<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 September 30, 1996

                                       or

       [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                For the Transition period from _____ to _____

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


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

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

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


                          ____________________________


          Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  YES X   NO
                                              ---    ---
          As of October 31, 1996, there were 6,027,872 shares of Common Stock
outstanding and 416,440 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 (unaudited)
                    December 31, 1995 and September 30, 1996                     3
 
                  Consolidated Income Statements (unaudited)
                    Nine months ended September 30, 1995 and 1996                4
 
                  Consolidated Income Statements (unaudited)
                    Three months ended September 30, 1995 and 1996               5
 
                  Statements of Stockholder's Equity (unaudited)
                    Nine months ended September 30, 1996                         6
 
                  Consolidated Statements of Cash Flows (unaudited)
                    Nine months ended September 30, 1995 and 1996                7
 
                    Notes to Condensed Consolidated Financial Statements         8
 
          ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS                           16
 
PART II           OTHER INFORMATION
 
          ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                              31
 
SIGNATURES                                                                      32
</TABLE>

                                       2
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.
 
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
-----------------------------------------------------------------------
<TABLE>
<CAPTION> 
ASSETS                                     DECEMBER 31,   SEPTEMBER 30,
                                               1995            1996
<S>                                       <C>             <C>
Cash and due from banks                    $ 21,898,903    $  7,833,975
Time deposits due from banks                  1,000,000               -
Federal funds sold                           15,000,000      94,000,000
Securities held to maturity
 (approximate market values of
 $155,685,959 and $376,956,153 at
 December 31, 1995
and September 30, 1996, respectively)       154,123,901     379,448,852
Securities available for sale                90,819,293     232,492,592
Loans, less allowance for loan losses
 of $35,000 and $84,114 at December 31,
 1995 and September 30, 1996,
 respectively                                22,864,216      43,717,369
Accrued interest and fees receivable         10,440,758      16,307,036
Equipment and leasehold improvements,        
 net                                          3,525,581       5,140,247
Other assets                                  2,763,661       4,272,260
                                           ------------    ------------
TOTAL ASSETS                               $322,436,313    $783,212,331
                                           ============    ============
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
LIABILITIES:
Deposits:
  Demand                                   $122,907,489    $411,063,944
  Savings                                    21,085,503      22,597,554
  Time                                       45,000,000      55,000,000
                                           ------------    ------------
       Total deposits                       188,992,992     488,661,498
 
Securities sold under repurchase             
 agreements                                  74,401,454     224,626,676
Other liabilities                             5,620,936      10,540,453
                                           ------------    ------------
 
       Total liabilities                    269,015,382     723,828,627
                                           ------------    ------------
 
STOCKHOLDERS' EQUITY:
  Class A common stock                            5,935           4,202
  Common stock                                   58,505          60,241
  Surplus                                    54,312,474      54,352,812
  Deferred compensation                      (2,117,787)     (1,797,400)
  Retained earnings                             899,794       6,259,463
  Net unrealized gain on securities            
   available for sale                           262,010         504,386
                                           ------------    ------------
       Total stockholders' equity            53,420,931      59,383,704
                                           ------------    ------------
 
TOTAL LIABILITIES AND STOCKHOLDERS'        
 EQUITY                                    $322,436,313    $783,212,331

                                           ============    ============
</TABLE> 
See notes to consolidated financial statements.

                                       3
<PAGE>
 
<TABLE>
<CAPTION>

INVESTORS FINANCIAL SERVICES CORP.
 
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
-----------------------------------------------------------------------------------------
                                                             SEPTEMBER 30,  SEPTEMBER 30,
                                                                 1995            1996
<S>                                                          <C>            <C>
 
OPERATING REVENUE:
Interest income:
  Federal funds sold                                           $   261,091    $   967,562
  Other short-term investments                                      44,340          6,448
  Securities held to maturity and available for sale             3,708,320     21,727,649
  Loans                                                            908,732      1,589,761
                                                               -----------    -----------
          Total interest income                                  4,922,483     24,291,420
                                                               -----------    -----------
Interest expense:
  Deposits                                                         508,138      5,565,501
  Securities sold under repurchase agreements                            -      5,691,253
  Federal funds purchased                                           69,644        322,019
  Treasury, tax and loan account                                    17,044         10,885
                                                               -----------    -----------
          Total interest expense                                   594,826     11,589,658
                                                               -----------    -----------
          Net interest income                                    4,327,657     12,701,762
 
  Provision for loan losses                                              -         49,114
                                                               -----------    -----------
          Net interest income after provision for
           loan losses                                           4,327,657     12,652,648
 
Noninterest income:
  Asset administration fees                                     36,700,881     40,661,709
  Proceeds from assignment of UIT servicing, net                 2,572,298              -
  Computer service fees                                            375,633        365,462
  Other operating income                                            54,982         57,065
  Net loss on securities available for sale                              -         (8,421)
                                                               -----------    -----------
          Net operating revenue                                 44,031,451     53,728,463
 
OPERATING EXPENSES
  Compensation of officers and employees                        20,707,192     23,436,228
  Pension and other employee benefits                            3,556,457      3,904,890
  Occupancy                                                      3,199,074      3,242,658
  Equipment                                                      3,622,101      3,991,122
  Insurance                                                        796,969        745,704
  Subcustodian fees                                              1,410,508      2,929,870
  Depreciation and amortization                                  1,090,549      1,095,115
  Professional fees                                              1,153,978      1,626,804
  Travel and sales promotion                                       558,514        698,966
  Other operating expenses                                       2,391,133      3,135,558
                                                               -----------    -----------
          Total operating expenses                              38,486,475     44,806,915
                                                               -----------    -----------
INCOME BEFORE INCOME TAXES                                       5,544,976      8,921,548

INCOME TAXES                                                     2,152,596      3,432,996
                                                               -----------    -----------
NET INCOME                                                     $ 3,392,380    $ 5,488,552
                                                               ===========    ===========
WEIGHTED AVERAGE SHARES OUTSTANDING                                             6,467,743
                                                                              ===========
EARNINGS PER SHARE                                                            $      0.85
                                                                              ===========
</TABLE> 
See notes to consolidated financial statements.

                                       4
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.
 
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE> 
<CAPTION>
-----------------------------------------------------------------------------------------
                                                             SEPTEMBER 30,   SEPTEMBER 30,
                                                                  1995            1996
<S>                                                           <C>            <C> 
OPERATING REVENUE:
Interest income:
  Federal funds sold                                           $   131,199    $   303,535
  Other short-term investments                                      15,675              -
  Securities held to maturity and available for sale             1,363,701      9,465,012
  Loans                                                            295,542        591,833
                                                               -----------    -----------
          Total interest income                                  1,806,117     10,360,380
                                                               -----------    -----------
Interest expense:
  Deposits                                                         151,284      2,495,044
  Securities sold under repurchase agreements                            -      2,995,597
  Federal funds purchased                                           13,817        168,418
  Treasury, tax and loan account                                     5,520          3,392
                                                               -----------    -----------
          Total interest expense                                   170,621      5,662,451
                                                               -----------    -----------
          Net interest income                                    1,635,496      4,697,929
 
Provision for loan losses                                                -              -
                                                               -----------    -----------
         Net interest income after provision
          for loan losses                                        1,635,496      4,697,929
 
Noninterest income:
  Asset administration fees                                     12,014,759     13,909,339
  Proceeds from assignment of UIT servicing, net                         -              -
  Computer service fees                                            125,615        118,852
  Other operating income                                            18,499         20,781
  Net loss on securities available for sale                              -        (14,694)
                                                               -----------    -----------
          Net operating revenue                                 13,794,369     18,732,207
 
OPERATING EXPENSES:
  Compensation of officers and employees                         6,834,587      8,146,583
  Pension and other employee benefits                            1,108,546      1,327,020
  Occupancy                                                        967,838      1,028,716
  Equipment                                                      1,178,829      1,355,353
  Insurance                                                        261,149        157,682
  Subcustodian fees                                                409,570      1,119,971
  Depreciation and amortization                                    335,014        402,594
  Professional fees                                                316,325        597,387
  Travel and sales promotion                                       150,442        205,779
  Other operating expenses                                         874,362      1,036,220
                                                               -----------    -----------
          Total operating expenses                              12,436,662     15,377,305
                                                               -----------    -----------
INCOME BEFORE INCOME TAXES                                       1,357,707      3,354,902 

INCOME TAXES                                                       477,404      1,289,904
                                                               -----------     ----------                                           
NET INCOME                                                     $   880,303    $ 2,064,998  
                                                               ===========    ===========
WEIGHTED AVERAGE SHARES OUTSTANDING                                           $ 6,471,069
                                                                             ============
EARNINGS PER SHARE                                                                  $0.32
                                                                             ============
</TABLE> 
See notes to consolidated financial statements.

                                       5
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.
 
STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE> 
<CAPTION>
--------------------------------------------------------------------------------------------------
                                          CLASS A                                                      
                                          COMMON    COMMON                    DEFERRED       RETAINED  
                                           STOCK     STOCK      SURPLUS     COMPENSATION     EARNINGS  
<S>                                        <C>      <C>         <C>         <C>              <C> 
BALANCE, DECEMBER 31, 1995                  5,935    58,505     54,312,474     (2,117,787)     899,794 
                                                                                                       
Adjustment to costs of stock issuance           -         -         35,193              -            - 
Conversion of class A to common stock      (1,733)    1,733              -              -            - 
Amortization of deferred compensation           -         -              -        320,387              
Exercise of stock options                                 3          5,145                             
Net income                                      -         -              -                   5,488,552 
Payment of dividend                                                                           (128,883)
Change in net unrealized gain on                                                                       
   securities available for sale                -                        -                             
                                        ---------   -------    -----------    -----------   ----------
BALANCE, SEPTEMBER 30, 1996               $ 4,202   $60,241    $54,352,812    $(1,797,400)  $6,259,463 
                                        =========   =======    ===========    ===========   ==========
</TABLE> 

<TABLE> 
<CAPTION> 
                                                          NET        
                                                      UNREALIZED     
                                                       GAIN ON       
                                                      INVESTMENT 
                                                      SECURITIES 
                                                       AVAILABLE 
                                                       FOR SALE                TOTAL
<S>                                                    <C>                  <C> 
BALANCE, DECEMBER 31, 1995                              262,010             53,420,931                    
                                                                                                        
Adjustment to costs of stock issuance                         -                 35,193                    
Conversion of class A to common stock                         -                      -                    
Amortization of deferred compensation                                          320,387                    
Exercise of stock options                                                        5,148                    
Net income                                                                   5,488,552                    
Payment of dividend                                                           (128,883)                                        
Change in net unrealized gain on                                                                                         
   securities available for sale                        242,376                242,376                                          
                                                      -----------         ------------                                          
BALANCE, SEPTEMBER 30, 1996                            $504,386            $59,383,704  
                                                      ===========         ============   
</TABLE>                                           
See notes to consolidated financial statements 

                                       6
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.  
                                    
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
--------------------------------------------------------------------------------
<TABLE>  
<CAPTION>  
                                               SEPTEMBER 30,   SEPTEMBER 30,
                                                   1995            1996
<S>                                             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                       $  3,392,380   $   5,488,552
                                                -------------   --------------
Adjustments to reconcile net income to
 net cash provided by
 operating activities:
  Depreciation and amortization                     1,090,549       1,095,115
  Amortization of deferred compensation                     -         320,387
  Provision for loan losses                                 -          49,114
  Amortization of premiums on securities,             526,346       1,779,230
   net of accretion of discounts
  Gain on sale of securities available                      -           8,421
   for sale
  Loss on disposal of fixed assets                          -          15,211
  Deferred income taxes                                     -        (161,584)
  Adjustment to carrying value of                   1,057,700               -
   interest rate floor contracts
  Changes in assets and liabilities:
      Accrued interest and fees receivable            310,248      (5,866,278)
      Other assets                                     12,461      (1,508,599)
      Other liabilities                             3,907,996       4,919,517
                                                -------------   --------------
          Total adjustments                         6,905,300         650,534
                                                -------------   --------------
          Net cash provided by operating           10,297,680       6,139,087
           activities
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
 available for sale and securities held
 to maturity                                       16,927,777      55,894,257
Proceeds from sale of securities                   
 available for sale                                         -      20,077,388
Purchases of securities                           (40,735,697)   (444,353,586)
Net (increase) decrease in time                       (40,575)      1,000,000
 deposits due from banks
Net increase in federal funds sold                          -     (79,000,000)
Net (increase) decrease in loans                    2,213,636     (20,902,267)
Purchases of equipment                             (1,047,133)     (2,724,992)
                                                -------------   --------------
          Net cash used for investing
           activities                             (22,681,992)   (470,009,200)
                                                -------------   --------------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits                       373,500     288,156,455
Net increase in time and savings                   
 deposits                                          12,321,605      11,512,051
Net increase in securities sold under                
 repurchase agreements                                      -     150,225,222
Adjustment to costs of stock issuance                       -          35,193
Proceeds from exercise of stock options                     -           5,148
Dividends paid                                              -        (128,883)
                                                -------------   -------------
          Net cash provided by financing           
           activities                              12,695,105     449,805,186
                                                -------------   -------------
 
NET INCREASE (DECREASE) IN CASH AND DUE        
 FROM BANKS                                           310,793     (14,064,928)
 
CASH AND DUE FROM BANKS, BEGINNING OF         
 PERIOD                                             7,207,657      21,898,903
                                                -------------   -------------

CASH AND DUE FROM BANKS, END OF PERIOD           $  7,518,450   $   7,833,975
                                                =============   =============
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION:
   Cash paid for interest                        $    617,000   $  11,012,000
                                                =============   =============
 
   Cash paid for income taxes                    $  2,334,000   $   3,818,000
                                                =============   =============
</TABLE> 
See notes to consolidated financial statements.

                                       7
<PAGE>
 
 INVESTORS FINANCIAL SERVICES CORP.

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (INFORMATION PERTAINING TO THE NINE MONTHS AND  THE THREE MONTHS ENDED
 SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

 1.    DESCRIPTION OF BUSINESS

       Investors Financial Services Corp. ("IFSC") provides asset administration
       services for the financial services industry through its wholly owned
       subsidiary, Investors Bank & Trust Company (the "Bank").  The Bank
       provides domestic and global custody, multicurrency accounting,
       institutional transfer agency, performance measurement, foreign exchange,
       securities lending, and mutual fund administration 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 common 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 September 30, 1996 and for the nine-month
       periods and the three-month periods ended September 30, 1995 and 1996,
       have been prepared by the Company, without audit, pursuant to the rules
       and regulations of the Securities and Exchange Commission.  Certain
       information and footnote disclosures normally included in annual
       financial statements prepared in accordance with generally accepted
       accounting principles have been condensed or omitted as permitted by such
       rules and regulations.  All adjustments, consisting of normal recurring
       adjustments, have been included.  Management believes that the
       disclosures are adequate to present fairly the financial position,
       results of operations and cash flows at the dates and for the periods
       presented.  It is suggested that these interim financial statements  be
       read in conjunction with the financial statements and the notes thereto
       included in the Company's latest annual report on Form 10-K.  Results for
       interim periods are not necessarily indicative of those to be expected
       for the full fiscal year.

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

                                       8
<PAGE>
 
 3. SECURITIES

       Carrying amounts and approximate market values of securities are
       summarized as follows as of December 31, 1995:
<TABLE>
<CAPTION>
 
 
                                   CARRYING    UNREALIZED  UNREALIZED  APPROXIMATE
       HELD TO MATURITY             VALUE        GAINS       LOSSES    MARKET VALUE
 
 
<S>                              <C>           <C>         <C>         <C>
Mortgage-backed securities       $144,123,901  $1,562,732    $117,924  $145,568,709
Federal Agency securities          10,000,000     117,250           -    10,117,250
Foreign government securities               -           -           -             -
                                 ------------  ----------    --------  ------------
 
Total                            $154,123,901  $1,679,982    $117,924  $155,685,959
                                 ============  ==========    ========  ============

 
                                  AMORTIZED    UNREALIZED  UNREALIZED    CARRYING
AVAILABLE FOR SALE                   COST        GAINS       LOSSES       VALUE
 
 
U.S. Treasury securities         $ 50,312,501  $  346,672    $  6,673  $ 50,652,500
Mortgage-backed securities         40,070,111     117,667      20,985    40,166,793
                                 ------------  ----------    --------  ------------
 
Total                            $ 90,382,612  $  464,339    $ 27,658  $ 90,819,293
                                 ============  ==========    ========  ============

</TABLE>
Carrying amounts and approximate market values of securities are summarized as
follows as of September 30, 1996:

<TABLE>
<CAPTION>
                                   CARRYING    UNREALIZED  UNREALIZED  APPROXIMATE
       HELD TO MATURITY             VALUE        GAINS       LOSSES    MARKET VALUE
<S>                              <C>           <C>         <C>         <C>
Mortgage-backed securities       $351,606,476  $1,135,538  $3,323,336  $349,418,678
Federal Agency securities          20,000,000           -     318,800    19,681,200
Foreign government securities       7,842,376      13,899           -     7,856,275
                                 ------------  ----------  ----------  ------------
  
Total                            $379,448,852  $1,149,437  $3,642,136  $376,956,153
                                 ============  ==========  ==========  ============
  
                                  AMORTIZED    UNREALIZED  UNREALIZED    CARRYING
AVAILABLE FOR SALE                   COST        GAINS       LOSSES       VALUE
 
 
U.S. Treasury securities         $ 45,154,595  $  111,579  $   20,124  $ 45,246,050
Mortgage-backed securities        186,497,354     864,503     115,315   187,246,542
                                 ------------  ----------  ----------  ------------
 
Total                            $231,651,949  $  976,082  $  135,439  $232,492,592
                                 ============  ==========  ==========  ============
</TABLE>

                                       9
<PAGE>
 
3.  SECURITIES (CONTINUED)

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

<TABLE>
<CAPTION>
 
                                      DECEMBER 31, 1995            SEPTEMBER 30, 1996
                                    CARRYING    APPROXIMATE     CARRYING      APPROXIMATE
        HELD TO MATURITY             VALUE      MARKET VALUE      VALUE      MARKET VALUE
 
 
<S>                               <C>           <C>           <C>            <C>
Due within one year               $          -  $          -   $ 10,000,000   $  9,765,600
Due from one to five years          79,803,891    80,885,330    100,256,004     98,886,233
Due five years up to ten years      68,228,986    68,639,409    222,266,583    220,699,144
Due after ten years                  6,091,024     6,161,220     46,926,265     47,605,176
                                  ------------  ------------   ------------   ------------
 
Total                             $154,123,901  $155,685,959   $379,448,852   $376,956,153
                                  ============  ============   ============   ============
 
 
 
                                      DECEMBER 31, 1995            SEPTEMBER 30, 1996
                                   AMORTIZED      CARRYING      AMORTIZED      CARRYING
        AVAILABLE FOR SALE            COST         VALUE          COST           VALUE
 
Due within one year               $ 25,240,028  $ 25,263,000   $ 20,014,388   $ 20,065,600
Due from one to five years          58,395,211    58,791,503    196,246,540    196,925,414
Due five years up to ten years       6,747,373     6,764,790     15,391,021     15,501,578
                                  ------------  ------------   ------------   ------------
 
Total                             $ 90,382,612  $ 90,819,293   $232,651,949   $232,492,592
                                  ============  ============   ============   ============
</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.

   Three securities available for sale were sold during the nine months ended
   September 30, 1996 resulting in net losses totaling $8,421.

   The carrying value of securities pledged amounted to approximately
   $206,000,000 and $291,000,000 at December 31, 1995 and September 30, 1996,
   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 advances
   pursuant to the terms of the custody agreements between the Company and those
   mutual fund clients to facilitate securities transactions and redemptions.
   The loans are generally collateralized with marketable securities. There were
   no impaired or nonperforming loans at December 31, 1995 or September 30,
   1996. In addition, there have been no loan charge-offs or recoveries during
   the nine months ended September 30, 1995 and 1996. Loans consisted of the
   following at December 31, 1995 and September 30, 1996:

                                       10
<PAGE>
 
4. LOANS (CONTINUED)
<TABLE>

 
                                                           DECEMBER 31,  SEPTEMBER 30,
                                                              1995           1996
<S>                                     <C>                <C>           <C>
 
Loans to individuals                                        $12,610,018    $18,433,399
Loans to not-for-profit institutions                            289,198         12,500
Loans to mutual funds                                        10,000,000     25,355,584
                                                            -----------    -----------
 
                                                             22,899,216     43,801,483
 
Less allowance for loan losses                                   35,000         84,114
                                                            -----------    -----------
 
Total                                                       $22,864,216    $43,717,369
                                                            ===========    ===========
</TABLE>
    The Company had commitments to lend of approximately $1,708,000 and
    $35,475,388 at December 31, 1995 and September 30, 1996, 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, 1995 and September 30, 1996:

<TABLE>
<CAPTION>
 
                                                  DECEMBER 31,     SEPTEMBER 30,
                                                      1995             1996
<S>                                          <C>                <C>
Furniture, fixtures and equipment                  $6,281,172            $8,200,576
Leasehold improvements                                761,929               571,169
                                                   ----------            ----------
Total                                               7,043,101             8,771,745
 
Less accumulated depreciation and                
 amortization                                       3,517,520             3,631,498
                                                   ----------            ---------- 

Equipment and leasehold improvements, net          $3,525,581            $5,140,247
                                                   ==========            ==========
</TABLE>
 6. DEPOSITS

    Time deposits at December 31, 1995 and September 30, 1996 include
    noninterest-bearing amounts of approximately $45,000,000 and $55,000,000,
    respectively.

    All time deposits had a minimum balance of $100,000 and a maturity of less
    than three months at December 31, 1995 and September 30, 1996.

 7. REPURCHASE AGREEMENTS

    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 $74,401,454 and $224,626,676 at December 31, 1995
    and September 30, 1996 respectively. The interest rate on the outstanding
    agreements at December 31, 1995 ranged from 5.5% to 6.0% and all agreements
    matured on January 2, 1996. The interest rate on the outstanding agreements
    at September 30, 1996 ranged from 4.95% to 5.98% and all agreements matured
    by October 2, 1996. The following securities were pledged under these
    agreements at December 31, 1995 and September 30, 1996:

                                       11
<PAGE>
 
 7. REPURCHASE AGREEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                   DECEMBER 31, 1995              SEPTEMBER 30, 1996
                                CARRYING    APPROXIMATE        CARRYING    APPROXIMATE
                                 VALUE      MARKET VALUE        VALUE      MARKET VALUE

<S>                           <C>           <C>           <C><C>           <C>
U.S. Treasury securities       $29,345,800   $29,345,800     $ 20,065,600  $ 20,065,600
Mortgage-backed securities      47,211,518    47,254,137      214,700,044   214,597,239
                               -----------   -----------     ------------  ------------
 
Total                          $76,557,318   $76,599,937     $234,765,644  $234,662,839
                               ===========   ===========     ============  ============
</TABLE>
 8. STOCKHOLDERS' EQUITY

    On May 27, 1994, the Bank's Board of Directors approved a reduction in the
    par value of the Company's common stock from $100 per share to $10 per
    share, and a 100-for-1 stock split which caused the number of shares of
    common stock authorized, issued and outstanding to increase from 10,000
    shares to 1,000,000 shares. The stock split resulted in a $9,000,000
    increase in common stock, a $1,000,000 decrease in surplus and an $8,000,000
    decrease in retained earnings. There were no other changes in authorized,
    issued or outstanding common stock for any period presented prior to the
    Spin-off Transaction.

    IFSC 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, 1995 and September 30, 1996, there
    were no preferred shares issued or outstanding.  There were 593,500 and
    420,181 shares of Class A Common Stock and 5,850,500 and 6,024,131 Common
    Stock issued and outstanding at December 31, 1995 and September 30, 1996,
    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 two stock option plans, the 1995 Stock Plan and the 1995
    Non-Employee Director Stock Option Plan.

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

    Under the terms of the 1995 Non-Employee Director Stock Option Plan, the
    Company may grant options to non-employee directors to purchase up to a
    maximum of 40,000 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, in April 1996 the Company's stockholders approved an amendment
    to the 1995 Non-Employee Director Plan that will allow non-employee
    directors to 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.

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

    In November 1995, the Company granted 114,000 shares 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 $2,117,787 and $1,797,400 at December 31, 1995 and September
    30, 1996, respectively, pursuant to these grants.

    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, 1995       211,500              $16.50
Granted                                  7,500   $22.375 - $22.625
Exercised                                 (312)             $16.50
Expired                                 (4,688)             $16.50
                                       -------  
 
Outstanding at September 30, 1996      214,000
                                       =======
 
Exercisable at September 30, 1996       35,408
                                       -------
 
</TABLE>

    Under Massachusetts law, trust companies such as the Bank may only pay
    dividends out of "net profits" and only to the extent that such payments
    will not impair the Bank's capital stock and surplus account. If, prior to
    declaration of a dividend, the Bank's capital stock and surplus accounts do
    not equal at least 10% of its deposit liabilities, then prior to the payment
    of the dividend, the Bank must transfer from net profits to its surplus
    account the amount required to make its surplus account equal to either (i)
    together with capital stock, 10% of deposit liabilities, or (ii) subject to
    certain adjustments, 100% of capital stock. The Bank and IFSC are required
    to maintain minimum amounts of capital to total "risk-weighted" assets, as
    defined by the banking regulators. At September 30, 1996, the Bank and IFSC
    are required to have minimum Tier 1 and total capital ratios of 3% and 8%,
    respectively. The actual ratios at that date were in excess of all
    regulatory requirements.

9.  PROCEEDS FROM ASSIGNMENT OF UNIT INVESTMENT TRUST SERVICING, NET

    During the first nine months of 1995, the Company recognized a net gain of
    $2,572,298 of noninterest income resulting from the assignment to another
    company of the rights to service approximately $5.0 billion of unit
    investment trust assets. In connection with the assignment, the Company
    adjusted to market value interest rate floors with a notional amount of
    $80,000,000, and the resulting loss of $1,057,700 is reported net of the
    cash proceeds from the assignment of unit investment trust servicing. These
    interest rate floors had previously been designated as hedges of fees from
    the unit investment trusts (see Note 10).

10. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

    LINES OF CREDIT - At September 30, 1996, the Company had commitments to
    individuals under collateralized open lines of credit totaling $64,220,700,
    against which $28,745,312 in loans was drawn. The credit risk involved in
    issuing lines of credit is essentially the same as that involved in
    extending loan facilities. The Company does not anticipate any loss as a
    result of these lines of credit.

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

<TABLE> 
      <S>                                     <C> 
       Interest rate contracts:
                Swap agreements                   $110,000,000
                Floor contracts                    $80,000,000
</TABLE> 

    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 one party may default on
    its contractual obligation.  Credit risk is limited
   

                                       13
<PAGE>
 
    to the posititve market value of the derivative financial instrument, which
    is significantly less than the notional value. The positive market value of
    the interest rate contracts was $0 at September 30, 1996.

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 September 30, 1996 was $24,802,000.  In addition,
    other cash balances in the amount of $1,391,679 were pledged to secure
    clearings with a depository institution as of September 30, 1996.

    LEASE COMMITMENTS - Minimum future commitments on noncancelable operating
    leases at September 30, 1996 were as follows:
<TABLE>
<CAPTION>
 
                          Bank
Fiscal Year Ending      Premises   Equipment
<S>                    <C>         <C>
 
    1996                  965,786    269,574
    1997                3,821,070    697,459
    1998                4,252,481    376,843
    1999                4,252,481    109,122
    2000 and beyond    31,240,242          -
</TABLE>
    Total rent expense was $3,090,666 and $3,109,603 for the nine months
    ended September 30, 1995 and 1996, respectively.

    CONTINGENCIES - The Company provides domestic and global custody,
    multicurrency accounting, institutional transfer agency, performance
    measurement, foreign exchange, securities lending and mutual fund
    administration 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 September 30, 1996 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 a matched position with another bank. These
    contracts are subject to market value fluctuations in foreign currencies.
    Gains and losses from such fluctuations are netted and recorded as an
    adjustment of asset administration fees. A summary of foreign exchange
    contracts outstanding at December 31, 1995 and September 30, 1996 is as
    follows (in thousands):

<TABLE>
<CAPTION>
                                DECEMBER 31, 1995               SEPTEMBER 30, 1996
                       ---------------------------------  -------------------------------
                                              UNREALIZED                       UNREALIZED
CURRENCY                 PURCHASES   SALES    GAIN/LOSS   PURCHASES   SALES    GAIN/LOSS
 
<S>                      <C>        <C>       <C>         <C>        <C>       <C>
Australian (Dollar)        $   482   $   482           -    $   499   $   499           -
Belgian (Franc)                715       715           -      1,235     1,235           -
Spain (Paseta)                   -         -           -        346       346           -
Canadian (Dollar)              118       118           -      3,727     3,727           -
France (Franc)                 859       859           -      8,711     8,711           -
Germany (Mark)                 955       955           -      8,499     8,499           -
Hong Kong (Dollar)           1,991     1,991           -        296       296           -
Japan (Yen)                 46,211    46,211           -     45,569    45,569           -
Malaysia (Ringgit)             505       505           -        562       562           -
Netherlands (Guilder)        1,797     1,797           -        820       820           -
Switzerland (Franc)              8         8           -        999       999           -
Other currencies               545       545           -      1,293     1,293           -
                           -------   -------       -------  -------   -------     -------                        
                           $54,186   $54,186           -    $72,556   $72,556           -
                           =======   =======       =======  =======   =======     =======
 
</TABLE>

                                       14
<PAGE>
 
12.  FOREIGN EXCHANGE CONTRACTS (CONTINUED)

 The maturity of contracts outstanding as of September 30, 1996 is as follows:
 
<TABLE>
<CAPTION>
Maturity         Purchases   Sales
<S>              <C>        <C>
October 1996       $63,831   $63,831
November 1996        4,725     4,725
January 1997         2,500     2,500
February 1997        1,500     1,500
 
</TABLE>

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

 OVERVIEW

      The following discussion and analysis of the financial condition and
 results of operations of the Company should be read in conjunction with the
 Company's Condensed Consolidated Financial Statements and related notes, which
 are included elsewhere in this Report.  The Company, through its wholly owned
 subsidiary, Investors Bank & Trust Company, provides domestic and global
 custody, multicurrency accounting, institutional transfer agency, performance
 measurement, foreign exchange, securities lending and mutual fund
 administration services to a variety of financial asset managers, including
 mutual fund complexes, investment advisors, banks and insurance companies.
 Currently, the Company provides financial asset administration services for
 assets totaling approximately $111 billion, including approximately $8.5
 billion of foreign assets.  The Company also engages in private banking
 transactions, including secured lending and deposit accounts.

      The Company's historical business and financial results have been
 significantly influenced by the restrictions imposed under the Competitive
 Equality Banking Act of 1987 ("CEBA").  Under the CEBA restrictions, the
 Company could not: (a) engage in any activity in which it was not engaged as of
 March 5, 1987; (b) increase its assets by more than 7% during any 12-month
 period beginning after August 10, 1988; (c) engage in certain cross-marketing
 activities with affiliates; or (d) permit overdrafts by or incur overdrafts on
 behalf of affiliates at a Federal Reserve Bank.  As a result of the Company's
 initial public offering completed on November 14, 1995 (the "Offering") and the
 distribution by Eaton Vance Corp. ("Eaton Vance") of all its shares of the
 Company's Common Stock and Class A Common Stock to the shareholders of Eaton
 Vance (the "Spin-Off Transaction"), the Company is no longer subject to such
 restrictions.   Accordingly, the Company's historical operating results may not
 necessarily be indicative of either the full scope of the future conduct of its
 business or its future operating results.

      The Company is now able to expand current business activities and
 participate in certain additional business activities which may result in
 increased revenues generated by an increase in client deposits and lending
 opportunities.  The Company's clients typically generate cash balances from
 securities sales and other transactions which they seek to invest on a short-
 term basis.  Because the Company had been subject to the CEBA 7% annual asset
 growth cap, it was not able to accept those deposits prior to the completion of
 the Spin-Off Transaction and directed them to other financial institutions,
 foregoing a potential source of revenue.  The Company directed client deposits
 averaging approximately $1.2 billion daily to other financial institutions in
 the fiscal year ended October 31, 1995.  Since the completion of the Spin-Off
 Transaction and the Offering, the Company has redirected an average of
 approximately $360 million daily of these balances into its own deposit
 products.  Similarly, many of the Company's clients use credit lines to
 leverage their portfolios or to handle overnight cash shortfalls.  CEBA
 requirements restricted the Company from making commercial loans of this type.
 As a result of the removal of CEBA limitations, the Company is now able to make
 commercial loans.  Since December 1995, the Company has entered into agreements
 to provide up to an aggregate of $40 million under secured lines of credit to
 mutual fund clients.  In addition, the Company makes fully secured advances to
 certain mutual fund clients pursuant to the terms of the custody agreements
 between the Company and those mutual fund clients.

      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 adviser to the Funds.  At the same time, the Company engaged the
 Bank of New York to act as sub-adviser to manage the investments of the Funds.
 In addition to acting as adviser 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 one
 operating master fund, the Merrimac Cash Portfolio, and one operating feeder
 fund, the Merrimac Cash Fund.  The Merrimac Cash Fund offers its shares only to
 institutions and other "accredited investors" (as that term is defined in Rule
 501(a) under the Securities Act of 1933) and invests all of its assets in the
 Merrimac Cash Portfolio.  The Merrimac Cash Portfolio invests its assets in
 high quality money market instruments.  The Funds may add additional feeder
 funds and master funds in the future.

      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 

                                       16
<PAGE>
 
 meaningful measures of financial results. Revenue generated from asset
 administration and other fees and interest income increased 22% from
 $44,031,000 in the first nine months of 1995 to $53,728,000 in the first nine
 months of 1996.

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

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

      The Company, because it is no longer subject to the CEBA balance sheet
 growth restrictions, is able to accept client deposits it had historically
 directed to other financial institutions.  As compensation for directing these
 deposits to other financial institutions, the Company had retained a portion of
 the earnings on the deposits; this amount was recognized as fee income.
 Generally, the Company now invests these deposits on its own behalf in various
 interest-earning assets and pays interest expense on those deposits.  As a
 result, the mix of fee income and interest income that comprise the total
 compensation package from clients is shifting as the relative amount of fee
 income decreases while the relative amount of interest income increases.

 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

      The Company's quarterly and annual operating results are affected by a
 wide variety of factors that could materially adversely affect revenues and
 profitability, including: the timing of the commencement or termination of
 client engagements, the rate of net inflows and outflows of investor funds in
 the debt and equity-based investment vehicles offered by the Company's clients,
 the introduction and market acceptance of new services by the Company and
 changes or anticipated changes in economic conditions.  Because the Company's
 operating expenses are relatively fixed, any unanticipated shortfall 

                                       17
<PAGE>
 
 in revenues in a quarter may have an adverse impact on the Company's results of
 operations for that quarter. As a result of the foregoing and other factors,
 the Company may experience material fluctuations in future operating results on
 a quarterly or annual basis which could materially and adversely affect its
 business, financial condition, operating results and stock price.

 STATEMENT OF OPERATIONS

 Comparison of Operating Results for the Nine Months Ended September 30, 1996
 and 1995

 Noninterest Income

      Noninterest income increased $1,372,000 to $41,076,000 for the nine months
 ended September 30, 1996 from $39,704,000 for the prior period.  Noninterest
 income consists of the following items:
<TABLE>
<CAPTION>
 
                                             For the Nine Months Ended  
                                                   September 30,
                                     -------------------------------------   -----------
                                              1995                1996          Change
                                     -------------------------------------   -----------
<S>                                    <C>                 <C>                 <C>
                                              (Dollars in thousands)
Asset administration fees                         $36,701            $40,662       11%
Proceeds from assignment of UIT
     servicing, net                                 2,572                  -        -
Computer service fees                                 376                365       (3)
Other operating income                                 55                 57        4
Loss on sale of investment security                     -                 (8)       -
                                           --------------      -------------    
Total Noninterest Income                          $39,704            $41,076        3%
                                     =======================================
</TABLE>

      Asset administration fees increased due principally to higher levels of
 assets processed.  Assets processed is the total dollar value of financial
 assets on the reported date for which the Company provides one or more of the
 following services: custody, multicurrency accounting, institutional transfer
 agency, performance measurement, foreign exchange, securities lending and
 mutual fund administration.  Total assets processed increased to $111 billion
 at September 30, 1996 from $90 billion at September 30, 1995.  Of the $21
 billion net increase in assets processed from September 30, 1995 to September
 30, 1996, approximately 13% of the increase reflects assets processed for new
 clients, and the remainder of the increase reflects growth of assets processed
 for existing clients and improved methods for tracking the amount of assets
 processed, offset in part by the assets of clients no longer serviced by the
 Company.  The remainder of the growth in asset administration fees was due to
 the net expansion of relationships with existing clients and increased use of
 the Company's cash management and foreign exchange services.  In addition,
 because the Company is now able to accept deposits that had been historically
 directed to other financial institutions due to CEBA asset growth restrictions,
 the Company has experienced a shift in the mix of compensation received from
 its clients.  See "Overview" in this Item 2.  A larger portion of the Company's
 compensation from clients is now in the form of interest income generated from
 client deposits, resulting in a decrease to asset administration fees and a
 related increase in net interest income.  The growth in asset administration
 fees was also offset by the transfer of unit investment trust assets discussed
 below.  The administration of these assets accounted for approximately
 $1,491,000 in asset administration fees in the nine months ended September 30,
 1995.

      Unit investment trust ("UIT") assets processed by the Company have
 decreased over the last five years, a reflection of declining investor demand
 for this type of unmanaged investment product.  Declining asset levels led one
 client, Merrill Lynch, to consolidate its asset administration service
 providers, and it agreed, effective March 1, 1995, to pay the Company to assign
 the Company's servicing rights to the Bank of New York Company, Inc.  The
 Company recognized proceeds of $2,572,000, net of expenses, resulting from the
 assignment of the rights to service approximately $5 billion of the client's
 unit investment trust assets.  The Company has made the strategic decision to
 focus its marketing and processing efforts on mutual funds and other pooled
 investments which typically experience higher growth in asset levels and can
 utilize a wider variety of services provided by the Company, as compared to
 unit investment trusts.  See Note 9 of Notes to Condensed Consolidated
 Financial Statements.

      Computer services fees consist of amounts charged by the Company to Eaton
 Vance for data processing services related to individual accounts managed by
 Eaton Vance.  Other operating income consists of miscellaneous private banking
 fees for safe deposit and checking account services.

                                       18
<PAGE>
 
 Operating Expenses

      Total operating expenses increased by $6,321,000 to $44,807,000 for the
 nine months ended September 30, 1996 compared to $38,486,000 for the nine
 months ended September 30, 1995.  The components of operating expenses were as
 follows:
<TABLE>
<CAPTION>
 
                                          For the nine months ended September
                                                          30,
                                        ------------------------------------   -----------
                                                  1995               1996          Change
                                        ------------------------------------   -----------
<S>                                    <C>                 <C>                <C>
                                              (Dollars in thousands)
Compensation                                      $20,707            $23,436       13%
Pension and other employee benefits                 3,556              3,905       10
Occupancy                                           3,199              3,243        1
Equipment                                           3,622              3,991       10
Insurance                                             797                746       (6)
Subcustodian Fees                                   1,410              2,930      108
Depreciation and amortization                       1,091              1,095        -
Professional Fees                                   1,154              1,627       41
Travel and sales promotion                            559                699       25
Other operating expenses                            2,391              3,135       31
                                     --------------------   ----------------
Total Noninterest Income                          $38,486            $44,807       16%
                                     ====================   ================
</TABLE>

      Compensation of officers and employees increased by $2,729,000 or 13% from
period to period due to several factors.  The number of employees increased 13%
to 742 at September 30, 1996 from 657 at September 30, 1995.  In addition,
compensation expense related to the Company's management incentive plan
increased because of the increase in earnings subject to incentive in the first
nine months of 1996 compared to the first nine months of 1995.  The remainder of
the increase in compensation expense resulted from salary increases.

      Pension and other employee benefits, including payroll taxes, group
insurance plans, retirement plan contributions and tuition reimbursement,
increased to $3,905,000 for the nine months ended September 30, 1996 from
$3,556,000 for the same period in 1995.  The 10% increase was due to increased
payroll taxes attributable to the increase in compensation expense and a
decrease in the discount rate used to calculate the expense of the defined
benefit retirement plan.

      Equipment expenses vary with the level of assets processed by the Company.
The $369,000 increase between periods was due principally to the growth in
assets processed by the company.

      Subcustodian expense consists of fees paid to centralized clearinghouses
and depositories for settling and holding securities on the Company's behalf.
This expense increased $1,520,000 to $2,930,000 for the nine months ended
September 30, 1996 from $1,410,000 for the nine months ended September 30, 1995.
This increase results from the increase in foreign assets processed, which are
subject to higher subcustodian fees, from $6.6 billion at September 30, 1995 to
$8.5 billion at September 30, 1996, and from the movement by clients into
emerging markets with higher cost structures.  These costs are passed through to
clients and make up part of the increase in asset administration fees.

      Professional fees increased $473,000 to $1,627,000 for the nine months
ended September 30, 1996 from $1,154,000 for the nine months ended September 30,
1995.  This increase results primarily from the Company's increased use of
contract programmers to perform systems development work.  Another factor
contributing to this increase is legal fees incurred in connection with the
Company's initial compliance with year-end related filings with the Securities
and Exchange Commission and the change of the Company's fiscal year.  The
Company has hired general counsel to, among other things, assist with these
reporting requirements in the future.

      Travel and sales promotion expense consists of expenses incurred by the
sales force, client management staff and other employees in connection with
making sales calls on potential clients, traveling to existing client sites and
the Company's foreign subsidiaries, and attending industry conferences.  This
expense increased $140,000 to $699,000 for the nine months ended September 30,
1996 from $559,000 for the nine months ended September 30, 1995 due primarily to
increased travel to the foreign subsidiaries.

                                       19
<PAGE>
 
      Other operating expenses increased $744,000 to $3,135,000 for the nine
months ended September 30, 1996 from $2,391,000 for the nine months ended
September 30, 1995.  Other operating expenses include fees for daily market
pricing data, telephone, office supplies, and Delaware excise tax.  Fees for
daily market pricing data vary with the level of assets processed.  Other
expenses such as telephone and office supplies vary with staffing levels.  The
Delaware excise tax is based on the number of shares authorized for issuance by
the Company.  This tax was imposed on the Company after its formation as a
Delaware corporation in June 1995 and accounts for $135,000 of the increase
between periods.  The remainder of the increase relates to the increases in
assets processed and staffing levels.

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 September 30, 1996 compared to the same
period in 1995.
<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         $   691   $ (23)  $   668
Investment securities                  17,631     389    18,020
Loans                                     860    (179)      681
                                      -------   -----   -------
Total interest-earning assets          19,182     187    19,369
                                      -------   -----   -------
 
INTEREST-BEARING LIABILITIES
Deposits                                4,947     122     5,069
Borrowings                              5,920       6     5,926
                                      -------   -----   -------
Total interest-bearing liabilities     10,867     128    10,995
                                      -------   -----   -------
 
Change in net interest income         $ 8,315   $  59   $ 8,374
                                      =======   =====   =======
 
</TABLE>

      Net interest income increased $8,374,000 or 194% to $12,702,000 for the
nine months ended September 30, 1996 from $4,328,000 for the same period in
1995.  This net increase resulted from an increase in interest income of
$19,369,000 offset by an increase in interest expense of $10,995,000.  The net
impact of the above changes was a 222 basis point decrease in net interest
margin.

      The increase in interest income resulted primarily from a higher level of
interest earning assets.  Prior to the Spin-Off Transaction, the Company was
subject to a 7% annual asset growth cap under CEBA.  The elimination of the CEBA
growth restriction has allowed the Company to accept deposits from clients which
it had historically directed to other financial institutions.  The Company's
average assets for the nine months ended September 30, 1996 increased
$434,133,000 or 355% compared to the same period in 1995.  This growth primarily
resulted from an increase in average interest earning assets of $402,688,000.

      Interest expense increased $10,995,000 due to the higher level of deposits
and an increase in the interest rate paid by the Company.  Prior to the Spin-off
Transaction, the Company was not trying to attract deposits to its balance sheet
and therefore did not pay a competitive interest rate.  The average rate paid on
deposits and short-term borrowings increased from 3.51 % to 4.81% between
periods.

                                       20
<PAGE>
 
Income Taxes

      The Company's earnings were taxed on the federal level at 34% for the 1996
and 1995 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 12.54%.  The provision for income taxes
for the nine months ended September 30, 1996 increased by $1,280,000 over the
same period in 1995.  The overall effective tax rate decreased to 38.5% for the
nine months ended September 30, 1996, from 38.8% for the same period in 1995.
The decrease in the effective tax rate is due to a decrease in the income of the
Company's Canadian subsidiary, which was taxed at the Canadian effective rate of
45.37%, and the related increase in the income of the Company's subsidiaries in
Dublin and the Cayman Islands, which are lower tax jurisdictions, as the Company
transferred certain offshore processing activities from Toronto to Dublin and
the Cayman Islands.

Comparison of Operating Results for the Quarters Ended September 30, 1996 and
1995

Noninterest Income

      Noninterest income increased $1,875,000 to $14,034,000 for the quarter
ended September 30, 1996 from $12,159,000 for the prior period.  Noninterest
income consists of the following items:
<TABLE>
<CAPTION>
 
                                        For the Quarters Ended September
                                                       30,
                                     ------------------------------------  ---------
                                             1995              1996          Change
                                     ------------------  ----------------  ---------
                                             (Dollars in thousands)
<S>                                    <C>               <C>                <C>
                                             
Asset administration fees                       $12,015           $13,909       16%
Computer service fees                               126               119       (6)
Other operating income                               18                21       17
Gain on sale of investment security                   -               (15)       -
                                     ------------------      ------------ 
Total Noninterest Income                        $12,159           $14,034       15%
                                     ====================  ==============
</TABLE>

       Asset administration fees increased due principally to higher levels of
assets processed.  The remainder of the growth in asset administration fees was
due to the net expansion of relationships with existing clients and increased
use of the Company's foreign exchange services.

Operating Expenses

       Total operating expenses increased by $2,940,000 to $15,377,000 for the
quarter ended September 30, 1996 compared to $12,437,000 for the quarter ended
September 30, 1995.  The components of operating expenses were as follows:
<TABLE>
<CAPTION>
 
                                         For the quarter ended September
                                                         30,
                                     -----------------------------------   --------
                                                1995               1996     Change
                                     --------------------  -------------   --------
                                             (Dollars in thousands)
<S>                                    <C>               <C>              <C>
                                            
Compensation                                    $ 6,835          $ 8,146      19%
Pension and other employee benefits               1,109            1,327      20
Occupancy                                           968            1,029       6
Equipment                                         1,179            1,355      15
Insurance                                           261              158     (39)
Subcustodian Fees                                   410            1,120     173
Depreciation and amortization                       335              403      20
Professional Fees                                   316              597      89
Travel and sales promotion                          150              206      37
Other operating expenses                            874            1,036      19
                                       ------------------  -------------
Total Noninterest Income                        $12,437          $15,377      24%
                                       ==================  =============
</TABLE>

                                       21
<PAGE>
 
       Compensation of officers and employees increased by $1,311,000 or 19%
from quarter to quarter due to several factors.  The number of employees
increased 13% to 742 at September 30, 1996 from 657 at September 30, 1995.  In
addition, compensation expense related to the Company's management incentive
plan increased because of the increase in earnings in the third quarter of 1996
compared to the third quarter of 1995.  The remainder of the increase in
compensation expense resulted from salary increases.

       Pension and other employee benefits increased to $1,327,000 for the
quarter ended September 30, 1996 from $1,109,000 for the same period in 1995.
The 20% increase was due to increased payroll taxes attributable to the increase
in compensation expense and a decrease in the discount rate used to calculate
the expense of the defined benefit retirement plan.

       Equipment expense consists of operating lease payments for
microcomputers,  and fees charged by EDS for processing and data storage
services provided to the Company.  These expenses vary with the level of assets
processed by the Company.  The $176,000 increase between periods is due
principally to the growth in assets processed.

       Insurance expense decreased 39% from $261,000 for the quarter ended
September 30, 1995 to $158,000 for the quarter ended September 30, 1996 due to
the renegotiation of the Company's coverage for errors and omissions liability,
directors and officers liability and blanket bond.

       Subcustodian expense increased $710,000 to $1,120,000 for the quarter
ended September 30, 1996 from $410,000 for the quarter ended September 30, 1995.
This increase results from the increase in foreign assets processed, which are
subject to higher subcustodian fees, from $6.5 billion at September 30, 1995 to
$8.5 billion at September 30, 1996, and from the movement by clients into
emerging markets with higher cost structures.

       Depreciation and amortization expense increased $68,000 between periods
due to purchases of furniture, equipment, and capitalized software in late 1995
and in 1996.

       Professional fees increased $281,000 to $597,000 for the quarter ended
September 30, 1996 from $316,000 for the quarter ended September 30, 1995.  This
increase results from the Company's increased use of contract programmers to
perform systems development work.

       Travel and sales promotion expense increased $56,000 to $206,000 for the
quarter ended September 30, 1996 from $150,000 for the quarter ended September
30, 1995 due to increased travel to the foreign subsidiaries.

       Other operating expenses increased $162,000 to $1,036,000 for the quarter
ended September 30, 1996 from $874,000 for the quarter ended September 30, 1995.
Fees for daily market pricing data vary with the level of assets processed.
Other expenses such as telephone and office supplies vary with staffing levels.
The Delaware excise tax is based on the number of shares authorized for issuance
by the Company.  The increase relates to the increases in assets processed and
staffing levels.

                                       22
<PAGE>
 
Net Interest Income

       Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates.  The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities or changes in
interest rates for the quarter ended September 30, 1996 compared to the same
period in 1995.
<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          $  149    $  7    $  156
Investment securities                   7,984     117     8,101
Loans                                     358     (61)      297
                                       ------    ----    ------
Total interest-earning assets           8,491      63     8,554
                                       ------    ----    ------
 
INTEREST-BEARING LIABILITIES
Deposits                                2,340       7     2,347
Borrowings                              3,141       3     3,144
                                       ------    ----    ------
Total interest-bearing liabilities      5,481      10     5,491
                                       ------    ----    ------
 
Change in net interest income          $3,010    $ 53    $3,063
                                       ======    ====    ======
 
 
</TABLE>

       Net interest income increased $3,063,000 or 187% to $4,698,000 for the
quarter ended September 30, 1996 from $1,635,000 for the same period in 1995.
This net increase resulted from an increase in interest income of $8,554,000
offset by an increase in interest expense of $5,491,000.  The net impact of the
above changes was a 286 basis point decrease in net interest margin.

       The increase in interest income resulted primarily from a higher level of
interest earning assets.  As discussed above, the elimination of the CEBA asset
growth restriction has allowed the Company to accept deposits from clients which
it had historically directed to other financial institutions.  The Company's
average assets for the quarter ended September 30, 1996 increased $564,850,000
or 424% compared to the same period in 1995.  This growth primarily resulted
from an increase in average interest earning assets of $531,908,000.

       Interest expense increased $5,491,000 due to the higher level of deposits
and an increase in the interest rate paid by the Company.  Prior to the Spin-off
Transaction, the Company was not trying to attract deposits to its balance sheet
and therefore did not pay a competitive interest rate.  The average rate paid on
deposits and short-term borrowings increased from 3.69% to 4.90% during the
period.

Income Taxes

       The Company's earnings were taxed on the federal level at 34% for the
1996 and 1995 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 12.54%. The provision for income taxes
for the quarter ended September 30, 1996 increased by $813,000 over the same
period in 1995.  The overall effective tax rate increased to 38.5% for the
quarter ended September 30, 1996, from 35.2% for the same period in 1995.  The
increase in the effective tax rate is due to the timing of the recognition of
tax expense in 1995; the overall effective tax rate in 1995 was 40%.

                                       23
<PAGE>
 
FINANCIAL CONDITION

Investment Portfolio

The following table summarizes the Company's investment portfolio for the dates
indicated:
<TABLE>
<CAPTION>
 
                                       December 31,  September 30,
                                     -------------- --------------
                                           1995          1996
                                     -------------- --------------
                                         (Dollars in thousands)
<S>                                    <C>           <C>
SECURITIES HELD TO MATURITY:
Mortgage-backed securities                 $144,124       $351,607
Federal Agency securities                    10,000         20,000
Foreign government securities                     -          7,842
                                     -------------- --------------
Total securities held to maturity          $154,124       $379,449
                                     ============== ==============
 
 
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities                   $ 50,652       $ 45,246
Mortgage-backed securities                   40,167        187,247
                                     -------------- --------------
Total securities available for sale        $ 90,819       $232,493
                                     ============== ==============
</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 banks 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 ("FHLB"), and foreign government bonds
issued by the Canadian provinces of Ontario and Manitoba.

       The Company invests in mortgage-backed securities and Federal Agency
securities 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. Federal Agency callable bonds generally have a higher yield
than U.S. Treasury securities due to credit risk and call risk.  Mortgage-backed
securities and Federal Agency callable bonds have credit risk, even though
payment guarantees and credit enhancements substantially reduce it.  Mortgage-
backed securities are also subject to the risk that fluctuating interest rates
and other factors may alter the prepayment rate of the loans underlying the
mortgage-backed securities, and so affect both the prepayment speed and the
value of such securities, while Federal Agency callable bonds are subject to the
risk that fluctuating interest rates and other factors may result in the
exercise of the call option by the Federal Agency.

       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.

       Effective November 1, 1994, the Company classified its investment
portfolio as held-to-maturity.  Management had the intent and the Company had
the ability to hold these securities until maturity.  In connection with the
initial adoption of the Financial Accounting Standards Board's Special Report, A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities, the Company reassessed the appropriateness of the
classifications of all securities held as of December 31, 1995.  As a result of
this reassessment, the Company reclassified debt securities with a carrying
value of $90 million from held-to-maturity to available for sale.  The held-to-
maturity portfolio is carried at cost, adjusted for amortization of premiums and
accretion of discounts.  The available-for-sale portfolio is carried at fair
value, with the net unrealized gains and losses recognized as an adjustment to
capital until final disposition or recovery.

                                       24
<PAGE>
 
       The book value and weighted average yield of the Company's securities
held to maturity at September 30, 1996, by effective maturity, are reflected in
the following table.
<TABLE>
<CAPTION>
 
                                                      Weighted
                                                      Average
                                        Book Value     Yield
                                      ------------   ---------
<S>                                     <C>         <C>
Due within one year                         10,000      6.42%
Due from one to five years                 100,256      6.74%
Due after five years up to ten years       222,267      6.92%
Due after ten years                         46,926      6.55%
Total securities                          $379,449
                                      ============
</TABLE>
The book value and weighted average yield of the Company's securities available
for sale at September 30, 1996, by effective maturity, are reflected in the
following table.
<TABLE>
<CAPTION>
 
                                                     Weighted
                                                      Average
                                        Book Value     Yield
                                      ------------   ---------
<S>                                     <C>         <C>
Due within one year                       $ 20,066      5.87%
Due from one to five years                 196,925      7.00%
Due after five years up to ten years        15,502      6.96%
                                      ------------
Total securities                          $232,493
                                      ============
</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,   September 30,
                                       --------------  ---------------
                                             1995            1996
                                       --------------  ---------------
<S>                                      <C>            <C>
                                            (Dollars in thousands)
Loans to individuals                          $12,610         $18,433
Loans to not-for-profit organizations             289              12
Loans to mutual funds                          10,000          25,356
                                       --------------  ---------------
                                               22,899          43,801
Less:  allowance for loan losses                  (35)            (84)
                                       --------------  ---------------
Net loans                                     $22,864         $43,717
 
Floating Rate                                 $22,839         $43,788
Fixed Rate                                         25              13
                                       --------------  ---------------
                                              $22,864         $43,801
                                       ==============  ===============
</TABLE>

       Historically, the Company's loan portfolio has been composed primarily of
loans to individually managed account customers. Although many of its clients
with pooled investment vehicles such as mutual funds use credit lines to
leverage their portfolios or to handle overnight cash shortfalls, CEBA
requirements restricted the Company from making commercial loans of this type.
As a result of the removal of CEBA limitations due to the Spin-Off Transaction,
the Company may now offer lending services directly to all clients and made its
first commercial loan in December 1995.

       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
secured lines of credit to mutual fund clients.  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

                                       25
<PAGE>
 
advances facilitate securities transactions and redemptions involving those
mutual funds and are fully secured by liquid collateral, primarily freely
tradable securities held in custody by the Company for those mutual funds.

       At September 30, 1996, 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 September 30, 1996
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.
The Company also has a loan relationship with another officer of Eaton Vance, M.
Dozier Gardner.  These loans to Mr. Clay and Mr. Gardner 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 September 30, 1996, 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 $84,000 at September 30, 1996.  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.

       As a result of the removal of CEBA limitations, the Company is now able
to make commercial loans such as the credit lines and advances to mutual fund
clients discussed above.  The Company hopes to increase its lending activities
with clients during the remainder of 1996.

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.
 

                                       26
<PAGE>
 
       The following table presents the repricing schedule for the Company's
 interest earning assets and interests bearing liabilities at September 30,
 1996:
<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
                                        -----------  ------------  ----------  ------------  ----------  --------
<S>                                       <C>          <C>          <C>         <C>          <C>         <C>
                                                                  (Dollars in thousands)
Interest earning assets (1):
   Federal Funds Sold                     $  94,000                                                      $ 94,000
   Investment securities (2)                176,272      $134,213    $123,731     $110,015    $ 67,710    611,941
   Loans - fixed rate                                                                   13                     13
   Loans - variable rate                     43,788                                                        43,788
                                        -----------  ------------  ----------  ------------  ----------  --------
    Total interest earning assets           314,060       134,213     123,731      110,028      67,710    749,742
 
 
Interest bearing liabilities
   Demand deposit accounts                  218,163                                                       218,163
   Savings accounts                          22,598                                                        22,598
   Interest rate contracts                 (100,000)       30,000      70,000                                   0
   Repurchase agreements                    224,627                                                       224,627
                                        -----------  ------------  ----------  -----------  -----------  --------
    Total interest bearing liabilities      365,388        30,000      70,000            0           0    465,388
                                        -----------  ------------  ----------  ------------  ----------  --------
 
 
    Net interest sensitivity gap
    during the period                      ($51,328)     $104,213    $ 53,731     $110,028    $ 67,710   $284,354
                                        ===========  ============  ==========  ===========  ==========  ========= 
 
       Cumulative gap                      ($51,328)     $ 52,885    $106,616     $216,644    $284,354
 
 
Interest sensitive assets as a
   percent of interest sensitive
   liabilities (cumulative)                   85.95%       113.38%     122.91%      146.55%     161.10%
 
Interest sensitive assets as a
   percent of total assets
   (cumulative)                               40.10%        57.24%      73.03%       87.08%      95.73%
 
 
Net interest sensitivity gap as a
   percent of total assets                    (6.55%)       13.31%       6.86%       14.05%       8.65%
 
Cumulative gap as a percent
   of total assets                            (6.55%)        6.75%      13.61%       27.66%      36.31%
----------------------------------------
 
(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.
 
</TABLE>

                                       27
<PAGE>
 
 LIQUIDITY

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

       The Company's primary sources of liquidity include cash and cash
 equivalents, federal funds sold, demand loans to individuals, new deposits,
 federal funds purchased, interest payments on securities held to maturity, fees
 collected from asset administration clients, and the capital raised from the
 Offering.  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 $.04 per share.

       The Company's ability to pay dividends on the Common Stock and Class A
 Common Stock depends on the receipt of dividends from Investors Bank & Trust
 Company.  Investors Bank & Trust Company has historically paid an aggregate
 annual dividend of $60,000 to its stockholders.  Any dividend payments by
 Investors Bank & Trust Company are subject to certain restrictions imposed by
 the Massachusetts Commissioner of Banks.  Subject to regulatory requirements,
 Investors Bank & Trust Company expects to pay an annual dividend to the
 Company, which the Company expects to pay to its stockholders, currently
 estimated to be in an amount equal to $.04 per share of outstanding Common
 Stock and Class A Common Stock (approximately $257,772 based upon 6,444,312
 shares outstanding as of September 30, 1996).  On May 15, 1996 and July 15,
 1996,  the Company paid quarterly dividends of $.01 per share to the  holders
 of the Company's Common Stock and Class A Common Stock.  On October 15, 1996,
 the Board of Directors of the Company, after declaration by the Bank of a
 dividend in like amount, declared a quarterly dividend of $.01 per share
 payable on November 15, 1996 to holders of the Company's Common Stock and Class
 A Common Stock as of October 31, 1996.

       At September 30, 1996, cash and cash equivalents were 1% of total assets,
 compared to 7% of total assets at December 31, 1995.  At September 30, 1996,
 approximately $119 million or 16% 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 $72 million.  Each bank may terminate its arrangement
 at any time and is under no contractual obligation to provide requested funding
 to the Company.  The Company's borrowings under these arrangements are
 typically on an overnight basis. The Company believes that if these banks were
 unable to provide funding as described above, a satisfactory alternative source
 of funding would be available to the Company.

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

       The Company's cash flows are comprised of three primary classifications:
 cash flows from operating activities, investing activities, and financing
 activities.  Cash flows provided by operating activities were $10,298,000 and
 $6,139,000 for the nine months ended September 30, 1995 and 1996, respectively.
 Net cash (used) provided by investing activities, consisting primarily of
 purchases of investment securities and proceeds from maturities of investment
 securities, was ($22,682,000) and ($470,009,000) for the nine months ended
 September 30, 1995 and 1996, respectively.  Net cash (used) provided by
 financing activities, consisting primarily of net activity in deposits, was
 $12,695,000 and $449,805,000 for the nine months ended September 30, 1995 and
 1996, respectively.

                                       28
<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.  In addition, the Company
 purchased new transfer agency computer software in April 1996.  As a result,
 the Company's capital expenditures were $1,047,000 and $2,725,000 for the nine
 months ended September 30, 1995 and 1996, respectively.  Capital expenditures
 for the remainder of 1996 are expected to approximate $4,071,000, principally
 for furniture and equipment related to the Company's move during the first half
 of 1997 to a new location.

       Stockholders' equity at September 30, 1996 was $59,384,000, an increase
 of $5,963,000 or 11%, from $53,421,000 at December 31, 1995.  The growth in
 stockholders' equity is attributable to an adjustment to the actual costs of
 the stock issuance completed in November 1995 and current period net income.
 The ratio of stockholders' equity to assets decreased to 7.58% at September 30,
 1996 from 16.57% at December 31, 1995 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 Company's Tier I and total capital
 ratios at September 30, 1996:
<TABLE>
<CAPTION>
 
                                                  September 30, 1996
                                                ---------------------
                                                   Amount      Ratio
                                               ------------  ----------
                                                      (Dollars in
                                                       thousands)
<S>                                             <C>          <C>
Tier I capital                                    $ 58,472     29.8%
Tier I capital minimum requirement                   7,853      4.0%
                                                ---------- ---------
Excess Tier I capital                             $ 50,619     25.8%
                                                ========== =========
 
Total capital                                     $ 58,557     29.8%
Total capital minimum requirement                   15,705      8.0%
                                                 --------- --------
Excess total capital                              $ 42,852     21.8%
                                        
Risk adjusted assets, net of intangible assets    $196,318
                                                ========== 
                           
 
</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 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 

                                       29
<PAGE>
 
 risk-based capital ratios and the Leverage Capital Ratio requires the capital
 of the Company to be reduced by most intangible assets. The Company's Leverage
 Capital Ratio at September 30, 1996 was 7.47%, which is in excess of regulatory
 requirements.

 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>
 
 
                                               Nine Months Ended September 30, 1995        Nine Months Ended September 30,
                                                                                                         1996
                                        -----------------------------------------------  ------------------------------------
                                              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                                   $  5,929        $  261        5.87%     $ 23,288     $   968        5.54%
Interest-earning deposits                           1,000            45        6.00%          168           6        4.76%
Investment securities                              83,246         3,708        5.94%      445,023      21,728        6.51%
Loans                                              13,560           909        8.94%       37,944       1,590        5.59%
                                              -----------   -----------  ----------    ----------  ----------  ---------- 
Total interest-earning assets                     103,735         4,923        6.33%      506,423      24,292        6.40%
                                                            -----------  ----------                ----------  ----------
Allowance for loan losses                             (35)                                    (68)
Noninterest-earning assets                         18,474                                  49,952
                                              -----------                              ----------    
Total assets                                     $122,174                                $556,307
                                              ===========                              ==========
 
INTEREST-BEARING LIABILITIES
Deposits:
   Demand                                        $ 11,263           327        3.87%     $143,239       5,236        4.87%
   Savings                                         10,747           181        2.25%       16,992         309        2.42%
   Time                                                 -             -           -           843          32        5.06%
Short Term Borrowings                                 606            87        4.01%      160,028       6,013        5.01%
                                              -----------   -----------  ----------    ----------  ----------  ----------
Total interest-bearing liabilities                 22,616           595        3.51%      321,102      11,590        4.81%
                                                            -----------  ----------                ----------     
Noninterest bearing liabilities
   Demand deposits                                 33,330                                 129,190
   Noninterest bearing time deposits               46,829                                  45,036
   Other liabilities                                5,189                                   7,996
                                              -----------                              ----------
Total liabilities                                 107,964                                 503,324
Equity                                             14,210                                  52,983
                                              -----------                              ----------
Total liabilities and equity                     $122,174                                 556,307
                                              ===========                              ==========
 
Net interest income                                              $4,328                               $12,702
                                                            ===========                            ==========
 
Net interest margin (1)                                                        5.56%                                 3.34%
Average interest rate spread (2)                                               2.82%                                 1.58%
Ratio of interest-earning assets to                                          458.68%                               157.71%
   interest-bearing liabilities
----------------------------------------
 
(1) Net interest income divided by  total interest-earning assets
(2) Yield on interest-earning assets less rate paid on interest-bearing
 liabilities
 
</TABLE>

                                       30
<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 September 30,
                                                              -----------------------------------------------------
                                                                        1995                      1996
                                                              -------------------------     -----------------------
<S>                                                         <C>                         <C>
                                                                     (in thousands, except per share data)
 
Net income                                                             $  880                       $2,065
  
Weighted average number of common shares outstanding                    4,030(2)                     6,444
  
Dilutive effect of common equivalent
 shares of stock options and warrants                                       -                           27
       
Weighted average number of common and                         -------------------------     -----------------------
 common equivalent shares outstanding                                    4,030                       6,471
       
                                                              =========================     =======================
 
Net income per share (1)                                                $  .22                      $  .32
                                                              =========================     =======================
 
       (1)  Primary and fully diluted income per share are the same for all periods presented
            
       (2)  Gives pro forma effect to the recapitalization of the Company on November 8, 1995 
            whereby the Company issued 3,418,573 shares of Common Stock and 611,427 shares of 
            Class A Common Stock in exchange for the 1,000,000 shares of the previously
            outstanding capital stock of Investors Bank & Trust Company.
</TABLE>            
b.  No reports on Form 8-K were filed during the quarter ended September 30,
    1996.


                                       31
<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:  November 8, 1996         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 and Secretary
                                    (Principal Financial and Accounting Officer)

                                       32