<PAGE>


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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

(Mark One)

      /X/      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the Quarterly period ended March 31, 1998

                                       or

      / /      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                               OF THE SECURITIES EXCHANGE ACT OF 1934
                           For the Transition period from       to 
                                                          -----    -----

                         Commission File Number 0-26996

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

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

            200 Clarendon 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 April 30, 1998, there were 6,483,281 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

               Condensed Consolidated Balance Sheets
                 December 31, 1997 (audited) and

                 March 31, 1998 (unaudited)                                     3

               Condensed Consolidated Income Statements  (unaudited)

                 Three months ended March 31, 1997 and 1998                     4

               Condensed Statement of Stockholder's Equity (unaudited)

                 Three months ended March 31, 1998                              5

               Condensed Consolidated Statements of Cash Flows (unaudited)

                 Three months ended March 31, 1997 and 1998                     6

               Notes to Condensed Consolidated Financial Statements             8


      Item 2.  Management's Discussion and Analysis of Financial Condition     20
               and Results of Operations



SIGNATURES                                                                     34

</TABLE>

                                       2


<PAGE>


INVESTORS FINANCIAL SERVICES CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND  MARCH 31, 1998

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

<TABLE>
<CAPTION>

                                                                           December 31,          March 31,
     ASSETS                                                                   1997                 1998
                                                                                                (unaudited)
<S>                                                                      <C>                 <C>        
Cash and due from banks                                                  $    17,037,568     $    69,668,890
Federal funds sold and securities purchased under resale agreements           75,000,000          50,000,000
Securities held to maturity (approximate market values of
  $809,708,389 and $897,903,949 at December 31, 1997
  and March 31, 1998, respectively)                                          802,046,077         890,541,133
Securities available for sale                                                462,850,089         462,081,710
Nonmarketable equity securities                                                5,476,600           7,626,500
Loans, less allowance for loan losses of $100,000
  at December 31, 1997 and March 31, 1998                                     55,944,957          78,229,537
Accrued interest and fees receivable                                          22,810,182          23,537,593
Equipment and leasehold improvements, net                                      7,900,994           8,676,962
Other assets                                                                  10,277,738           9,796,713
                                                                         ---------------     ---------------
TOTAL ASSETS                                                             $ 1,459,344,205     $ 1,600,159,038
                                                                         ---------------     ---------------
                                                                         ---------------     ---------------

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
  Deposits:
    Demand                                                              $   354,616,945     $   361,793,873
    Savings                                                                 427,122,987         373,858,819
    Time                                                                     65,000,000          65,000,000
                                                                         ---------------     ---------------
      Total deposits                                                        846,739,932         800,652,692

Short-term borrowings                                                        499,932,628         682,405,433
Other liabilities                                                             13,609,660          14,880,468
                                                                         ---------------     ---------------
      Total liabilities                                                    1,360,282,220       1,497,938,593
                                                                         ---------------     ---------------
Company obligated mandatorily redeemable preferred securities of
  subsidiary trust holding junior subordinated deferrable interest
  debentures of the Company                                                   24,161,104          24,168,180
                                                                         ---------------     ---------------
STOCKHOLDERS' EQUITY:

  Common stock                                                                    64,703              64,851
  Surplus                                                                     55,072,990          55,246,978
  Deferred compensation                                                       (1,248,775)         (1,064,456)
  Retained earnings                                                           19,545,070          22,559,115
  Accumulated other comprehensive income                                       1,466,893           1,245,817
  Treasury stock (at par, 4,000 shares)                                             --                   (40)
                                                                         ---------------     ---------------
Total stockholders' equity                                                    74,900,881          78,052,265
                                                                         ---------------     ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $ 1,459,344,205     $ 1,600,159,038
                                                                         ---------------     ---------------
                                                                         ---------------     ---------------
</TABLE>


           See notes to condensed consolidated financial statements.


                                       3
<PAGE>


INVESTORS FINANCIAL SERVICES CORP.

CONDENSED CONSOLIDATED INCOME STATEMENTS  (unaudited)
THREE MONTHS ENDED MARCH 31, 1997 AND 1998

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

<TABLE>
<CAPTION>


                                                                                  March 31,                March 31,
                                                                                    1997                     1998
<S>                                                                         <C>                        <C>           

OPERATING REVENUE:
Interest income:
   Federal funds sold and securities purchased
     under resale agreements                                                $        675,747           $      348,559
   Investment securities held to maturity and available for sale                  13,691,446               19,963,021
   Loans                                                                             664,409                  668,706
                                                                            ----------------           --------------
     Total interest income                                                        15,031,602               20,980,286

Interest expense:
   Deposits                                                                        4,445,602                5,651,354
   Short-term borrowings                                                           4,129,864                8,204,807
                                                                            ----------------           --------------
     Total interest expense                                                        8,575,466               13,856,161
                                                                            ----------------           --------------
     Net interest income                                                           6,456,136                7,124,125

Noninterest income:
   Asset administration fees                                                      17,607,375               20,844,655
   Computer service fees                                                             116,460                  118,985
   Other operating income                                                             35,985                  109,524
   Gain on sale of securities available for sale                                        -                     200,427
                                                                            ----------------           --------------
     Net operating revenue                                                        24,215,956               28,397,716

OPERATING EXPENSES:
   Compensation and benefits                                                      11,468,135               14,056,446
   Technology and telecommunications                                               2,462,067                2,563,054
   Transaction processing services                                                 2,037,711                2,030,977
   Occupancy                                                                       1,088,480                1,623,275
   Depreciation and amortization                                                     388,339                  533,604
   Travel and sales promotion                                                        331,503                  383,768
   Professional fees                                                                 472,141                  244,016
   Insurance                                                                         181,759                  185,823
   Other operating expenses                                                          883,538                1,153,365
                                                                            ----------------           --------------
     Total operating expenses                                                     19,313,673               22,774,328
                                                                            ----------------           --------------

INCOME BEFORE INCOME TAXES AND MINORITY INTEREST                                   4,902,283                5,623,388

Provision for income taxes                                                         1,822,219                2,024,419
Minority interest expense, net of income taxes                                       258,498                  390,800
                                                                            ----------------           --------------
NET INCOME                                                                         2,821,566                3,208,169
                                                                            ----------------           --------------
Other comprehensive income, net of tax:
     Unrealized gain (loss) on securities:
     Unrealized holding gains (losses) arising during the period                      45,414                 (221,076)
                                                                            ----------------           --------------
   Other comprehensive income (loss)                                                  45,414                 (221,076)
                                                                            ----------------           --------------
     Comprehensive income                                                   $      2,866,980           $    2,987,093
                                                                            ----------------           --------------
                                                                            ----------------           --------------
BASIC EARNINGS PER SHARE                                                    $           0.44           $         0.50
                                                                            ----------------           --------------
                                                                            ----------------           --------------
DILUTED EARNINGS PER SHARE                                                  $           0.43           $         0.48
                                                                            ----------------           --------------
                                                                            ----------------           --------------

</TABLE>


   See notes to condensed consolidated financial statements.

                                       4


<PAGE>


INVESTORS FINANCIAL SERVICES CORP.

CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited)
THREE MONTHS ENDED MARCH 31, 1998

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

<TABLE>
<CAPTION>
                                                                                             Accumulated
                                                                                               Other
                                          Common                   Deferred     Retained    Comprehensive  Treasury
                                           Stock     Surplus     Compensation   Earnings    Income (Loss)   Stock          Total
<S>                                       <C>      <C>           <C>           <C>           <C>           <C>         <C>
BALANCE, DECEMBER 31, 1997                $64,703  $55,072,990   $(1,248,775)  $19,545,070   $ 1,466,893   $ -         $ 74,900,881
                                                                
Amortization of deferred compensation        -            -          184,319        -               -        -              184,319
Exercise of stock options                     148      250,948          -           -               -        -              251,096
Purchase of treasury stock                   -         (76,960)         -           -               -       (40)            (77,000)
Net income                                   -            -             -        3,208,169          -        -            3,208,169
Payment of dividend                          -            -             -         (194,124)         -        -             (194,124)
Change in accumulated other
   comprehensive income (loss)               -            -             -           -           (221,076)    -             (221,076)
                                          -------  -----------   -----------   -----------   -----------   ----        ------------
                                                      
BALANCE, MARCH 31, 1998                   $64,851  $55,246,978   $(1,064,456)  $22,559,115   $ 1,245,817   $(40)       $ 78,052,265
                                          -------  -----------   -----------   -----------   -----------   ----        ------------
                                          -------  -----------   -----------   -----------   -----------   ----        ------------
                                                               
</TABLE>

See notes to condensed consolidated financial statements.


                                       5
<PAGE>


INVESTORS FINANCIAL SERVICES CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited)
THREE MONTHS ENDED MARCH 31, 1997 AND 1998

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                             March 31,        March 31,
                                                                               1997             1998
<S>                                                                       <C>              <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                                                $   2,821,566    $   3,208,169
                                                                          -------------     ------------ 
Adjustments to reconcile net income to net cash provided by
operating activities:

  Depreciation and amortization                                                 388,339          540,680
  Amortization of deferred compensation                                         109,725          184,319
  Amortization of premiums on securities, net of accretion of discounts         771,189        1,745,984
  Deferred income taxes                                                          16,879             --
  (Gain) on sale of securities available for sale                                  --           (200,427)
  Changes in assets and liabilities:
    Accrued interest and fees receivable                                     (3,816,962)        (727,411)
    Other assets                                                             (1,821,794)         481,024
    Other liabilities                                                         7,126,236        1,395,165
                                                                          -------------     ------------ 
      Total adjustments                                                       2,773,612        3,419,334
                                                                          -------------     ------------ 
      Net cash provided by operating activities                               5,595,178        6,627,503
                                                                          -------------     ------------ 


CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from maturities of securities available for sale                    26,279,300       45,320,888
Proceeds from maturities of securities held to maturity                      14,698,733       63,343,813
Proceeds from sales of securities available for sale                               --         42,609,303
Purchases of securities available for sale                                  (59,892,284)     (88,335,184)
Purchases of securities held to maturity                                   (207,425,019)    (152,556,486)
Purchase of nonmarketable equity securities                                  (4,509,200)      (2,149,900)
Net decrease in federal funds sold and securities
  purchased under resale agreements                                         120,000,000       25,000,000
Net increase in loans                                                       (10,371,338)     (22,284,580)
Purchases of equipment and leasehold improvements                              (285,814)      (1,309,572)
                                                                          -------------     ------------ 
      Net cash used for investing activities                               (121,505,622)     (90,361,718)
                                                                          -------------     ------------ 
</TABLE>


See notes to condensed consolidated financial statements.


                                       6
<PAGE>

INVESTORS FINANCIAL SERVICES CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited)
THREE MONTHS ENDED MARCH 31, 1997 AND 1998  (continued)

<TABLE>
<CAPTION>

                                                           March 31,      March 31,
                                                             1997           1998
<S>                                                      <C>            <C>         
CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in demand deposits                          $ 18,613,432   $  7,176,928
Net increase (decrease) in time and savings deposits        8,660,397    (53,264,168)
Net increase in short-term borrowings                      68,360,756    182,472,805
Cost of stock issuance                                       (755,257)            --
Proceeds from exercise of stock options                        16,500        251,096
Proceeds from issuance of preferred stock                  25,000,000           --
Purchase of treasury stock                                   --              (77,000)
Dividends paid                                               (128,886)      (194,124)
                                                         ------------   ------------
    Net cash provided by financing activities             119,766,942    136,365,537
                                                         ------------   ------------
NET INCREASE IN CASH AND DUE FROM BANKS                     3,856,498     52,631,322
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD               19,226,453     17,037,568
                                                         ------------   ------------
CASH AND DUE FROM BANKS, END OF PERIOD                   $ 23,082,951   $ 69,668,890
                                                         ------------   ------------
                                                         ------------   ------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

  Cash paid for interest                                 $  8,601,000   $ 13,735,000
                                                         ------------   ------------
                                                         ------------   ------------
  Cash paid for income taxes                             $    503,000   $    714,000
                                                         ------------   ------------
                                                         ------------   ------------

</TABLE>


See notes to condensed consolidated financial statements.


                                       7
<PAGE>


INVESTORS FINANCIAL SERVICES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 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 and shall mean the Bank
      prior to that date.

      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 1998 condensed consolidated interim financial statements of the
      Company and condensed consolidated subsidiaries as of March 31, and for
      the three-month periods ended March 31, 1997 and 1998 have been prepared
      by the Company, without audit, pursuant to the rules and regulations of
      the Securities and Exchange Commission. Certain information and footnote
      disclosures normally included in annual financial statements prepared in
      accordance with generally accepted accounting principles have been
      condensed or omitted as permitted by such rules and regulations. All
      adjustments, consisting of normal recurring adjustments, have been
      included. Management believes that the disclosures are adequate to present
      fairly the financial position, results of operations and cash flows at the
      dates and for the periods presented. It is suggested that these interim
      financial statements be read in conjunction with the financial statements
      and the notes thereto included in the Company's latest annual report on
      Form 10-K. Results for interim periods are not necessarily indicative of
      those to be expected for the full fiscal year.

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


                                       8
<PAGE>


3.    SECURITIES

      Carrying amounts and approximate market values of securities are
      summarized as follows as of December 31, 1997:

<TABLE>
<CAPTION>
      
                                                    Carrying          Unrealized      Unrealized      Approximate
             Held to Maturity                        Value               Gains          Losses       Market Value
      <S>                                        <C>                 <C>              <C>            <C>          
       State and political subdivisions          $  35,224,790       $  2,296,252     $      -       $  37,521,042
       Mortgage-backed securities                  590,364,940          5,649,718         514,023      595,500,635
       Federal agency securities                   168,687,478            545,863         491,229      168,742,112
       Foreign government securities                 7,768,869            175,731            -           7,944,600
                                                 -------------       ------------     -----------    -------------
       Total                                     $ 802,046,077       $  8,667,564     $ 1,005,252    $ 809,708,389
                                                 -------------       ------------     -----------    -------------
                                                 -------------       ------------     -----------    -------------
</TABLE>


<TABLE>
<CAPTION>
      
                                                   Amortized          Unrealized      Unrealized       Carrying
             Available for Sale                      Cost                Gains          Losses           Value
      <S>                                        <C>                 <C>              <C>            <C>          
       U.S. Treasury securities                  $  30,002,114       $     90,136     $      -       $  30,092,250
       State and political subdivisions              8,348,265             33,588            -           8,381,853
       Mortgage-backed securities                  422,207,689          2,624,065         455,768      424,375,986
                                                 -------------       ------------     -----------    -------------
       Total                                     $ 460,558,068       $  2,747,789     $   455,768    $ 462,850,089
                                                 -------------       ------------     -----------    -------------
                                                 -------------       ------------     -----------    -------------
</TABLE>
      
      
      Carrying amounts and approximate market values of securities are
      summarized as follows as of March 31, 1998:

<TABLE>
<CAPTION>
      
                                                    Carrying          Unrealized      Unrealized      Approximate
             Held to Maturity                        Value               Gains          Losses       Market Value
      <S>                                        <C>                 <C>              <C>            <C>          
      State and political subdivisions           $  35,370,510       $  2,339,606     $      -        $ 37,710,116
      Mortgage-backed securities                   661,601,876          5,652,453         942,316      666,312,013
      Federal agency securities                    185,814,846            777,968         642,593      185,950,221
      Foreign government securities                  7,753,901            177,698            -           7,931,599
                                                 -------------       ------------     -----------    -------------
      Total                                      $ 890,541,133       $  8,947,725     $ 1,584,909    $ 897,903,949
                                                 -------------       ------------     -----------    -------------
                                                 -------------       ------------     -----------    -------------
</TABLE>
      
      
<TABLE>
<CAPTION>
      
                                                   Amortized          Unrealized      Unrealized       Carrying
             Available for Sale                      Cost                Gains          Losses           Value
      <S>                                        <C>                 <C>              <C>            <C>
      U.S. Treasury securities                   $  19,988,033       $     70,567     $     -        $ 20,058,600
      Municipal bonds                               20,333,663             61,897         57,868       20,337,692
      Mortgage-backed securities                   401,226,222          2,376,360        448,646      403,153,936
      Federal agency securities                     18,587,202                -           55,720       18,531,482
                                                 -------------       ------------     -----------    -------------
      Total                                      $ 460,135,120       $  2,508,824     $  562,234     $462,081,710
                                                 -------------       ------------     -----------    -------------
                                                 -------------       ------------     -----------    -------------
      
</TABLE>
      
      
                                       9
<PAGE>


3.    SECURITIES (CONTINUED)

      Nonmarketable equity securities at March 31, 1998 consisted 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, 1997                March 31, 1998
                                         Carrying     Approximate     Carrying      Approximate
         Held to Maturity                  Value      Market Value      Value       Market Value
      <S>                              <C>            <C>            <C>            <C>         
      Due within one year              $       --     $       --     $      3,901   $      3,947
      Due from one to five years        357,580,590    360,361,877    352,187,726    354,190,880
      Due five years up to ten years    183,840,479    184,373,997    194,198,202    194,931,309
      Due after ten years               260,625,008    264,972,515    344,151,304    348,777,813
                                       ------------   ------------   ------------   ------------
      Total                            $802,046,077   $809,708,389   $890,541,133   $897,903,949
                                       ------------   ------------   ------------   ------------
                                       ------------   ------------   ------------   ------------
            
</TABLE>
            
<TABLE>
<CAPTION>
            
                                           December 31, 1997               March 31, 1998
                                         Amortized     Carrying        Amortized      Carrying
          Available for Sale               Cost           Value          Cost           Value
      <S>                              <C>            <C>            <C>            <C>         
      Due within one year              $ 20,020,094   $ 20,039,100   $ 14,992,353   $ 15,021,100
      Due from one to five years        307,636,460    309,517,768    355,898,606    357,461,799
      Due five years up to ten years    132,367,416    132,756,384     88,160,910     88,520,835
      Due after ten years                   534,098        536,837      1,083,251      1,077,976
                                       ------------   ------------   ------------   ------------
      Total                            $460,558,068   $462,850,089   $460,135,120   $462,081,710
                                       ------------   ------------   ------------   ------------
                                       ------------   ------------   ------------   ------------      
</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.

      Seven available for sale securities were sold during the three months
      ended March 31, 1998, resulting in gains totaling $200,427.

      The carrying value of securities pledged amounted to approximately
      $590,000,000 and $784,000,000 at December 31, 1997 and March 31, 1998,
      respectively. Securities are pledged primarily to secure public funds and
      clearings with other depository institutions.


                                       10
<PAGE>


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, 1997 or March 31, 1998. In addition, there have been
      no loan charge-offs or recoveries during the three months ended March 31,
      1997 and 1998. Loans consisted of the following at December 31, 1997 and
      March 31, 1998:

<TABLE>
<CAPTION>

                                             December 31,    March 31,
                                                1997           1998
<S>                                          <C>           <C>        
      Loans to individuals                   $26,857,933   $21,477,297
      Loans to not-for-profit institutions        12,500        12,500
      Loans to mutual funds                   29,174,524    56,839,740
                                             -----------   -----------
                                              56,044,957    78,329,537
      Less allowance for loan losses             100,000       100,000
                                             -----------   -----------
      Total                                  $55,944,957   $78,229,537
                                             -----------   -----------
                                             -----------   -----------
</TABLE>


      The Company had commitments to lend of approximately $62,845,000 and
      $65,441,000 at December 31, 1997 and March 31, 1998, 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, 1997 and March 31, 1998:

<TABLE>
<CAPTION>

                                                                  December 31,    March 31,
                                                                      1997          1998
<S>                                                                <C>           <C>        
      Furniture, fixtures and equipment                            $11,189,053   $12,296,299
      Leasehold improvements                                           492,138       473,745
                                                                     ---------     ---------
      Total                                                         11,681,191    12,770,044
      Less accumulated depreciation and amortization                 3,780,197     4,093,082
                                                                     ---------     ---------
      Equipment and leasehold improvements, net                    $ 7,900,994   $ 8,676,962
                                                                   -----------   -----------
                                                                   -----------   -----------
</TABLE>

6.    DEPOSITS

      Time deposits at December 31, 1997 and March 31, 1998 include
      noninterest-bearing amounts for both years of approximately $65,000,000.

      All time deposits had a minimum balance of $100,000 and a maturity of less
      than three months at December 31, 1997 and March 31, 1998.


                                       11
<PAGE>


7.    SHORT-TERM BORROWINGS

      The major components of short-term borrowings are as follows at December
      31, 1997 and March 31, 1998:

<TABLE>
<CAPTION>

                                            December 31,       March 31,
                                               1997              1998

      <S>                                 <C>               <C>          
      Repurchase agreements               $ 499,188,363     $ 627,152,306
      Federal funds purchased                         -        30,000,000
      FHLBB advance                                   -        25,000,000
      Treasury, tax and loan account            744,265           253,127
                                          -------------     -------------
      Total                               $ 499,932,628     $ 682,405,433
                                          -------------     -------------
                                          -------------     -------------
</TABLE>


      The Company enters into repurchase agreements whereby securities are sold
      by the Company under agreements to repurchase. The interest rate on the
      outstanding agreements at December 31, 1997 ranged from 4.95% to 5.90% and
      all agreements matured by March 3, 1998. The interest rates on the
      outstanding agreements at March 31, 1998 ranged from 5.43% to 5.61% and
      all agreements mature by July 31, 1998. The amount outstanding at March
      31, 1998 was the highest amount outstanding at any month end during the
      period ended March 31, 1998. The average balance during the period ended
      March 31, 1998 was $586,126,000.

      The Company purchases excess reserves in the form of federal funds from
      other banks in order to meet the Federal Reserve Bank ("FRB")
      requirements. The interest rate on the outstanding balance at March 31,
      1998 was 6.10%.

      The Company has a borrowing arrangement with the FHLBB which is utilized
      on an overnight basis to satisfy temporary funding requirements. The
      interest rate on the outstanding balance at March 31, 1998 was 5.63%. The
      Company has the option to put the advance back to FHLBB on the 22nd day of
      each month, and the advance matures on March 27, 2000.

      The Company receives federal tax deposits from clients as agent for the
      FRB and accumulates these deposits in the Treasury, tax and loan account.
      The FRB charges the Company interest at the Federal funds rate on such
      deposits. The interest rates on the outstanding balance at December 31,
      1997 and March 31, 1998 were 5.26% and 5.41%, respectively.

      The following securities were pledged under these agreements at December
      31, 1997 and March 31, 1998:

<TABLE>
<CAPTION>

                                               December 31, 1997                 March 31, 1998
                                           Carrying       Approximate      Carrying        Approximate
                                             Value       Market Value        Value        Market Value
        <S>                             <C>              <C>             <C>             <C>           
        U.S. Treasury securities         $  20,392,469   $  20,392,469   $  10,239,602   $   10,239,602
        Federal agency securities               -              -            51,865,319       52,090,838
        Mortgage-backed securities         501,141,751     503,300,183     583,292,655      586,242,564
                                         -------------   -------------   -------------    -------------
        Total                            $ 521,534,220   $ 523,692,652   $ 645,397,576    $ 648,573,004

                                         -------------   -------------   -------------    -------------
                                         -------------   -------------   -------------    -------------
</TABLE>


                                       12
<PAGE>


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 and
      20,000,000 shares of Common Stock, all with a par value of $.01 per share.
      At December 31, 1997 and March 31, 1998, there were no preferred shares
      issued or outstanding. There were 6,470,313 and 6,485,094 shares of Common
      Stock issued and outstanding at December 31, 1997 and March 31, 1998,
      respectively.

      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. On April 15, 1998, the
      Shareholders of the Company authorized the issuance of up to an additional
      600,000 shares of Common Stock under the 1995 Stock Plan. Of the total
      1,160,000 shares of Common Stock authorized for issuance under the plan,
      572,518 were available for grant at March 31, 1998. 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. On March
      31, 1998 the Company repurchased 4,000 unvested shares for $77,000 under
      the terms of the 1995 Stock Plan. The Company has recorded deferred
      compensation of $1,248,775 and $1,064,456 at December 31, 1997 and March
      31, 1998, respectively, pursuant to these grants.

      Under the terms of the 1995 Non-Employee Director Stock Option Plan, as
      amended, 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 on November 8, 1995 to
      each director. Any director elected or appointed after such date receives
      an automatic initial grant of options to purchase 2,500 shares upon
      becoming a director. Thereafter, each director receives 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.


                                       13
<PAGE>


9.    STOCKHOLDERS' EQUITY (Continued)

      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.

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

                                                      Number of   Weighted-Average
                                                        Shares     Exercise Price

      <S>                                              <C>        <C>     
      Outstanding at December 31, 1997                 517,284    $     30
      Granted                                            5,600          45
      Exercised                                        (14,781)         17
      Canceled                                          (7,043)         20
                                                       -------
      Outstanding at March 31, 1998                    501,060          29
                                                       -------
                                                       -------
      Outstanding and exercisable at March 31, 1998    159,138
                                                       -------
                                                       -------
</TABLE>


      Earnings Per Share - Under SFAS 128, the Company is required to disclose
      a reconciliation of Basic EPS and Diluted EPS for the periods ending
      March 31, 1998 and 1997 as follows:

<TABLE>
<CAPTION>

                                                                          Per Share
                                                  Income       Shares      Amount
      <S>                                       <C>          <C>          <C>     
      March 31, 1998
      Basic EPS
      Income available to common stockholders   $3,208,169    6,476,542   $   0.50
                                                                          --------
                                                                          --------
      Dilutive effect of common equivalent
        shares of stock options                                 193,046
                                                             ----------
      Diluted EPS
      Income available to common stockholders   $3,208,169    6,669,588   $   0.48
                                                ----------   ----------   --------
                                                ----------   ----------   --------
      
      March 31, 1997
      Basic EPS
      Income available to common stockholders   $2,821,566    6,444,534   $   0.44
                                                                          --------
                                                                          --------
      Dilutive effect of common equivalent
        shares of stock options                                 113,907
                                                             ----------
      Diluted EPS
      
      Income available to common stockholders   $2,821,566    6,588,441   $   0.43
                                                ----------   ----------   --------
                                                ----------   ----------   --------
</TABLE>


                                       14
<PAGE>


9.    STOCKHOLDERS' EQUITY (Continued)

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

10.   COMPREHENSIVE INCOME

      During the period ended March 31, 1998, the Company adopted the Statement
      of Financial Accounting Standards ("SFAS"), No. 130, "Reporting
      Comprehensive Income". SFAS No. 130 establishes standards for reporting
      and display of comprehensive income and its components in a full set of
      general-purpose financial statements. SFAS No. 130 requires that the
      Company classify items of other comprehensive income by their nature in a
      financial statement and display the accumulated balance of other
      comprehensive income separately from retained earnings and additional
      paid-in capital in the equity section of the balance sheet.

11.   OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

      Lines of Credit - At March 31, 1998, the Company had commitments to
      individuals under collateralized open lines of credit totaling
      $90,661,000, against which $25,220,000 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 $310,000,000 as of March 31,
      1998. 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 $94,022 at March 31, 1998.

      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 13, 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.


                                       15
<PAGE>


12.   COMMITMENTS AND CONTINGENCIES

      Restrictions on Cash Balances - The Company is required to maintain
      certain average cash reserve balances with the FRB. The reserve balance
      requirement as of March 31, 1998 was $29,438,000. In addition, other cash
      balances in the amount of $1,561,893 were pledged to secure clearings with
      a depository institution as of March 31, 1998.

      Lease Commitments - Minimum future commitments on noncancelable operating
      leases March 31, 1998 were as follows:

<TABLE>
<CAPTION>

                                                 Bank
      Fiscal Year Ending                        Premises           Equipment
                                        
      <S>                                    <C>                  <C>        
      1998                                   $  4,551,311         $ 1,585,518
      1999                                      6,068,414           1,808,058
      2000                                      5,815,280             664,442
      2001                                      5,696,908               -
      2002 and beyond                          29,999,475               -

</TABLE>

      Total rent expense was $1,568,611 and $2,082,575 for the three months
      ended March 31, 1997 and 1998, 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 $108,074 and
      $164,057 for the three months ended March 31, 1997 and 1998, 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 March 31, 1998 that
      are material to the consolidated financial position or results of
      operations of the Company.


                                       16
<PAGE>


13.   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, 1997 and March 31, 1998 is as
      follows (in thousands):

<TABLE>
<CAPTION>

                             December 31, 1997             March 31, 1998
                       ----------------------------  ----------------------------
                                         Unrealized                    Unrealized
Currency               Purchases  Sales   Gain/Loss  Purchases  Sales   Gain/Loss
<S>                    <C>       <C>          <C>    <C>       <C>          <C>  
France (FRF)           $ 4,292   $ 4,292      --     $45,988   $45,988      --
Germany (DEM)            1,016     1,016      --       9,006     9,006      --
United Kingdom (GBP)     3,440     3,440      --       7,037     7,037      --
Japan (JPY)              5,000     5,000      --       5,066     5,066      --
Switzerland (CHF)          483       483      --       3,797     3,797      --
Czechoslovakia (CZK)      --        --        --       2,902     2,902      --
Hong Kong (HKD)          5,011     5,011      --       2,656     2,656      --
Italy (ITL)                145       145      --         770       770      --
Thailand (THB)            --        --        --         629       629      --
Canada (CAD)               278       278      --         459       459      --
Sweden (SEK)               317       317      --         360       360      --
Netherlands (NLG)          271       271      --         296       296      --
Other currencies         2,689     2,689      --         804       804      --
                       -------   -------  ---------  -------   -------  ---------
                       $22,942   $22,942      --     $79,770   $79,770      --
                       -------   -------  ---------  -------   -------  ---------
                       -------   -------  ---------  -------   -------  ---------

</TABLE>

      The maturity of contracts outstanding as of March 31, 1998 is as follows:

<TABLE>
<CAPTION>

           Maturity                        Purchases           Sales
           <S>                              <C>              <C>    
           April 1998                       $ 75,880         $75,880
           May 1998                            1,390           1,390
           August 1998                         2,500           2,500

</TABLE>

14.   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 and the Bank's
      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 Company's and the Bank's
      capital amounts and classification are also subject to qualitative
      judgments by the regulators about components, risk weightings, and other
      factors.

      Quantitative measures established by regulation to ensure capital adequacy
      require the Company and the Bank to maintain minimum amounts and ratios
      (set forth in the table below) of total and Tier I capital (as defined in
      the regulations) to risk-weighted assets (as defined), and of Tier I
      capital (as defined) to average assets (as defined). Management believes,
      as of March 31, 1998, that the Company and the Bank meet all capital
      adequacy requirements to which it is subject.


                                       17
<PAGE>


14.   REGULATORY MATTERS (Continued)

      As of March 31, 1998, the most recent notification from the Federal
      Deposit Insurance Corporation categorized the Company and the Bank as well
      capitalized under the regulatory framework for prompt corrective action.
      To be categorized as well capitalized, the Company and the Bank must
      maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
      ratios as set forth in the following table. There are no conditions or
      events since that notification that management believes have changed the
      Company's or the Bank's category. The following table presents the capital
      ratios for the Bank and the Company for the quarter ended March 31, 1998
      and the year ended December 31, 1997.

<TABLE>
<CAPTION>

                                                                   Minimum                 To Be Well Capitalized
                                                                  For Capital                   Under Prompt
                                         Actual                Adequacy Purposes        Corrective Action Provisions
                               ------------------------      -----------------------   ------------------------------
                                  Amount         Ratio          Amount         Ratio        Amount          Ratio
                               ------------      ------      ------------      -----     -------------      ------
<S>                            <C>               <C>         <C>               <C>       <C>                <C>
As of March 31, 1998:

Total Capital
(to Risk Weighted Assets
     - the Company)            $101,074,628      26.84%      $ 30,129,927      8.00%           N/A           N/A
(to Risk Weighted Assets                                                                  
      - the Bank)              $ 98,612,323      26.31%      $ 29,983,760      8.00%      $ 37,479,000      10.00%
Tier I Capital                                                                            
(to Risk Weighted Assets                                                                  
     - the Company)            $100,974,628      26.81%      $ 15,064,963      4.00%           N/A           N/A
Tier I Capital                                                                            
(to Risk Weighted Assets                                                                  
     - the Bank)               $ 98,512,323      26.28%      $ 14,991,880      4.00%      $ 22,487,820       6.00%
Tier I Capital                                                                            
(to Average Assets                                                                        
     - the Company)            $100,974,628       6.94%      $ 58,225,661      4.00%           N/A           N/A
Tier I Capital                                                                            
(to Average Assets                                                                        
     - the Bank)               $ 98,512,323       6.77%      $ 58,165,032      4.00%      $ 72,706,290       5.00%
                                                                                          
                                                                                          
As of December  31, 1997:                                                                 
                                                                                          
Total Capital                                                                             
(to Risk Weighted Assets                                                                  
     - the Company)            $ 97,695,092      29.03%      $ 26,919,487      8.00%           N/A           N/A
Total Capital                                                                           
(to Risk Weighted Assets                                                              
     - the Bank)               $ 96,140,693      28.57%      $ 26,918,947      8.00%      $ 33,648,684      10.00%
Tier I Capital                                                                          
(to Risk Weighted Assets                                                              
     - the Company)            $ 97,595,092      29.00%      $ 13,459,744      4.00%           N/A           N/A
Tier I Capital                                                                          
(to Risk Weighted Assets                                                              
     - the Bank)               $ 96,040,693      28.54%      $ 13,459,473      4.00%      $ 20,189,210       6.00%
Tier I Capital                                                                          
(to Average Assets                                                                    
     - the Company)            $ 97,595,092       6.39%      $ 61,062,667      4.00%           N/A           N/A
Tier I Capital                                                                          
(to Average Assets                                                                    
     - the Bank)               $ 96,040,693       6.31%      $ 60,892,699      4.00%      $ 76,115,874       5.00%
                                                                                      
</TABLE>


                                       18
<PAGE>


14.   REGULATORY MATTERS (Continued)

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


                                       19
<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 55 mutual fund complexes, investment advisors, banks and insurance
companies. Currently, the Company provides financial asset administration
services for assets totaling approximately $155 billion, including approximately
$11 billion of foreign assets. The Company also engages in private banking
transactions, including secured lending and deposit accounts.

         On May 12, 1998 the Company entered into an agreement to acquire AMT
Capital Services, Inc. and its affiliated companies ("AMT Capital Services"), a
New York-based firm recognized for providing high quality fund administration
services to global and domestic institutional investment firms. The Company will
acquire all of the outstanding capital stock of AMT Capital Services in exchange
for shares of the Company's common stock. AMT Capital Services will operate as a
wholly-owned subsidiary of the Company and will assist in the development of the
fund administration components of the Company's growth strategy. The Company
expects the acquisition to be completed on or before May 31, 1998.

         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
17% from $24,216,000 in the first three months of 1997 to $28,398,000 in the
first three months of 1998.

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

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


                                       20
<PAGE>


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 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.

         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. In addition, the Year 2000
issue discussed below may affect the Company's operations. 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.

Impact of the Year 2000 Issue

         The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.

         In late 1997 the Company, with the assistance of an outside consultant,
completed a detailed assessment of the Company's Year 2000 compliance status. As
part of the assessment process, the Company also developed project plans for
application renovation and testing. Based on this assessment, the Company
determined that it will be required to modify or upgrade portions of its
software so that its computer systems will properly utilize dates beyond
December 31, 1999. The Company presently believes that with modifications to, or
upgrades of, existing software, the Year 2000 Issue can be mitigated. However,
if such modifications and upgrades are not made, or are not completed in a
timely manner, the Year 2000 Issue could have a material impact on the
operations of the Company.


                                       21
<PAGE>


         The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. The Company's total Year 2000 project cost and estimates to
complete include the estimated costs and time associated with the impact of a
third party's Year 2000 Issue, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
company's systems, would not have a material adverse effect on the Company.

         The Company will utilize both internal and external resources to modify
or upgrade existing software and to test such software for Year 2000 compliance.
The Company plans to complete the Year 2000 project, including all testing, by
December 31, 1998. The total remaining cost of the Year 2000 project is
estimated at $1,271,000, which will be expensed as incurred over the next nine
months, and is being funded through operating cash flows. These amounts are not
expected to have a material effect on the Company's results of operations. To
date, the Company has incurred and expensed approximately $329,000 related to
the assessment of, and remediation efforts in connection with, its Year 2000
project and the development of a remediation plan.

         The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer code, the compatibility of third-party
interfaces, and similar uncertainties.


                                       22
<PAGE>


Statement of Operations

Comparison of Operating Results for the Quarters Ended March 31, 1997 and 1998

Noninterest Income

         Noninterest income increased $3,514,000 to $21,274,000 for the quarter
ended March 31, 1998 from $17,760,000 for the quarter ended March 31, 1997.
Noninterest income consists of the following items:

<TABLE>
<CAPTION>

                                       For the Quarters Ended
                                             March 31,
                                ------------------------------------
                                  1997          1998          Change
                                ----------  ------------      ------
                                       (Dollars in thousands)

<S>                             <C>           <C>               <C>
Asset administration fees       $  17,607     $  20,845         18%
Computer service fees                 117           119           2
Other operating income                 36           110         206
Gain on sale of securities              -           200           -
                                ---------     ---------
Total Noninterest Income        $  17,760     $  21,274         20%

</TABLE>


         Asset administration fees increased $3,238,000 to $20,845,000 for the
quarter ended March 31, 1998 compared to $17,607,000 for the quarter ended March
31, 1997. 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 $155 billion at March 31, 1998
from $131 billion at March 31, 1997. Of this $24 billion net increase in assets
processed, approximately 11% 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.


                                       23
<PAGE>


Operating Expenses

         Total operating expenses increased by $3,460,000 to $22,774,000 for the
quarter ended March 31, 1998 compared to $19,314,000 for the quarter ended March
31, 1997. The components of operating expenses were as follows:

<TABLE>
<CAPTION>


                                           For the Quarter Ended
                                                 March 31,
                                    ---------------------------------
                                      1997         1998        Change
                                    -------       --------     ------
                                          (Dollars in thousands)
<S>                                 <C>           <C>            <C>
Compensation and benefits           $11,468       $14,056        23%
Technology and telecommunications     2,462         2,563         4
Transaction processing services       2,038         2,031        --
Occupancy                             1,088         1,623        49
Depreciation and amortization           388           534        38
Travel and sales promotion              332           384        16
Professional fees                       472           244       (48)
Insurance                               182           186         2
Other operating expenses                884         1,153        30
                                    -------       -------
 Total Operating Expenses           $19,314       $22,774        18%
                                    -------       -------
                                    -------       -------

</TABLE>


         Compensation and benefits expense increased by $2,588,000 or 23% from
period to period due to several factors. The average number of employees
increased 23% to 1,039 during the quarter ended March 31, 1998 from 852 during
the same period in 1997. This increase relates primarily to the increase in
client relationships and to the expansion of existing client relationships
during the period. Benefits, including payroll taxes, group insurance plans,
retirement plan contributions and tuition reimbursement, increased by $354,000
for the quarter ended March 31, 1998 from the same period in 1997. The increase
was due principally to increased payroll taxes attributable to the increase in
compensation expense. Effective January 1, 1998 the Company adopted the
accounting method promulgated by Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," ("SOP
98-1"). SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. Accordingly, the Company
capitalized $148,000 of compensation and compensation-related expenses for
employees who were directly associated with internal use computer software
projects during the quarter ended March 31, 1998.

         Occupancy expense increased $535,000 to $1,623,000 for the quarter
ended March 31, 1998 from $1,088,000 for the quarter ended March 31, 1997. The
increase resulted from the move to new office space as well as expansion into
additional office space in the Boston, Toronto and Dublin locations.

         Depreciation and amortization expense increased $146,000 between
periods due to purchases of furniture, equipment, and capitalized software
throughout 1997.

         Travel and sales promotion expense increased $52,000 to $384,000 for
the quarter ended March 31, 1998 from $332,000 for the quarter ended March 31,
1997 due to increased travel to the foreign subsidiaries.

         Professional fees decreased $228,000 to $244,000 for the quarter ended
March 31, 1998 from $472,000 for the quarter ended March 31, 1997. The decrease
in professional fees relates to non-recurring consulting and legal fees incurred
in the first quarter of 1997.

         Other operating expenses include fees for office supplies expense,
recruiting costs, and temporary help. These expenses increased $269,000 to
$1,153,000 for the quarter ended March 31, 1998 from $884,000 for the quarter
ended March 31, 1997. Recruiting costs and costs of temporary help accounted for
$68,000 of the increase. This increase relates to the tight labor market caused
by a period of low unemployment in Massachusetts. Fees assessed by the
Massachusetts Banking Commission increased by


                                       24
<PAGE>


$33,000 due to the growth in the total assets of the Bank and a change in the
assessment base. The remainder of the increase relates to growth in assets
processed.

Net Interest Income

         Net interest income is affected by the volume and mix of assets and
liabilities, and the movement and level of interest rates. The table below
presents the changes in net interest income resulting from changes in the volume
of interest-earning assets or interest-bearing liabilities or changes in
interest rates for the quarter ended March 31, 1998 compared to the same period
in 1997.

<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         $  (418)     $    90      $  (328)
Investment securities                  6,948         (677)       6,271
Loans                                    (26)          31            5
                                     -------      -------      -------
Total interest-earning assets          6,504         (556)       5,948
                                     -------      -------      -------
Interest-bearing liabilities

Deposits                               1,341         (137)       1,204
Borrowings                             3,734          342        4,076
                                     -------      -------      -------
Total interest-bearing liabilities     5,075          205        5,280
                                     -------      -------      -------
Change in net interest income        $ 1,429      $  (761)     $   668
                                     -------      -------      -------
                                     -------      -------      -------

</TABLE>



         Net interest income increased $668,000 or 10% to $7,124,000 for the
quarter ended March 31, 1998 from $6,456,000 for the same period in 1997. This
net increase resulted from an increase in interest income of $5,948,000 offset
in part by an increase in interest expense of $5,280,000. The net impact of the
above changes was a 63 basis point decrease in net interest margin.

         The increase in interest income resulted primarily from a higher level
of interest earning assets. The Company's average assets for the quarter ended
March 31, 1998 increased $441,000,000 or 43% compared to the same period in
1997. This growth primarily resulted from an increase in average interest
earning assets of $419,000,000.

         Interest expense increased due primarily to a $399,000,000 increase in
average deposits and short term borrowings for the quarter ended March 31, 1998
compared to the same period in 1997. Also, to a lesser extent, interest expense
increased due to an increase in the average interest rate paid by the Company
from 4.80% to 4.97% during the period.

Income Taxes

         The Company's earnings were taxed on the federal level at 35% for the
1998 and 1997 periods. State taxes on the gross earnings from the Company's
portfolio of investment securities, held by a wholly-owned subsidiary, were
assessed at the tax rate for Massachusetts securities corporations of 1.32%.
State taxes on the remainder of the Company's taxable income were assessed at
the tax rate for Massachusetts banks of 11.32% in 1997 and 10.91% in 1998. The
provision for income taxes for the quarter ended March 31, 1998 increased by
$202,000 over the same period in 1997. The overall effective tax rate decreased
to 36% for the quarter ended March 31, 1998, from 37.2% for the same period in
1997. The decrease in the effective tax rate is due to the Company's continued
investment in municipal securities during the last three quarters of 1997.


                                       25
<PAGE>


Financial Condition

Investment Portfolio

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

<TABLE>
<CAPTION>

                                          December 31,   March 31,
                                            1997           1998
                                          --------       --------
                                           (Dollars in thousands)
<S>                                       <C>            <C>     
Securities held to maturity:

State and political subdivisions          $ 35,225       $ 35,370
Mortgage-backed securities                 590,365        661,602
Federal agency securities                  168,687        185,815
Foreign government securities                7,769          7,754
                                          --------       --------                                                         
Total securities held to maturity         $802,046       $890,541
                                          --------       --------
                                          --------       --------                                                         
Securities available for sale:                           
                                                         
Municipal bonds                           $  8,382       $ 20,338
U.S. Treasury securities                    30,092         20,059
Mortgage-backed securities                 424,376        403,154
Federal agency securities                     --           18,531
                                          --------       --------                                                         
Total securities available for sale       $462,850       $462,082
                                          --------       --------
                                          --------       --------
</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 comprised
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 FHLBB, municipal securities, and foreign
government bonds issued by the Canadian provinces of Ontario and Manitoba.

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

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

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


                                       26
<PAGE>


         The book value and weighted average yield of the Company's securities
held to maturity at March 31, 1998, by effective maturity, are reflected in the
following table:

<TABLE>
<CAPTION>

                                                              Weighted
                                              Book             Average
                                              Value             Yield
                                            --------          --------- 
                                             (Dollars in Thousands)
<S>                                         <C>                  <C>  
Due within one year                         $      4             7.29%
Due from one to five years                   352,188             6.57%
Due from five years up to ten years          194,198             6.54%
Due after ten years                          344,151             6.22%
                                            --------
Total securities held to maturity           $890,541            
                                            --------
                                            --------

</TABLE>

The book value and weighted average yield of the Company's securities available
for sale at March 31, 1998, by effective maturity, are reflected in the
following table:


<TABLE>
<CAPTION>

                                              Book             Average
                                              Value             Yield
                                            --------          --------- 
                                             (Dollars in Thousands)
<S>                                         <C>                 <C>  
Due within one year                         $15,021             5.89%
Due from one to five years                  357,462             6.43%
Due from five years up to ten years          88,521             6.08%
Due after ten years                           1,078             5.29%
                                            --------
Total securities available for sale        $462,082
                                            --------
                                            --------

</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,      March 31,
                                          1997              1998
                                        ------------     ----------
                                           (Dollars in thousands)

<S>                                      <C>              <C>     
Loans to individuals                     $ 26,858         $ 21,477
Loans to not-for-profit organizations          13               13
Loans to mutual funds                      29,174           56,840
                                         --------         --------
                                           56,045           78,330
Less:  allowance for loan losses             (100)            (100)
                                         --------         --------
Net loans                                $ 55,945         $ 78,230
                                         --------         --------
                                         --------         --------                                                          
Floating rate                            $ 55,932         $ 78,217
Fixed rate                                     13               13
                                         --------         --------
                                         $ 55,945         $ 78,230
                                         --------         --------                                                      
                                         --------         --------
</TABLE>


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


                                       27
<PAGE>


option by securities held in custody by the Company for those mutual funds.
Loans to mutual funds also include advances by the Company to certain mutual
fund clients pursuant to the terms of the custody agreements between the Company
and those clients. The advances facilitate securities transactions and
redemptions involving those mutual funds and are fully collateralized by liquid
collateral, primarily freely tradable securities held in custody by the Company
for those mutual funds.

         At March 31, 1998, 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's credit loss experience has been excellent. There have
been no loan chargeoffs in the history of the Company. It is the Company's
policy to place a loan on non-accrual status when either principal or interest
becomes 60 days past due and the loan's collateral is not sufficient to cover
both principal and accrued interest. As of March 31, 1998, there were no past
due loans, troubled debt restructurings, or any loans on nonaccrual status.
Although virtually all of the Company's loans are fully collateralized with
freely tradable securities, management recognizes some credit risk inherent in
the loan portfolio, and has recorded an allowance for loan losses of
approximately $100,000 at March 31, 1998. 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.


                                       28
<PAGE>


The following table presents the repricing schedule for the Company's interest
earning assets and interest bearing liabilities at March 31, 1998:

<TABLE>
<CAPTION>

                                        Within      Over Three    Over Six     Over One
                                         Three       to Six       to Twelve     Year to           Over Five
                                        Months       Months        Months      Five Years           Years              Total
                                      ---------     ---------     ---------    ----------        -----------         ----------
                                                                  (Dollars in thousands)
<S>                                   <C>           <C>           <C>          <C>               <C>                 <C>       
Interest earning assets (1):

Federal funds sold                    $   50,000        -             -              -                 -             $   50,000
Investment securities (2)                600,859     178,698       196,403        264,441            112,221          1,352,622
Loans - fixed rate                        78,317        -             -              -                  -                78,317
Loans - variable rate                       -           -             -                13               -                    13
                                      ---------     ---------     ---------    ----------        -----------         ----------
       Total interest earning
       assets                            729,176     178,698       196,403        264,454            112,221          1,480,952

Interest bearing liabilities:

    Demand deposit accounts              149,682        -             -              -                  -               149,682
    Savings accounts                     373,859        -             -              -                  -               373,859
    Interest rate contracts             (260,000)     60,000       110,000         90,000               -                   -
    Short term borrowings                682,405        -             -              -                  -               682,405
                                      ---------     ---------     ---------    ----------        -----------          ---------
       Total interest bearing
       liabilities                      945,946       60,000       110,000         90,000               -             1,205,946
                                      ---------     ---------     ---------    ----------        -----------          ---------
       Net interest sensitivity
       gap during the period          $(216,770)   $ 118,698     $  86,403    $  174,454        $   112,221         $  275,006
                                      ---------     ---------     ---------    ----------        -----------         ----------
                                      ---------     ---------     ---------    ----------        -----------         ----------
       Cumulative gap                 $(216,770)   $ (98,072)    $ (11,669)   $  162,785         $  275,006
                                      ---------     ---------     ---------    ----------        -----------
                                      ---------     ---------     ---------    ----------        -----------

Interest sensitive assets as a
    percent of interest sensitive
    liabilities (cumulative)              77.08%        90.25%        98.95%       113.50%           122.80%

Interest sensitive assets as a
    percent of total assets
    (cumulative)                          45.57%        56.74%        69.01%        85.54%            92.55%

Net interest sensitivity gap as a
    percent of total assets              (13.55%)        7.42%         5.40%        10.90%             7.01%

Cumulative gap as a percent
    of total assets                      (13.55%)       (6.13%)       (0.73%)       10.17%            17.19%

</TABLE>


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

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


                                       29
<PAGE>


Liquidity

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

         The Company's primary sources of liquidity include cash and cash
equivalents, federal funds sold, new deposits, short term borrowings, interest
payments on securities held to maturity and available for sale, fees collected
from asset administration clients, and the capital raised from the sale of the
Capital Securities described in Note 8 of the Condensed Consolidated Financial
Statements (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 $.12 per share.

         The Company's ability to pay dividends on the Common Stock depends on
the receipt of dividends from the Bank. In addition, the Company may not pay
dividends on its Common Stock if it is in default under certain agreements
entered into in connection with the sale of the Capital Securities. 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 $.12
per share of the Company's outstanding Common Stock (approximately $778,211
based upon 6,485,094 shares outstanding as of March 31, 1998).

         At March 31, 1998, cash and cash equivalents were 4% of total assets.
At March 31, 1998, approximately $18 million or 1% 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 as of March 31, 1998 was $161 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 at March 31,
1998 was $1.3 billion.

         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. If the Company borrows under this arrangement, the Company is
required to hold FHLBB stock equal to 5% of such outstanding advances. The
aggregate amount of borrowing available to the Company under this arrangement at
March 31, 1998 was $549 million.


                                       30
<PAGE>


Capital Resources

         Historically, the Company has financed its operations primarily through
internally generated cash flows. The Company incurs capital expenditures for
furniture, fixtures and miscellaneous equipment needs. The Company leases
microcomputers through operating leases. Such capital expenditures have been
incurred and such leases entered into on an as-required basis, primarily to meet
the growing operating needs of the Company. As a result, the Company's capital
expenditures were $286,000 and $1,310,000 for the three months ended March 31,
1997 and 1998, respectively.

         Stockholders' equity at March 31, 1998 was $78,052,000, an increase of
$3,151,000 or 4%, from $74,901,000 at December 31, 1997. The ratio of
stockholders' equity to assets decreased to 4.88% at March 31, 1998 from 5.13%
at December 31, 1997 due to the significant increase in assets.

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

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

         The following table summarizes the Company's Tier I and total capital
ratios at March 31, 1998:

<TABLE>
<CAPTION>
                                                    March 31, 1998
                                                  ------------------
                                                  Amount       Ratio
                                                 --------      ----- 
                                                (Dollars in Thousands)
<S>                                              <C>           <C>   
Tier I capital                                   $100,975      26.81%
Tier I capital minimum requirement                 15,065       4.00%
                                                 --------      ----- 
Excess Tier I capital                            $ 85,910      22.81%
                                                 --------      ----- 
                                                 --------      ----- 
Total capital                                    $101,075      26.84%
Total capital minimum requirement                  30,130       8.00%
                                                 --------      ----- 
Excess Total capital                             $ 70,945      18.84%
                                                 --------      ----- 
                                                 --------      ----- 
Risk adjusted assets, net of intangible assets   $376,624
                                                 --------
                                                 --------

</TABLE>


                                       31
<PAGE>


         The following table summarizes the Bank's Tier I and total capital
ratios at March 31, 1998:

<TABLE>
<CAPTION>

                                                            March 31, 1998
                                                       -----------------------
                                                          Amount         Ratio
                                                       -----------       ----- 
                                                       (Dollars in Thousands)

<S>                                                    <C>               <C>   
Tier I capital                                         $    98,512       26.28%
Tier I capital minimum requirement                          14,992        4.00%
                                                       -----------       ----- 
Excess Tier I capital                                  $    83,520       22.28%
                                                       -----------       ----- 
                                                       -----------       ----- 
Total capital                                          $    98,612       26.31%
Total capital minimum requirement                           29,984        8.00%
                                                       -----------       ----- 
Excess Total capital                                   $    68,628       18.31%
                                                       -----------       ----- 
                                                       -----------       ----- 
Risk adjusted assets, net of intangible assets         $   374,797
                                                       -----------
                                                       -----------

</TABLE>


         In addition to the risk-based capital guidelines, the Federal Reserve
Board and the FDIC use a "Leverage Ratio" as an additional tool to evaluate
capital adequacy. The Leverage Ratio is defined to be a company's Tier I capital
divided by its adjusted total assets. The Leverage 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 Ratio of 4.0% to 5.0%. The computation
of the risk-based capital ratios and the Leverage Ratio requires that the
capital of the Company be reduced by most intangible assets. The Company's
Leverage Ratio at March 31, 1998 was 6.94%, which is in excess of regulatory
requirements. The Bank's Leverage Ratio at March 31, 1998 was 6.77%, which is
also in excess of regulatory requirements.


                                       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>

                                              Three Months Ended March 31, 1997       Three Months Ended March 31, 1998
                                            --------------------------------------  --------------------------------------
                                             Average                     Average      Average                     Average
                                             Balance      Interest      Yield/Cost    Balance       Interest    Yield/Cost
                                           -----------    --------      ----------  ------------    --------    ----------
                                                    (Dollars in Thousands)                   (Dollars in Thousands)
<S>                                       <C>             <C>              <C>      <C>             <C>            <C>  
Interest earning assets
    Federal funds sold and securities
       purchased under resale agreements   $    51,544    $    676         5.25%    $     23,778    $    348       5.85%
    Investment securities                      839,559      13,692         6.52%       1,291,859      19,963       6.18%
    Loans                                       63,265         664         4.20%          57,271         669       4.67%
                                           -----------    --------         ----     ------------    --------       ---- 
    Total interest earning assets              954,368      15,032         6.30%       1,372,908      20,980       6.11%
                                                          --------         -----                    --------       -----
    Allowance for loan losses                     (100)                                     (100)
    Noninterest-earning assets                  60,787                                    82,833
                                           ------------                             ------------
    Total assets                            $1,015,055                                $1,455,641
                                           ------------                             ------------
                                           ------------                             ------------
Interest bearing liabilities
    Deposits:
       Demand                               $  119,986    $  1,462         4.87%    $    193,151    $  2,452       5.08%
       Savings                                 253,387       2,985         4.71%         290,730       3,199       4.40%
    Short term borrowings                      341,745       4,129         4.83%         630,343       8,205       5.21%
                                               -------       -----         ----          -------       -----       ---- 
    Total interest bearing liabilities         715,118       8,576         4.80%       1,114,224      13,856       4.97%
                                                          --------         -----                    --------       -----
    Noninterest bearing liabilities

       Demand deposits                         161,048                                   161,098
       Noninterest bearing time deposits        48,944                                    65,000
       Other liabilities                        10,813                                    14,485
                                           ------------                             ------------
    Total liabilities                          935,923                                 1,354,807

    Trust preferred stock                       15,894                                    24,164
    Equity                                      63,238                                    76,670
                                          -------------                             -------------
    Total liabilities and equity           $ 1,015,055                               $ 1,455,641
                                          -------------                             -------------
                                          -------------                             -------------
    Net interest income                                   $  6,456                                  $  7,124
                                                          --------                                  --------
                                                          --------                                  --------

    Net interest margin  (1)                                               2.71%                                   2.08%
    Average interest rate spread  (2)                                      1.50%                                   1.14%
    Ratio of interest-earning assets to
       interest-bearing liabilities                                      133.46%                                 123.22%

</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>


                                   SIGNATURES

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

                              INVESTORS FINANCIAL SERVICES CORP.
                             
Date:  May  10, 1998          By:  /s/ Kevin J. Sheehan
                                  ---------------------
                                   Kevin J. Sheehan
                                   Chairman, President and Chief
                                   Executive Officer
                             
                              By:  /s/ Karen C. Keenan
                                  ---------------------
                                   Karen C. Keenan
                                   Chief Financial Officer
                                   (Principal Financial and Accounting Officer)


                                       34