<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, 1997

                                       or

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

                        Commission File Number 0-26996

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


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

           200 Clarendon Sreet, P.O. Box 9130, Boston, MA 02117-9130
         (Address of principal executive offices, including Zip Code)

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


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


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


     As of October 31, 1997, there were 6,445,862 shares of Common Stock
outstanding.

<PAGE>
 
                      INVESTORS FINANCIAL SERVICES CORP.


                                     INDEX
                                     -----



PART I            FINANCIAL INFORMATION

<TABLE> 
<CAPTION> 

                                                                                Page
                                                                                ----
<S>                                                                            <C>  
         Item 1.  Condensed Consolidated Financial Statements

                  Consolidated Balance Sheets
                    December 31, 1996 and
                    September 30, 1997 (unaudited)                                 3
                                                                                  
                  Consolidated Income Statements  (unaudited)                     
                    Nine months ended September 30, 1996 and 1997                  4
                                                                                  
                  Consolidated Income Statements (unaudited)                      
                    Three months ended September 30, 1996 and 1997                 5
                                                                                  
                  Statement of Stockholder's Equity (unaudited)                   
                    Nine months ended September 30, 1997                           6
                                                                                  
                  Consolidated Statements of Cash Flows (unaudited)               
                    Nine months ended September 30, 1996 and 1997                  7
                                                                                  
                  Notes to Condensed Consolidated Financial Statements             9
                                                                                  
         Item 2.  Management's Discussion and Analysis of Financial Condition     19
                  and Results of Operations                                       
                                                                                  
PART II           OTHER INFORMATION                                               
                                                                                  
                                                                                  
         Item 6.  Exhibits and Reports on Form 8-K                                34
                                                                                  
                                                                                  
                                                                                  
SIGNATURES                                                                        35
</TABLE> 

                                       2
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
-------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                                        December 31,        September 30,
                                                                                            1996                1997
                                                                                                             (unaudited)
ASSETS 
<S>                                                                                  <C>                 <C> 
Cash and due from banks                                                               $   19,226,453      $   25,029,586
Federal funds sold and securities purchased under resale agreements                      120,000,000           -
Securities held to maturity (approximate market values of                                                 
      $460,182,579 and $757,781,734 at December 31, 1996                                                  
      and September 30, 1997, respectively)                                              460,009,923          749,448,367
Securities available for sale                                                            271,120,964          460,281,597
Nonmarketable equity securities                                                              967,400            5,476,600
Loans, less allowance for loan losses of $100,000                                                         
      at December 31, 1996 and September 30, 1997                                         66,236,889           47,403,504
Accrued interest and fees receivable                                                      16,366,171           23,432,991
Equipment and leasehold improvements, net                                                  5,243,974            7,722,034
Other assets                                                                               5,289,873           13,562,771
                                                                                      ---------------     ----------------
TOTAL ASSETS                                                                          $  964,461,647      $ 1,332,357,450
                                                                                      ===============     ================
                                                                                                          
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                      
                                                                                                          
LIABILITIES:                                                                                              
   Deposits:                                                                                              
      Demand                                                                          $  264,914,614       $  291,715,506
      Savings                                                                            271,602,295          172,179,107
      Time                                                                                60,000,000           87,800,000
                                                                                      ---------------     ----------------
          Total deposits                                                                 596,516,909          551,694,613
                                                                                                          
Short-term borrowings                                                                    296,820,752          672,444,111
Other liabilities                                                                          9,264,676           12,308,082
                                                                                      ---------------     ----------------
          Total liabilities                                                              902,602,337        1,236,446,806
                                                                                      ---------------     ----------------
                                                                                                          
Company obligated mandatorily redeemable preferred securities of subsidiary trust                         
   holding junior subordinated deferrable interest debentures of the Company              -                    24,166,257
                                                                                      ---------------     ----------------
                                                                                                          
STOCKHOLDERS' EQUITY:                                                                                     
      Class A common stock                                                                     3,595             -
      Common stock                                                                            60,848               64,456
      Surplus                                                                             54,352,812           54,373,424
      Deferred compensation                                                              (1,687,675)          (1,358,500)
      Retained earnings                                                                    8,480,431           16,745,644
      Net unrealized gain on securities available for sale                                   649,299            1,919,363
                                                                                      ---------------     ----------------
Total stockholders' equity                                                                61,859,310           71,744,387
                                                                                      ---------------     ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                            $  964,461,647      $ 1,332,357,450
                                                                                      ===============     ================

</TABLE> 

See notes to condensed consolidated financial statements.

                                       3
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED INCOME STATEMENTS  (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 

                                                                                     September 30,     September 30,
                                                                                         1996               1997          
<S>                                                                               <C>               <C> 
OPERATING REVENUE:
Interest income:
   Federal funds sold and securities purchased
      under resale agreements                                                         $    974,010     $     946,609
   Investment securities held to maturity and available for sale                        21,727,649        48,283,937
   Loans                                                                                 1,589,761         1,910,559
                                                                                      -------------    ------------- 
      Total interest income                                                             24,291,420        51,141,105
                                                                                                          
Interest expense:                                                                                         
   Deposits                                                                              5,565,501        13,868,308
   Short-term borrowings                                                                 6,024,157        18,129,747
                                                                                      -------------    ------------- 
      Total interest expense                                                            11,589,658        31,998,055
                                                                                      -------------    ------------- 
      Net interest income                                                               12,701,762        19,143,050
                                                                                                          
Provision for loan losses                                                                   49,114         -
                                                                                      -------------    ------------- 
      Net interest income after provision for loan losses                               12,652,648        19,143,050
                                                                                                          
Noninterest income:                                                                                       
   Asset administration fees                                                            40,661,709        55,648,699
   Computer service fees                                                                   365,462           351,000
   Other operating income                                                                   57,065           249,362
   Gain/(loss) on sale of securities available for sale                                     (8,421)           41,760
                                                                                      -------------    ------------- 
      Net operating revenue                                                             53,728,463        75,433,871
                                                                                                          
OPERATING EXPENSES:                                                                                       
   Compensation of officers and employees                                               23,436,228        31,833,284
   Pension and other employee benefits                                                   3,904,890         4,711,461
   Occupancy                                                                             3,242,658         3,044,544
   Equipment                                                                             3,991,122         5,043,033
   Insurance                                                                               745,704           550,914
   Subcustodian fees                                                                     2,929,870         4,309,961
   Depreciation and amortization                                                         1,095,115         1,415,873
   Professional fees                                                                     1,626,804         2,370,808
   Travel and sales promotion                                                              698,966         1,139,572
   Other operating expenses                                                              3,135,558         5,860,682
                                                                                      -------------    ------------- 
      Total operating expenses                                                          44,806,915        60,280,132
                                                                                      -------------    ------------- 
                                                                                                          
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST                                         8,921,548        15,153,739
                                                                                                          
Provision for income taxes                                                               3,432,996         5,455,346
Minority interest expense, net of income taxes                                          -                  1,046,476
                                                                                      -------------    ------------- 
NET INCOME                                                                            $  5,488,552     $   8,651,917
                                                                                      =============    =============
                                                                                                          
WEIGHTED AVERAGE SHARES OUTSTANDING                                                      6,467,743         6,603,202
                                                                                      =============    ============= 
                                                                                                          
EARNINGS PER SHARE                                                                    $       0.85     $        1.31
                                                                                      =============    =============
</TABLE> 

See notes to condensed consolidated financial statements.

                                       4
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.
CONDENSED CONSOLIDATED INCOME STATEMENTS  (unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                                        September 30,     September 30,
                                                                                             1996              1997
<S>                                                                                 <C>                   <C> 
OPERATING REVENUE:
Interest income:
   Federal funds sold and securities purchased
      under resale agreements                                                          $   303,535          $   103,089
   Investment securities held to maturity and available for sale                         9,465,012           18,444,231
   Loans                                                                                   591,833              570,264
                                                                                      -------------        -------------
      Total interest income                                                             10,360,380           19,117,584
                                                                                                           
Interest expense:                                                                                          
   Deposits                                                                              2,495,044            4,408,706
   Short-term borrowings                                                                 3,167,407            8,611,526
                                                                                      -------------        -------------
      Total interest expense                                                             5,662,451           13,020,232
                                                                                      -------------        -------------
      Net interest income                                                                4,697,929            6,097,352
                                                                                                           
Provision for loan losses                                                                -                    -
                                                                                      -------------        -------------
      Net interest income after provision for loan losses                                4,697,929            6,097,352
                                                                                                           
Noninterest income:                                                                                        
   Asset administration fees                                                            13,909,339           19,724,710
   Computer service fees                                                                   118,852              117,169
   Other operating income                                                                   20,781              105,393
   Gain/(loss) on sale of securities available for sale                                    (14,694)              34,650
                                                                                      -------------        -------------
      Net operating revenue                                                             18,732,207           26,079,274
                                                                                                           
OPERATING EXPENSES:                                                                                        
   Compensation of officers and employees                                                8,146,583           11,291,151
   Pension and other employee benefits                                                   1,327,020            1,581,993
   Occupancy                                                                             1,028,716              834,754
   Equipment                                                                             1,355,353            1,659,376
   Insurance                                                                               157,682              185,334
   Subcustodian fees                                                                     1,119,971            1,559,438
   Depreciation and amortization                                                           402,594              546,005
   Professional fees                                                                       597,387              616,052
   Travel and sales promotion                                                              205,779              359,827
   Other operating expenses                                                              1,036,220            2,239,513
                                                                                      -------------        -------------
      Total operating expenses                                                          15,377,305           20,873,443
                                                                                      -------------        -------------
                                                                                                           
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST                                         3,354,902            5,205,831
                                                                                                           
Provision for income taxes                                                               1,289,904            1,876,046
Minority interest expense, net of income taxes                                           -                      395,143
                                                                                      -------------        -------------
NET INCOME                                                                            $  2,064,998         $  2,934,642
                                                                                      =============        =============
                                                                                                           
WEIGHTED AVERAGE SHARES OUTSTANDING                                                      6,471,069            6,638,592
                                                                                      =============        =============
EARNINGS PER SHARE                                                                    $       0.32         $       0.44
                                                                                      =============        =============
</TABLE> 

See notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.                    
                                                      
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1997                   
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                                                    Net Unrealized                
                                                                                                       Gain on       
                                                                                                     Investment                    
                                         Class A                                                     Securities    
                                         Common     Common                   Deferred     Retained   Available     
                                          Stock     Stock      Surplus     Compensation   Earnings    For Sale         Total 
<S>                                   <C>     <C>         <C>        <C>             <C>        <C>              <C> 
BALANCE, DECEMBER 31, 1996             $   3,595   $60,848   $54,352,812  $(1,687,675)  $ 8,480,431   $  649,299      $61,859,310
Conversion of class A to common stock     (3,595)    3,595                                                                 -
Amortization of deferred compensation                                         329,175                                     329,175 
Exercise of stock options                               13        20,612                                                   20,625
Net income                                                                                8,651,917                     8,651,917
Payment of dividend                                                                        (386,704)                     (386,704)
Change in net unrealized gain on                                                                                        
  securities available for sale                                                                        1,270,064        1,270,064
                                       ---------   -------   -----------  -----------   -----------  -----------      -----------
BALANCE, SEPTEMBER 30, 1997            $       0   $64,456   $54,373,424  $(1,358,500)  $16,745,644   $1,919,363      $71,744,387
                                       =========   =======   ===========  ===========   ===========   ==========      ===========
</TABLE> 

                                       6
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.                    
                                                      
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997                   
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                                                   September 30,      September 30,
                                                                                       1996               1997
<S>                                                                          <C>                    <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                         $  5,488,552          $  8,651,917
                                                                               -----------------     -----------------
Adjustments to reconcile net income to net cash provided by operating
activities:
    Depreciation and amortization                                                     1,095,115             1,415,873
    Amortization of deferred compensation                                               320,387               329,175
    Provision for loan losses                                                            49,114             -
    Amortization of premiums on securities, net of accretion of discounts             1,779,230             2,817,168
    Deferred income taxes                                                             (161,584)                16,880
    (Gain)/loss on sale of securities available for sale                                  8,421               (41,760)
    Loss on disposal of fixed assets                                                     15,211             -
    Changes in assets and liabilities:
       Accrued interest and fees receivable                                          (5,866,278)           (7,066,820)
       Other assets                                                                  (1,508,599)           (8,272,898)
       Other liabilities                                                              4,919,517             2,425,888
                                                                               -----------------     -----------------
          Total adjustments                                                             650,534            (8,376,494)
                                                                               -----------------     -----------------
          Net cash provided by operating activities                                   6,139,086               275,423
                                                                               -----------------     -----------------


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale                            29,825,254            69,408,056
Proceeds from maturities of securities held to maturity                              26,069,003            65,406,880
Proceeds from sales of securities available for sale                                 20,077,388            12,982,134
Purchases of securities available for sale                                         (175,526,949)         (271,302,698)
Purchases of securities held to maturity                                           (268,826,637)         (355,998,155)
Purchase of nonmarketable equity securities                                            -                   (4,509,200)
Net decrease in time deposits due from banks                                          1,000,000             -
Net (increase) decrease in federal funds sold and securities
    purchased under resale agreements                                               (79,000,000)          120,000,000
Net (increase) decrease in loans                                                    (20,902,267)           18,833,385
Purchases of equipment and leasehold improvements                                    (2,724,992)           (3,893,933)
                                                                               -----------------     -----------------
          Net cash used for investing activities                                   (470,009,200)         (349,073,531)
                                                                               -----------------     -----------------

</TABLE> 

See notes to condensed consolidated financial statements.

                                       7
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited)  (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                        September 30,          September 30,
                                                                            1996                   1997
<S>                                                                  <C>                     <C> 
CASH FLOWS FROM FINANCING ACTIVITIES:                               
Net increase in demand deposits                                         $288,156,455           $  26,800,892
Net increase (decrease) in time and savings deposits                      11,512,051             (71,623,188)
Net increase in short-term borrowings                                    150,225,222             375,623,359
Stock issuance costs                                                          35,193                (833,743)
Proceeds from exercise of stock options                                        5,148                  20,625
Proceeds from issuance of preferred stock                                 -                       25,000,000
Dividends paid                                                              (128,883)               (386,704)
                                                                        ------------           -------------
          Net cash provided by financing activities                      449,805,186             354,601,241
                                                                        ------------           -------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS                       (14,064,928)              5,803,133
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD                              21,898,903              19,226,453
                                                                        ------------           -------------
CASH AND DUE FROM BANKS, END OF PERIOD                                  $  7,833,975           $  25,029,586
                                                                        ============           =============
                                                                    
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                   
    Cash paid for interest                                              $ 11,012,000           $  32,196,000
                                                                        ============           =============
    Cash paid for income taxes                                          $  3,818,000           $   5,608,000
                                                                        ============           =============
</TABLE> 

See notes to condensed consolidated financial statements.

                                       8
<PAGE>
 
INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE MONTHS AND THE THREE MONTHS ENDED SEPTEMBER
30, 1996 AND 1997 IS UNAUDITED)
--------------------------------------------------------------------------------

1.    DESCRIPTION OF BUSINESS

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

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

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

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

      On September 19,1997, pursuant to the terms of the Certificate of
      Incorporation of the Company, all shares of the Company's Class A Common
      Stock automatically converted into shares of the Company's Common Stock.
      The terms of the Class A Common Stock were identical to the terms of the
      Common Stock, except that the Common Stock receives only one vote per
      share rather than the ten votes per share previously received by Class A
      Common stock.


2.    INTERIM FINANCIAL STATEMENTS

      The consolidated interim financial statements of the Company and
      consolidated subsidiaries as of September 30, 1997 and for the nine-month
      periods and the three-month periods ended September 30, 1996 and 1997 have
      been prepared by the Company, without audit, pursuant to the rules and
      regulations of the Securities and Exchange Commission. Certain information
      and footnote disclosures normally included in annual financial statements
      prepared in accordance with generally accepted accounting principles have
      been condensed or omitted as permitted by such rules and regulations. All
      adjustments, consisting of normal recurring adjustments, have been
      included. Management believes that the disclosures are adequate to present
      fairly the financial position, results of operations and cash flows at the
      dates and for the periods presented. It is suggested that these interim
      financial statements be read in conjunction with the financial statements
      and the notes thereto included in the Company's latest annual report on
      Form 10-K. Results for interim periods are not necessarily indicative of
      those to be expected for the full fiscal year.

                                       9
<PAGE>
 
2.    INTERIM FINANCIAL STATEMENTS  (CONTINUED)

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

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


3.    SECURITIES

      Carrying amounts and approximate market values of securities are
      summarized as follows as of December 31, 1996:
<TABLE> 
<CAPTION> 
                                                    Carrying            Unrealized         Unrealized          Approximate
                 Held to Maturity                     Value               Gains              Losses           Market Value
<S>                                                <C>                <C>               <C>                 <C> 
        Mortgage-backed securities                  $ 414,664,590      $   1,973,263      $   1,750,168         $ 414,887,685
        Federal Agency securities                      37,517,495             49,546            224,972            37,342,069
        Foreign government securities                   7,827,838            124,987              -                 7,952,825
                                                    -------------      -------------      -------------         ------------- 
        Total                                       $ 460,009,923      $   2,147,796      $   1,975,140         $ 460,182,579
                                                    =============      =============      =============         =============

<CAPTION> 
                                                      Amortized           Unrealized         Unrealized            Carrying
                Available for Sale                       Cost                Gains              Losses               Value
<S>                                                <C>                <C>               <C>                 <C> 

        U.S. Treasury securities                    $  40,107,999      $     151,304      $           3         $  40,259,300
        Mortgage-backed securities                    229,930,801          1,086,092            155,229           230,861,664
                                                    -------------      -------------      -------------         -------------

        Total                                       $ 270,038,800      $   1,237,396      $     155,232         $ 271,120,964
                                                    =============      =============      =============         =============

</TABLE> 

      Carrying amounts and approximate market values of securities are
      summarized as follows as of September 30, 1997:
<TABLE> 
<CAPTION> 
                                                       Carrying           Unrealized           Unrealized       Approximate
                 Held to Maturity                       Value               Gains                Losses         Market Value
<S>                                               <C>                <C>                   <C>               <C> 
        State and political subdivisions            $  35,080,916     $   1,520,552         $    -             $  36,601,468
        Mortgage-backed securities                    575,332,444         7,644,716               801,620        582,175,540
        Federal Agency securities                     131,250,616           331,155               512,395        131,069,376
        Foreign government securities                   7,784,391           150,959              -                 7,935,350
                                                    -------------     -------------         -------------      ------------- 
        Total                                       $ 749,448,367     $   9,647,382         $   1,314,015      $ 757,781,734
                                                    =============     =============         =============      ============= 
<CAPTION> 
                                                    Amortized             Unrealized           Unrealized        Carrying
               Available for Sale                      Cost                 Gains                Losses            Value
<S>                                               <C>                <C>                   <C>               <C> 
        U.S. Treasury securities                    $  35,024,687     $     121,463         $     -            $  35,146,150
        Mortgage-backed securities                    422,304,044         2,979,782               148,379        425,135,447
                                                    -------------     -------------         -------------      -------------
        Total                                       $ 457,328,731     $   3,101,245         $     148,379      $ 460,281,597
                                                    =============     =============         =============      ============= 
</TABLE> 

                                       10
<PAGE>
 
3.    SECURITIES (CONTINUED)

      Nonmarketable equity securities at September 30, 1997 consisted of
      $5,476,600 of stock of the Federal Home Loan Bank of Boston (the "FHLBB").
      As a member of the FHLBB, the Company is required to invest in $100 par
      value stock of the FHLBB in an amount equal to the greater of (i) 1% of
      its outstanding residential mortgage loan principal (including mortgage
      pool securities), (ii) 0.3% of total assets, and (iii) total advances from
      the FHLBB, divided by a leverage factor of 20. If and when FHLBB stock is
      redeemed, the Company will receive an amount equal to the par value of the
      stock.

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

      
<TABLE> 
<CAPTION> 

                                                         December 31, 1996                          September 30, 1997
                                                  Carrying             Approximate            Carrying             Approximate
                Held to Maturity                    Value             Market Value              Value             Market Value
<S>                                        <C>                     <C>                  <C>                 <C> 
        Due within one year                    $  19,052,213         $  18,873,837         $      -              $      -
        Due from one to five years               114,459,070           113,819,081           234,546,376           235,936,056
        Due five years up to ten years           240,620,332           241,016,881           298,173,826           299,363,207
        Due after ten years                       85,878,308            86,472,780           216,728,165           222,482,471
                                               -------------         -------------         -------------         -------------
        Total                                  $ 460,009,923         $ 460,182,579         $ 749,448,367         $ 757,781,734
                                               =============         =============         =============         =============
<CAPTION> 
                                                      December 31, 1996                          September 30, 1997
                                                  Amortized             Carrying             Amortized              Carrying
               Available for Sale                   Cost                  Value                 Cost                  Value
<S>                                        <C>                     <C>                  <C>                 <C> 
        Due within one year                    $  19,964,080         $  20,046,800         $  25,046,375         $  25,101,600
        Due from one to five years               213,758,992           214,525,641           287,711,520           289,834,350
        Due five years up to ten years            36,315,728            36,548,523           144,570,836           145,345,647
                                               -------------         -------------         -------------         -------------
        Total                                  $ 270,038,800         $ 271,120,964         $ 457,328,731         $ 460,281,597
                                               =============         =============         =============         =============
</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.

      Two securities available for sale were sold during the nine months ended
      September 30, 1997, resulting in gains totaling $41,760.

      The carrying value of securities pledged amounted to approximately
      $362,000,000 and $729,000,000 at December 31, 1996 and September 30, 1997,
      respectively. Securities are pledged primarily to secure public funds and
      clearings with other depository institutions.


4.    LOANS

      Loans consist of demand loans with individuals and not-for-profit
      institutions located in the greater Boston, Massachusetts metropolitan
      area and loans to mutual fund clients. The loans to mutual funds include
      lines of credit and advances pursuant to the terms of the custody
      agreements between the Company and those mutual fund clients to facilitate
      securities transactions and redemptions. Generally, the loans are, or may
      be, in the event of default, collateralized with marketable securities
      held by the Company as custodian. There were no impaired or nonperforming
      loans at December 31, 1996 or September 30, 1997. In addition, there have
      been no loan charge-offs or recoveries during the nine months ended
      September 30, 1996 and 1997. Loans consisted of the following at December
      31, 1996 and September 30, 1997:

                                       11
<PAGE>
 
4.    LOANS (CONTINUED)
<TABLE> 
<CAPTION> 
                                                                         December 31,        September 30,
                                                                           1996                  1997
<S>                                                              <C>                    <C>  
          Loans to individuals                                          $ 23,448,999           $ 19,918,608
          Loans to not-for-profit institutions                                12,500                 12,500
          Loans to mutual funds                                           42,875,390             27,572,396
                                                                     ----------------      -----------------
                                                                          66,336,889             47,503,504
          Less allowance for loan losses                                     100,000                100,000
                                                                     ----------------      -----------------
          Total                                                         $ 66,236,889           $ 47,403,504
                                                                     ================      =================
</TABLE> 

      The Company had commitments to lend of approximately $37,128,000 and
      $79,050,000 at December 31, 1996 and September 30, 1997, respectively. The
      terms of these commitments are similar to the terms of outstanding loans.


5.    EQUIPMENT AND LEASEHOLD IMPROVEMENTS

      The major components of equipment and leasehold improvements are as
      follows at December 31, 1996 and September 30, 1997:
<TABLE> 
<CAPTION> 
                                                                           December 31,       September 30,
                                                                               1996                 1997
<S>                                                                     <C>                   <C> 
          Furniture, fixtures and equipment                               $ 8,516,450            $ 10,818,236
          Leasehold improvements                                              744,395                 617,897
                                                                       ---------------        ----------------
          Total                                                             9,260,845              11,436,133
          Less accumulated depreciation and amortization                    4,016,871               3,714,099
                                                                       ---------------        ----------------
          Equipment and leasehold improvements, net                       $ 5,243,974           $   7,722,034
                                                                       ===============        ================
</TABLE> 

6.    DEPOSITS

      Time deposits at December 31, 1996 and September 30, 1997 include
      noninterest-bearing amounts of approximately $55,000,000 and $85,000,000,
      respectively.

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


7.    SHORT-TERM BORROWINGS

      The major components of short-term borrowings are as follows at December
      31, 1996 and September 30, 1997:
<TABLE> 
<CAPTION> 

                                                                         December 31,          September 30,
                                                                             1996                   1997
<S>                                                                <C>                     <C> 
        Repurchase agreements                                           $ 296,421,201          $ 621,657,318
        FHLBB Borrowings                                                       -                  50,000,000
        Treasury, Tax and Loan account                                        399,551                786,793
                                                                    ------------------     ------------------
        Total                                                           $ 296,820,752          $ 672,444,111
                                                                    ==================     ==================

</TABLE> 

                                       12
<PAGE>
 
7.    SHORT-TERM BORROWINGS (CONTINUED)

      The Company enters into repurchase agreements whereby securities are sold
      by the Company under agreements to repurchase. The Company had liabilities
      under these agreements of $296,421,201 and $621,657,318 at December 31,
      1996 and September 30, 1997, respectively. The interest rate on the
      outstanding agreements at December 31, 1996 was 5.91% and all agreements
      matured on January 2, 1997. The interest rates on the outstanding
      agreements at September 30, 1997 ranged from 5.53% to 6.55% and all
      agreements matured from October 1, 1997 to October 24, 1997. The following
      securities were pledged under these agreements at December 31, 1996 and
      September 30, 1997:

<TABLE> 
<CAPTION> 


                                                      December 31, 1996                           September 30, 1997
                                                 Carrying             Approximate             Carrying             Approximate
                                                  Value              Market Value              Value               Market Value
<S>                                   <C>                     <C>                  <C>                     <C> 
        U.S. Treasury securities             $   37,249,940        $   37,249,940         $   35,146,150         $   35,146,150
        Federal Agency securities                25,000,000            24,803,950             20,000,000             19,903,900
        Mortgage-backed securities              245,689,672           246,777,873            582,459,619            588,511,151
                                         -------------------    ------------------    -------------------    -------------------
        Total                                 $ 307,939,612         $ 308,831,763          $ 637,605,769          $ 643,561,201
                                         ===================    ==================    ===================    ===================

</TABLE> 

      The Company has a borrowing arrangement with the FHLBB whereby the Company
      may borrow amounts determined by prescribed collateral levels. The Company
      had a term advance outstanding under this agreement of $50,000,000 at
      September 30, 1997. The interest rate on the outstanding advance at
      September 30, 1997 was 5.58%, and the advance matures on September 10,
      1999. The Company has the option to put the advance back to the FHLBB on
      the 8th day of each month.


      The Company receives federal tax deposits from clients as agent for the
      Federal Reserve Bank and accumulates these deposits in the Treasury, Tax
      and Loan account. The Federal Reserve Bank charges the Company interest at
      the Federal Funds rate on such deposits. The Company had liabilities under
      this agreement of $399,551 at December 31, 1996 and $786,793 at September
      30, 1997. The interest rates on the outstanding balance at December 31,
      1996 and September 30, 1997 were 5.10% and 5.41%, respectively.



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


      On January 31, 1997, a trust sponsored and wholly owned by the Company
      issued $25,000,000 in 9.77% Trust Preferred Securities (the "Capital
      Securities"), the proceeds of which were invested by the trust in the same
      aggregate principal amount of the Company's newly issued 9.77% Junior
      Subordinated Deferrable Interest Debentures due February 1, 2027 (the
      "Junior Subordinated Debentures"). The $25,000,000 aggregate principal
      amount of the Junior Subordinated Debentures represents the sole asset of
      the Trust. The Company has guaranteed, on a subordinated basis,
      distributions and other payments due on the Capital Securities (the
      "Guarantee"). The Guarantee, when taken together with the Company's
      obligations under (i) the Debentures; (ii) the indenture pursuant to which
      the Junior Subordinated Debentures were issued; and (iii) the Amended and
      Restated Declaration of Trust governing the Trust constitutes a full and
      unconditional guarantee of the Trust's obligations under the Capital
      Securities.


9.    STOCKHOLDERS' EQUITY

      The Company has authorized 1,000,000 shares of Preferred Stock, 650,000
      shares of Class A Common Stock and 20,000,000 shares of Common Stock, all
      with a par value of $.01 per share. At December 31, 1996 and September 30,
      1997, there were no preferred shares issued or outstanding. There were
      359,545 shares of Class A Common Stock and 6,084,767 shares of Common
      Stock issued and outstanding at December 31, 1996. On September 19, 1997,
      pursuant to the terms of the Certificate of

                                       13
<PAGE>
 
9.    STOCKHOLDERS' EQUITY (Continued)

      Incorporation of the Company, all shares of the Company's Class A Common
      Stock automatically converted into shares of the Company's Common Stock.
      The terms of the Class A Common Stock were identical to the terms of the
      Common Stock, except that the Common Stock receives only one vote per
      share rather than the ten votes per share previously received by Class A
      Common stock. As a result, there were 6,445,562 shares of Common Stock
      issued and outstanding at September 30, 1997.

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

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

      In November 1995, the Company granted 114,000 shares of Common Stock to
      certain officers of the Company under the 1995 Stock Plan. Of these
      grants, 105,000 shares vest in sixty equal monthly installments, and the
      remainder vest in five equal annual installments. Upon termination of
      employment, the Company has the right to repurchase all unvested shares at
      a price equal to the fair market value at the date of the grant. The
      Company has recorded deferred compensation of $1,687,675 and $1,358,500 at
      December 31, 1996 and September 30, 1997, respectively, pursuant to these
      grants.

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

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

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

                                       14
<PAGE>
 
9.    STOCKHOLDERS' EQUITY (Continued)

      A summary of option activity under all plans is as follows:
<TABLE> 
<CAPTION> 



                                                            Number of              Exercise Price
                                                              Shares                  Per Share
<S>                                                    <C>                      <C> 
        Outstanding at December 31, 1996                         345,150           $16.50 - $26.125
        Granted                                                   23,324           $27.50 - $47.125
        Exercised                                                 (1,550)               $16.50
        Expired/Canceled                                            (375)               $16.50
                                                          ---------------
        Outstanding at September 30, 1997                        366,549           $16.50 - $47.125
                                                          ===============
        Exercisable at September 30, 1997                        112,341
                                                          ===============

</TABLE> 

10.   OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

      LINES OF CREDIT - At September 30, 1997, the Company had commitments to
      individuals under collateralized open lines of credit totaling
      $101,355,000, against which $22,305,000 in loans were drawn. The credit
      risk involved in issuing lines of credit is essentially the same as that
      involved in extending loan facilities. The Company does not anticipate any
      loss as a result of these lines of credit.

      INTEREST-RATE CONTRACTS - Interest rate contracts involve an agreement
      with a counterparty to exchange cash flows based on an underlying interest
      rate index. Swap agreements involve the exchange of a series of interest
      payments, either at a fixed or variable rate, based upon the notional
      amount without the exchange of the underlying principal amount. The
      Company's exposure from these interest rate contracts results from the
      possibility that the other party may default on its contractual
      obligation, so-called counterparty risk. Credit risk is limited to the
      positive market value of the derivative financial instrument, which is
      significantly less than the notional value. The Company was party to swap
      agreements with aggregate notional amounts of $330,000,000 as of September
      30, 1997. The effect of these agreements was to lengthen short-term
      variable rate liabilities into longer-term fixed-rate liabilities. The
      positive market value of the interest rate contracts was $38,000 at
      September 30, 1997.

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

      The Company also enters into foreign exchange contracts, as discussed in
      Note 12., with clients and simultaneously enters into matched positions
      with other banks. These contracts are subject to market value fluctuations
      in foreign currencies. Gains and losses from such fluctuations are netted
      and recorded as an adjustment of asset administration fees.


11.   COMMITMENTS AND CONTINGENCIES

      Restrictions on Cash Balances - The Company is required to maintain
      certain average cash reserve balances with the Federal Reserve Bank. The
      reserve balance requirement as of September 30, 1997 was $21,837,000. In
      addition, other cash balances in the amount of $1,562,000 were pledged to
      secure clearings with a depository institution as of September 30, 1997.

                                       15
<PAGE>
 
11.   COMMITMENTS AND CONTINGENCIES (Continued)

      Lease Commitments - Minimum future commitments on noncancelable operating
      leases at September 30, 1997 were as follows:
<TABLE> 
<CAPTION> 

                                                      Bank
      Fiscal Year Ending                           Premises            Equipment
<S>                                        <C>                 <C> 
      1997                                     $   1,310,629         $   477,072
      1998                                         6,067,264           1,879,535
      1999                                         6,096,544           1,543,606
      2000                                         5,824,993             546,200
      2001 and beyond                             35,704,420               -
</TABLE> 

      Total rent expense was $4,316,000 and $4,568,000 for the nine months ended
      September 30, 1996 and 1997, respectively.

      On February 1, 1996, the Company entered into a five year facility
      management agreement with a third party provider of duplicating and
      delivery services. Under the terms of the agreement, the Company agreed to
      pay certain minimum annual charges, subject to increases due to certain
      usage thresholds. Service expense under this contract was $167,000 and
      $325,000 for the nine months ended September 30, 1996 and 1997,
      respectively.

      Contingencies - The Company provides global custody, multicurrency
      accounting, institutional transfer agency, performance measurement,
      foreign exchange, securities lending, mutual fund administration and
      investment advisory services to a variety of financial asset managers,
      including mutual fund complexes, investment advisors, banks and insurance
      companies. Assets under custody and management, held by the Company in a
      fiduciary capacity, are not included in the consolidated balance sheets
      since such items are not assets of the Company. Management conducts
      regular reviews of its fiduciary responsibilities and considers the
      results in preparing its consolidated financial statements. In the opinion
      of management, there are no contingent liabilities at September 30, 1997
      that are material to the consolidated financial position or results of
      operations of the Company.


12.   FOREIGN EXCHANGE CONTRACTS

      The Company enters into foreign exchange contracts with clients and
      simultaneously enters into matched positions with another bank. These
      contracts are subject to market value fluctuations in foreign currencies.
      Gains and losses from such fluctuations are netted and recorded as an
      adjustment of asset administration fees. A summary of foreign exchange
      contracts outstanding at December 31, 1996 and September 30, 1997 is as
      follows (in thousands):

                                       16
<PAGE>
 
<TABLE> 
<CAPTION> 

                                               December 31, 1996                                   September 30, 1997
                               --------------------------------------------------   ----------------------------------------------
                                                                  Unrealized                                            Unrealized
Currency                         Purchases          Sales         Gain/Loss           Purchases           Sales         Gain/Loss
<S>                            <C>             <C>             <C>                 <C>                <C>            <C> 
Germany (Mark)                      $  2,118        $  2,118             -              $  49,361         $  49,361           -
Japan (Yen)                           40,828          40,828             -                 16,550            16,550           -
United Kingdom (Pound)                 1,873           1,873             -                 13,304            13,304           -
France (Franc)                         1,093           1,093             -                  3,140             3,140           -
Italy (Lira)                              51              51             -                  3,064             3,064           -
Switzerland (Franc)                        -               -             -                  2,511             2,511           -
Singapore (Dollar)                       331             331             -                  2,202             2,202           -
New Zealand (Dollar)                     147             147             -                  1,845             1,845           -
Netherlands (Guilder)                    918             918             -                  1,650             1,650           -
Australia (Dollar)                       102             102             -                  1,634             1,634           -
Philippines (Peso)                        78              78             -                  1,297             1,297           -
Hong Kong (Dollar)                     1,807           1,807             -                  1,251             1,251           -
Malaysia (Ringgit)                     6,009           6,009             -                  1,109             1,109           -
Other currencies                       1,791           1,791             -                  4,154             4,154           -
                                -------------     -----------      --------------    -------------    --------------    -----------
                                   $  57,146       $  57,146             -              $ 103,072         $ 103,072           -
                                =============     ===========      ==============    =============    ==============    ===========

</TABLE> 

      The maturity of contracts outstanding as of September 30, 1997 is as
      follows:

<TABLE> 
<CAPTION> 

           Maturity                        Purchases            Sales

<S>                                    <C>                 <C>                                                                    
             October 1997                 $ 83,305           $ 83,305
             November 1997                   1,177              1,177
             December 1997                  13,590             13,590
             February 1998                   5,000              5,000
</TABLE> 

13.   REGULATORY MATTERS

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

                                       17
<PAGE>
 
13.   REGULATORY MATTERS  (CONTINUED)

      Quantitative measures established by regulation to ensure capital adequacy
      require the Bank to maintain minimum amounts and ratios (set forth in the
      table below) of total and Tier 1 capital (as defined in the regulations)
      to risk-weighted assets (as defined), and of Tier 1 capital (as defined)
      to average assets (as defined). Management believes, as of September 30,
      1997, that the Bank meets all capital adequacy requirements to which it is
      subject.

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

<TABLE> 
<CAPTION> 

                                                                                                             To Be Well
                                                                            Minimum                       Capitalized Under
                                                                          For Capital                     Prompt Corrective
                                          Actual                       Adequacy Purposes                  Action Provisions
                              -------------------------------    ------------------------------    --------------------------------
                                   Amount            Ratio            Amount           Ratio            Amount            Ratio
                              -----------------    ----------    -----------------    ---------    -----------------    -----------
<S>                            <C>                <C>             <C>              <C>            <C>                   <C> 
As of September 30, 1997:
Total Capital
  (to Risk Weighted Assets)       $ 92,883,487        29.89%         $ 24,858,347        8.00%         $ 31,072,934         10.00%
Tier I Capital
  (to Risk Weighted Assets)       $ 92,783,487        29.86%         $ 12,429,173        4.00%         $ 18,643,760          6.00%
Tier I Capital
  (to Average Assets)             $ 92,783,487         7.03%         $ 52,757,393        4.00%         $ 65,946,741          5.00%

As of December 31, 1996:

Total Capital
  (to Risk Weighted Assets)       $ 60,818,485        24.71%         $ 19,691,528        8.00%         $ 24,614,410         10.00%
Tier I Capital
  (to Risk Weighted Assets)       $ 60,718,485        24.67%        $   9,845,764        4.00%         $ 14,768,646          6.00%
Tier I Capital
  (to Average Assets)             $ 60,718,485         9.65%         $ 25,155,710        4.00%         $ 31,444,637          5.00%

</TABLE> 


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

                                       18
<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 global custody,
multicurrency accounting, institutional transfer agency, performance
measurement, foreign exchange, securities lending, mutual fund administration
and investment advisory services to a variety of financial asset managers,
including 50 mutual fund complexes, investment advisors, banks and insurance
companies. Currently, the Company provides financial asset administration
services for assets totaling approximately $148 billion, including approximately
$9.9 billion of foreign assets. The Company also engages in private banking
transactions, including secured lending and deposit accounts.

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

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

         The Company derives its revenues from financial asset administration
services and private banking transactions. Although interest income and
noninterest income are reported separately for financial statement presentation
purposes, the Company's clients view the pricing of the Company's asset
administration and banking service offerings on a bundled basis. In establishing
a fee structure for a specific client, management analyzes the expected revenue
and related expenses, as opposed to separately analyzing fee income and interest
income and related expenses for each from such relationship. Accordingly,
management believes net operating revenue (net interest income plus noninterest
income) and net income are meaningful measures of financial results. Revenue
generated from asset administration and other fees and interest income increased
40% from $53,728,000 in the first nine months of 1996 to $75,434,000 in the
first nine months of 1997.

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

                                       19
<PAGE>
 
         Net interest income represents the difference between income generated
from interest-earning assets and expense on interest-bearing liabilities.
Interest-bearing liabilities are generated by the Company's clients who, in the
course of their financial asset management, generate cash balances which they
deposit on a short-term basis with the Company. The Company invests these cash
balances and remits a portion of the earnings on these investments to its
clients. The Company's share of earnings from these investments is viewed as
part of the total package of compensation paid to the Company from its clients
for performing asset administration services.

Certain Factors That May Affect Future Results

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

         The Company's future results may be subject to substantial risks and
uncertainties. Because certain fees charged by the Company for its services,
including fees for the provision of investment advisory and other services to
the Merrimac Funds and the Merrimac Master Portfolios, are based on the market
values of assets processed, such fees and the Company's quarterly and annual
operating results are sensitive to changes in interest rates, declines in stock
market values, and investors seeking alternatives to the investment offerings of
the Company's clients. Also, the Company's interest-related services, along with
the market value of the Company's investments, may be adversely affected by
rapid changes in interest rates. In addition, many of the Company's client
engagements are, and in the future are likely to continue to be, terminable upon
60 days notice.

         Also, the Company relies on certain intellectual property protections
to preserve its intellectual property rights. Any invalidation of the Company's
intellectual property rights or lengthy and expensive defense of those rights
could have a material adverse affect on the Company. The segment of the
financial services industry in which the Company is engaged is extremely
competitive. Certain current and potential competitors of the Company are more
established and benefit from greater market recognition and have substantially
greater financial, development and marketing resources than the Company.

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

                                       20
<PAGE>
 
Statement of Operations

Comparison of Operating Results for the Nine Months Ended September 30, 1997 and
1996

Noninterest Income

         Noninterest income increased $15,215,000 to $56,291,000 for the nine
months ended September 30, 1997 from $41,076,000 for the nine months ended
September 30, 1996. Noninterest income consists of the following items:

<TABLE> 
<CAPTION> 
                                          FOR THE NINE MONTHS ENDED
                                                SEPTEMBER 30,
                                          -------------------------
                                             1996          1997         CHANGE
                                            ------        ------       --------
                                           (DOLLARS IN THOUSANDS)
<S>                                       <C>           <C>            <C>
Asset administration fees                  $40,662       $55,649          37%
Computer service fees                          365           351         (4)
Other operating income                          57           249         337
Gain (Loss) on sale of security
  available for sale                            (8)           42         625
                                           -------       ------- 
Total Noninterest Income                   $41,076       $56,291          37%
                                           =======       =======
</TABLE> 


         Asset administration fees increased $14,987,000 to $55,649,000 for the
nine months ended September 30, 1997 compared to $40,662,000 for the nine months
ended September 30, 1996. The Company earns such fees on assets processed by the
Company on behalf of a variety of financial asset managers. Assets processed is
the total dollar value of financial assets on the reported date for which the
Company provides one or more of the following services: custody, multicurrency
accounting, institutional transfer agency, performance measurement, foreign
exchange, securities lending, mutual fund administration and investment advisory
services. Total assets processed increased to $148 billion at September 30, 1997
from $111 billion at September 30, 1996. Of this $37 billion net increase in
assets processed, approximately 23% of the increase reflects assets processed
for new clients, and the remainder of the of the increase reflects growth of
assets processed for existing clients. The largest component of asset
administration fees is asset-based fees, which increased between periods due to
the increase in assets processed. Another significant portion of the increase in
asset administration fees resulted from the Company's success in marketing
ancillary services such as securities lending and foreign exchange.

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

                                       21
<PAGE>
 
Operating Expenses

         Total operating expenses increased by $15,473,000 to $60,280,000 for
the nine months ended September 30, 1997 compared to $44,807,000 for the nine
months ended September 30, 1996. The components of operating expenses were as
follows:

<TABLE> 
<CAPTION> 
                                                   For the Nine Months Ended
                                                         September 30,
                                                -------------------------------    ----------------
                                                      1996              1997             Change
                                                -------------     -------------    ----------------
                                                    (Dollars in thousands)
<S>                                           <C>                <C>               <C> 
Compensation                                       $  23,436         $  31,833             36 %
Pension and other employee benefits                    3,905             4,711             21
Occupancy                                              3,243             3,044            (6)
Equipment                                              3,991             5,043             26
Insurance                                                746               551           (26)
Subcustodian fees                                      2,930             4,310             47
Depreciation and amortization                          1,095             1,416             29
Professional fees                                      1,627             2,371             46
Travel and sales promotion                               699             1,140             63
Other operating expenses                               3,135             5,861             87
                                                -------------     -------------
Total Operating Expenses                           $  44,807         $  60,280             35 %
                                                =============     =============
</TABLE> 

         Compensation of officers and employees increased by $8,397,000 or 36%
from period to period due to several factors. The average number of employees
increased 29% to 914 during the nine months ended September 30, 1997 from 711
during the same period in 1996. This increase relates primarily to the increase
in new client relationships and to the expansion of existing client
relationships during the period. In addition, compensation expense related to
the Company's management incentive plan increased because of the increase in
earnings in the first nine months of 1997 compared to the first nine months of
1996. The remainder of the increase in compensation expense resulted from salary
increases.

         Pension and other employee benefits increased to $4,711,000 for the
nine months ended September 30, 1997 from $3,905,000 for the same period in
1996. The 21% increase was due principally to increased payroll taxes
attributable to the increase in compensation expense. In addition, the Company
recognized costs associated with establishing a defined benefit retirement plan
for the Company's Dublin subsidiaries, of which costs approximately $90,000
related to employees' prior years of service.

         Equipment expense consists of operating lease payments for
microcomputers and fees charged by Electronic Data Systems for mainframe data
processing and data storage services provided to the Company. These expenses
vary with the level of assets processed by the Company. The $1,052,000 increase
between periods is due principally to the growth in assets processed.

         Insurance expense decreased 26% from $746,000 for the nine months ended
September 30, 1996 to $551,000 for the nine months ended September 30, 1997 due
to the renegotiation, in May 1996, of the Company's premiums and coverage for
errors and omissions liability, directors and officers liability and blanket
bond.

         Subcustodian expense increased $1,380,000 to $4,310,000 for the nine
months ended September 30, 1997 from $2,930,000 for the nine months ended
September 30, 1996. This increase resulted primarily from the increase in
foreign assets processed, which are typically subject to higher subcustodian
fees than domestic assets processed, from $8.5 billion at September 30, 1996 to
$9.9 billion at September 30, 1997, and from the movement by clients into
emerging markets with higher cost structures.

         Depreciation and amortization expense increased $321,000 between
periods due to purchases of furniture, equipment, and capitalized software in
late 1996 and in 1997.

                                       22
<PAGE>
 
         Professional fees increased $744,000 to $2,371,000 for the nine months
ended September 30, 1997 from $1,627,000 for the nine months ended September 30,
1996. This increase results primarily from the Company's increased use of
contract programmers to perform systems development work.

         Travel and sales promotion expense increased $441,000 to $1,140,000 for
the nine months ended September 30, 1997 from $699,000 for the nine months ended
September 30, 1996 due to increased travel to the foreign subsidiaries.

         Other operating expenses include fees for daily market pricing data,
telephone and office supplies expense, recruiting costs, and temporary help.
These expenses increased $2,726,000 to $5,861,000 for the nine months ended
September 30, 1997 from $3,135,000 for the nine months ended September 30, 1996.
Fees for daily market pricing data, which vary with the level of assets
processed, increased by $159,000 during the period. Other expenses such as
telephone and office supplies vary with staffing levels. Expenses relating to
these items represented $591,000 of the increase. Recruiting costs and costs of
temporary help accounted for $664,000 of the increase; this increase relates to
the tight labor market caused by a period of low unemployment in Massachusetts
during 1997. Additionally, $325,000 of the increase related to the Company's
decision to outsource its mailroom and photocopy facility in February, 1996;
expenses related to these services were included in compensation expense prior
to that time. Approximately $356,000 of the increase relates to annual
maintenance fees on software used to generate automated financial statements for
the Company's clients as part of its expanded mutual fund administration
services.

Net Interest Income

         Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities or changes in
interest rates for the nine months ended September 30, 1997 compared to the same
period in 1996.

<TABLE> 
<CAPTION> 

                                           Change           Change
                                           Due to           Due to
                                           Volume            Rate            Net
                                         ------------     ------------    -----------
                                                   (Dollars in thousands)
<S>                                    <C>              <C>            <C> 
Interest-earning assets
Fed funds sold and
   interest-earning deposits                $   -          $     (27)     $     (27)
Investment securities                         26,668            (112)         26,556
Loans                                            527            (207)            320
                                         ------------     ------------    -----------
Total interest-earning assets                 27,195            (346)         26,849
                                         ------------     ------------    -----------
Interest-bearing liabilities

Deposits                                       7,041            1,258          8,299
Borrowings                                    11,893              216         12,109
                                         ------------     ------------    -----------
Total interest-bearing liabilities            18,934            1,474         20,408
                                         ------------     ------------    -----------
Change in net interest income               $  8,261       $  (1,820)       $  6,441
                                         ============     ============    ===========

</TABLE> 

         Net interest income increased $6,441,000 or 51% to $19,143,000 for the
nine months ended September 30, 1997 from $12,702,000 for the same period in
1996. This net increase resulted from an increase in interest income of
$26,849,000 offset in part by an increase in interest expense of $20,408,000.
The net impact of the above changes was a 96 basis point decrease in net
interest margin.

         The increase in interest income resulted primarily from a higher level
of interest earning assets. The Company's average assets for the nine months
ended September 30, 1997 increased $582,446,000 or 105% compared to the same
period in 1996. This growth primarily resulted from an increase in average
interest earning assets of $567,322,000.

                                       23
<PAGE>
 
         Interest expense increased due primarily to a $516,668,000 increase in
average deposits and short term borrowings for the nine months ended September
30, 1997 compared to the same period in 1996. Also, to a lesser extent, interest
expense increased due to an increase in the average interest rate paid by the
Company from 4.81% to 5.09% during the period.


Income Taxes

         The Company's earnings were taxed on the federal level at 35% for the
1997 and 1996 periods. State taxes on the gross earnings from the Company's
portfolio of investment securities, held by a wholly-owned subsidiary, were
assessed at the tax rate for Massachusetts securities corporations of 1.32%.
State taxes on the remainder of the Company's taxable income were assessed at
the tax rate for Massachusetts banks of 11.76% in 1996 and 11.32% in 1997. The
provision for income taxes for the nine months ended September 30, 1997
increased by $2,022,000 over the same period in 1996. The overall effective tax
rate decreased to 36.0% for the nine months ended September 30, 1997, from 38.5%
for the same period in 1996. The decrease in the effective tax rate is due to
the Company's investment in municipal securities in the first quarter of 1997.


Statement of Operations

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

Noninterest Income

         Noninterest income increased $5,948,000 to $19,982,000 for the quarter
ended September 30, 1997 from $14,034,000 for the quarter ended September 30,
1996. Noninterest income consists of the following items:

<TABLE> 
<CAPTION> 


                                      For the Quarters Ended  
                                           September 30,        
                                   ------------------------------   -------
                                      1996              1997        Change
                                   ------------     -------------   -------
                                       (Dollars in thousands)
<S>                               <C>              <C>             <C> 
Asset administration fees            $  13,909         $  19,725        42%
Computer service fees                      119               117        (2)
Other operating income                      21               105       400
Gain on sale of security
   available for sale                      (15)               35       333
                                   ------------     -------------
Total Noninterest Income             $  14,034         $  19,982        42%
                                   ============     =============
</TABLE> 

         Asset administration fees increased $5,816,000 to $19,725,000 for the
three months ended September 30, 1997 compared to $13,909,000 for the three
months ended September 30, 1996. Total assets processed increased to $148
billion at September 30, 1997 from $111 billion at September 30, 1996. Of this
$37 billion net increase in assets processed, approximately 23% of the increase
reflects assets processed for new clients, and the remainder of the of the
increase reflects growth of assets processed for existing clients. The largest
component of asset administration fees is asset-based fees, which increased
between periods due to the increase in assets processed. Another significant
portion of the increase in asset administration fees resulted from the Company's
success in marketing ancillary services such as securities lending and foreign
exchange.

                                       24
<PAGE>
 
Operating Expenses

        Total operating expenses increased by $5,496,000 to $20,873,000 for the
quarter ended September 30, 1997 compared to $15,377,000 for the quarter ended
September 30, 1996. The components of operating expenses were as follows:

<TABLE> 
<CAPTION> 
                                                     For the Quarters Ended
                                                         September 30,
                                                ------------------------------    ----------
                                                    1996             1997          Change
                                                -------------     ------------    ----------
                                                     (Dollars in thousands)
<S>                                            <C>                <C>           <C> 
Compensation                                        $  8,146        $  11,291        39 %
Pension and other employee benefits                    1,327            1,582        19
Occupancy                                              1,029              835       (19)
Equipment                                              1,355            1,659        22
Insurance                                                158              185        17
Subcustodian fees                                      1,120            1,559        39
Depreciation and amortization                            403              546        35
Professional fees                                        597              616         3
Travel and sales promotion                               206              360        75
Other operating expenses                               1,036            2,240       116
                                                -------------     ------------
Total Operating Expenses                           $  15,377        $  20,873        36 %
                                                =============     ============
</TABLE> 
         Compensation of officers and employees increased by $3,145,000 or 39%
from period to period due to several factors. The average number of employees
increased 35% to 994 during the quarter ended September 30, 1997 from 737 during
the same period in 1996. This increase relates primarily to the increase in new
client relationships and to the expansion of existing client relationships
during the period. The remainder of the increase in compensation expense
resulted from salary increases.

         Pension and other employee benefits increased to $1,582,000 for the
quarter ended September 30, 1997 from $1,327,000 for the same period in 1996.
The 19% increase was due principally to increased payroll taxes attributable to
the increase in compensation expense.

         Occupancy expense decreased by $194,000 to $835,000 for the quarter
ended September 30, 1997 from $1,029,000 during the same period in 1996. The
decrease was non-recurring, and related to the Company's office space
consolidation in the 1997 period.

         Equipment expense varies with the level of assets processed by the
Company. The $304,000 increase between periods is due principally to the growth
in assets processed.

         Insurance expense increased $27,000 from $158,000 for the quarter ended
September 30, 1996 to $185,000 for the quarter ended September 30, 1997 due to
the addition of certain liability coverage during 1997.

         Subcustodian expense increased $439,000 to $1,559,000 for the quarter
ended September 30, 1997 from $1,120,000 for the quarter ended September 30,
1996. This increase resulted from the increase in foreign assets processed,
which are typically subject to higher subcustodian fees than domestic assets
processed, from $8.5 billion at September 30, 1996 to $9.9 billion at September
30, 1997, and from the movement by clients into emerging markets with higher
cost structures.

         Depreciation and amortization expense increased $143,000 between
periods due to purchases of furniture, equipment, and capitalized software in
late 1996 and in 1997.

         Travel and sales promotion expense increased $154,000 to $360,000 for
the quarter ended September 30, 1997 from $206,000 for the quarter ended
September 30, 1996 due to increased travel to the foreign subsidiaries.

                                       25
<PAGE>
 
         Other operating expenses increased $1,204,000 to $2,240,000 for the
quarter ended September 30, 1997 from $1,036,000 for the quarter ended September
30, 1996. Fees for daily market pricing data, which vary with the level of
assets processed, increased by $41,000 during the period. Other expenses such as
telephone and office supplies vary with staffing levels. Expenses relating to
these items represented $305,000 of the increase. Recruiting costs accounted for
$278,000 of the increase; this increase relates to the tight labor market caused
by a period of low unemployment in Massachusetts during the third quarter of
1997. Additionally, $112,000 of the increase related to the Company's decision
to outsource its mailroom and photocopy facility in February, 1996; expenses
related to these services were included in compensation prior to that time.
Approximately $119,000 of the increase relates to annual maintenance fees on
software used to generate automated financial statements for the Company's
clients as part of its expanded mutual fund administration services.

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, 1997 compared to the same
period in 1996.

<TABLE> 
<CAPTION> 
                                           Change           Change
                                           Due to           Due to
                                           Volume            Rate           Net
                                         ------------     ------------   -----------
                                                   (Dollars in thousands)
<S>                                      <C>               <C>             <C> 
  Interest-earning assets
  Fed funds sold and
     interest-earning deposits                $   (179)      $     (21)      $   (200)
  Investment securities                          9,147            (168)         8,979
  Loans                                            345            (367)           (22)
                                           ------------     ------------   -----------
  Total interest-earning assets                  9,313            (556)         8,757
                                           ------------     ------------   -----------
  
  Interest-bearing liabilities
  Deposits                                         964             945          1,909
  Borrowings                                     5,227             222          5,449
                                           ------------     ------------   -----------
  Total interest-bearing liabilities             6,191           1,167          7,358
                                           ------------     ------------   -----------
  Change in net interest income               $  3,122       $  (1,723)      $  1,399
                                           ============     ============   ===========
 
</TABLE> 
 
         Net interest income increased $1,399,000 or 30% to $6,097,000 for the
quarter ended September 30, 1997 from $4,698,000 for the same period in 1996.
This net increase resulted from an increase in interest income of $8,757,000
offset in part by an increase in interest expense of $7,358,000. The net impact
of the above changes was a 90 basis point decrease in net interest margin.

         The increase in interest income resulted primarily from a higher level
of interest earning assets. The Company's average assets for the quarter ended
September 30, 1997 increased $582,943,000 or 83% compared to the same period in
1996. This growth primarily resulted from an increase in average interest
earning assets of $565,140,000.

         Interest expense increased due primarily to a $508,236,000 increase in
average deposits and short term borrowings for the quarter ended September 30,
1997 compared to the same period in 1996. Also, to a lesser extent, interest
expense increased due to an increase in the average interest rate paid by the
Company from 4.90% to 5.36% during the period.

                                       26
<PAGE>
 
Income Taxes

         The Company's earnings were taxed on the federal level at 35% for the
1997 and 1996 periods. State taxes on the gross earnings from the Company's
portfolio of investment securities, held by a wholly-owned subsidiary, were
assessed at the tax rate for Massachusetts securities corporations of 1.32%.
State taxes on the remainder of the Company's taxable income were assessed at
the tax rate for Massachusetts banks of 11.76% in 1996 and 11.32% in 1997. The
provision for income taxes for the quarter ended September 30, 1997 increased by
$586,000 over the same period in 1996. The overall effective tax rate decreased
to 36.0% for the quarter ended September 30, 1997, from 38.4% for the same
period in 1996. The decrease in the effective tax rate is due to the Company's
investment in municipal securities in the first quarter of 1997.


FINANCIAL CONDITION

Investment Portfolio

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

<TABLE> 
<CAPTION> 
   
                                                       December 31,        September 30,
                                                          1996                 1997
                                                  -----------------      ------------------
                                                           (Dollars in thousands)
<S>                                             <C>                  <C>                     
    Securities held to maturity:                                                            
    State and political subdivisions                    $         -            $     35,081 
    Mortgage-backed securities                              414,665                 575,332 
    Federal Agency securities                                37,517                 131,251 
    Foreign government securities                             7,828                   7,784 
                                                  -----------------      ------------------
   Total securities held to maturity                    $   460,010            $    749,448 
                                                  =================      ==================
                                                                                           
   Securities available for sale:                                                          
   U.S. Treasury securities                             $    40,259            $     35,146 
   Mortgage-backed securities                               230,862                 425,136 
                                                  -----------------      ------------------
   Total securities available for sale                  $   271,121            $    460,282 
                                                  =================      ==================
</TABLE> 

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

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

                                       27
<PAGE>
 
         The Company invests in municipal securities to generate stable, tax
advantaged income. Municipal securities generally have lower stated yields than
Federal Agency and U.S. Treasury securities, but the after-tax yields are
comparable. Municipal securities are subject to credit risk.

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

         The book value and weighted average yield of the Company's securities
held to maturity at September 30, 1997, by effective maturity, are reflected in
the following table.

<TABLE> 
<CAPTION> 

                                                                 Weighted
                                                 Book             Average
                                                 Value             Yield
                                             --------------     ------------
<S>                                      <C>                    <C> 
                            
Due within one year                             $    -
Due from one to five years                         234,546            6.64%
Due from five years up to ten years                298,174            6.67%
Due after ten years                                216,728            6.28%
                                             --------------
Total securities held to maturity               $  749,448
                                             ==============
</TABLE> 

The book value and weighted average yield of the Company's securities available
for sale at September 30, 1997, by effective maturity, are reflected in the
following table.

<TABLE> 
<CAPTION> 

                                                                 Weighted
                                                 Book             Average
                                                 Value             Yield
                                             --------------     ------------
<S>                                        <C>                  <C> 
Due within one year                            $    25,102            6.11%
Due from one to five years                         289,834            6.60%
Due from five years up to ten years                145,346            6.77%
                                             --------------
Total securities available for sale             $  460,282
                                             ==============

</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,
                                                       1996                1997
                                                  ---------------     ----------------
                                                        (Dollars in thousands)
<S>                                         <C>                    <C> 
Loans to individuals                                   $  23,449            $  19,919
Loans to not-for-profit organizations                         13                   13
Loans to mutual funds                                     42,875               27,572
                                                  ---------------     ----------------
                                                          66,337               47,504

Less:  allowance for loan losses                            (100)                (100)
                                                  ---------------     ----------------
Net loans                                              $  66,237            $  47,404

Floating rate                                          $  66,324            $  47,491
Fixed rate                                                    13                   13
                                                  ---------------     ----------------
                                                       $  66,337            $  47,504
                                                  ===============     ================
</TABLE> 

                                       28
<PAGE>
 
         Virtually all loans to individually managed account customers are
written on a demand basis, bear variable interest rates tied to the prime rate
and are fully secured by liquid collateral, primarily freely tradable securities
held in custody by the Company for the borrower. Since December 1995, the
Company has entered into agreements to provide up to an aggregate of $40 million
under lines of credit to mutual fund clients. These unsecured lines of credit
may, in the event of a default, be collateralized at the Company's option by
securities held in custody by the Company for those mutual funds. Loans to
mutual funds also include advances by the Company to certain mutual fund clients
pursuant to the terms of the custody agreements between the Company and those
clients. The advances facilitate securities transactions and redemptions
involving those mutual funds and are fully collateralized by liquid collateral,
primarily freely tradable securities held in custody by the Company for those
mutual funds.

         At September 30, 1997, the Company's only lending concentrations which
exceeded 10% of total loans were revolving lines of credit to mutual fund
clients as discussed above. These loans were made in the ordinary course of
business on the same terms and conditions prevailing at the time for comparable
transactions. The Company also had a lending relationship at September 30, 1997
with Landon T. Clay, former Chairman of the Board of Eaton Vance and a principal
stockholder of the Company, representing two loans aggregating $1,200,000 in
principal amount. These loans to Mr. Clay were made in the ordinary course of
business on the same terms and conditions prevailing at the time for comparable
transactions with unrelated third parties. Each of these loans was secured with
non-voting common stock of Eaton Vance.

         The Company's credit loss experience has been excellent. There have
been no loan chargeoffs in the history of the Company. It is the Company's
policy to place a loan on non-accrual status when either principal or interest
becomes 60 days past due and the loan's collateral is not sufficient to cover
both principal and accrued interest. As of September 30, 1997, there were no
past due loans, troubled debt restructurings, or any loans on nonaccrual status.
Although virtually all of the Company's loans are fully collateralized with
freely tradable securities, management recognizes some credit risk inherent in
the loan portfolio, and has recorded an allowance for loan losses of
approximately $100,000 at September 30, 1997. This amount is not allocated to
any particular loan, but is intended to absorb any risk of loss inherent in the
loan portfolio. Management actively monitors the loan portfolio and the
underlying collateral and regularly assesses the adequacy of the allowance for
loan losses.


INTEREST RATE SENSITIVITY

         Interest rate risk arises when an earning asset matures or when its
rate of interest changes in a time frame different from that of the supporting
interest-bearing liability. By seeking to minimize the difference between the
amount of earning assets and the amount of interest-bearing liabilities that
could change interest rates in the same time frame, the Company attempts to
reduce the risk of significant adverse effects on net interest income caused by
interest rate changes. The Company does not attempt to match each earning asset
with a specific interest-bearing liability. Instead, as shown in the table
below, it aggregates all of its earning assets and interest-bearing liabilities
to determine the difference between these in specific time frames. This
difference is known as the rate-sensitivity gap. A positive gap indicates that
more earning assets than interest-bearing liabilities mature in a time frame,
and a negative gap indicates the opposite. Maintaining a balanced position will
reduce risk associated with interest rate changes, but it will not guarantee a
stable interest rate spread because the various rates within a time frame may
change by differing amounts and change in different directions.

         The Company seeks to manage interest rate risk by investment portfolio
actions designed to address the interest rate sensitivity of asset cash flows in
relation to liability cash flows. Portfolio actions used to manage interest rate
risk include managing the effective duration of the portfolio securities and
utilizing interest rate floors and interest rate swaps. Interest rate 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.

                                       29
<PAGE>
 
The following table presents the repricing schedule for the Company's interest
earning assets and interest bearing liabilities at September 30, 1997:

<TABLE> 
<CAPTION> 

                                         Within        Over Three       Over Six        Over One
                                          Three          to Six         to Twelve        Year to        Over Five
                                         Months          Months          Months        Five Years        Years          Total
                                     --------------   ------------   -------------   -------------   -------------  --------------
                                                                         (Dollars in thousands)
<S>                                 <C>              <C>             <C>             <C>            <C>             <C> 
Interest earning assets (1):                                                                                        
    Investment securities (2)           $  516,963     $  193,280      $  199,026      $  194,231      $  106,230    $  1,209,730
    Loans - fixed rate                                                                         13                              13
    Loans - variable rate                   47,491                                                                         47,491
                                     --------------   ------------   -------------   -------------   -------------  --------------
       Total interest earning 
          assets                           564,454        193,280         199,026         194,244         106,230       1,257,234
                                     --------------   ------------   -------------   -------------   -------------  --------------
                                                                                                                    
Interest bearing liabilities:                                                                                       
    Demand deposit accounts                130,293                                                                        130,293
    Savings accounts                       172,179                                                                        172,179
    Time accounts                            2,800                                                                          2,800
    Interest rate contracts               (300,000)        60,000         120,000         120,000                               0
    Short term borrowings                  672,444                                                                        672,444
                                     --------------   ------------   -------------   -------------   -------------  --------------
       Total interest bearing
       liabilities                         677,716         60,000         120,000         120,000               0         977,716
                                     --------------   ------------   -------------   -------------   -------------  --------------
                                                                                                                    
                                                                                                                    
       Net interest sensitivity gap                                                                                 
       during the period               $  (113,262)    $  133,280       $  79,026       $  74,244      $  106,230      $  279,518
                                     ==============   ============   =============   =============   =============  ==============

       Cumulative gap                  $  (113,262)     $  20,018       $  99,044      $  173,288      $  279,518
                                     ==============   ============   =============   =============   =============

Interest sensitive assets as a
    percent of interest sensitive
    liabilities (cumulative)                83.29%        102.71%         111.55%         117.72%         128.59%

Interest sensitive assets as a
    percent of total assets
    (cumulative)                            42.37%         56.87%          71.81%          86.39%          94.36%

Net interest sensitivity gap as a
    percent of total assets                (8.50%)         10.00%           5.93%           5.57%           7.97%

Cumulative gap as a percent
    of total assets                        (8.50%)          1.50%           7.43%          13.01%          20.98%
</TABLE> 


    (1)Adjustable rate assets are included in the period in which interest rates
       are next scheduled to adjust rather than in the period in which they are
       due. Fixed rate loans are included in the period in which they are
       scheduled to be repaid.

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

                                       30
<PAGE>
 
LIQUIDITY

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

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

         The Company's ability to pay dividends on the Common Stock depends on
the receipt of dividends from the Bank. Any dividend payments by the Bank are
subject to certain restrictions imposed by the Massachusetts Commissioner of
Banks. Subject to regulatory requirements, the Bank expects to pay an annual
dividend to the Company, which the Company expects to pay to its stockholders,
currently estimated to be in an amount equal to $.08 per share of the Company's
outstanding Common Stock (approximately $515,645 based upon 6,445,562 shares
outstanding as of September 30, 1997).

         At September 30, 1997, cash and cash equivalents were 2% of total
assets. At September 30, 1997, approximately $25 million or 2% of total interest
earning assets mature within a one year period.

         The Company has informal borrowing arrangements with various
counterparties whereby each counterparty has agreed to make funds available to
the Company at the Federal funds overnight rate. The aggregate amount of these
borrowing arrangements is $116 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 $1,150
million.

         The Company also has a borrowing arrangement with the FHLBB whereby the
Company may borrow amounts determined by prescribed collateral levels and the
amount of FHLBB stock held by the Company. The minimum amount of FHLBB stock
held by the Company is required to be the greater (i) 1% of its outstanding
residential mortgage loan principal (including mortgage pool securities), (ii)
0.3% of total assets, (iii) total advances from the FHLBB, divided by a leverage
factor of 20. The aggregate amount of borrowing available to the Company under
this arrangement at September 30, 1997 was $414 million. An additional
investment in FHLBB stock would be required to borrow to the available limit.


CAPITAL RESOURCES

         Historically, the Company has financed its operations primarily through
internally generated cash flows. The Company incurs capital expenditures for
furniture, fixtures and miscellaneous equipment needs. The Company leases
microcomputers through operating leases. Such capital expenditures have been
incurred and such leases entered into on an as-required basis, primarily to meet
the growing operating needs of the Company. As a result, the Company's capital
expenditures were $2,725,000 and $3,894,000 for the nine months ended September
30, 1996 and 1997, respectively.

                                       31
<PAGE>
 
         On January 31, 1997, the Company completed the issuance and sale of
$25,000,000 in 9.77% Capital Securities. The capital raised in the offering,
along with existing capital and earnings generated in the future, will be used
to support the Company's balance sheet growth.

         Stockholders' equity at September 30, 1997 was $71,744,000, an increase
of $9,885,000 or 16%, from $61,859,000 at December 31, 1996. The ratio of
stockholders' equity to assets decreased to 5.38% at September 30, 1997 from
6.41% at December 31, 1996 due to the significant increase in assets.

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

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

         The following table summarizes the Bank's Tier I and total capital
ratios at September 30, 1997:
<TABLE> 
<CAPTION> 
                                                              September 30,1997
                                                         ----------------------------
                                                             Amount          Ratio
                                                         ---------------    ---------
<S>                                                   <C>                 <C> 
Tier I capital                                                $  92,783        29.9%
Tier I capital minimum requirement                               12,429         4.0%
                                                         ---------------    ---------
Excess Tier I capital                                         $  80,354        25.9%
                                                         ===============    =========

Total capital                                                 $  92,883        29.9%
Total capital minimum requirement                                24,858         8.0%
                                                         ---------------    ---------
Excess Total capital                                          $  68,025        21.9%
                                                         ===============    =========

Risk adjusted assets, net of intangible assets                 $310,729
                                                         ===============

</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 risk-based
capital ratios and the Leverage Capital Ratio requires that the capital of the
Company be reduced by most intangible assets. The Bank's Leverage Capital Ratio
at September 30, 1997 was 7.03%, which is in excess of regulatory requirements.
The capital ratios of the Company are substantially similar to those of the
Bank.

                                       32
<PAGE>
 
         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, 1996         Nine Months Ended September 30, 1997
                                            -----------------------------------------    ------------------------------------------
                                              Average                      Average         Average                       Average
                                              Balance       Interest     Yield/Cost        Balance        Interest     Yield/Cost
                                            ------------   ------------  ------------    -------------   ------------  ------------
<S>                                        <C>            <C>             <C>            <C>            <C>           <C>   
Interest earning assets
    Federal Funds Sold and securities
       purchased under resale agreements     $   23,288         $  968         5.54%          $23,429         $  947         5.39%
    Interest earning deposits                       168              6         4.76%                0              0
    Investment securities                       445,023         21,728         6.51%          994,083         48,284         6.48%
    Loans                                        37,944          1,590         5.59%           56,233          1,910         4.53%
                                            ------------   ------------  ------------    -------------   ------------  ------------
    Total interest earning assets               506,423         24,292         6.40%        1,073,745         51,141         6.35%
                                                           ------------  ------------                    ------------  ------------
    Allowance for loan losses                       (68)                                         (100)
    Noninterest-earning assets                   49,952                                        65,108
                                            ------------                                 -------------
    Total assets                               $556,307                                    $1,138,753
                                            ============                                 =============

Interest bearing liabilities
    Deposits:
       Demand                                  $143,239       $  5,236         4.87%      $   124,824       $  4,835         5.16%
       Time                                         843             32         5.06%            1,424             55         5.15%
       Savings                                   16,992            309         2.42%          245,428          8,986         4.88%
    Short term borrowings                       160,028          6,013         5.01%          466,094         18,122         5.18%
                                            ------------   ------------  ------------    -------------   ------------  ------------
    Total interest bearing liabilities          321,102         11,590         4.81%          837,770         31,998         5.09%
                                                           ------------  ------------                    ------------  ------------

    Noninterest bearing liabilities
       Demand deposits                          129,190                                       144,220
       Noninterest bearing time deposits         45,036                                        55,989
       Other liabilities                          7,996                                        12,443
                                            ------------                                 -------------
    Total liabilities                           503,324                                     1,050,422
    Trust Preferred Stock                             0                                        21,617
    Equity                                       52,983                                        66,714
                                            ------------                                 -------------
    Total liabilities and equity               $556,307                                    $1,138,753
                                            ============                                 =============

    Net interest income                                      $  12,702                                     $  19,143
                                                           ============                                  ============

    Net interest margin  (1)                                                   3.34%                                         2.38%
    Average interest rate spread  (2)                                          1.58%                                         1.26%
    Ratio of interest-earning assets to
       interest-bearing liabilities                                          157.71%                                       128.17%
</TABLE> 

    (1)Net interest income divided by total interest-earning assets.

    (2)Yield on interest-earning assets less rate paid on interest-bearing
       liabilities.

                                       33
<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                   Nine Months Ended
                                                        September 30,                       September 30,
                                                ------------------------------      ------------------------------
                                                    1996             1997               1996             1997
                                                -------------    -------------      -------------    -------------
                                                              (in thousands, except per share data)
<S>                                            <C>              <C>                <C>              <C>           
Net income                                          $  2,065         $  2,936           $  5,489         $  8,652
Weighted average number of common                     
     shares outstanding                                6,444            6,445              6,444            6,445
                                             
Dilutive effect of common equivalent         
     shares of stock options and warrants                 27              194                 24              158
                                                -------------    -------------      -------------    -------------
Weighted average number  of common and       
     common equivalent shares outstanding              6,471            6,639              6,468            6,603
                                                =============    =============      =============    =============
Net income per share  (1)                          $    0.32        $    0.44          $    0.85        $    1.31
                                                =============    =============      =============    =============
</TABLE> 

     (1) Primary and fully diluted income per share are the same for all periods
         presented.

b. The Company did not file any Current Reports on Form 8-K during the
three months ended September 30, 1997.

                                      34

<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  10, 1997                    By:  /s/ Kevin J. Sheehan
                                                  ------------------------------
                                                  Kevin J. Sheehan
                                                  Chairman, President and Chief
                                                  Executive Officer



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

                                       35