTORS FINANCIAL SERVICES CORP.

    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    (INFORMATION PERTAINING TO THE SIX MONTHS AND THE THREE MONTHS ENDED JUNE
    30, 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, 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 June 30, 1997 and for the six-month
          periods and the three-month periods ended June 30, 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.

          During 1997 the Financial Accounting Standards Board ("FASB") issued
          Statement of Financial Accounting Standards ("SFAS") No. 130
          "Reporting Comprehensive Income" and SFAS No. 131 "Disclosure About
          Segments of an Enterprise and Related Information", which will be
          applicable for the Company in fiscal 1998. Management has not assessed
          the impact of these standards.

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

                                       8
<PAGE>
 
    3. SECURITIES

       Carrying amounts and approximate market values of securities are
       summarized as follows as of December 31, 1996:

<TABLE>
<CAPTION>
 
 
                                   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
                                  ============   ==========   ==========   ============
 
 
</TABLE>
Carrying amounts and approximate market values of securities are summarized as
follows as of June 30, 1997:

<TABLE>
<CAPTION>
                                      CARRYING     UNREALIZED   UNREALIZED    APPROXIMATE
         HELD TO MATURITY               VALUE         GAINS       LOSSES     MARKET VALUE
 
<S>                                 <C>            <C>          <C>          <C>
State and political subdivisions     $ 34,939,268   $  673,370   $   12,593   $ 35,600,045
Mortgage-backed securities            572,578,478    3,998,096    2,041,685    574,534,889
Federal Agency securities             101,590,980      324,834      394,646    101,521,168
Foreign government securities           7,798,850       45,925            -      7,844,775
                                     ------------   ----------   ----------   ------------ 
Total                                $716,907,576   $5,042,225   $2,448,924   $719,500,877
                                     ============   ==========   ==========   ============
 
 
                                      AMORTIZED    UNREALIZED   UNREALIZED     CARRYING
AVAILABLE FOR SALE                      COST          GAINS       LOSSES         VALUE
 
U.S. Treasury securities             $ 40,037,363   $   95,487   $        -   $ 40,132,850
Mortgage-backed securities            281,555,820    2,658,353       67,512    284,146,661
                                     ------------   ----------   ----------   ------------ 
Total                                $321,593,183   $2,753,840   $   67,512   $324,279,511
                                     ============   ==========   ==========   ============
</TABLE>

                                       9
<PAGE>
 
3. SECURITIES (CONTINUED)

   Nonmarketable equity securities at June 30, 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               JUNE 30, 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    181,601,501    181,403,815
Due five years up to ten years      240,620,332    241,016,881    341,753,541    342,451,798
Due after ten years                  85,878,308     86,472,780    193,552,534    195,645,264
                                   ------------   ------------   ------------   ------------
Total                              $460,009,923   $460,182,579   $716,907,576   $719,500,877
                                   ============   ============   ============   ============
 
 
 
                                       DECEMBER 31, 1996               JUNE 30, 1997
                                    AMORTIZED      CARRYING       AMORTIZED      CARRYING
AVAILABLE FOR SALE                    COST           VALUE          COST           VALUE
 
Due within one year                $ 19,964,080   $ 20,046,800   $ 30,062,757   $ 30,130,500
Due from one to five years          213,758,992    214,525,641    249,043,850    251,414,351
Due five years up to ten years       36,315,728     36,548,523     42,486,576     42,734,660
                                   ------------   ------------   ------------   ------------
Total                              $270,038,800   $271,120,964   $321,593,183   $324,279,511
                                   ============   ============   ============   ============ 
</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.

   One security available for sale was sold during the six months ended June 30,
   1997, resulting in a gain of $7,110.

   The carrying value of securities pledged amounted to approximately
   $362,000,000 and $481,000,000 at December 31, 1996 and June 30, 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 June 30, 1997. In addition, there have been no loan
   charge-offs or recoveries during the six months ended June 30, 1996 and 1997.
   Loans consisted of the following at December 31, 1996 and June 30, 1997:

                                       10
<PAGE>
 
4. LOANS (CONTINUED)

<TABLE>
<CAPTION>
 
                                        DECEMBER 31,    JUNE 30,
                                            1996          1997
 
<S>                                     <C>           <C>
Loans to individuals                     $23,448,999   $ 17,462,670
Loans to not-for-profit institutions          12,500         12,500
Loans to mutual funds                     42,875,390     85,052,029
                                         -----------   ------------
                                          66,336,889    102,527,199
Less allowance for loan losses               100,000        100,000
                                         -----------   ------------
Total                                    $66,236,889   $102,427,199
                                         ===========   ============
</TABLE>

   The Company had commitments to lend of approximately $37,128,000 and
   $63,821,000 at December 31, 1996 and June 30, 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 June 30, 1997:
 
<TABLE> 
<CAPTION> 
                                                  DECEMBER 31,       JUNE 30,
                                                     1996              1997
<S>                                               <C>                 <C> 
Furniture, fixtures and equipment                   $8,516,450         $ 9,807,614
Leasehold improvements                                 744,395             921,041
                                                    ----------         -----------
Total                                                9,260,845          10,728,655

Less accumulated depreciation and                                                  
 amortization                                        4,016,871           3,663,512 
                                                    ----------         -----------
Equipment and leasehold improvements,                                              
 net                                                $5,243,974         $ 7,065,143 
                                                    ==========         ===========
</TABLE>
6. DEPOSITS

   Time deposits at December 31, 1996 and June 30, 1997 include noninterest-
   bearing amounts of approximately $55,000,000 and $50,000,000, respectively.

   All time deposits had a minimum balance of $100,000 and a maturity of less
   than three months at December 31, 1996 and June 30, 1997.

7. SHORT-TERM BORROWINGS

   The major components of short-term borrowings are as follows at December 31,
   1996 and June 30, 1997:

<TABLE>
<CAPTION>
                                  DECEMBER 31,     JUNE 30,
                                      1996           1997
<S>                               <C>            <C>
Repurchase agreements              $296,421,201   $408,703,232
Treasury, Tax and Loan account          399,551        420,685
                                   ------------   ------------
Total                              $296,820,752   $409,123,917
                                   ============   ============
</TABLE>

                                       11
<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 $408,703,232 at December 31, 1996 and
   June 30, 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 June 30, 1997 ranged from
   5.51% to 6.23% and all agreements matured by July 1, 1997. The following
   securities were pledged under these agreements at December 31, 1996 and June
   30, 1997:

<TABLE>
<CAPTION>
                                   DECEMBER 31, 1996                JUNE  30, 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      $ 35,124,250   $ 35,124,250
Federal Agency securities        25,000,000     24,803,950        20,000,000     19,770,300
Mortgage-backed securities      245,689,672    246,777,873       363,718,434    366,090,516
                               ------------   ------------   ---------------   ------------
Total                          $307,939,612   $308,831,763      $418,842,684   $420,985,066
                               ============   ============   ===============   ============
</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
   no liabilities outstanding under this agreement at December 31, 1996 or June
   30, 1997.

   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 $420,685 at June 30, 1997. The
   interest rates on the outstanding balance at December 31, 1996 and June 30,
   1997 were 5.10% and 5.62%, 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 June 30, 1997,
   there were no preferred shares issued or outstanding. There were 359,545 and
   318,984 shares of Class A Common Stock and 6,084,767 and 6,126,453 shares of
   Common Stock issued and outstanding at December 31, 1996 and June 30, 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.

                                       12
<PAGE>
 
9. STOCKHOLDERS' EQUITY (CONTINUED)

   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.

   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 $1,468,225 at December 31, 1996 and
   June 30, 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                                15,200    $27.50 - $43.50
Exercised                              (1,125)            $16.50
Expired                                     -                  -
                                      -------    
Outstanding at June 30, 1997          359,225    $16.50 - $43.50
                                      =======    
Exercisable at June 30, 1997           96,520
                                      =======    
</TABLE>

                                       13
<PAGE>
 
10. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

    LINES OF CREDIT - At June 30, 1997, the Company had commitments to
    individuals under collateralized open lines of credit totaling $96,994,000,
    against which $33,173,000 in loans were drawn. The credit risk involved in
    issuing lines of credit is essentially the same as that involved in
    extending loan facilities. The Company does not anticipate any loss as a
    result of these lines of credit.

    INTEREST-RATE CONTRACTS - The following table summarizes the contractual or
    notional amounts of derivative financial instruments held by the Company at
    June 30, 1997:

                  Interest rate contracts:
                     Swap agreements               $260,000,000
                     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 effect of these
    agreements was to lengthen short-term variable rate liabilities into longer-
    term fixed-rate liabilities . The positive market value of the interest rate
    contracts was $154,000 at June 30, 1997

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

    The Company also enters into foreign exchange contracts, as discussed in
    Note 12., with clients and simultaneously enters into matched positions with
    other banks. 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.


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 June 30, 1997 was $20,947,000. In addition, other
    cash balances in the amount of $1,488,000 were pledged to secure clearings
    with a depository institution as of June 30, 1997.

    LEASE COMMITMENTS - Minimum future commitments on noncancelable operating
    leases at June 30, 1997 were as follows:
<TABLE>
<CAPTION>
 
                                                      Bank
Fiscal Year Ending                                  Premises    Equipment
<S>                                                <C>          <C>
                      
     1997                                          $ 2,118,913  $  795,167
     1998                                            5,503,381   1,416,564
     1999                                            5,503,381   1,080,635
     2000                                            5,503,381     223,055
     2001 and beyond                                35,407,496           -
</TABLE>
           Total rent expense was $2,943,000 and $3,173,000 for the six months
       ended June 30, 1996 and 1997, respectively.

                                       14

<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 $96,000 and $213,000 for
    the six months ended June 30, 1996 and 1997, respectively.

    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 June 30, 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 June 30, 1997 is as follows
    (in thousands):

<TABLE>
<CAPTION>
 
                                        DECEMBER 31, 1996                                     JUNE 30, 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       -           $43,250               $43,250                     -
France (Franc)                   1,093             1,093       -             4,358                 4,358                     -
Netherlands (Guilder)              918               918       -             4,225                 4,225                     -
Hong Kong (Dollar)               1,807             1,807       -             3,202                 3,202                     -
United Kingdom (Pound)           1,873             1,873       -             2,660                 2,660                     -
Germany (Mark)                   2,118             2,118       -             1,620                 1,620                     -
Indonesia (Rupiah)                 198               198       -             1,320                 1,320                     -
Malaysia (Ringgit)               6,009             6,009       -             1,183                 1,183                     -
Sweden (Krona)                     139               139                       919                   919
Other currencies                 2,163             2,163       -             3,748                 3,748                     -
                               -------           -------    ---------      --------       ---------------       --------------------

                               $57,146           $57,146       -           $66,485              $66,485                     -
                               =======           =======    =========      ========       ===============       ====================

</TABLE> 

    The maturity of contracts outstanding as of June 30, 1997 is as follows:
<TABLE> 
<CAPTION> 
    Maturity                       Purchases              Sales
<S>                               <C>                   <C> 
   July 1997                        $56,737              $56,737
   August 1997                        6,128                6,128
   December 1997                      3,620                3,620
</TABLE>

                                       15
<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 consolidated financial
    statements. Under capital adequacy guidelines and the regulatory framework
    for prompt corrective action, the Bank must meet specific capital guidelines
    that involve quantitative measures of the Bank's assets, liabilities, and
    certain off-balance sheet items as calculated under regulatory accounting
    practices. The 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 June 30, 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 June 30, 1997:
 
Total Capital
  (to Risk Weighted Assets)     $90,885,937  26.95%   $26,978,106   8.00%   $33,722,633  10.00%
Tier I Capital
  (to Risk Weighted Assets)     $90,785,937  26.92%   $13,489,053   4.00%   $20,233,580   6.00%
Tier I Capital
  (to Average Assets)           $90,785,937   7.23%   $50,202,352   4.00%   $62,752,940   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>

    Payment of dividends by the Bank is subject to provisions of the
    Massachusetts banking law which provides that dividends may be paid out of
    net profits provided (i) capital stock and surplus remain unimpaired, (ii)
    dividend and retirement fund requirements of any preferred stock have been
    met, (iii) surplus equals or exceeds capital stock, and (iv) there are
    deducted from net profits any losses and bad debts, as defined, in excess of
    reserves specifically established therefore.

                                       16
<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 55 mutual fund complexes, investment advisors,
    banks and insurance companies.  Currently, the Company provides financial
    asset administration services for assets totaling approximately $146
    billion, including approximately $10.5 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.

         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 41% from $34,996,000 in the
    first six months of 1996 to $49,355,000 in the first six 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.

                                       17
<PAGE>
 
         Net interest income represents the difference between income generated
    from interest-earning assets and expense on interest-bearing liabilities.
    Interest-bearing liabilities are generated by the Company's clients who, in
    the course of their financial asset management, generate cash balances which
    they deposit on a short-term basis with the Company.  The Company invests
    these cash balances and remits a portion of the earnings on these
    investments to its clients.  The Company's share of earnings from these
    investments is viewed as part of the total package of compensation paid to
    the Company from its clients for performing asset administration services.

    CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

         From time to time, information provided by the Company, statements made
    by its employees or information included in its filings with the Securities
    and Exchange Commission (including this Form 10-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.  During the
    quarter ended June 30, 1997, the Company reported that one of its clients
    announced plans to consolidate its custody and fund accounting services with
    another service provider.  As of June 30, 1997, this client represented
    approximately $11 billion in assets processed, and less than 1.5% of the
    Company's revenues.

         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.

 

                                       18
<PAGE>
 
    STATEMENT OF OPERATIONS

    Comparison of Operating Results for the Six Months Ended June 30, 1997 and
    1996

    Noninterest Income

         Noninterest income increased $9,268,000 to $36,309,000 for the six
    months ended June 30, 1997 from $27,041,000 for the prior period.
    Noninterest income consists of the following items:
<TABLE>
<CAPTION>
 
                                    For the Six Months
                                          Ended
                                         June 30,
                                -----------------------   ------
                                     1996        1997     Change
                                ------------  ---------   ------
<S>                               <C>         <C>         <C>
                                  (Dollars in thousands)
     Asset administration fees       $26,752     $35,924      34%
     Computer service fees               247         234      (5)
     Other operating income               36         144     300
     Gain on sale of security
         available for sale                6           7      17
                                ------------     -------
     Total Noninterest Income        $27,041     $36,309      34%
                                ============     =======
</TABLE>

         Asset administration fees increased $9,172,000 to $35,924,000 for the
    six months ended June 30, 1997 compared to $26,752,000 for the six months
    ended June 30, 1996.  The Company earns such fees on assets processed by the
    Company on behalf of a variety of financial asset managers.  Assets
    processed is the total dollar value of financial assets on the reported date
    for which the Company provides one or more of the following services:
    custody, multicurrency accounting, institutional transfer agency,
    performance measurement, foreign exchange, securities lending, mutual fund
    administration and investment advisory services.  Total assets processed
    increased to $146 billion at June 30, 1997 from $108 billion at June 30,
    1996.  Of this $38 billion net increase in assets processed, approximately
    21% 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 largest component of asset administration fees is
    asset-based fees, which increased between periods due to the increase in
    assets processed.  Another significant portion of the increase in asset
    administration fees resulted from the Company's success in marketing
    ancillary services such as securities lending and foreign exchange.

         Computer service fees consist of amounts charged by the Company for
    data processing services related to individual accounts.  Other operating
    income consists of dividends received relating to the FHLBB stock investment
    and miscellaneous transaction-oriented private banking fees.  The increase
    in other operating income was due entirely to the Company's increased
    investment in FHLBB stock.

                                       19
<PAGE>
 
    Operating Expenses

         Total operating expenses increased by $9,977,000 to $39,407,000 for the
    six months ended June 30, 1997 compared to $29,430,000 for the six months
    ended June 30, 1996.  The components of operating expenses were as follows:
<TABLE>
<CAPTION>
 
 
                                         For the Six Months
                                               Ended
                                              June 30,
                                        -------------------- 
                                          1996        1997        Change 
                                        --------    --------      ------- 
                                       (Dollars in thousands)
<S>                                    <C>         <C>          <C>     
Compensation                              $15,290     $20,542      34%
Pension and other employee benefits         2,578       3,129      21
Occupancy                                   2,214       2,210       -
Equipment                                   2,636       3,384      28
Insurance                                     588         366     (38)
Subcustodian fees                           1,810       2,750      52
Depreciation and amortization                 693         870      26
Professional fees                           1,029       1,755      71
Travel and sales promotion                    493         780      58
Other operating expenses                    2,099       3,621      73
                                          -------     -------
Total Operating Expenses                  $29,430     $39,407      34%
                                          =======     =======
 
</TABLE>

         Compensation of officers and employees increased by $5,252,000 or 34%
from period to period due to several factors.  The average number of employees
increased 23% to 852 during the six months ended June 30, 1997 from 691 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 half of 1997 compared to the first half of 1996.  The remainder of the
increase in compensation expense resulted from salary increases.

         Pension and other employee benefits increased to $3,129,000 for the six
months ended June 30, 1997 from $2,578,000 for the same period in 1996.  The 21%
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, of which costs approximately $90,000 related to employees'
prior years of service.

         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 $748,000 increase
between periods is due principally to the growth in assets processed.

         Insurance expense decreased 38% from $588,000 for the six months ended
June 30, 1996 to $366,000 for the six months ended June 30, 1997 due to the
renegotiation, in May 1996, of the Company's premiums and coverage for errors
and omissions liability, directors and officers liability and blanket bond.

         Subcustodian expense increased $940,000 to $2,750,000 for the six
months ended June 30, 1997 from $1,810,000 for the six months ended June 30,
1996.  This increase resulted primarily from the increase in foreign assets
processed, which are typically subject to higher subcustodian fees than domestic
assets processed, from $8.0 billion at June 30, 1996 to $10.5 billion at June
30, 1997, and from the movement by clients into emerging markets with higher
cost structures.

         Depreciation and amortization expense increased $177,000 between
periods due to purchases of furniture, equipment, and capitalized software in
late 1996 and in 1997.

                                       20
<PAGE>
 
         Professional fees increased $726,000 to $1,755,000 for the six months
ended June 30, 1997 from $1,029,000 for the six months ended June 30, 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 $287,000 to $780,000 for
the six months ended June 30, 1997 from $493,000 for the six months ended June
30, 1996 due to increased travel to the foreign subsidiaries.

         Other operating expenses include fees for daily market pricing data,
telephone and office supplies expense, recruiting costs, and temporary help.
These expenses increased $1,522,000 to $3,621,000 for the six months ended June
30, 1997 from $2,099,000 for the six months ended June 30, 1996.  Fees for daily
market pricing data, which vary with the level of assets processed, increased by
$117,000 during the period.  Other expenses such as telephone and office
supplies vary with staffing levels. Expenses relating to these items represented
$286,000 of the increase.  Recruiting costs and costs of temporary help
accounted for $502,000 of the increase; this increase relates to the tight labor
market caused by a period of low unemployment in Massachusetts during the first
half of 1997.  Additionally, $219,000 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 expense prior
to that time.  Approximately $238,000 of the increase relates to annual
maintenance fees on 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 six months ended June 30, 1997 compared to the same
period in 1996.
<TABLE>
<CAPTION>
 
 
                                      Change   Change
                                      Due to   Due to
                                      Volume    Rate      Net
                                     --------  -------  -------
<S>                                   <C>      <C>      <C>
                                       (Dollars in thousands)
INTEREST-EARNING ASSETS
Fed funds sold and
    interest-earning deposits         $   178   $  (4)  $   174
Investment securities                  17,323     254    17,577
Loans                                     489    (147)      342
                                      -------   ------   ------
Total interest-earning assets          17,990     103    18,093
 
INTEREST-BEARING LIABILITIES
Deposits                                5,922     468     6,390
Borrowings                              6,632      29     6,661
                                      -------   ------   ------   
Total interest-bearing liabilities     12,554     497    13,051
                                      -------   ------   ------
Change in net interest income         $ 5,436   $(394)  $ 5,042
                                      =======   ======  =======
</TABLE>

         Net interest income increased $5,042,000 or 63% to $13,046,000 for the
six months ended June 30, 1997 from $7,955,000 for the same period in 1996.
This net increase resulted from an increase in interest income of  $18,093,000
offset in part by an increase in interest expense of $13,051,000.  The net
impact of the above changes was a 102 basis point decrease in net interest
margin.

         The increase in interest income resulted primarily from a higher level
of interest earning assets. The Company's average assets for the six months
ended June 30, 1997 increased $581,846,000 or 120% compared to the same period
in 1996.  This growth primarily resulted from an increase in average interest
earning assets of $561,476,000.

                                       21

<PAGE>
 
         Interest expense increased $13,051,000 due primarily to a $520,557,000
increase in average deposits and short term borrowings for the six months ended
June 30, 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 4.75% to 4.93% 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 11.76% in 1996 and 11.32% in 1997.  The
provision for income taxes for the six months ended June 30, 1997 increased by
$1,437,000 over the same period in 1996.  The overall effective tax rate
decreased to 36.0% for the six months ended June 30, 1997, from 38.5% 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.


STATEMENT OF OPERATIONS

Comparison of Operating Results for the Quarters Ended June 30, 1997 and 1996

Noninterest Income

         Noninterest income increased $4,452,000 to $18,549,000 for the quarter
ended June 30, 1997 from $14,097,000 for the prior period.  Noninterest income
consists of the following items:
<TABLE>
<CAPTION>
 
                                    For the Quarters
                                         Ended
                                        June 30,
                                ---------------------  ---------
                                    1996       1997     Change
                                ----------  ---------  ---------
<S>                               <C>        <C>        <C>
                                      (Dollars in
                                       thousands)
     Asset administration fees      $13,955    $18,317      31%
     Computer service fees              122        117      (4)
     Other operating income              16        108     575
     Gain on sale of security
         available for sale               4          7      75
                                   --------    -------
     Total Noninterest Income       $14,097    $18,549      32%
                                   ========    =======
</TABLE>

         Asset administration fees increased $4,362,000 to $18,317,000 for the
three months ended June 30, 1997 compared to $13,955,000 for the three months
ended June 30, 1996.  Total assets processed increased to $146 billion at June
30, 1997 from $108 billion at June 30, 1996.  Of this $38 billion net increase
in assets processed, approximately 21% 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 largest component of asset
administration fees is asset-based fees, which increased between periods due to
the increase in assets processed.  Another significant portion of the increase
in asset administration fees resulted from the Company's success in marketing
ancillary services such as securities lending and foreign exchange.


 

                                       22
<PAGE>
 
Operating Expenses

         Total operating expenses increased by $5,181,000 to $20,093,000 for the
quarter ended June 30, 1997 compared to $14,912,000 for the quarter ended June
30, 1996.  The components of operating expenses were as follows:

<TABLE>
<CAPTION>
                                         For the Quarters
                                              Ended
                                             June 30,
                                        -----------------    ------
                                         1996       1997     Change
                                        ------     ------    ------
                                           (Dollars in
                                            thousands)
<S>                                    <C>        <C>        <C>
Compensation                             $ 7,853    $10,721      37%
Pension and other employee benefits        1,227      1,482      21
Occupancy                                  1,053      1,121       6
Equipment                                  1,329      1,765      33
Insurance                                    283        184     (35)
Subcustodian fees                            988      1,312      33
Depreciation and amortization                382        482      26
Professional fees                            475        838      76
Travel and sales promotion                   294        448      52
Other operating expenses                   1,028      1,740      69
                                         -------    -------
Total Operating Expenses                 $14,912    $20,093      35%
                                         =======    =======
 
</TABLE>

         Compensation of officers and employees increased by $2,868,000 or 37%
from period to period due to several factors.  The average number of employees
increased 25% to 878 during the quarter ended June 30, 1997 from 701 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.  The remainder of the increase in compensation expense
resulted from salary increases.

         Pension and other employee benefits increased to $1,482,000 for the
quarter ended June 30, 1997 from $1,227,000 for the same period in 1996.  The
21% increase was due principally to increased payroll taxes attributable to the
increase in compensation expense.

         Equipment expense varies with the level of assets processed by the
Company.  The $436,000 increase between periods is due principally to the growth
in assets processed.

         Insurance expense decreased 35% from $283,000 for the quarter ended
June 30, 1996 to $184,000 for the quarter ended June 30, 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 $324,000 to $1,312,000 for the quarter
ended June 30, 1997 from $988,000 for the quarter ended June 30, 1996.  This
increase resulted from the increase in foreign assets processed, which are
typically subject to higher subcustodian fees than domestic assets processed,
from $8.0 billion at June 30, 1996 to $10.5 billion at June 30, 1997, and from
the movement by clients into emerging markets with higher cost structures.
Subcustodian expense was offset in part by the Company's improved cash
management in foreign accounts during the quarter.

         Depreciation and amortization expense increased $100,000 between
periods due to purchases of furniture, equipment, and capitalized software in
late 1996 and in 1997.

         Professional fees increased $363,000 to $838,000 for the quarter ended
June 30, 1997 from $475,000 for the quarter ended June 30, 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 $154,000 to $448,000 for
the quarter ended June 30, 1997 from $294,000 for the quarter ended June 30,
1996 due to increased travel to the foreign subsidiaries.

                                       23
<PAGE>
 
         Other operating expenses increased $712,000 to $1,740,000 for the
quarter ended June 30, 1997 from $1,028,000 for the quarter ended June 30, 1996.
Fees for daily market pricing data, which vary with the level of assets
processed, increased by $46,000 during the period.  Other expenses such as
telephone and office supplies vary with staffing levels.  Expenses relating to
these items represented $144,000 of the increase.  Recruiting costs and costs of
temporary help accounted for $154,000 of the increase; this increase relates to
the tight labor market caused by a period of low unemployment in Massachusetts
during the second quarter of 1997. Additionally, $105,000 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 on software used to generate automated financial
statements for the Company's clients as part of its expanded mutual fund
administration services.  Also, $118,000 of the increase resulted from the
adoption of a new regulatory assessment methodology by the Massachusetts
Division of Banks.

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 June 30, 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          $  (69)    $ 18    $  (51)
Investment securities                   8,679      302     8,981
Loans                                      94        2        96
                                       --------   -----  -------
Total interest-earning assets           8,704      322     9,026
 
INTEREST-BEARING LIABILITIES
Deposits                                2,616      305     2,921
Borrowings                              3,489       88     3,577
                                       --------   ------  ------
Total interest-bearing liabilities      6,105      393     6,498
                                       --------   ------  ------
Change in net interest income          $2,599     $(71)   $2,528
                                       ========   ======  ======
 
</TABLE>

         Net interest income increased $2,528,000 or 62% to $6,590,000 for the
quarter ended June 30, 1997 from $4,062,000 for the same period in 1996.  This
net increase resulted from an increase in interest income of  $9,026,000 offset
in part by an increase in interest expense of $6,498,000.  The net impact of the
above changes was a 63 basis point decrease in net interest margin.

         The increase in interest income resulted primarily from a higher level
of interest earning assets. The Company's average assets for the quarter ended
June 30, 1997 increased $552,047,000 or 98% compared to the same period in 1996.
This growth primarily resulted from an increase in average interest earning
assets of $534,859,000.

         Interest expense increased $6,498,000 due primarily to a $498,876,000
increase in deposits and short term borrowings for the quarter ended June 30,
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 4.79% to 5.05% during the period.

                                       24
<PAGE>
 
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 11.76% in 1996 and 11.32% in 1997. The
provision for income taxes for the quarter ended June 30, 1997 increased by
$542,000 over the same period in 1996.  The overall effective tax rate decreased
to 34.8% for the quarter ended June 30, 1997, from 37.8% 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.

                                       25
<PAGE>
 
FINANCIAL CONDITION

Investment Portfolio

The following table summarizes the Company's investment portfolio for the dates
indicated:

<TABLE>
<CAPTION>
                                       December 31,  June 30,
                                           1996        1997
                                     -------------- ----------
                                       (Dollars in thousands)
<S>                                    <C>           <C>
SECURITIES HELD TO MATURITY:
State and political subdivisions           $      -   $ 34,939
Mortgage-backed securities                  414,665    572,579
Federal Agency securities                    37,517    101,591
Foreign government securities                 7,828      7,799
                                          ---------- ---------
Total securities held to maturity          $460,010   $716,908
                                          ========== =========
 
 
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities                   $ 40,259   $ 40,133
Mortgage-backed securities                  230,862    284,147
                                          ---------- ---------
Total securities available for sale        $271,121   $324,280
                                          ========== =========
</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 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.

                                       26
<PAGE>
 
         The book value and weighted average yield of the Company's securities
held to maturity at June 30, 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                181,602      6.74%
Due after five years up to ten years      341,753      6.75%
Due after ten years                       193,553      6.39%
                                         --------
Total securities                         $716,908
                                         ========
</TABLE>
    The book value and weighted average yield of the Company's securities
    available for sale at June 30, 1997, by effective maturity, are reflected in
    the following table.
<TABLE>
<CAPTION>
 
                                                   Weighted
                                          Book      Average
                                          Value      Yield
                                      -----------  --------
<S>                                     <C>        <C>
Due within one year                      $ 30,131      6.18%
Due from one to five years                251,414      6.81%
Due after five years up to ten years       42,735      6.86%
                                         --------
Total securities                         $324,280
                                         ========
</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.

    Loan Portfolio

         The following table summarizes the Company's loan portfolio for the
    dates indicated:
<TABLE>
<CAPTION>
 
                                         December 31,    June 30,
                                             1996          1997
                                       --------------  ----------
<S>                                      <C>            <C>
                                          (Dollars in thousands)
Loans to individuals                          $23,449    $ 17,463
Loans to not-for-profit organizations              13          13
Loans to mutual funds                          42,875      85,051
                                              --------   --------
                                               66,337     102,527
Less:  allowance for loan losses                 (100)       (100)
                                              --------   --------
Net loans                                     $66,237    $102,427
 
Floating Rate                                 $66,324    $102,514
Fixed Rate                                         13          13
                                              --------   --------
                                              $66,337    $102,527
                                              ========   ========
</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

                                       27
<PAGE>
 
    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 June 30, 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
    June 30, 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 June 30,
    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 June 30, 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 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.
 

                                       28
<PAGE>
 
 The following table presents the repricing schedule for the Company's interest
 earning assets and interest bearing liabilities at June 30, 1997:

<TABLE>
<CAPTION>
                                             Within     Over Three    Over Six    Over One
                                             Three        to Six     to Twelve     Year to    Over Five
                                             Months       Months       Months    Five Years     Years       Total
                                        -------------  -----------  ----------  ------------  ----------  ----------
                                                                    (Dollars in thousands)
<S>                                       <C>           <C>          <C>         <C>          <C>         <C>
Interest earning assets (1):
   Federal Funds Sold                     $   63,000                                                      $   63,000
   Investment securities (2)                 444,184       175,683     199,861      118,277     103,182    1,041,187
   Loans - fixed rate                              -                                     13                       13
   Loans - variable rate                     102,514             -           -            -           -      102,514
                                          ----------      --------    --------     --------    --------   ----------
       Total interest earning assets         609,698       175,683     199,861      118,290     103,182    1,206,714
                                          ----------      --------    --------     --------    --------   ----------
 
 
Interest bearing liabilities:
   Demand deposit accounts                    82,471                                                          82,471
   Savings accounts                          344,765                                                         344,765
   Interest rate contracts                  (200,000)       30,000     120,000       50,000                        -
   Short term borrowings                     409,124             -           -            -           -      409,124
                                          ----------      --------    --------     --------    --------   ----------
       Total interest bearing                
        liabilities                          636,360        30,000     120,000       50,000           -      836,360 
                                          ----------      --------    --------     --------    --------   ----------
 
 
       Net interest sensitivity gap
       during the period                   ($ 26,662)     $145,683    $ 79,861     $ 68,290    $103,182   $  307,354
                                          ==========      ========    ========     ========    ========   ==========
 
       Cumulative gap                      ($ 26,662)     $119,021    $198,882     $267,172    $307,354
                                          ==========      ========    ========     ========    ========   
 
Interest sensitive assets as a
   percent of interest sensitive
   liabilities (cumulative)                    95.81%       117.86%     125.29%      131.94%     144.28%
 
Interest sensitive assets as a
   percent of total assets
   (cumulative)                                48.52%        62.50%      78.40%       87.81%      96.02%
 
 
Net interest sensitivity gap as a
   percent of total assets                     (2.12%)       11.59%       6.35%        5.43%       8.21%
 
Cumulative gap as a percent
   of total assets                             (2.12%)        9.47%      15.83%       21.26%      29.47%
</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.

                                       29
<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, 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 the Bank.   Any dividend
 payments by the Bank are subject to certain restrictions imposed by the
 Massachusetts Commissioner of Banks.  Subject to regulatory requirements, the
 Bank 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 the Company's outstanding Common Stock and Class A
 Common Stock (approximately $515,635 based upon 6,445,437 shares outstanding as
 of June 30, 1997).

         At June 30, 1997, cash and cash equivalents were 1% of total assets.
 At June 30, 1997, approximately $30 million or 3% 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 $136 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 $525
 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 June 30, 1997 was $483 million.  An
 additional investment in FHLBB stock would be required to borrow to the
 available limit.

 

                                       30
<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 $2,592,000 and $2,691,000 for the six months ended
 June 30, 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 June 30, 1997 was $68,653,000, an increase of
 $6,794,000 or 11%, from $61,859,000 at December 31, 1996.  The ratio of
 stockholders' equity to assets decreased to 5.22% at June 30, 1997 from 6.41%
 at December 31, 1996 due to the significant increase in assets.

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

         Federal Reserve Board and FDIC guidelines require that banking
 organizations have a minimum ratio of total capital to risk-adjusted assets and
 off balance sheet items of 8.0%. Total capital is defined as the sum of "Tier
 I" and "Tier II" capital elements, with at least half of the total capital
 required to be Tier I. Tier I capital includes, with certain restrictions, the
 sum of common stockholders' equity, 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 June 30, 1997:
<TABLE>
<CAPTION>
 
                                                June 30, 1997
                                                -------------
                                              Amount      Ratio
                                             --------    -------
                                            (Dollars in
                                             thousands)
<S>                                       <C>          <C>
Tier I capital                               $ 90,786     26.9%
Tier I capital minimum requirement             13,489      4.0%
                                             --------    -------
Excess Tier I capital                        $ 77,297     22.9%
                                             ========     =====
Total capital                                $ 90,886     27.0%
Total capital minimum requirement              26,978      8.0%
                                             --------    -------
Excess total capital                         $ 63,908     19.0%
                                             ========     =====
Risk adjusted assets, net of intangible      
 assets                                      $337,226 
                                             ========     
</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

                                       31
<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 June 30, 1997 was 7.23%, 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>
 
 
                                              Six Months Ended June 30, 1996        Six Months Ended June  30, 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        $ 24,929      $   664         5.33%   $   31,586    $   844        5.34%
Interest-earning deposits                         253            6         4.74%            -          -           -
Investment securities                         383,564       12,263         6.39%      914,752     29,840        6.52%
Loans                                          34,031          998         5.87%       57,915      1,340        4.63%
                                             --------    ---------    ----------   ---------     -------       ------
Total interest-earning assets                 442,777       13,931         6.29%    1,004,253     32,024        6.38%
                                                         ---------    ----------                 -------       ------
Allowance for loan losses                         (68)                                   (100)
Noninterest-earning assets                     41,864                                  62,266
                                             --------                              ----------
Total assets                                 $484,573                              $1,066,419
                                             ========                              ==========
 
INTEREST-BEARING LIABILITIES
Deposits:
   Demand                                    $121,616        2,912         4.79%   $  121,003      2,965        4.90%
   Time                                           762           20         5.25%          472         11        4.66%
   Savings                                     12,365          138         2.23%      269,880      6,484        4.81%
Short Term Borrowings                         114,845        2,857         4.98%      378,790      9,518        5.03%
                                             --------    ---------    ----------   ---------     -------       ------
Total interest-bearing liabilities            249,588        5,927         4.75%      770,145     18,978        4.93%
                                                         ---------    ----------                 -------       ------
Noninterest bearing liabilities
   Demand deposits                            130,211                                 147,708
   Noninterest bearing time deposits           45,000                                  51,298
   Other liabilities                            7,855                                  11,870
                                             --------                              ----------
Total liabilities                             432,654                                 981,021
Trust Preferred Stock                               -                                  20,331
Equity                                         51,919                                  65,067
                                             --------                              ----------
Total liabilities and equity                 $484,573                              $1,066,419
                                             ========                              ==========
 
Net interest income                                        $ 8,004                               $13,046
                                                           =======                               =======
 
Net interest margin (1)                                                    3.62%                                2.60%
Average interest rate spread (2)                                           1.54%                                1.45%
Ratio of interest-earning assets to                                      177.40%                              130.40%
   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

                                       32
<PAGE>
 
 PART II - OTHER INFORMATION

 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 June 30,     Six Months Ended June 30,
                                             ------------------------------     --------------------------
                                                    1996            1997           1996           1997
                                             --------------      ----------     -----------    -----------
                                                     (in thousands, except per share data)
<S>                                            <C>              <C>            <C>            <C>
Net income                                         $2,003         $2,895         $3,424        $5,716
                                                
                                                
Weighted average number of common               
 shares outstanding                                 6,444          6,445          6,444         6,445
                                                
                                                
                                                
Dilutive effect of common equivalent            
 shares of stock options and warrants                  21            156             22           137
                                                ----------       --------       --------       ------
                                                                                               
Weighted average number of common and                                                          
 common equivalent shares outstanding               6,465          6,601          6,466         6,582
                                                ==========       ========       ========       ======
                                                                                               
Net income per share (1)                           $  .31         $  .44         $  .53        $  .87
                                                ==========       ========       ========       ======
 
</TABLE>
(1) Primary and fully diluted income per share are the same for all periods
    presented
 
b.  The Company did not file any Current Reports on Form 8-K during the three
    months ended June 30, 1997.

                                       33
<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:  August  12, 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)

                                       34