SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


--------------------------------------------------------------------------------
                                    FORM 10-Q

[ X ] QUARTERLY  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
                               ------------------

                                       or

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

                       Commission file number: 1-13654
                                               -------

                       LIBERTY FINANCIAL COMPANIES, INC.
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             (Exact name of registrant as specified in its charter)



         Massachusetts                                   04-3260640
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(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)


600 Atlantic Avenue, Boston, Massachusetts                            02210-2214
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

                                 (617) 722-6000
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)

      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. [ X ] Yes [ ] No

   There were  28,527,612  shares of the  registrant's  Common  Stock,  $.01 par
value,  and 327,725 shares of the  registrant's  Series A Convertible  Preferred
Stock, $.01 par value, outstanding as of October 31, 1996.




Exhibit Index - Page 28                                             Page 1 of 31


<PAGE>



                        LIBERTY FINANCIAL COMPANIES, INC.
        QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 1996


                                TABLE OF CONTENTS


Part I.    FINANCIAL INFORMATION                                       Page
                                                                       ----

Item 1.    Financial Statements
           Consolidated  Balance  Sheets as of September 30, 1996
            and December 31, 1995
           Consolidated Income Statements for the Three Months
            and Nine Months Ended September 30, 1996 and 1995
           Consolidated Statements of Cash Flows for the Nine Months
            Ended September 30, 1996 and 1995
           Consolidated Statement of Stockholders' Equity for the
            Nine Months Ended September 30, 1996
           Notes to Consolidated Financial Statements

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

Part II.   OTHER INFORMATION

Item 5.    Other Information
Item 6.    Exhibits and Reports on Form 8-K
Signatures
Exhibit Index


<PAGE>

<TABLE>


                        LIBERTY FINANCIAL COMPANIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<CAPTION>

                                             September 30      December 31
                                                1996              1995
                                             ------------     ------------
                                              Unaudited
                                     ASSETS
<S>                                           <C>             <C>
Assets:
   Investments                                $11,443,517     $10,144,742
   Cash and cash equivalents                    1,059,300         875,314
   Accrued investment income                      157,573         132,856
   Deferred policy acquisition costs              295,514         179,672
   Value of insurance in force                     90,656          43,939
   Deferred distribution costs                    119,662         114,579
   Intangible assets                              207,549         192,301
   Other assets                                   156,729         106,734
   Separate account assets                      1,033,218         959,224
                                              -----------     -----------
                                              $14,563,718     $12,749,361
                                              ===========     ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
   Policyholder balances                      $11,559,719     $10,084,392
   Notes payable to affiliates                    229,000         229,000
   Payable for investments purchased
    and loaned                                    540,207         317,715
   Other liabilities                              252,714         259,685
   Separate account liabilities                   974,978         889,107
                                              -----------     -----------
      Total liabilities                        13,556,618      11,779,899
                                              -----------     -----------

Redeemable convertible preferred stock,
 $0.01 par value;327,725 shares issued
 and outstanding in 1996; 327,741 shares
 in 1995                                           13,630          13,040
                                              -----------     -----------
Stockholders' Equity:
 Common stock, $.01 par value, authorized
  100,000,000 shares; 28,522,362 shares
  issued and outstanding in 1996; 27,682,536
  shares in 1995                                      285             277
Additional paid-in capital                        830,792         810,510
Net unrealized investment gains                    45,617          87,158
Retained earnings                                 117,036          59,370
Unearned compensation                                (260)           (893)
                                              -----------     -----------
      Total stockholders' equity                  993,470         956,422
                                              -----------     -----------
                                              $14,563,718     $12,749,361
                                              ============    ===========





                             See accompanying notes
</TABLE>
<PAGE>
<TABLE>

                        LIBERTY FINANCIAL COMPANIES, INC.
                         CONSOLIDATED INCOME STATEMENTS
                      (in thousands, except per share data)
                                    Unaudited
<CAPTION>


                                        Three Months Ended    Nine Months Ended
                                           September 30          September 30
                                       -------------------    -----------------
                                         1996        1995      1996        1995
                                         ----        ----      ----        ----
<S>                               <C>         <C>         <C>         <C>
Investment income                 $ 207,696   $ 191,437   $ 593,522   $ 567,581
Interest credited to
 policyholders                     (152,015)   (143,571)   (433,122)   (413,758)
                                  ---------   ---------   ---------   ---------
Investment spread                    55,681      47,866     160,400     153,823
                                  ---------   ---------   ---------   ---------
Net realized investment gains
 (losses)                               733       1,430       2,823      (4,942)
                                  ---------   ---------   ---------   ---------
Fee income:
 Investment advisory and
  administrative fees                49,522      43,163     144,739     108,650
 Distribution and service fees       11,316       9,398      33,010      18,991
 Transfer agency fees                11,381       9,682      32,610      20,629
 Surrender charges and net
  commissions                         8,694       7,034      25,831      17,864
 Separate account fees                4,982       3,317      12,018       9,738
                                  ---------   ---------   ---------   ---------
Total fee income                     85,895      72,594     248,208     175,872
                                  ---------   ---------   ---------   ---------
Expenses:
 Operating expenses                 (71,511)    (59,730)   (205,274)   (160,958)
 Amortization of deferred
  policy acquisition costs          (15,467)    (12,025)    (44,440)    (38,186)
 Amortization of deferred
  distribution costs                  (7,782)     (6,143)    (21,950)   (12,371)
 Amortization of value of
  insurance in force                 (2,407)     (3,133)     (5,975)     (9,986)
 Amortization of intangible
  assets                             (3,810)     (3,488)    (12,076)     (8,557)
 Interest expense                    (4,930)     (4,682)    (14,986)    (11,451)
                                  ---------   ---------   ---------   ---------
Total expenses                     (105,907)    (89,201)   (304,701)   (241,509)
                                  ---------   ---------   ---------   ---------

Pretax income                        36,402      32,689     106,730      83,244
Income tax expense                  (11,689)    (10,733)    (35,137)    (30,127)
                                  ---------   ---------   ---------   ---------
Net income                        $  24,713   $  21,956   $  71,593   $  53,117
                                  =========   =========   =========   =========

Net income per share                  $0.82       $0.76       $2.40       $1.93
                                  =========   =========   =========   =========

Common stock and common stock
 equivalents                         29,708      28,763      29,527      27,267
                                  =========   =========   =========   =========















                             See accompanying notes
</TABLE>
<PAGE>
<TABLE>

                        LIBERTY FINANCIAL COMPANIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                    Unaudited
<CAPTION>

                                                           Nine Months Ended
                                                              September 30
                                                           -----------------
                                                            1996        1995
                                                            ----        ----
<S>                                                      <C>         <C>
Cash flows from operating activities:
Net income                                               $ 71,593   $  53,117
Adjustments to reconcile net income to net cash
 provided by operating activities:
  Depreciation and amortization                            50,374      39,120
  Interest credited to policyholders                      433,122     413,758
  Net realized investment (gains) losses                   (2,823)      4,942
  Net amortization of  investments                          2,769       6,651
  Change in deferred policy acquisition  costs            (16,427)    (29,359)
  Net change in assets and liabilities, net of
   effect of acquisitions                                (102,312)    (66,986)
                                                        ---------   ---------
     Net cash provided by operating activities            436,296     421,243
                                                        ---------   ---------

Cash flows from investing activities:
  Investments purchased held to maturity                        0    (227,966)
  Investments purchased available for sale             (3,116,451) (1,808,248)
  Investments sold held to maturity                             0      14,930
  Investments sold available for sale                     760,455     340,978
  Investments matured held to maturity                          0     205,673
  Investments matured available for sale                  927,439     672,353
  Acquisitions, net of cash acquired                      (38,420)    (96,774)
  Change in policy loans                                  (22,950)    (14,334)
  Change in mortgage loans                                  6,028      14,036
                                                        ---------   ---------
     Net cash used in investing activities             (1,483,899)   (899,352)
                                                        ---------   ---------

Cash flows from financing activities:
  Withdrawals from policyholder accounts                 (807,478)   (680,636)
  Deposits to policyholder accounts                     1,849,683     935,045
  Securities lending                                      194,932     544,009
  Borrowings from affiliates                                    0     124,000
  Repayments under revolving credit facility               (4,000)    (10,500)
  Exercise of stock options                                 1,371          83
  Dividends paid                                           (2,919)     (1,904)
                                                        ---------   ---------
     Net cash provided by financing activities          1,231,589     910,097
                                                        ---------   ---------
  Increase in cash and cash equivalents                   183,986     431,988
  Cash and cash equivalents at beginning of period        875,314     726,711
                                                        ---------   ---------
  Cash and cash equivalents at end of period           $1,059,300  $1,158,699
                                                        =========   =========



                             See accompanying notes
</TABLE>
<PAGE>
<TABLE>
                       LIBERTY FINANCIAL COMPANIES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (in thousands)
                                    Unaudited

<CAPTION>


                                    Net
                     Additional  Unrealized                           Total
              Common  Paid-In    Investment Retained    Unearned   Stockholders'
              Stock   Capital      Gains    Earnings  Compensation    Equity
              ------ ----------  ---------- --------  ------------ ------------
<S>             <C>   <C>        <C>        <C>        <C>            <C>
Balance,
 December 31,
 1995           $277  $810,510   $  87,158  $  59,370  $   (893)      $956,422
Common stock
 issued in
 Independent
 acquisition       3     8,497           0          0         0          8,500
Proceeds from
 exercise
 of stock
 options           2     1,369           0          0         0          1,371
Unearned
 compensation      0         0           0          0       633            633
Accretion to
 face value of
 preferred
 stock             0         0           0       (590)        0           (590)
Common stock
 dividends         3    10,415           0    (12,630)        0         (2,212)
Preferred
 stock
 dividends         0         0           0       (707)        0           (707)
Conversion of
 preferred
 stock             0         1           0          0         0              1
Change in net
 unrealized
 gains             0         0     (41,541)         0         0        (41,541)
Net income         0         0           0     71,593         0         71,593
             -------   -------     -------    -------   -------        -------
Balance,
 September 30,
 1996           $285  $830,792    $ 45,617   $117,036   $  (260)      $993,470
             =======  ========    ========   ========   =======       ========











                            See accompanying notes

</TABLE>
<PAGE>

                      LIBERTY FINANCIAL COMPANIES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  Unaudited

1.  General

       The accompanying  unaudited consolidated financial statements include all
   adjustments,   consisting  of  normal  recurring  accruals,  that  management
   considers  necessary  for a  fair  presentation  of the  Company's  financial
   position  and  results  of  operations  as of and  for  the  interim  periods
   presented.  Certain  footnote  disclosures  normally  included  in  financial
   statements   prepared  in  accordance  with  generally  accepted   accounting
   principles  have  been  condensed  or  omitted  pursuant  to  the  rules  and
   regulations of the Securities and Exchange  Commission,  although the Company
   believes the  disclosures  in these  consolidated  financial  statements  are
   adequate  to  present  fairly  the  information   contained   herein.   These
   consolidated  financial  statements  should be read in  conjunction  with the
   audited  consolidated  financial  statements  contained in the Company's 1995
   Annual Report to Stockholders.  The results of operations for the nine months
   ended September 30, 1996 are not necessarily  indicative of the results to be
   expected for the full year.

       Certain prior period amounts in the accompanying  unaudited  consolidated
   income  statements  have been  reclassified  to conform to the current period
   presentation.  The principal  reclassifications relate to the presentation of
   investment spread (the amount by which net investment income exceeds interest
   credited to  policyholder  balances) and the  components of the Company's fee
   income. These  reclassifications  were made to provide additional information
   with respect to the Company's major sources of revenue.


2.  Industry Segment Information

      The Company is an asset accumulation and management company which operates
   in  two  industry  segments:   retirement-oriented   insurance   (principally
   annuities) and asset management.  The annuity insurance business is conducted
   at Keyport Life Insurance Company  ("Keyport").  Keyport generates investment
   spread  income from the  investment  portfolio  which  supports  policyholder
   balances  associated  with its fixed and  indexed  annuity  business  and its
   closed block of single premium whole life  insurance.  The annuity  insurance
   business also derives fee income from the  administration  of fixed,  indexed
   and variable annuity  contracts.  The asset management  business is conducted
   principally at the Colonial Group, Inc. ("Colonial"),  an investment advisor,
   distributor  and  transfer  agent  to  mutual  funds,  Stein  Roe  &  Farnham
   Incorporated  ("Stein Roe"), a diversified  investment  advisor,  and Newport
   Pacific Management,  Inc. ("Newport"),  an investment advisor to mutual funds
   and institutional  accounts  specializing in Asian equity markets.  The asset
   management business derives fee income from investment products and services.

      Approximately  62.3%  of the  Company's  operating  earnings  for the nine
   months ended  September 30, 1996 was  attributable  to the Company's  annuity
   insurance  business,  with the remaining 37.7%  attributable to the Company's
   asset management activities.  This compares to approximately 67.9% and 32.1%,
   respectively, during the year earlier period.

3.  Acquisitions

      On March 7, 1996, the Company acquired, for cash and common stock, all the
   outstanding common stock of Independent Holdings,  Inc.  ("Independent").  In
   addition, the Company agreed to make contingent payments in common stock upon
   the  attainment  of  certain  objectives.   Independent  is  engaged  in  the
   distribution of annuity and investment products through banks.

       On April 11,  1996,  the Company  acquired  for cash all the  outstanding
   capital  stock  of KJMM  Investment  Management  Company,  Inc.  ("KJMM"),  a
   registered  investment  advisor primarily in the wealth management  business.
   KJMM had assets under  management of  approximately  $400.0 million as of the
   date of acquisition.

       On August 9, 1996, Keyport entered into a 100% coinsurance  agreement for
   a $965.3  million  block of  single  premium  deferred  annuities  issued  by
   Fidelity & Guaranty Life Insurance Company ("F&G Life"). Under this agreement
   ("the F&G Life transaction"), the investment risk of the annuity policies was
   transferred   to  Keyport.   However,   the  policies  will  continue  to  be
   administered by F&G Life, and F&G Life remains  contractually  liable for the
   performance of all policy obligations. The F&G Life transaction resulted in a
   $934.0 million  increase in investments  and a $31.3 million  increase in the
   value of insurance in force.
<PAGE>

4.    Investments

      Investments,  all of which  pertain  to  Keyport,  were  comprised  of the
   following (in thousands):

<TABLE>
<CAPTION>
                                    September 30        December 31
                                        1996               1995
                                    ------------       -----------
<S>                                  <C>                <C>
Fixed maturities                     $10,710,754        $9,535,948
Mortgage loans                            68,477            74,505
Policy loans                             521,276           498,326
Other invested assets                    106,898            10,748
Equity securities                         36,112            25,215
                                     -----------       -----------
   Total                             $11,443,517       $10,144,742
                                     ===========       ===========
</TABLE>

      The Company's  general  investment policy is to hold fixed maturity assets
   for  long-term  investment  and,  accordingly,  the  Company  does not have a
   trading  portfolio.  To provide for maximum portfolio  flexibility and enable
   appropriate tax planning,  the Company classifies its entire fixed maturities
   investments  as " available  for sale" which are  carried at  estimated  fair
   value.

      The following table summarizes  Keyport's  investments in fixed maturities
   as of September 30, 1996 (in thousands):

<TABLE>
<CAPTION>
                                          Gross       Gross
                           Amortized    Unrealized  Unrealized      Fair
                             Cost         Gains       Losses        Value
                          ------------  ----------  -----------  -----------
<S>                       <C>           <C>          <C>         <C>
U.S. Treasury
 securities               $  430,957     $  1,138     $  (1,559)  $  430,536
Mortgaged backed
 securities of
 U.S. government
 agencies                  1,714,844       34,903       (17,332)   1,732,415
Obligations of
 states and
 political subdivisions       56,365          715           (62)      57,018
Debt securities
 issued by foreign
 governments                  50,787        2,558          (216)      53,129
Corporate securities       4,326,971      122,322       (27,150)   4,422,143
Other mortgage backed
 securities                2,281,123       34,916       (39,291)   2,276,748
Asset backed securities    1,459,453        9,353       (12,205)   1,456,601
Senior secured loans         282,164            0             0      282,164
                         -----------   ----------   -----------  -----------
 Total fixed
  maturities             $10,602,664   $  205,905   $   (97,815) $10,710,754
                         ===========   ==========   ===========  ===========

</TABLE>
<PAGE>

5.  Net Income per Share

          Net income per share is calculated by dividing  applicable  net income
     by the weighted average number of shares of common stock outstanding during
     each period,  adjusted for the  incremental  shares  attributable to common
     stock equivalents. Common stock equivalents consist of outstanding employee
     stock options.  In calculating net income per share,  net income is reduced
     by convertible preferred stock dividend requirements.  Such preferred stock
     earns  cumulative  dividends  at the annual rate of $2.875 per share and is
     redeemable  at the option of the  Company,  subject to certain  conditions,
     anytime  after March 24,  1998.  At the time  ofissuance,  the  convertible
     preferred stock was determined not to be a common stock equivalent.

<PAGE>

ITEM 2.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF RESULTS OF  OPERATIONS  AND
FINANCIAL CONDITION

Results of Operations

   Net Income was $24.7  million or $0.82 per share in the third quarter of 1996
compared to $22.0 million or $0.76 per share in the third quarter of 1995.  This
higher  net  income in the third  quarter  of 1996 was due to higher  investment
spread and fee income. Partially offsetting these items were increased operating
expenses and higher  amortization  expense.  For the nine months ended September
30,  1996,  net income was $71.6  million or $2.40 per share  compared  to $53.1
million or $1.93 per share for the nine months ended  September  30,  1995.  The
higher net income for the nine months ended September 30, 1996 was  attributable
to higher investment  spread,  higher fee income (primarily  associated with the
Colonial and Newport  acquisitions early in 1995) and to net realized investment
gains in 1996  compared to net  realized  investment  losses in 1995.  Partially
offsetting these items were increased operating expenses,  amortization expense,
interest expense, and higher income tax expense.

   Pretax  Income was $36.4  million in the third  quarter of 1996  compared  to
$32.7  million in the third  quarter of 1995.  This higher  pretax income in the
third quarter of 1996 was primarily attributable to higher investment spread and
fee income.  For the nine months ended  September  30, 1996,  pretax  income was
$106.7 million compared to $83.2 million for the nine months ended September 30,
1995. The higher pretax income for the nine months ended  September 30, 1996 was
primarily  due to higher  investment  spread,  the higher income at Colonial and
Newport and to net realized  investment  gains in 1996  compared to net realized
investment losses in 1995.

   Investment  Spread is the  amount by which  investment  income  earned on the
Company's  investments  exceeds  interest  credited  on  policyholder  balances.
Investment  spread was $55.7  million in the third  quarter of 1996  compared to
$47.9  million  in the third  quarter of 1995.  The amount by which the  average
yield on investments  exceeds the average interest credited rate on policyholder
balances is the investment spread percentage.  Such investment spread percentage
in the third quarter of 1996 was 1.84% compared to 1.70% in the third quarter of
1995. For the nine months ended September 30, 1996, investment spread was $160.4
million compared to $153.8 million for the nine months ended September 30, 1995.
The investment  spread  percentage was 1.84% for the nine months ended September
30, 1996 compared to 1.89% for the nine months ended September 30, 1995. For the
remainder  of 1996,  assuming  a constant  interest  rate  environment,  Keyport
anticipates a lower investment yield and a lower interest credited rate compared
to 1995.  The  investment  spread  percentage  for the  remainder of the year is
expected to be comparable to the spread percentage for the first nine months.

   Investment  income was $207.7 million in the third quarter of 1996,  compared
to $191.4 million in the third quarter of 1995.  Investment  income increased in
the 1996  period  primarily  as a result of a higher  level of average  invested
assets,  partially  offset by a decrease in the average  investment  yield.  The
average  investment  yield was 7.37% in the third  quarter of 1996  compared  to
7.46% in the 1995 period.  The decreased  investment  yield in 1996 reflects the
lower interest rates  prevailing  during the latter half of 1995 and early 1996.
For the nine months  ended  September  30,  1996,  investment  income was $593.5
million compared to $567.6 million for the nine months ended September 30, 1995.
Investment  income increased in the 1996 nine-month period primarily as a result
of the higher level of average invested  assets,  partially offset by a decrease
in the average  investment yield. The average investment yield was 7.34% for the
nine months ended  September 30, 1996 compared to 7.56% in the 1995 period.  The
decreased  investment yield in 1996 reflects the lower interest rates prevailing
during the latter half of 1995 and early 1996.

   Interest  credited  to  policyholders  totaled  $152.0  million  in the third
quarter  of 1996  compared  to  $143.6  million  in the third  quarter  of 1995.
Interest  credited to policyholders  increased in the 1996 period primarily as a
result  of a higher  level  of  policyholder  balances,  partially  offset  by a
decrease in the average interest credited rate.  Policyholder  balances averaged
$11.0  billion in the third  quarter of 1996  compared  to $10.0  billion in the
third  quarter of 1995.  The average  interest  credited  rate was 5.53% in 1996
compared  to 5.76% in  1995.  For the nine  months  ended  September  30,  1996,
interest credited to policyholders was $433.1 million compared to $413.8 million
for the nine months ended September 30, 1995. Interest credited to policyholders
increased  in the 1996  nine-month  period  primarily  as a result of the higher
level of average  policyholder  balances,  partially offset by a decrease in the
average interest credited rate. Policyholder balances averaged $10.5 billion for
the nine months ended  September  30, 1996 compared to $9.7 billion for the nine
months ended September 30, 1995. The average interest credited rate was 5.50% in
1996 compared to 5.67% in 1995.

   Average Investments (computed without giving effect to SFAS 115), including a
portion of the Company's  cash and cash  equivalents,  were $11.3 billion in the
third  quarter of 1996  compared to $10.3  billion in the third quarter of 1995.
This increase of $1.0 billion was primarily due to the F&G Life  transaction and
sales of the Company's fixed and indexed annuities during the period.  Fixed and
indexed  annuity  premiums  totaled  $338.6 million in the third quarter of 1996
compared  to $159.3  million  in the third  quarter  of 1995.  The  increase  in
premiums in the 1996 period was primarily  attributable  to the sales of indexed
annuities  which  were  introduced  during the third  quarter  of 1995.  Indexed
annuities  provide the investor  with the  potential to  participate  in returns
based upon the S&P 500, while providing a guarantee of principal associated with
a traditional  annuity.  In the 1996 three-month  period,  indexed annuity sales
were $167.9 million compared to $17.0 million in 1995. For the nine months ended
September 30, 1996,  average  investments  were $10.8 billion  compared to $10.0
billion for the nine months ended September 30, 1995.  Fixed and indexed annuity
premiums  totaled  $865.3  million for the nine months ended  September 30, 1996
compared to $892.9  million for the nine months ended  September  30, 1995.  The
decrease  in the 1996  nine-month  period was also  attributable  to the reduced
market demand for fixed-rate  annuities  earlier in 1996 offset by significantly
increased  sales of indexed  products.  Sales of indexed  annuities  during 1996
totaled $474.9 million compared to $34.6 million in 1995.

   Net Realized  Investment  Gains  totaled $0.7 million in the third quarter of
1996 compared to $1.4 million in the third quarter of 1995.  For the nine months
ended  September  30,  1996,  net  realized  investment  gains were $2.8 million
compared to net  investment  losses of $4.9  million  for the nine months  ended
September  30, 1995.  The net realized  gains in the 1996 period were  primarily
attributable to sales of corporate investment securities; the realized losses in
1995  were  attributable  to sales of  Keyport  fixed  maturity  investments  to
maximize total return.

   Investment  Advisory and Administrative Fees are based on the market value of
assets  managed in mutual  funds and for  wealth  management  and  institutional
investors. Investment advisory and administrative fees were $49.5 million in the
third  quarter of 1996  compared to $43.2  million in the third quarter of 1995.
This  increase  of $6.3  million  primarily  reflects a higher  level of average
assets  under  management.  For  the  nine  months  ended  September  30,  1996,
investment  advisory and  administrative  fees were $144.7  million  compared to
$108.6  million for the nine months ended  September  30,  1995.  A  substantial
portion  of this  increase  of  $36.1  million  was  related  to the fee  income
attributable  to the assets  acquired in the Colonial  acquisition in March 1995
and the Newport  acquisition  in April 1995  (whose  results of  operations  are
included in the  consolidated  financial  statements for nine months in 1996 and
six months in 1995). In addition,  the increase  reflects growth of assets under
management during the period.

   The levels of assets  under  management  are  affected  by product  sales and
redemptions and by changes in the market values of such assets under management.
Assets under  management and changes in assets under management are set forth in
the two tables below (in billions).
<TABLE>
Assets Under Management
-----------------------
<CAPTION>
                                    As of September 30
                                    ------------------
                                     1996       1995
                                     ----       ----

<S>                                 <C>         <C>
Mutual Funds:
 Broker-distributed                 $15.7       $15.1
 Direct-marketed                      6.6         4.7
 Closed-end                           1.9         1.8
 Variable annuity                     1.1         1.0
                                     ----        ----
                                     25.3        22.6
 Wealth Management                    5.0         4.6
 Institutional                        4.7         4.3
                                     ----        ----
  Total Assets Under Management*    $35.0       $31.5
                                     ====        ====
  ---------
  * As of September 30, 1996, Keyport's investments of $11.9 billion bring total
    assets under management to $46.9 billion.
</TABLE>
<TABLE>

Changes in Assets Under Management
----------------------------------
<CAPTION>
                             Three Months Ended     Nine Months Ended
                                September 30           September 30
                            ---------------------  ---------------------
                              1996        1995       1996        1995
                            ---------   ---------  ----------  ---------

<S>                            <C>         <C>         <C>        <C>
Assets under management -
 beginning                     $33.9       $30.4       $31.9      $16.3
Sales and reinvestments          1.9         1.4         5.8        3.4
Redemptions and withdrawals     (1.5)       (1.8)       (4.2)      (6.6)
Acquisitions                       0         0.6         0.4       14.9
Market appreciation              0.7         0.9         1.1        3.5
                               -----       -----       -----      -----
Assets under management -
 ending                        $35.0       $31.5       $35.0      $31.5
                               =====       =====       =====      =====
</TABLE>

   Average  fee-based  assets under  management were $34.0 billion for the three
months ended  September  30, 1996 compared to $30.4 billion for the three months
ended September 30, 1995. For the nine months ended September 30, 1996,  average
fee-based  assets  were $33.3  billion  compared  to $25.9  billion for the nine
months ended  September 30, 1995.  This increase of $7.4 billion during the 1996
nine-month  period was primarily  due to the Colonial and Newport  acquisitions,
net  mutual  fund  sales  and  market  appreciation.   Investment  advisory  and
administrative  fees were 0.59% of average assets under  management in the third
quarter of 1996 and 0.57% in the third  quarter of 1995.  For nine months  ended
September 30, such amounts were 0.58% and 0.56%,  respectively.  These increases
in the effective fee rate were primarily due to the higher  proportion of equity
assets under management during 1996.

   Distribution  and Service Fees are based on the market value of the Company's
broker-distributed  mutual funds.  Distribution  fees of 0.75% are earned on the
average assets  attributable  to such funds sold without  front-end sales loads,
and  service  fees of 0.25% (net of amounts  passed on to selling  brokers)  are
earned on the total of such average mutual fund assets. These fees totaled $11.3
million  in the third  quarter  of 1996  compared  to $9.4  million in the third
quarter of 1995. This increase of $1.9 million was primarily attributable to the
higher asset level of mutual funds without  front-end sales loads.  For the nine
months  ended  September  30,  1996,  distribution  and service  fees were $33.0
million  compared to $19.0 million for the nine months ended September 30, 1995.
This  increase of $14.0 million was  primarily  attributable  to the full period
consolidation  of Colonial.  As a percentage of weighted  average assets,  these
fees approximated 0.69% in each of the 1996 and 1995 periods.

   Transfer  Agency Fees are based on the market value of assets  managed in the
Company's  broker-distributed  and direct-marketed  mutual funds. Such fees were
$11.4  million on average  assets of $22.0  billion in the third quarter of 1996
and $9.7  million on  average  assets of $19.9  billion in the third  quarter of
1995.  The revenue  increase of $1.7 million was primarily due to higher average
assets of direct-marketed  mutual funds. As a percentage of total average mutual
fund assets in the third quarter of 1996 and 1995, respectively, transfer agency
fees were approximately 0.21% and 0.19%. For the nine months ended September 30,
1996, transfer agency fees were $32.6 million on average assets of $21.6 billion
and $20.6  million on average  assets of $15.0 billion for the nine months ended
September 30, 1995.  The revenue  increase of $12.0 million was primarily due to
the full-period  consolidation of Colonial and a fee increase on direct marketed
funds  instituted  during the third  quarter of 1995.  As a percentage  of total
average  mutual  fund assets for the nine months  ended  September  30, 1996 and
1995, transfer agency fees were approximately 0.20% and 0.18%, respectively.

   Surrender  Charges and Net  Commissions  are revenues earned on: a) the early
withdrawal of fixed,  indexed and variable annuity  policyholder  balances,  and
redemptions  of the  broker-distributed  mutual  funds  which were sold  without
front-end sales loads; b) the  distribution of the Company's  broker-distributed
mutual funds (net of the substantial  portion of such commissions that is passed
on to the  selling  brokers);  and c) the  sales of  non-proprietary  investment
products in the Company's bank marketing  businesses (net of the portion of such
commissions  that is passed on to the Company's  client banks).  Total surrender
charges  and net  commissions  were $8.7  million  in the third  quarter of 1996
compared to $7.0 million in the third quarter of 1995,  and, for the nine months
ended  September 30, 1996 were $25.8  million  compared to $17.9 million for the
nine months ended September 30, 1995.

     Surrender  charges  on fixed,  indexed  and  variable  annuity  withdrawals
generally  are  assessed at declining  rates  applied to  policyholder  balances
during the first five to seven years of the contract;  contingent deferred sales
charges on mutual fund  redemptions  are assessed at declining  rates on amounts
redeemed during the first six years.  Such charges totaled $4.6 million and $4.5
million in the third quarter of 1996 and 1995,  respectively,  and $14.5 million
and  $13.8  million  for the nine  months  ended  September  30,  1996 and 1995,
respectively.  The  increase for the nine months  ended  September  30, 1996 was
primarily  attributable  to the  full-period  consolidation  of Colonial.  On an
annualized  basis,  total  fixed,   indexed  and  variable  annuity  withdrawals
represented  11.5%  and  8.1% of the  total  average  annuity  policyholder  and
separate account  balances in the third quarter of 1996 and 1995,  respectively,
and  10.7% and 9.9% of the  total  average  policyholder  and  separate  account
balances for the nine months ended  September  30, 1996 and 1995,  respectively.
The higher level of  withdrawals  in the 1996 third quarter was expected and was
attributable  to surrenders of annuities  acquired in the F&G Life  transaction;
excluding these  surrenders,  the annualized  surrender  percentage in the third
quarter of 1996 was 8.9%.

   Net  commissions  were $4.1  million  in the third  quarter  of 1996 and $2.5
million in the third quarter of 1995.  The increase in 1996 was almost  entirely
attributable  to the  acquisition  of Independent on March 7, 1996. For the nine
months ended September 30, 1996, net commissions  were $11.3 million compared to
$4.1 million for the nine months ended  September 30, 1995.  The increase in the
1996  nine-month  period  was  primarily  attributable  to  the  acquisition  of
Independent and the full period consolidation of Colonial.

   Separate  Account Fees are primarily  mortality and expense charges earned on
variable annuity and variable life policyholder balances.  These fees, which are
based on the market  values of the assets  supporting  the contracts in separate
accounts,  were $5.0  million  in the third  quarter  of 1996  compared  to $3.3
million in the third  quarter of 1995.  For the nine months ended  September 30,
1996, these fees were $12.0 million compared to $9.7 million for the nine months
ended September 30, 1995. Such fees represented  1.72% and 1.62%,  respectively,
of average variable annuity and variable life separate account balances.

   Operating  Expenses  primarily  represent  compensation,  marketing and other
general and  administrative  expenses.  These expenses were $71.5 million in the
third  quarter of 1996,  compared to $59.7 million in the third quarter of 1995,
an  increase of $11.8  million.  The  increase in the third  quarter of 1996 was
primarily  due to  increases  in  compensation  and  marketing  expenses  in the
Company's mutual fund businesses and to the acquisition of Independent.  For the
nine months ended  September 30, 1996,  operating  expenses were $205.3  million
compared to $161.0  million for the nine months ended  September  30,  1995,  an
increase of $44.3  million.  A substantial  portion of the increase for the nine
months  ended  September  30, 1996 relates to the full period  consolidation  of
Colonial and Newport.  In addition,  approximately $5.4 million was attributable
to the acquisition of  Independent.  The remainder of the increase was primarily
attributable to the higher levels of compensation and marketing  expenses in the
mutual fund businesses.

   Amortization  of Deferred Policy  Acquisition  Costs was $15.5 million in the
third quarter of 1996 compared to $12.0 million in the third quarter of 1995 and
$44.4  million for the nine months ended  September  30, 1996  compared to $38.2
million  for  the  nine  months  ended  September  30,  1995.  The  increase  in
amortization   during  1996  was  primarily  due  to  a  decrease  in  estimated
amortization  periods determined in the last quarter of 1995 relating to shorter
average  policy lives,  and to the growth of business in force  associated  with
fixed,  indexed and variable  annuity sales.  Amortization  expense  represented
0.52% and 0.45%, on an annualized  basis, of the total average  policyholder and
separate account  balances in the third quarter of 1996 and 1995,  respectively,
and 0.52%  and 0.48% of the total  average  policyholder  and  separate  account
balances for the nine months ended September 30, 1996 and 1995, respectively.

   Amortization  of Deferred  Distribution  Costs relates to the deferred  sales
commissions  acquired in  connection  with the Colonial  acquisition  and to the
distribution  of  mutual  fund  shares  sold  without   front-end  sales  loads.
Amortization  was $7.8  million in the third  quarter of 1996  compared  to $6.1
million in the third quarter of 1995 and $21.9 million for the nine months ended
September 30, 1996 compared to $12.4 million for the nine months ended September
30,  1995.  The  increase  during  the  third  quarter  of  1996  was  primarily
attributable  to continuing  sales of such fund shares during 1995 and 1996. The
increase  during the nine months ended 1996 was  primarily  attributable  to the
full-period consolidation of Colonial.

   Amortization of Value of Insurance in Force totaled $2.4 million in the third
quarter of 1996  compared to $3.1 million in the third  quarter of 1995 and $6.0
million for the nine months ended  September  30, 1996 compared to $10.0 million
for the nine months  ended  September  30, 1995.  The  decrease in  amortization
during 1996 was primarily due to an increase in estimated  amortization  periods
in the last  quarter of 1995  relating  to longer  average  policy  lives on the
Company's closed block of whole life insurance, partially offset by $0.5 million
of  amortization  recorded in the third quarter of 1996 relating to the F&G Life
transaction.

   Amortization  of  Intangible  Assets was $3.8 million in the third quarter of
1996 compared to $3.5 million in the third quarter of 1995 and $12.1 million for
the nine months ended  September  30, 1996 compared to $8.6 million for the nine
months ended  September  30, 1995.  These  increases  were  attributable  to the
acquisitions of Colonial, Newport and Independent.

   Interest  Expense was $4.9 million in the third  quarter of 1996  compared to
$4.7 million in the third quarter of 1995.  For the nine months ended  September
30, 1996 interest  expense was $15.0  million  compared to $11.5 million for the
nine months ended  September  30,  1995.  The increase for the nine months ended
September 30, 1996 was primarily  attributable to the  full-period  inclusion of
the $100.0 million note issued in connection  with the Colonial  acquisition and
the $24.0 million note issued in connection with the Newport acquisition.

   Income Tax Expense was $11.7  million or 32.1% of income before income taxes,
in the third  quarter  of 1996  compared  to $10.7  million,  or 32.8% of income
before  income taxes,  in the third  quarter of 1995.  For the nine months ended
September  30,  1996,  income tax expense  was $35.1  million or 32.9% of income
before income taxes compared to $30.1 million or 36.2% for the nine months ended
September  30, 1995. In both the 1996 and 1995  periods,  substantially  all the
federal income tax expense related to the Company's annuity insurance business.

Financial Condition

   Stockholders'  Equity as of September 30, 1996 was $993.5 million compared to
$956.4  million as of December 31, 1995.  Net income during the period was $71.6
million; cash dividends on the Company's Preferred and Common Stock totaled $2.9
million.  In addition,  Common Stock  totaling $8.5 million and $1.4 million was
issued in connection  with the  acquisition of Independent and upon the exercise
of stock options,  respectively.  A decrease in net unrealized  investment gains
during the period decreased stockholders' equity by $41.5 million.

   Book Value Per Share  amounted to $34.83 at September  30, 1996 compared with
$34.55 at December 31, 1995. Excluding net unrealized gains on investments, book
value per share  amounted to $33.23 at September 30, 1996 and $31.40 at December
31, 1995.  As of  September  30, 1996,  there were 28.5  million  common  shares
outstanding compared to 27.7 million shares as of December 31, 1995.

   Investments, excluding cash and cash equivalents, totaled $11.4 billion as of
September  30, 1996  compared to $10.1  billion as of December  31,  1995.  This
increase reflects the F&G Life transaction,  fixed and indexed annuity sales for
the nine  months  ended  September  30,  1996 and a decrease  in net  unrealized
investment gains of approximately $188.1 million.

   The Company  manages the  majority of its  invested  assets  internally.  The
Company's  general  investment  policy  is to hold  fixed  maturity  assets  for
long-term  investment  and,  accordingly,  the  Company  does not have a trading
portfolio.  To provide for maximum  portfolio  flexibility  and  appropriate tax
planning,  the Company  classifies  its entire fixed  maturities  investments as
"available for sale" and accordingly  classifies  such  investments at estimated
fair value.

   The  Company's  total   investments  at  September  30,  1996  reflected  net
unrealized  gains of $120.4  million  relating to its  available  for sale fixed
maturities and equity  portfolios.  As of December 31, 1995, such net unrealized
investment  gains were $308.5 million.  The decrease in net unrealized gains for
the nine  months  ended  September  30,  1996  principally  reflects  the higher
relative prevailing interest rates during the period.

   Approximately $10.5 billion, or 98.1%, of the fixed maturities investments at
September  30,  1996,  was  rated  by  Standard  & Poor's  Corporation,  Moody's
Investors Service or under comparable statutory rating guidelines established by
the National Association of Insurance  Commissioners  ("NAIC"). At September 30,
1996, the carrying value of investments  in below  investment  grade  securities
totaled $966.3  million,  or 8.1% of total  investments  (including a portion of
cash and cash  equivalents) of $11.9 billion.  Below investment grade securities
generally  provide higher yields and involve greater risks than investment grade
securities  because their issuers  typically are more highly  leveraged and more
vulnerable to adverse  economic  conditions  than investment  grade issuers.  In
addition,  the trading market for these  securities may be more limited than for
investment grade securities.

Investment Management

   Asset-liability  matching is utilized by the Company to minimize the risks of
interest rate fluctuations and disintermediation.  The Company believes that its
fixed and  indexed  policyholder  balances  should  be  backed  by  investments,
principally  comprised of fixed maturities,  that generate  predictable rates of
return. The Company does not have a specific target rate of return. Instead, its
rates  of  return  vary  over  time  depending  on  the  current  interest  rate
environment,  the  slope of the  yield  curve  and the  excess  at  which  fixed
maturities are priced over the yield curve.  Its portfolio  strategy is designed
to  achieve  adequate  risk-adjusted  returns  consistent  with  the  investment
objectives of effective asset-liability matching, liquidity and safety.

   The Company conducts its investment  operations to closely match the duration
of the assets in its  investment  portfolio to its  policyholder  balances.  The
Company  seeks to  achieve a  predictable  spread  between  what it earns on its
assets and what it pays on its policyholder balances by investing principally in
fixed  maturities.  The  Company's  fixed-rate  products  incorporate  surrender
charges to encourage  persistency,  discourage  withdrawals and make the cost of
its policyholder balances more predictable. Approximately 85.7% of the Company's
fixed and  indexed  annuity  policyholder  balances  were  subject to  surrender
charges at September 30, 1996.

   As part of its  asset-liability  matching  discipline,  the Company  conducts
detailed  computer   simulations  that  model  its  fixed-maturity   assets  and
liabilities  under commonly used stress-test  interest rate scenarios.  Based on
the results of these computer  simulations,  the  investment  portfolio has been
constructed with a view to maintaining a desired  investment  spread between the
yield on portfolio assets and the rate paid on its policyholder balances under a
variety of possible future  interest rate  scenarios.  At September 30, 1996 the
effective duration of the Company's fixed maturities investments  (approximately
93.6% of total investments) was approximately 2.7 years.

   As a component of its investment strategy, the Company utilizes interest rate
swap agreements ("swap agreements") to match assets more closely to liabilities.
Swap  agreements are  agreements to exchange with a  counterparty  interest rate
payments of differing character (fixed-rate payments exchanged for variable-rate
payments) based on an underlying principal balance (notional principal) to hedge
against interest rate changes. The Company currently utilizes swap agreements to
reduce asset  duration and to better match  interest rates earned on longer-term
fixed rate assets with interest  rates credited to  policyholders.  At September
30,  1996,  the Company had 39  outstanding  swap  agreements  with an aggregate
notional  principal amount of $2.3 billion.  These agreements  mature in various
years through 2001. In addition,  with respect to the Company's indexed annuity,
the Company buys call options on the S&P 500 Index to manage its  obligation  to
provide  returns based upon this Index.  At September 30, 1996,  the Company had
options with an estimated fair value of $62.9 million.

   There are risks  associated  with some of the  techniques the Company uses to
match  its  assets  and  liabilities.  The  primary  risk  associated  with swap
agreements is the risk associated with counterparty nonperformance.  The Company
believes  that  the  counterparties  to  its  swap  agreements  are  financially
responsible and that the counterparty risk associated with these transactions is
minimal. In addition,  swap agreements have interest rate risk.  However,  these
swap  agreements  hedge  fixed-rate  assets;  any interest rate  movements  that
adversely  affect the market value of swap agreements  would be more than offset
by changes in the market values of such fixed rate assets.

   The Company  routinely  reviews its portfolio of investment  securities.  The
Company identifies  monthly any investments that require  additional  monitoring
and carefully  reviews the carrying value of such investments at least quarterly
to determine whether specific investments should be placed on a nonaccrual basis
and to determine  declines in value that may be other than temporary.  In making
these reviews, the Company principally  considers the adequacy of collateral (if
any),  compliance with contractual  covenants,  the borrower's  recent financial
performance,  new reports and other externally generated information  concerning
the  creditor's  affairs.  In the  case  of  publicly  traded  fixed  maturities
investments, management also considers market value quotations if available.

Liquidity

   The Company is a holding company whose liquidity needs include the following:
(i) operating  expenses;  (ii) debt service;  (iii) dividends on preferred stock
and common stock; (iv) acquisitions; and (v) working capital where needed to its
operating  subsidiaries.  The Company's  principal sources of cash are dividends
from its operating  subsidiaries,  and, in the case of funding for  acquisitions
and certain long-term capital needs of its subsidiaries, long-term borrowings.

   Regulatory  authorities  permit dividend payments from Keyport to the Company
up to the lesser of (i) 10% of statutory surplus as of the preceding December 31
or (ii) the net gain  from  operations  for the  preceding  fiscal  year.  As of
September  30, 1996,  Keyport  could  declare  dividends of up to $34.6  million
without the  approval of the  Commissioner  of  Insurance  of the State of Rhode
Island.  Under  Colonial's  credit  facility,  Colonial  could pay  dividends of
approximately $37.7 million as of September 30, 1996.

   Each of the Company's  business  segments have their own liquidity  needs and
financial resources.  In the Company's annuity insurance  operations,  liquidity
needs and financial  resources  pertain to the management of the general account
assets and policyholder  balances. In the Company's asset management activities,
liquidity needs and financial resources pertain to the investment management and
distribution of mutual funds, wealth management and institutional accounts.

   Keyport  uses cash for the  payment of annuity and life  insurance  benefits,
operating   expenses  and  policy   acquisition   costs,  and  the  purchase  of
investments. Keyport generates cash from net investment income, annuity premiums
and  deposits,  and from  maturities  of fixed  investments.  Annuity  premiums,
maturing investments and net investment income have historically been sufficient
to meet Keyport's cash requirements.  Keyport monitors cash and cash equivalents
in an effort to maintain  sufficient  liquidity  and has  strategies in place to
maintain sufficient liquidity in changing interest rate environments. Consistent
with the nature of its obligations, Keyport has invested a substantial amount of
its general account assets in readily marketable securities. As of September 30,
1996,  $9.7  billion  of  Keyport's  total  investments,   including  short-term
investments, are considered readily marketable.

   To the extent that unanticipated  surrenders cause Keyport to sell a material
amount of  securities  prior to their  maturity  for  liquidity  purposes,  such
surrenders could have a material adverse effect on the Company. However, Keyport
believes that liquidity to fund withdrawals  would be available through incoming
cash flow,  the sale of short-term or  floating-rate  instruments  or investment
securities in its short duration portfolio, thereby precluding the sale of fixed
maturity investments in a potentially unfavorable market.

   Based upon the  historical  cash flow of the Company,  the Company's  current
financial  condition  and the  Company's  expectation  that  there will not be a
material  adverse  change in the  results of  operations  of the Company and its
subsidiaries  during the next twelve months, the Company believes that cash flow
provided  by  operating  activities  over this period  will  provide  sufficient
liquidity for the Company to meet its working  capital,  capital  investment and
other operational cash needs, its debt service  obligations,  its obligations to
pay dividends on the Preferred Stock, and its intentions to pay dividends on the
Common Stock.  The Company's cash flow may be influenced by, among other things,
general economic conditions,  realized investment gains and losses, the interest
rate  environment,  the  level  of  assets  under  management,  market  changes,
regulatory changes and tax law changes.

Effects of Inflation

   Inflation has not had a material effect on the Company's consolidated results
of operations.  The Company  manages its investment  portfolio in part to reduce
its exposure to interest rate fluctuations.  In general, the market value of the
Company's   fixed   maturity   portfolio   increases  or  decreases  in  inverse
relationship  with  fluctuations  in  interest  rates,  and  the  Company's  net
investment  income increases or decreases in direct  relationship  with interest
rate  changes.   (If  interest  rates  decline  the  Company's   fixed  maturity
investments generally will increase in market value, while net investment income
will decrease as fixed maturity  investments mature or are sold and the proceeds
are  reinvested at reduced  rates.)  However,  inflation may result in increased
operating  expenses  that may not be  readily  recoverable  in the prices of the
services charged by the Company.
<PAGE>

Item 5.  Other Information


   As previously  reported,  the Company revised its financial reporting format.
In  particular,  components of investment  spread,  which are from the Company's
retirement-oriented  insurance  products,  are  presented  separately  from  fee
income, which is generated mainly from its investment  management products.  The
Company also has made corresponding  changes in its Management's  Discussion and
Analysis presentation.

   Set forth below is a  description  of the Company's  business  formatted in a
similar  manner  built around the  distinction  between the  Company's  two core
business segments.  The following  business  description is not required in this
report,  but is included  to assist  investors  and  analysts.  The  information
presented  below does not include  disclosures  different in substance  from the
Company's prior SEC filings.

Overview

   Liberty Financial  Companies,  Inc. ("Liberty Financial" or the "Company") is
an asset accumulation and management company -- that is, Liberty Financial earns
revenues by accumulating financial assets from investors and savers and managing
those  assets.   Liberty  Financial   accumulates  assets  by  offering  diverse
investment  and   retirement-oriented   insurance   products   through  multiple
distribution channels.

   The  Company  has two core  product  lines --  retirement-oriented  insurance
products  (principally  annuities) and investment  management  products  (mutual
funds, as well as wealth  management and institutional  investment  management).
The Company's insurance products primarily produce spread income; the investment
management products produce fee income. The Company believes that these products
have  attractive  growth  prospects  due to important  demographic  and economic
trends. These trends include the aging baby boom generation's desire to increase
savings  and   investment,   lower  public   confidence   that   government  and
employer-provided  retirement  benefits  will be adequate  for future  retirees,
longer life expectancies and rising health care costs.

   Liberty  Financial's  efforts to  capitalize  on these growth  prospects  are
guided by four interrelated strategies:

      Diversification.  Within its two  core product lines, the Company develops
      and markets a range of products that serve individuals at different stages
      of their life and  earnings  cycle.  This mix is also  designed to include
      products  that will be in demand  under a variety of  economic  and market
      conditions.  Similarly, the Company reaches customers through a variety of
      distribution  channels.  The Company believes that the  diversification in
      its products and  distribution  channels  allows it to increase its assets
      under  management in different market cycles,  thereby  reducing  earnings
      volatility.

      Innovation.   Liberty  Financial   believes  that  product,   service  and
      distribution innovations are essential in order to grow its asset base and
      meet the ever  changing  financial  needs of its  customers.  The  Company
      believes it has an impressive track record in such innovations.

      Integration.   Liberty   Financial   conducts  business   through  several
      operating  units that are wholly  owned  subsidiaries.  Liberty  Financial
      emphasizes  integration  of  its  operating  units,  with  a  view  toward
      accumulating  additional  assets  or  achieving  scale  economies  in  its
      operating expense structure.

      Acquisition.  Where  appropriate,  the Company  seeks  acquisitions   that
      provide   additional   assets,    investment   management    capabilities,
      distribution  capabilities or other integration  opportunities in its core
      product areas.

   For the nine months ended  September 30, 1996,  the Company had total product
sales of $6.7  billion.  Sixty-two  percent  of these  product  sales  were made
through an  intermediary  distributor,  with the  balance  made  directly to the
investor or policyholder.

   At September 30, 1996, assets under management were $46.9 billion, consisting
of the following:

       $11.9 billion in annuities and other insurance products;

       $25.3 billion in mutual fund assets;

       $5.0 billion attributable to wealth management; and

       $4.7 billion attributable to institutional investment management.

   For the nine months ended September 30, 1996 products producing spread income
accounted for approximately 62% of the Company's pre-tax operating income, while
products producing fee income accounted for the remaining 38%. Liberty Financial
seeks to balance  the spread  income and fee income  components  of its  pre-tax
operating income. The Company has made progress in achieving this goal since its
acquisitions of The Colonial Group, Inc. and Newport Pacific Management, Inc. in
the first half of 1995.

   At September 30, 1996,  approximately 82% of Liberty Financial's voting stock
was indirectly owned by Liberty Mutual Insurance Company.

Retirement-Oriented Insurance Products

   The Company offers a full range of  retirement-oriented  insurance  products,
grouped according to whether they provide fixed,  indexed or variable returns to
policyholders. Substantially all these products currently are annuities that are
underwritten  and issued by  Keyport  Life  Insurance  Company  ("Keyport"),  an
operating  unit of the Company.  Annuities  are insurance  products  designed to
offer individuals  protection  against the risk of outliving their income during
retirement.  In addition to offering a  tax-favored  source of lifetime  income,
annuities are also a tax-efficient means of accumulating  savings for retirement
needs.

          Fixed  Annuities.  The Company's  principal fixed annuity products are
          individual  single  premium  deferred  annuities  ("SPDAs").   A  SPDA
          policyholder  typically  makes a single premium payment at the time of
          issuance.  The  Company  obligates  itself to credit  interest  to the
          policyholder's  account  at a rate that is  guaranteed  for an initial
          term (typically one year) and is adjusted annually thereafter, subject
          to a guaranteed  minimum rate.  At September  30, 1996,  the Company's
          fixed annuity policyholder balances were $8.8 billion.

          Equity-Indexed  Annuities. Indexed annuities are an innovative product
          first  introduced  in  1995  by the  Company  when  it  began  selling
          KeyIndex, an equity-indexed product. An equity-indexed annuity credits
          a return to the  policyholder  at a  "participation  rate"  equal to a
          portion of the change in value of a specified  equity index.  KeyIndex
          is currently  offered for both one and  five-year  terms with interest
          earnings  based on a percentage  of the increase in the S&P 500 Index.
          With the  five-year  term,  the  interest  earnings  are  based on the
          highest  anniversary  value  of the S&P 500  Index  during  the  term.
          KeyIndex  also  provides a guarantee  of  principal  at the end of the
          term.  Thus,  unlike a direct equity  investment,  even if the S&P 500
          Index declines,  there is no risk to principal. At September 30, 1996,
          the Company's  equity-indexed  annuity policyholder balances were $572
          million.  The Company has several versions of the equity-index annuity
          concept under development.

          Variable Annuities. Variable annuities offer a selection of underlying
          investment  alternatives,  which may satisfy a variety of policyholder
          objectives. In a variable annuity, separate account investment options
          (similar to mutual  funds) pass the  investment  risk  directly to the
          policyholder  in  return  for the  potential  of higher  returns.  The
          Company's  Preferred  Advisor  variable  annuity  currently  offers 11
          separate account investment choices and four guaranteed fixed interest
          options.  At  September  30,  1996,  the  Company's  variable  annuity
          separate account policyholder balances were $975 million.

   Fixed  and  indexed  annuities  produce  spread  income;  variable  annuities
primarily produce fee income.

   While  the  Company  currently  does not  offer  traditional  life  insurance
products,  it manages a closed  block of single  premium  whole  life  insurance
policies  ("SPWLs").   SPWLs  are  a  retirement-oriented   tax-advantaged  life
insurance  product.  The Company  discontinued sales of SPWLs in response to the
Tax Reform Act of 1986.  The  Company  had SPWL  policyholder  balances  of $2.1
billion at September 30, 1996. SPWLs produce spread income.

   Under current law, returns credited on annuities and life insurance  policies
during the accumulation period (the period during which interest is credited and
payouts  have not yet begun) are not  subject  to federal or state  income  tax.
Proceeds  payable on death from a life insurance  policy are also free from such
taxes. At the maturity or payment date of an annuity policy, the policyholder is
entitled  to  receive  the  original  deposit  plus  accumulated   returns.  The
policyholder may elect to take this amount in either a lump sum or an annualized
series of payments over time. The return  component of such payments is taxed at
the time of receipt as ordinary income.

   The Company's  insurance  products  include  important  features  designed to
promote both sales and asset retention,  including  interest crediting rates and
surrender  charges.  Interest  crediting and participation  rates  significantly
influence the Company's  ability to be  competitive in the sale of new policies.
SPDA renewal  rates impact  retention of SPDA assets,  particularly  on policies
where surrender  penalties have expired.  All of the Company's  annuities permit
the  policyholder  at anytime  to  withdraw  all or any part of the  accumulated
policy  balance.  Surrender  charges  provide a measure  of  protection  against
premature withdrawal of policy balances. Surrender charges typically start at 7%
and  then  decline  over a five-  to  seven-year  period.  All of the  Company's
annuities  currently are issued with surrender  charges.  With respect to spread
income  products  (fixed  and  indexed  annuities),  both  crediting  rates  and
policyholder  withdrawals  affect the Company's  management  of  asset/liability
matching and contribute to the achievement of investment spread targets.

   The Company  believes  Keyport has a reputation for excellent  service to its
intermediary distributors and its policyholders.  Keyport has developed advanced
technology  systems for  immediate  response to  customer  inquiries,  and rapid
processing of policy  issuances and commission  payments  (often at the point of
sale). These systems also play an important role in controlling costs. Keyport's
annualized  operating  expenses  during the nine months ended September 30, 1996
were 0.45% of assets,  making  Keyport one of the lowest cost  operators  in the
annuity business.

   Keyport's strong financial ratings are important to its ability to accumulate
and retain policyholder balances. Keyport is rated "A+" (Superior) by A.M. Best,
"AA-" by Standard and Poor's and "A1" by Moody's.  A.M.  Best is an  independent
insurance  rating  agency  that  assigns  fifteen  letter  ratings to  insurance
companies,  ranging from "A++" (Superior) to "F" (In Liquidation).  Publications
of A.M.  Best  indicate  that  "A++"  and "A+"  ratings  are  assigned  to those
companies that in A.M. Best's opinion have achieved superior overall performance
when compared to the quantitative and qualitative  standards established by A.M.
Best,  and  generally   have   demonstrated  a  strong  ability  to  meet  their
policyholder  obligations  over a long period of time.  These  ratings are based
upon  information  supplied to the rating  agency,  and are directed  toward the
protection of policyholders, not investors.

   The Company has two primary financial objectives for its  retirement-oriented
insurance  products:  to increase  policyholder  balances  through new sales and
asset retention and to earn targeted investment spreads on its fixed and indexed
return products.

   New product  sales are  influenced  primarily  by overall  market  conditions
impacting  the  attractiveness  of  these  products,  and by  product  features,
including  interest  crediting and  participation  rates,  and innovations  that
distinguish the Company's products from those of its competitors. Sales of SPDAs
tend to be  sensitive to  prevailing  interest  rates.  Sales can be expected to
increase in interest rate environments when SPDA crediting rates are higher than
rates offered by competing conservative fixed-return  investments,  such as bank
certificates of deposit.  SPDA sales can be expected to decline in interest rate
environments when this differential in rates is not present.

   Premiums on fixed and indexed  annuities are  deposited to Keyport's  general
investment account. To achieve its targeted investment spreads, the Company must
earn  returns  on its  general  account  sufficiently  in excess of the fixed or
indexed returns  credited to  policyholders.  The key element of this investment
process is asset/liability  management.  Successful  asset/liability  management
requires a  quantitative  assessment of overall  policy  liabilities  (including
maturities,  surrenders  and  crediting  of returns) and prudent  investment  of
general  account  assets.  The two  most  important  tools  in  managing  policy
liabilities are setting crediting rates and establishing  surrender periods. The
asset side of the investment  process  requires  portfolio  techniques that earn
required  yields while  effectively  managing both interest rate risk and credit
risk.  The  Company  emphasizes  a  conservative   approach  to  asset/liability
management,  which is oriented toward reducing downside risk in adverse markets,
as opposed to  maximizing  spread in  favorable  markets.  The  approach is also
designed to reduce earnings volatility.

   The majority of the Company's  general  account (86.1% at September 30, 1996)
is invested in fixed maturity  securities.  An additional  8.0% is maintained in
cash and cash equivalents for short term liquidity needs. The principal strategy
for managing  interest rate risk is to maintain a relatively  short  duration of
its  fixed income  portfolio (2.7 years at September 30, 1996). The Company also
employs hedging  strategies,  including  interest rate swaps and caps, to manage
this risk. In the case of KeyIndex,  the Company  purchases S&P 500 call options
to hedge its obligations to provide  participation rate returns.  Credit risk is
managed by careful credit analysis and monitoring.  At September 30, 1996, 91.9%
of the fixed income  component  of the general  account  portfolio  consisted of
investment grade securities  (securities rated BBB- or higher by S&P, or Baa3 or
higher by Moody's),  which had an overall  average S&P rating of A+. The balance
was invested in below investment  grade securities to enhance overall  portfolio
yield.  At  September  30, 1996,  less than 0.1% of the fixed  income  portfolio
consisted of securities in default.

Investment Management

     Liberty Financial has three core types of investment  management  products:
mutual funds, wealth management,  and institutional  investment management.  The
Company has four separate operating units engaged in investment management:  The
Colonial Group,  Inc.  ("Colonial"),  Stein Roe & Farnham  Incorporated  ("Stein
Roe"), Newport Pacific Management, Inc. ("Newport") and Liberty Asset Management
Company ("LAMCO").

          Mutual Funds.  The Company  sponsors 71 open-end mutual funds, as well
          as  seven   closed-end   funds.   The   open-end   funds   include  40
          intermediary-distributed  Colonial funds, 20 direct-marketed Stein Roe
          funds and 11 funds that are  investment  options  under the  Company's
          variable  annuities.  The closed-end funds include five Colonial funds
          and two LAMCO  funds.  At September  30, 1996,  total fund assets were
          $25.3  billion.  At that date 46% of these  assets  were  invested  in
          equity funds  (compared to 36% at September 30, 1995),  28% in taxable
          fixed  income funds and 26% in  tax-exempt  fixed  income  funds.  The
          Company seeks to continue to increase  equity mutual fund assets under
          management.

          Wealth  Management.  At September 30, 1996,  the Company  managed $5.0
          billion  in  investment  portfolios  for high net  worth  individuals,
          families   and  trusts,   all  of  which  is  managed  by  Stein  Roe.
          
          Institutional  Investment  Management.  At  September  30,  1996,  the
          Company   managed   $4.7   billion  of   investment   portfolios   for
          institutional  investors  such  as  insurance  companies,  public  and
          private   retirement   funds,   endowments,   foundations   and  other
          institutions.  Most of these  assets  are  managed  by Stein  Roe.  In
          addition,  Stein Roe manages $9.6 billion of Keyport's general account
          portfolio.

   The Company  believes that the most  important  factors in  accumulating  and
retaining  investment  management  assets are investment  performance,  customer
service and brand name recognition.  Strong investment performance is crucial to
asset  accumulation  and  retention,  regardless of the product or  distribution
channel.  Performance  is  particularly  important  for  mutual  funds,  whether
intermediary-distributed or direct-marketed. The Company believes that currently
the  most   important   measure  of   performance   influencing   sales  through
intermediaries  is peer group  rankings  compiled  by Lipper.  For the  one-year
period ended September 30, 1996,  based on figures for Class A (front-end  load)
shares,  20 of the  Colonial  funds  were  in the  top two  quartiles  of  their
respective  Lipper  peer  groups,  with  11  funds  in  the  top  quartile.  For
direct-marketed  funds,  the Company  believes that currently the most important
performance  measure  influencing sales is Morningstar  ratings. Of the 12 Stein
Roe funds rated by Morningstar as of the date of this report, none are less than
three-star (an indication of strong and consistent investment performance), with
four  funds  having a  four-star  rating  and three  funds  having  the  maximum
five-star rating. The Company's  investment  performance must remain competitive
for the Company to continue to grow investment management sales and assets.

   Excellent  service to  customers,  including  mutual  fund  shareholders  and
distributors, is fundamental to successful asset retention. The Company acquired
Colonial,  in part,  because of its reputation for excellent  customer  service.
Following the acquisition of Colonial,  the Company consolidated its mutual fund
transfer agency functions into Colonial.

   The Company believes that, in light of the  proliferation of mutual funds and
investment  managers,  strong brand name  recognition  in relevant  distribution
channels is essential to asset  accumulation  and retention,  particularly  with
respect to mutual  funds.  The Company  believes  that the Colonial name carries
strong brand name  recognition  among brokers and other  intermediaries  selling
mutual funds,  and that the Stein Roe name carries  similar  recognition  in the
direct  sales  channel.  Similarly,  the Company  believes  that Stein Roe has a
franchise presence in the wealth market, and that Newport is a recognized leader
in investment management in Asian markets.

   As with  insurance  products,  sales of mutual  funds  and  other  investment
management  products are subject to market  forces,  such as changes in interest
rates and stock market  performance.  Sales of the Company's equity mutual funds
have benefited in 1996 from the continued  strong  performance of the U.S. stock
market. Sales of the Company's fixed income mutual funds have been modest during
1996,  given  current  market  conditions.  Changes  in the  financial  markets,
including  significant increases or decreases in interest rates or stock prices,
can increase or decrease  fund sales and  redemptions,  as well as the values of
fund  portfolios,  all of which can  impact the level of  investment  management
fees.

   The Company's financial objectives with respect to its investment  management
businesses are to grow assets under management in each of its three core product
areas,  and to  improve  operating  margins  through  increasing  scale and cost
savings   produced  by   integration.   The  investment   management   business,
particularly  with respect to mutual funds,  offers  excellent  opportunities to
grow operating  profits and to achieve and attain  attractive  operating margins
for  those   participants   whose   asset  base  and   investment   and  service
infrastructure reach critical mass levels. Since its acquisition of Colonial and
Newport in the first six months of 1995,  the Company has  generated  annualized
cost savings of approximately  $12.0 million per year through the  consolidation
of various support and service functions in its mutual fund business.

Distribution and Sales

   Liberty Financial sells its products through multiple distribution  channels.
Total  proprietary  product  sales for the nine months ended  September 30, 1996
were  $6.7  billion.   Sixty-two  percent  of  these  sales  were  made  through
intermediaries,  and the  remaining  38% of  sales  were  made  directly  to the
investor.

Distribution Through Intermediaries

   The  Company  sells  both   annuities   and  mutual  funds  through   various
intermediaries,   including  national  and  regional  brokerage  firms,   banks,
financial  planners  and  insurance  agents.  In the first nine  months of 1996,
almost  30,000  brokers and agents sold the  Company's  products.  The Company's
annuities and mutual funds are most often sold to middle and upper-middle  class
investors and savers.  Many of these  individuals,  busy with their own careers,
families and other  interests,  seek the help of an investment  professional  in
selecting  investment  and  retirement  savings  products.   In  each  of  these
intermediary  channels,  the Company provides  products,  as well as promotional
materials and other support services.

   Reflecting its diversification  strategy,  the Company maintains distribution
relationships     with    several    different    types    of    intermediaries.
Intermediary-distributed  mutual funds and annuities historically have been sold
through  brokerage  firms  and  insurance  agents.  In  recent  years  banks and
financial planners also have become significant  distributors of these products.
Banks have moved into selling  mutual funds and annuities to counter the outflow
of customer  deposits and to increase  fee income.  The Company was a pioneer in
selling through banks, both in terms of helping banks develop marketing programs
and in establishing  wholesaling  relationships with banks.  Fee-based financial
planners also have emerged as a significant distribution channel.

   The   Company   employs   wholesalers   for   its   annuities   and  for  its
intermediary-distributed mutual funds. The wholesalers meet with intermediaries'
sales forces to educate them on matters  such as product  objectives,  features,
performance  records and other key selling  points.  The Company  also  produces
marketing material designed to help  intermediaries sell the Company's products,
and provides  after-sale support to both the intermediaries and their customers.
The  degree  and  mix of  these  services  vary  with  the  requirements  of the
particular  intermediary.  For example,  a small brokerage or financial planning
firm typically will utilize more of these support services than a large national
brokerage firm.

   Liberty  Financial  has two sales units that sell mutual funds and  annuities
through  banks:  the  Liberty  Financial  Bank Group and  Independent  Financial
Marketing Group, Inc. ("IFMG"). The Company acquired IFMG in March, 1996, and is
in the  process  of  consolidating  these two  organizations  into  IFMG.  These
businesses  design and implement  programs that sell such products through their
client  banks,  license and train  sales  personnel  and provide  administrative
support.  Program  structures and the degree of the Company's  involvement  vary
widely depending upon the particular needs of each bank. In some banks, the bank
provides   space  in  its  branches  and  the  Company   places  its  own  sales
representatives  in that space and fully  operates  the program.  Products  sold
include the Company's proprietary products, as well as non-proprietary  products
(including  in some cases the bank's own  proprietary  mutual  funds).  In other
cases,  the  Company's  role may be limited to functions  such as licensing  and
training the bank's employees and wholesaling  products.  At September 30, 1996,
these  operations had 163 bank  relationships  involving  over 3,100  registered
salespersons.

   The sales  practices  and support  needs of the  Company's  distributors  are
constantly  evolving.  The  Company  must  respond to these  changes in order to
maintain and  increase  its  intermediary  distribution  relationships.  Pricing
structures in these  channels,  particularly  with respect to mutual funds,  are
evolving from  one-time  up-front  sales loads to options that shift  investors'
payments  over  time and move  toward  fee-based  pricing.  Intermediaries  also
increasingly demand that product providers supply new value-added services.  The
Company's  intermediary-distributed  mutual  funds now are sold  with  alternate
pricing   structures.   The  Company  is  seeking  to  develop   innovative  new
technology-based  service and support tools, such as asset allocation models and
on-line customer account  management  systems,  designed to provide  value-added
services to intermediaries and their customers.  Some distributors have begun to
assess fee sharing  payments or similar charges as additional  compensation  for
fund sales.  The Company may have to choose in certain cases  between  absorbing
these charges or limiting its access to certain distributors.

Direct Distribution

   The Company's  direct-marketed mutual funds, as well as its wealth management
and  institutional   investment  management  services,   are  sold  directly  to
investors.   The   Company's   direct-marketed   mutual   funds  are   purchased
predominantly  by middle and upper middle class  investors and savers who choose
to select  their own funds and who wish to avoid  paying sales loads and similar
fees.  Wealth  management  clients  typically are high net worth individuals and
families  and  smaller   institutional   investors.   Institutional   investment
management  clients  typically  are larger  institutional  investors  managed by
in-house professional staffs that select and oversee asset managers,  often with
the  advice of third  party  consultants.  Direct  sales of these  products  and
services  requires  that the Company  perform all of the  marketing  and service
functions required to reach and retain these investors.

   In each  of the  direct  sales  markets  served  by the  Company,  investment
performance  is essential to generating  sales and retaining  customers.  Mutual
fund sales also  require  robust  marketing  campaigns  using  print,  radio and
television  advertising  and direct mail that  highlight  performance  and other
selling  points.  The  Company  believes  that  certain of the  technology-based
customer  service and support tools it is  developing,  such as on-line  account
access and asset  allocation  programs,  will be important tools in accumulating
and retaining assets in the direct distribution channels. Stein Roe's reputation
as a high quality asset manager is the most  important  factor in generating new
wealth and  institutional  asset management  clients.  Active  management of the
client  relationship,  including  frequent  personal  contacts,  is necessary to
retain these clients.

Diversification

   The appeal of the Company's products varies according to an individual's age,
income,  risk tolerance and financial goals. The Company's  products vary widely
in financial  objectives and risks. The Company's  product diversity is designed
in part to serve  individuals  at  various  stages  of their  life and  earnings
cycles,  with an emphasis on retirement  savings and income  needs.  The Company
also believes  that its product mix will appeal to customers  under a variety of
economic and market conditions.  This  diversification is designed to smooth out
the ebbs and flows of the financial markets.  There are times when equity mutual
funds will sell more briskly than fixed income funds or  annuities.  Conversely,
there  are  other  periods  when  the  opposite  will  be the  case.  Similarly,
diversification  of  distribution  channels  allows  the  Company  to reach many
distinct  segments of the  marketplace  and lessens  its  dependence  on any one
source of assets. The Company believes that the  diversification in its products
and  distribution  channels  allows it to increase  assets in  different  market
cycles, thereby reducing earnings volatility.

Innovation

   The Company  believes that innovations  creating new or enhanced  products or
accessing new markets are essential in order to grow its asset base and meet the
ever-changing  needs of its customers.  Successful  product  innovation has been
critical to growth  throughout  the  financial  services  industry.  The Company
believes  that,   aside  from  excellent   investment   performance,   continual
introduction of new and innovative  products is the best strategy for generating
new sales. In addition,  the Company believes that the  distinctions  which have
separated intermediary and direct distribution channels are blurring as a result
of the trend in intermediary channels toward fee-based pricing, the introduction
of asset allocation and other new value-added  services and the emergence of new
sales mediums (such as the Internet). This is particularly the case for products
such as mutual funds that are purchased by individual  investors.  To succeed in
the  future in  maintaining  and  expanding  its  client  base and  distribution
relationships,  the Company must respond by  developing  new  products,  pricing
structures and technology-driven tools.

   The  Company  believes  that  it has an  impressive  record  in  product  and
distribution  innovations.  Keyport was a leader in  developing  single  premium
whole  life  insurance.  Liberty  Financial  was a pioneer  in the  business  of
distributing  mutual funds and annuities  through  banks.  The Colonial  Newport
Tiger Fund was the first  U.S.-based  mutual  fund to focus  exclusively  on the
"Tiger"  countries  of Asia.  The Stein Roe  Young  Investor  Fund was the first
mutual fund to be coupled with an  educational  program to teach younger  people
about investing,  while at the same time offering parents an excellent device to
save for educational and other family needs. The Company's ability to create new
products  continued  with  its  introduction  in 1995  of  KeyIndex,  the  first
equity-indexed annuity introduced into the marketplace.

Integration

   Liberty Financial  conducts business through several operating units that are
wholly  owned  subsidiaries.   Integration  of  Liberty  Financial's   operating
companies  is  a  fundamental  operating  philosophy.  Leveragable  talents  and
resources include product  development and design,  distribution  relationships,
investment  management,   investor  servicing  and  technology  development  and
support. Where appropriate, the Company seeks to leverage those resources across
multiple operating units, with a view toward  accumulating  additional assets or
reducing  expenses.  Examples of successfully  implemented  integration  efforts
include the following:

          Upon the Company's  acquisition  of Newport in April,  1995,  Colonial
          assumed the marketing,  sales, service and administration of Newport's
          flagship Tiger Fund. The Fund's outstanding investment performance has
          continued  following the  acquisition  (it remains ranked first in its
          Lipper peer group for the five-year  period ended September 30, 1996),
          and asset growth has been  exceptional,  more than tripling since that
          time.  Colonial also has  benefited  because the  availability  of the
          Colonial Newport Tiger Fund has established distribution  arrangements
          with new  intermediaries.  
          
          Stein Roe manages  most of  Keyport's  general  account  fixed  income
          portfolio,  and, together with, Colonial and Newport,  manages certain
          funds underlying Keyport's variable annuity product.

          Colonial's transfer agency operations also perform these functions for
          the Stein Roe funds.

          During the nine months ended  September 30, 1996,  the Company's  bank
          distribution   units  were  the  largest   distributor   of  Keyport's
          annuities,  and the second largest  distributor of the Colonial funds,
          accounting for 13.5% and 7.3%,  respectively,  of total sales of those
          products.

Acquisitions

   Acquisitions  are an  integral  part  of  the  Company's  business  strategy.
Keyport,  Colonial,  Stein Roe,  Newport,  and, most  recently,  IFMG all joined
Liberty Financial through acquisition.  Where appropriate, the Company continues
to seek  opportunities to make acquisitions that can provide  additional assets,
investment  management  capabilities,   distribution   capabilities,   or  other
integration opportunities.  Current areas of focus for the Company's acquisition
efforts include the following:

         Mutual funds, with particular focus on equities and foreign markets;

         Additional distribution capabilities;

         Wealth  management  firms  that can become  part of Stein Roe,  and can
         leverage  and expand  Stein Roe's  franchise  in the wealth  management
         market; and

         Blocks of  annuity  assets  that  can be  purchased  or  co-insured  on
         attractive terms.

<PAGE>

 Item 6.  Exhibits and Reports on Form 8-K

(a)    Exhibits

   11 Statement re Computation of Per Share Earnings
   12 Statement re Computation of Ratios
   27 Financial Data Schedule

(b)    Reports on Form 8-K

   There were no reports on Form 8-K filed  during the quarter  ended  September
   30, 1996.

<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.


                                       LIBERTY FINANCIAL COMPANIES, INC.

                                               /s/ Gerald Rush
                                     -------------------------------------
                                                 Gerald Rush
                                            Vice President Finance
                                         (Duly Authorized Officer and
                                          Chief Accounting Officer)








Date:   November 8, 1996

<PAGE>




                                Exhibit Index


Exhibit No.    Description                                               Page
-----------    -----------                                               ----

   11          Statement re Computation of Per Share Earnings             29
   12          Statement re Computation of Ratios                         30
   27          Financial Data Schedule                                    31