<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-Q
 
(MARK ONE)
    [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934
 
                 For the Quarterly Period Ended March 31, 1997
 
                                      or
 
    [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934
 
                        COMMISSION FILE NUMBER 1-12365
 
             EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER:
                          BA Merchant Services, Inc.
 
         STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION:
                                   Delaware
 
                    I.R.S. EMPLOYER IDENTIFICATION NUMBER:
                                  94-3252840
 
                    ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
                           One South Van Ness Avenue
                        San Francisco, California 94103
 
              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 415-241-3390
 
              FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
                         IF CHANGED SINCE LAST REPORT:
                                     None
 
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
 
                                Yes  X     No
                                    ---       ---
 
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
 
Class A Common Stock, $0.01 par value--16,236,092 outstanding on March 31, 1997
Class B Common Stock, $0.01 par value--30,200,000 outstanding on March 31, 1997
 
-------------------------------------------------------------------------------
 
This document serves both as an analytical review for analysts, shareholders,
and other interested persons, and as the quarterly report on Form 10-Q of BA
Merchant Services, Inc. to the Securities and Exchange Commission, which has
taken no action to approve or disapprove the report or to pass upon its
accuracy or adequacy. Additionally, this document is to be read in conjunction
with BA Merchant Services, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1996, including the consolidated financial statements and
notes thereto.
<PAGE>
 
                                     INDEX
 
                           BA MERCHANT SERVICES, INC.
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
                          PART I FINANCIAL INFORMATION
 
 <C>     <S>                                                               <C>
 Item 1. Financial Statements...........................................     1
         Consolidated Balance Sheet.....................................     1
         Consolidated Statement of Operations...........................     2
         Consolidated Statement of Cash Flows...........................     3
         Consolidated Statement of Changes in Equity....................     4
         Notes to Consolidated Financial Statements.....................     5
         Management's Discussion and Analysis of Financial Condition and
 Item 2. Results of Operations..........................................     8
         Highlights.....................................................     8
         Results of Operations..........................................     8
         Balance Sheet Review...........................................     9
         Liquidity and Capital Resources................................     9
         Risk Management................................................     9
         Forward-Looking Statements.....................................    10
 
                           PART II OTHER INFORMATION
 
 Item 6. Exhibits and Reports on Form 8-K...............................    10
</TABLE>
 
                                       i
<PAGE>
 
ITEM 1. FINANCIAL STATEMENTS
 
                           BA MERCHANT SERVICES, INC.
 
                           CONSOLIDATED BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                        MARCH 31, DECEMBER 31,
                                                          1997        1996
                                                        --------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S>                                                     <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents............................ $211,334    $138,398
  Drafts in transit....................................   29,764      87,803
  Accounts receivable..................................   33,941      35,282
                                                        --------    --------
    Total current assets...............................  275,039     261,483
Property and equipment, net............................   18,902      16,760
Other assets...........................................    9,912       8,478
                                                        --------    --------
    Total assets....................................... $303,853    $286,721
                                                        ========    ========
LIABILITIES AND EQUITY
Current liabilities:
  Accounts payable..................................... $  3,534    $    415
  Merchants payable....................................   14,341      14,092
  Accrued liabilities..................................    4,671       5,603
  Accrued credit card association and interchange
   fees................................................    7,471       5,060
  Income taxes payable ................................    7,632       3,188
                                                        --------    --------
    Total current liabilities..........................   37,649      28,358
Other liabilities......................................    6,853       6,238
                                                        --------    --------
    Total liabilities..................................   44,502      34,596

Stockholders' equity:
Class A Common Stock, par value $0.01 (authorized
 200,000,000 shares; issued and outstanding 16,236,092
 shares)...............................................      162         162
Class B Common Stock, par value $0.01 (authorized
 50,000,000 shares; issued and outstanding 30,200,000
 shares)...............................................      302         302
Additional paid-in capital.............................  249,628     249,622
Retained earnings......................................    9,259       2,039
                                                        --------    --------
    Total stockholders' equity.........................  259,351     252,125
                                                        --------    --------
    Total liabilities and equity....................... $303,853    $286,721
                                                        ========    ========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       1
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                 THREE MONTHS
                                                                ENDED MARCH 31,
                                                                ---------------
                                                                 1997    1996
                                                                ------- -------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                             <C>     <C>
Net revenue.................................................... $32,890 $28,242
Operating expense (See Note 6):
  Data processing and communications...........................   7,565   6,678
  Salaries and employee benefits...............................   7,402   5,960
  General and administrative...................................   4,634   3,199
  Depreciation.................................................   2,100   1,903
  Occupancy....................................................     620     468
  Amortization of intangibles..................................     113     288
                                                                ------- -------
    Total operating expense....................................  22,434  18,496
                                                                ------- -------
Income from operations.........................................  10,456   9,746
Net interest income............................................   1,850     --
                                                                ------- -------
Income before income taxes.....................................  12,306   9,746
Provision for income taxes.....................................   5,086   4,025
                                                                ------- -------
    Net income................................................. $ 7,220 $ 5,721
                                                                ======= =======
Earnings per common and common equivalent share................ $  0.16     N/A
Earnings per common share--assuming full dilution.............. $  0.16     N/A
</TABLE>
 
 
                See Notes to Consolidated Financial Statements.
 
                                       2
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                                   MARCH 31,
                                                             -------------------
                                                               1997      1996
                                                             --------  --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S>                                                          <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $  7,220  $  5,721
Adjustments to net income to arrive at cash provided by
 operating activities:
  Depreciation..............................................    2,100     1,903
  Amortization of intangibles...............................      113       288
  Benefit from deferred income taxes........................     (342)     (300)
  Amortization of restricted stock..........................      102       --
  Amortization of loan fee..................................       85       --
  Changes in operating assets and liabilities:
    Decrease in drafts in transit...........................   58,039     3,604
    Decrease in accounts receivable.........................    1,341        83
    Increase (decrease) in accounts payable.................    3,119      (134)
    Increase in current income taxes payable ...............    4,444       --
    Increase in merchants payable...........................      249       941
    Increase (decrease) in accrued liabilities..............     (932)      801
    Increase (decrease) in accrued credit card association
     and interchange fees...................................    2,411      (898)
    Other, net..............................................     (675)    1,150
                                                             --------  --------
      Net cash provided by operating activities.............   77,274    13,159
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..........................   (4,242)   (3,158)
                                                             --------  --------
      Net cash used for investing activities................   (4,242)   (3,158)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in underwriting expense............................      (96)      --
BAC's change in funding.....................................      --    (10,315)
                                                             --------  --------
      Net cash used for financing activities................      (96)  (10,315)
                                                             --------  --------
Increase (decrease) in cash and cash equivalents............   72,936      (314)
Cash and cash equivalents at beginning of period............  138,398       345
                                                             --------  --------
Cash and cash equivalents at end of period.................. $211,334  $     31
                                                             ========  ========
CASH PAID DURING THE PERIOD FOR:
  Income taxes.............................................. $    985  $  4,325
                                                             ========  ========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       3
<PAGE>
 
                           BA MERCHANT SERVICES, INC.
 
                  CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
 
<TABLE>
<CAPTION>
                                                           THREE MONTHS
                                                         ENDED MARCH 31,
                                                       ------------------
                                                         1997      1996
                                                       --------  --------
   (DOLLAR AMOUNTS IN THOUSANDS)
   <S>                                                 <C>       <C>
   CLASS A COMMON STOCK
   Balance at beginning of quarter.................... $    162  $    --
   Issuance of additional stock.......................      --        --
   Dividends..........................................      --        --
                                                       --------  --------
   Balance at end of quarter..........................      162       --

   CLASS B COMMON STOCK
   Balance at beginning of quarter....................      302       --
   Issuance of additional stock.......................      --        --
                                                       --------  --------
   Balance at end of quarter..........................      302       --

   ADDITIONAL PAID IN CAPITAL                                         --
   Balance at beginning of quarter....................  249,622       --
   Amortization of unvested portion of restricted
    stock.............................................      102       --
   Additional underwriting expenses...................      (96)      --
                                                       --------  --------
   Balance at end of quarter..........................  249,628       --

   RETAINED EARNINGS                                                  --
   Balance at beginning of quarter....................    2,039       --
   Net income.........................................    7,220       --
                                                       --------  --------
   Balance at end of quarter..........................    9,259       --

   BAC'S EQUITY INTEREST
   Balance at beginning of quarter....................      --     99,168
   Net income.........................................      --      5,721
   BAC's change in funding............................      --    (10,315)
                                                       --------  --------
   Balance at end of quarter..........................      --     94,574
                                                       --------  --------
     Total equity end of quarter...................... $259,351  $ 94,574
                                                       ========  ========
</TABLE>
 
 
                See Notes to Consolidated Financial Statements.
 
                                       4
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1--ORGANIZATION AND NATURE OF OPERATIONS
 
  BA Merchant Services, Inc. ("BAMS" or the "Company") was incorporated on
October 11, 1996 and commenced operations December 4, 1996, upon the transfer
by Bank of America NT&SA (the "Bank") and Bank of America NW, National
Association ("BANW"), (formerly Seattle-First National Bank) of their
respective United States merchant processing businesses to BAMS in
consideration for 30.2 million shares of Class B Common Stock (the
"Reorganization"). Effective January 1, 1997, BANW was merged into the Bank.
The Bank is a wholly owned subsidiary of BankAmerica Corporation ("BAC").
References in the consolidated financial statements and these Notes to
Consolidated Financial Statements to "BAC" shall be deemed to be references to
BankAmerica Corporation and its subsidiaries and affiliates, including the
Bank and, prior to January 1, 1997, BANW. BAC owns 100% of the Class B Common
Stock.
 
  BAC's transfer to BAMS of certain assets and liabilities of its United
States merchant processing businesses (net assets) was accounted for as a
reorganization of entities under common control and, accordingly, the transfer
of these net assets was accounted for at historical cost. Included in the
transfer of net assets was Seafirst Merchant Services, Inc., a wholly owned
subsidiary of BANW.
 
  During December 1996, BAMS issued 16.1 million shares of Class A Common
Stock in underwritten initial public offerings (the "Offerings") which
generated gross proceeds of $249.6 million less the underwriters' discount and
expense totaling $16.7 million, resulting in net proceeds of $232.9 million.
In late December 1996, $126.3 million of the net proceeds were used to pay
down the outstanding balance on a revolving line of credit with an affiliate.
The borrowings had been used to finance operations between the Reorganization
and the Offerings.
 
  In connection with the Reorganization, BAMS entered into a definitive
agreement with BAC to acquire the merchant processing businesses then
conducted by the Bank in Thailand and the Philippines (the "Asian
Acquisitions") and to work cooperatively to allow BAMS to acquire BAC's
merchant processing businesses in Taiwan and other countries in Asia subject
to the approval of the local regulatory authorities in each country.
 
  BAMS provides an array of payment processing and related information
products and services to merchants throughout the United States who accept
credit, charge and debit cards as payment for goods and services. BAMS is one
of the largest processors of merchant debit and credit card transactions in
the United States.
 
NOTE 2--FINANCIAL STATEMENTS PRESENTATION
 
  The unaudited consolidated financial statements of BA Merchant Services,
Inc. and its subsidiary Seafirst Merchant Services, Inc. are prepared in
conformity with generally accepted accounting principles for interim financial
information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
In the opinion of management, all adjustments necessary for a fair
presentation of the financial position and results of operations for the
periods presented have been included. All such adjustments are of a normal
recurring nature. These unaudited financial statements should be read in
conjunction with the audited consolidated financial statements included in
BAMS' Annual Report on Form 10-K for the year ended December 31, 1996.
 
  The accompanying financial statements have been prepared as if the Company
had operated as a separate entity for all periods presented. The Statement of
Operations for the quarter ended March 31, 1996 represents the combined
historical results of operations of the United States merchant processing
businesses of the Bank and BANW. Financial statements for periods presented
subsequent to the Reorganization include the consolidated results of
operations and assets and liabilities of the Company. For simplicity of
presentation, these financial statements are referred to herein as
Consolidated Financial Statements.
 
 
                                       5
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
  Prior to the Reorganization, changes in BAC's equity interest represented
net income of the Company adjusted for net cash transfers to and from BAC.
Additionally, the pre-Reorganization financial statements include allocations
of certain assets (primarily property and equipment) and expenses relating to
the merchant processing businesses transferred from BAC. Management believes
these allocations are reasonable. Certain of the pre-Reorganization expenses
in the Consolidated Financial Statements are not necessarily indicative of the
costs that would have been incurred if the Company had performed these
functions as a stand-alone entity. Therefore, prior to the Reorganization, the
Consolidated Financial Statements may not necessarily reflect the Company's
consolidated results of operations, changes in equity and cash flows as they
would have been had the Company been a separate, stand-alone entity during the
periods presented. Subsequent to the Reorganization, the Company performed
these functions using its own resources and purchased services (from BAC and
other companies) and was responsible for the costs and expenses associated
with the management of a stand-alone entity.
 
  Certain amounts in prior periods have been reclassified to conform to the
current presentation.
 
NOTE 3--INCOME TAXES
 
  The following is a summary of the components of income tax expense:
 
<TABLE>
<CAPTION>
                                                   FOR THE THREE MONTHS ENDED
                                                            MARCH 31,
                                                   --------------------------
                                                       1997           1996
                                                  -------------- --------------
                                                  (DOLLAR AMOUNTS IN THOUSANDS)
     <S>                                          <C>            <C>
     Provision for income taxes:
       Federal...................................         $3,939         $3,092
       State.....................................          1,147            933
                                                  -------------- --------------
         Total...................................         $5,086 $        4,025
                                                  ============== ==============
</TABLE>
 
  BAMS' estimated annual effective income tax rate for the three-month periods
ended March 31, 1997 and 1996 was 41.3%. This rate is higher than the federal
statutory tax rate of 35% due principally to state income taxes. Income taxes
payable to affiliate were $1.6 million at March 31, 1997 and $3.2 million at
December 31, 1996.
 
NOTE 4--EARNINGS PER COMMON SHARE
 
  Historical earnings per share have not been presented for the three months
ended March 31, 1996 since the Company had no outstanding stock as of that
date and such information would not be meaningful. Pro forma earnings per
share for the three-month period ended March 31, 1996 is listed below and has
been computed by dividing net income by the weighted average number of common
shares outstanding assuming the stock issued in the Reorganization and
Offerings had been outstanding since January 1, 1994.
 
<TABLE>
<CAPTION>
                                                     FOR THE THREE MONTHS ENDED
                                                             MARCH 31,
                                                    ---------------------------
                                                       1997       1996
                                                    ---------- ----------
     (DOLLAR AMOUNTS IN THOUSANDS EXCEPT EARNINGS
     PER SHARE DATA)
     <S>                                            <C>        <C>        <C>
     Net income..................................   $    7,220 $    5,721
     Average number of shares outstanding........       46,538        N/A
     Pro forma average number of shares
      outstanding................................          N/A     46,300
     Earnings per share .........................   $     0.16        N/A
     Pro forma earnings per share ...............          N/A $     0.12
     Pro forma earnings per share (adjusted)(a)
      ...........................................          N/A $     0.15
</TABLE>
--------
  (a)  Pro forma earnings per share, as adjusted, assumes that proceeds from
       the Offerings in the fourth quarter of 1996 were available from January
       1, 1994 and were invested in short-term investments.
 
                                       6
<PAGE>
 
                          BA MERCHANT SERVICES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 5--CHANGES IN EARNINGS PER SHARE CALCULATIONS
 
  In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128), which is effective for periods ending after December 15, 1997.
BAMS expects to adopt SFAS No. 128 in the fourth quarter of 1997. Upon the
adoption, BAMS will be required to change the method currently used to compute
earnings per share and to restate all prior periods presented. SFAS No. 128
eliminates "primary" earnings per share and earnings per share, assuming full
dilution, and requires only "basic" and "diluted" earnings per share. As a
result, under the new requirements, BAMS' computation of earnings per common
and common equivalent share will be replaced by earnings per common share
which excludes any dilutive effects of outstanding stock options and warrants.
Also, BAMS' computation of earnings per common share, assuming full dilution,
will be replaced with diluted earnings per share and will be based on the
average market price of the Class A Common Stock for the period. There is no
impact expected in connection with the adoption of SFAS No. 128 for the first
quarter of 1997.
 
NOTE 6--RELATED PARTIES
 
  The Company and BAC engage in various intercompany transactions and
arrangements including the provision by BAC of various services to the
Company. Such services are currently provided pursuant to various intercompany
agreements which, among other things, grant to the Company a license to use
the Bank of America name and certain trademarks and service marks in
connection with the Company's business.
 
  Additional services provided under the intercompany agreements include
product distribution services, direct access processing services, direct
access marketing services, system support services, association and network
sponsorship and representation in the credit card associations,
telecommunications services, tax and treasury services, regulatory and
compliance, legal, accounting and audit services and other miscellaneous
support and administrative services.
 
  The Company believes that the cost of services provided under the
intercompany arrangements are not materially different from the costs that
would have been incurred if the Company was unaffiliated with BAC.
 
                                       7
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
HIGHLIGHTS
 
  Sales processed by BA Merchant Services, Inc. ("BAMS" or the "Company") in
the first quarter of 1997 were up $1.3 billion or 25 percent from last year
and reflect the continued expansion of its internal sales staff. During the
first quarter, BAMS opened sales offices in Orlando, Florida and Atlanta,
Georgia. Additionally, BAMS now has a sales presence in Colorado, and plans to
open sales offices in Philadelphia, Pennsylvania and Boston, Massachusetts by
the end of the second quarter.
 
  The Company continues to pursue obtaining the necessary foreign regulatory
approvals for the acquisition of various BAC merchant processing businesses in
Asia. In 1996, the Company entered into a definitive agreement with BAC to
acquire the merchant processing business then conducted by BAC in Thailand and
the Philippines (the Asian Acquisitions) and to work cooperatively to allow
BAMS to acquire BAC's merchant processing businesses in Taiwan and other
countries in Asia, subject to the approval of the local regulatory authorities
in each country. Approval from the Ministry of Commerce in Thailand has been
received, and the Company anticipates the acquisition of BAC's merchant
processing business in Thailand to be completed in the second or third quarter
of 1997. The Company is also awaiting final approval from the Securities and
Exchange Commission of the Philippines for the acquisition of such business of
BAC in that country and anticipates the acquisition of this Asia component
will be completed prior to the end of the third quarter of 1997, although no
assurance can be given that the approval will be obtained or as to the timing
thereof.
 
  The Company submitted a formal application to conduct business operations in
Taiwan to the Ministry of Finance of the Republic of China on January 16,
1997. Approval was received on April 30, 1997. The Company expects to complete
other governmental requirements by the end of the third quarter or early in
the fourth quarter. No assurance can be given that all other governmental
requirements will be completed or as to the timing thereof.
 
  The Company successfully piloted its new transaction processing system
called Hostlink(TM) during the first quarter of 1997 and anticipates fully
converting all merchants from the current in-house transaction processing
system to the new system during the second quarter. The new system will allow
the Company to reduce its dependence on third party vendors and reduce its
incremental cost of processing for new merchants.
 
  The Company began the integration of its Northwest operations that were
acquired from BANW and expects to complete the conversion of those operations
to its primary merchant accounting system by mid-1997. By converting all
processing operations to one merchant accounting system, the Company expects
to reduce costs by eliminating duplicate back office operations, eliminating
costs associated with the duplicate computer systems and restructuring certain
customer service functions.
 
RESULTS OF OPERATIONS
 
  Net Revenue. In the three-month period ended March 31, 1997, net revenue was
$32.9 million, up $4.6 million, or 16 percent, from the three-month period
ended March 31, 1996. This increase was primarily attributable to a $1.3
billion or 25 percent increase in sales volume processed during the first
quarter of 1997. The increase in sales volume resulted primarily from growth
in the Company's merchant base through continued emphasis on marketing and
sales growth, especially in the expansion to new sales territories, including
New York and Chicago.
 
  Operating Expense. Total operating expense was $22.4 million in the three
months ended March 31, 1997, an increase of $3.9 million, or 21 percent, from
the same period a year ago. This increase was primarily reflected in higher
general and administrative expense, salaries and employee benefits and data
processing and communications expense. General and administrative expense
increased $1.4 million reflecting increased merchant supplies expense due to
increased volume, increased administrative expense associated with being an
independent company including insurance, accounting and financial reporting
expense and a one time expense associated with the startup cost of a new
merchant. Salaries and employee benefits expense increased $1.4 million from
the three months ended
 
                                       8
<PAGE>
 
March 31, 1996, primarily as a result of staff growth as well as higher
incentive expense. Additionally, data processing and communications expense
was up $0.9 million which was attributable to higher authorization expense and
to increased telecommunications costs, resulting from higher transaction
volume.
 
  Provision for Income Taxes. The provision for income taxes was $5.1 million
for the quarter ended March 31, 1997, compared to $4.0 million for the same
period in 1996, reflecting higher operating income. The effective tax rate at
March 31, 1997 and 1996 was approximately 41.3 percent.
 
BALANCE SHEET REVIEW
 
  The Company's assets totaled $303.9 million as of March 31, 1997, up $17.1
million from December 31, 1996. The increase was primarily due to an increase
in cash and cash equivalents of $72.9 million partially offset by a $58.0
million decrease in drafts in transit. This reflects the last day of March
falling on a Monday, when the Company receives cash for debit and credit card
transactions processed for the two days over the weekend.
 
  Total liabilities were $44.5 million as of March 31, 1997, up $9.9 million
from December 31, 1996 primarily due to increases in income taxes payable,
accounts payable and accrued credit card association and interchange fees.
Current income taxes payable increased $4.4 million due to the timing of first
quarter estimated tax payments. Accounts payable increased due to receipt of
equipment associated with the Hostlink(TM) System. Credit card association
fees and interchange fees increased $2.4 million as fees were accrued for the
weekend at quarter end.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company generated cash flows from operations of $77.3 million and $13.2
million, for the three months ended March 31, 1997 and 1996, respectively.
Cash flows increased at March 31, 1997 reflecting increased cash and cash
equivalents due to the last day of March falling on a Monday as previously
discussed.
 
  Prior to the time BAC transferred its domestic merchant processing
businesses to the Company in the fourth quarter of 1996, funds generated by
the Company's operations and not used for investment were remitted to BAC.
 
  Total stockholders' equity was $259.4 million as of March 31, 1997 compared
to $252.1 million as of December 31, 1996.
 
  The Company has a commitment for a $70 million revolving line of credit with
an affiliate. The commitment was unutilized as of March 31, 1997.
 
RISK MANAGEMENT
 
  The credit card associations have rules that apply to a bank or other
processing firm that acquires a card transaction from a merchant and processes
and enters the transaction into the credit card system for presentment to the
card issuer. In the event of certain types of billing disputes between a
cardholder and a merchant, the processor of the transaction assists the
merchant in investigating and resolving the dispute. If the dispute is not
resolved in favor of the merchant, the transaction is charged back to the
merchant and that amount is credited or otherwise refunded to the cardholder.
If the processor is unable to collect such amounts from the merchant's
account, and if the merchant refuses or is unable due to bankruptcy or other
reasons to reimburse the processor for the chargeback, the processor bears the
loss for the amount of the refund paid to the cardholder. In cases in which
the transaction is acquired by a processor other than the bank or other
processing firm that will enter it into the credit card system, the processor
is generally required by that bank or other firm to indemnify it against such
losses. The Company has entered into such arrangements with the Bank pursuant
to a sponsorship agreement.
 
                                       9
<PAGE>
 
  Chargeback exposure can also result from fraudulent credit card transactions
initiated by merchant customers. Examples of merchant fraud include logging
fictitious sales transactions and falsifying transaction amounts on actual
sales. The Company conducts a background review of its merchant customers, and
on a daily basis monitors merchant transactions against standards it has
developed in its efforts to prevent merchant fraud. The Company also can
withhold or delay a merchant's daily settlement if fraudulent activity is
suspected, thereby mitigating exposure to loss. However, there can be no
assurance that the Company will not experience significant amounts of merchant
fraud, which may have a material adverse effect on the Company's business,
financial condition, and results of operations. The degree of exposure to
chargebacks may also be adversely affected by the development of new
transaction delivery channels, such as the Internet, which has yet to be fully
evaluated.
 
  In certain cases, the Company, as a processor, bears the risk of merchant
nonpayment of applicable interchange, assessment, and other fees. The Company
receives payments for merchant transactions from a card association clearing
bank less the fees retained by the card issuer (interchange fees). For those
merchants which the Company bills on a periodic basis (usually monthly), the
Company advances payment to the merchant for the gross amount of the
merchant's transactions. The Company then bills the merchant periodically for
the interchange fees and processing fees. Failure by the merchant to honor
such invoices adversely affects the Company's net revenues. The Company is not
exposed to card issuer credit losses unassociated with a dispute between the
cardholder and the merchant as long as the transaction is properly processed
and the merchant is not deemed by the credit card organizations to have
excessive fraud or chargebacks.
 
  Losses from fraudulent or disputed transaction activity were $0.3 million
for the quarter ended March 31, 1997, representing .005 percent of sales, down
from .006 percent in the first quarter of 1996.
 
FORWARD-LOOKING STATEMENTS
 
  This report contains forward-looking statements, usually containing the
words "estimate", "project", "expect" or similar expressions. These statements
are subject to uncertainties, including those discussed in this report and in
"Forward-Looking Statements" in BAMS' report on Form 10-K for the year ended
December 31, 1996, that could cause actual results to differ materially.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
 
                           PART II OTHER INFORMATION
 
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
  Exhibits
 
   27 Financial Data Schedule
 
  The Company did not file any reports on Form 8-K during the three months
ended March 31, 1997.
 
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<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.
 
                                     BA MERCHANT SERVICES, INC.
                                     Registrant
 
                                     By Principal Executive Officer and
                                     Duly Authorized Signatory:
 
                                     /s/ Sharif M. Bayyari
                                     ------------------------------------------
                                     SHARIF M. BAYYARI
                                     President and Chief
                                     Executive Officer
                                     May 13, 1997
 
                                     By Principal Financial Officer and
                                     Duly Authorized Signatory:
 
                                     /s/ James H. Williams
                                     ------------------------------------------
                                     JAMES H. WILLIAMS
                                     Executive Vice President,
                                     Chief Financial Officer and
                                     Chief Accounting Officer
                                     May 13, 1997
 
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