State Street (STT)

OVERVIEW

        State Street Corporation is a financial holding company headquartered in Boston, Massachusetts. Through its subsidiaries, including its principal bank subsidiary, State Street Bank and Trust Company, State Street provides a full range of products and services to meet the needs of institutional investors worldwide. Unless otherwise indicated or unless the context requires otherwise, all references in this Management's Discussion and Analysis to "State Street," "we," "us," "our" or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. At September 30, 2007, we had consolidated total assets of $139.89 billion, total deposits of $93.00 billion, total shareholders' equity of $11.25 billion and employed 26,425.

        Our customers include mutual funds and other collective investment funds, corporate and public retirement plans, insurance companies, foundations, endowments and other investment pools, and investment managers. Our two lines of business, Investment Servicing and Investment Management, provide products and services including custody, recordkeeping, daily pricing and administration, shareholder services, foreign exchange, brokerage and other trading services, securities finance, deposit and short-term investment facilities, loan and lease financing, investment manager and hedge fund manager operations outsourcing, performance, risk and compliance analytics, investment research and investment management, including passive and active U.S. and non-U.S. equity and fixed income strategies. We had $15.15 trillion of assets under custody and $2 trillion of assets under management at September 30, 2007. Financial information about our business lines is provided later in the "Line of Business Information" section.

        This Management's Discussion and Analysis is part of our Quarterly Report on Form 10-Q to the SEC, and updates the Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2006, which we refer to as the 2006 Form 10-K, and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007. We previously filed these reports with the SEC. You should read the financial information in this Form 10-Q in conjunction with the financial information contained in those filings. Certain amounts previously reported have been reclassified to conform to current period classifications.

        We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles, which we refer to as GAAP, and which require management to make judgments in the application of its accounting policies that involve significant estimates and assumptions about the effect of matters that are inherently uncertain. Accounting policies considered relatively more significant in this respect are accounting for lease financing, goodwill, income taxes and pension costs. Additional information about these accounting policies is included in the "Significant Accounting Estimates" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2006 Form 10-K. Other than our application of the provisions of FASB Staff Position No. FAS 13-2 and Interpretation No. 48, which are discussed in note 1 to the consolidated financial statements in this Form 10-Q, there were no significant changes to these accounting policies during the first nine months of 2007.

State Street Corporation is a financial holding company headquartered in Boston, Massachusetts. Through its subsidiaries, including its principal bank subsidiary, State Street Bank & Trust Company, State Street provides a full range of products and services to meet the needs of institutional investors worldwide. Unless otherwise indicated or unless the context requires otherwise, all references in this Management’s Discussion and Analysis to “State Street,” “we,” “us,” “our” or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. At June 30, 2007, we had consolidated total assets of $112.27 billion, total deposits of $73.04 billion, total shareholders’ equity of $7.75 billion and employed 22,350.

Our customers include mutual funds and other collective investment funds, corporate and public retirement plans, insurance companies, foundations, endowments and other investment pools, and investment managers. Our two lines of business, Investment Servicing and Investment Management, provide products and services including custody, recordkeeping, daily pricing and administration, shareholder services, foreign exchange, brokerage and other trading services, securities finance, deposit and short-term investment facilities, loan and lease financing, investment manager and hedge fund manager operations outsourcing, performance, risk and compliance analytics, investment research and investment management, including passive and active U.S. and non-U.S. equity and fixed income strategies. We had $13.04 trillion of assets under custody and $1.93 trillion of assets under management at June 30, 2007. Financial information about our business lines is provided later in the “Line of Business Information” section.

This Management’s Discussion and Analysis is part of our Quarterly Report on Form 10-Q to the SEC, and updates the Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2006, which we refer to as the 2006 Form 10-K, and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007. We previously filed both of these reports with the SEC. You should read the financial information in this Form 10-Q in conjunction with the financial information contained in those filings. Certain amounts previously reported have been reclassified to conform to current period classifications.

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles, which we refer to as GAAP, and which require management to make judgments in the application of its accounting policies that involve significant estimates and assumptions about the effect of matters that are inherently uncertain. Accounting policies considered relatively more significant in this respect are accounting for lease financing, goodwill, income taxes and pension costs. Additional information about these accounting policies is included in the “Significant Accounting Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2006 Form 10-K. Other than our application of the provisions of FASB Staff Position No. FAS 13-2 and Interpretation No. 48, which are discussed in note 1 to the consolidated financial statements in this Form 10-Q, there were no significant changes to these accounting policies during the first six months of 2007.

OVERVIEW

Comparing the third quarter of 2006 to the third quarter of 2005, our total revenue grew 9%, with fee revenue up 10% and net interest revenue up 13%, and total operating expenses increased 8%. The year-over-year growth in revenue was particularly notable in servicing and management fees and securities finance revenue. We experienced seasonal weakness in trading services and securities finance revenue during the third quarter of 2006 compared to this year’s second quarter; however, compared to the very strong third quarter of 2005, securities finance revenue increased 18%. While operating expenses increased 8% in the 2006 to 2005 quarterly comparison, they were down 7% from this year’s second quarter, partly offsetting seasonal revenue declines, as we continued to actively manage our expenses. Our effective tax rate for the third quarter of 2006 was 34.6%, compared to 34.0% for the third quarter of 2005.

Third quarter 2006 diluted earnings per share of $.83 increased 11% from $.75 per share from continuing operations for the third quarter of 2005. This year’s third quarter earnings included $.03 per share related to a cumulative gain recorded in trading services revenue resulting from the consolidation into our balance sheet of certain trusts that we use in connection with our tax-exempt investment programs. Additional information about this cumulative gain is included in the “Results of Operations—Fee Revenue” section of this Discussion and Analysis. Earnings for the third quarter of 2005 included $.03 per share related to the final settlement of the 2003 sale of our Private Asset Management business. We reported this gain in our 2005 10-K.

In the same comparison, earnings per share from net income was $.83 and $.43, respectively. The 2005 earnings included a loss from discontinued operations of $.32 per share related to our plan to divest our ownership interest in Bel Air Investment Advisors LLC (“Bel Air”), which we completed early in the third

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

quarter of 2006. We reported this loss in our 2005 10-K. Additional information concerning the Bel Air divestiture is included in Note 2 to the Consolidated Financial Statements in this Form 10-Q.

For the first nine months of 2006, total revenue grew 16%, with particularly strong growth in management fee and trading services revenues, up 28% and 29%, respectively, and net interest revenue, up 19%. In the same comparison, servicing fee revenue grew 10% and securities finance revenue grew 15%. Growth in operating expenses of 12% resulted in positive operating leverage of 4%, which we define as the excess of the growth rate of total revenue over the growth rate of total operating expenses.

Diluted earnings per share from continuing operations for the first nine months of 2006 was $2.35, up 13% from $2.08 for the 2005 period. Earnings for the 2006 period included tax-related charges of $.25 per share, which consisted of $.18 per share primarily related to the impact on income tax expense of the Tax Increase Prevention and Reconciliation Act, or “TIPRA,” and $.07 per share related to an increased tax provision for the potential resolution of issues with the Internal Revenue Service, or “IRS,” with respect to our treatment of certain leveraged leases. These charges were reported in our second quarter 10-Q. Excluding the $.25 per share of tax-related charges, diluted earnings per share from continuing operations was $2.60 for the first nine months of 2006, a 25% increase from $2.08 per share for the first nine months of 2005.

Diluted earnings per share from net income for the same periods was $2.38 and $1.76, respectively. The nine-month 2006 period included income from discontinued operations of $.03 related to the Bel Air divestiture, which we reported in our first quarter 2006 10-Q. The 2005 period included the previously mentioned loss from discontinued operations of $.32 per share related to the Bel Air divestiture.

In our 2005 10-K, management reaffirmed our financial goals for 2006. These financial goals are: (1) annual growth in operating-basis earnings per share from continuing operations of 10% to 15%; (2) annual growth in operating-basis revenue of 8% to 12%; and (3) annual operating-basis return on shareholders’ equity from continuing operations of 14% to 17%. Operating-basis results, as defined by management, include taxable-equivalent net interest revenue with a corresponding charge to income tax expense, and exclude the previously described tax-related charges.

Management measures our financial goals and related results on an operating basis to provide financial information that is comparable from period to period, and to present comparable financial trends with respect to our ongoing business operations. The use of taxable-equivalent net interest revenue facilitates the comparison of revenues from both taxable and non-taxable sources. The previously described tax-related charges are not part of our normal ongoing business operations, and as a result prevent a meaningful comparison of earnings per share and return on shareholders’ equity with that of other periods. Management believes that operating-basis financial information facilitates an investor’s understanding and analysis of State Street’s underlying performance and trends in addition to financial information prepared in accordance with GAAP.

Through the first nine months of 2006, our operating-basis financial performance, as defined above, places us above the high end of our ranges for all three of the above-described financial goals. For full-year 2006, we expect that we will moderately exceed the high end of these ranges. Our full-year 2006 financial results will continue to be affected by the current short-term domestic and non-U.S. interest-rate environment, as well as the pace of capital markets activities. We intend to keep the credit quality of our investment portfolio high, and will continue to manage our operating expense growth to support growth in revenue.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Information about risks and uncertainties that could cause our actual financial results to differ materially from our financial goals is included in Item 1A of our 2005 10-K.

OVERVIEW

Comparing the second quarter of 2006 with the second quarter of 2005, our total revenue grew 21% and total operating expenses were up 14%. Total fee revenue grew 20%, with the growth particularly strong in management fees and trading services fees, primarily foreign exchange trading revenue. In addition, net interest revenue was up  21% as a result of a more favorable mix of deposits and growth in the balance sheet due to customer demand. We continued to manage expenses in light of a dynamic market environment, and achieved positive operating leverage of 7%, which we define as the excess of the growth rate of total revenue over the growth rate of total operating expenses.

Second quarter 2006 diluted earnings per share of $.68 included tax-related charges of $.25 per share. These charges consisted of $.18 per share primarily related to the impact on income tax expense of the recently passed Tax Increase Prevention and Reconciliation Act, and $.07 per share related to an additional provision for the potential resolution of issues with the Internal Revenue Service, or “IRS,” with respect to our treatment of certain leveraged leases. These issues have been disclosed in our previous SEC filings. Excluding the $.25 per share of tax-related charges, diluted earnings per share were $.93 for the second quarter of 2006, a 41% increase from $.66 per share for the second quarter of 2005. Our effective tax rate for the second quarter of 2006 was 52.1%, compared to 34.0% for the second quarter of 2005. Additional information concerning the charges to income tax expense is included in the “Income Taxes” section of this Discussion and Analysis, and in Note 12 to the Consolidated Financial Statements in this Form 10-Q.

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OVERVIEW

Comparing the first quarter of 2006 with the first quarter of 2005, our total revenue grew 16%, our expenses were up 13%, and earnings per share from continuing operations grew 25%. We achieved positive operating leverage, which we define as the excess of the growth rate of total revenue over the growth rate of total operating expenses, of 3%.

Net income for the first quarter of 2006 included income from discontinued operations of $10 million (income of $16 million reduced by related tax expense of $6 million), or $.03 per share. The income related to finalizing costs associated with our plan to divest our ownership interest in Bel Air Investment Advisors, or “Bel Air.” Additional information concerning the Bel Air divestiture is in Note 2 to the Consolidated Financial Statements in this Form 10-Q. Including income from discontinued operations, net income for the first quarter of 2006 was $292 million, or $.87 per diluted share.

In our 2005 10-K, we reaffirmed our financial goals for State Street for 2006. These financial goals are: (1) annual growth in operating-basis earnings per share from continuing operations of 10% to 15%; (2) annual growth in operating-basis revenue of 8% to 12%; and (3) annual operating-basis return on shareholders’ equity from continuing operations of 14% to 17%. These goals are measured on an operating basis. Operating-basis results, as defined by management, include taxable-equivalent basis net interest revenue with a corresponding charge to income tax expense. We measure our financial goals and related results on an operating basis to provide financial information that is comparable from period to period, and to present comparable financial trends with respect to our ongoing businesses and operations. We believe that this financial information facilitates the understanding and analysis of State Street’s ongoing activities in addition to financial information prepared in accordance with GAAP.

For the first quarter of 2006, we exceeded the above-stated ranges. If the current strength in revenue growth continues, we may be above the middle of the above-stated ranges for the full year; however, the interest-rate environment, seasonality in our business, particularly as it has historically affected

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

market-driven revenue, and managing expense growth will continue to present challenges for the remainder of 2006. Information about risks and uncertainties that could cause our actual results to differ materially from our financial goals is included in Item 1A of our 2005 10-K.

State Street Corporation recorded net income from continuing operations for the third quarter of 2005 of $250 million, or $.75 per diluted share, compared to $177 million, or $.52 per diluted share, for the third quarter of 2004. Revenue of $1.39 billion in the third quarter of 2005 increased 18%, or $214 million, compared to $1.17 billion in the third quarter of 2004. Total operating expenses for the third quarter of 2005 of $1.01 billion increased 11%, or $ 102 million, compared to $906 million in 2004. For the third quarter of 2005, return on shareholders’ equity from continuing operations was 15.9%, compared to 11.7% in the third quarter of 2004.

For the nine months ended September 30, 2005, net income from continuing operations was $696 million, or $2.08 per diluted share, compared to $614 million, or $1.80 per share for the comparable period in 2004. Revenue of $4.06 billion in 2005 increased 10%, or $377 million, compared to $3.68 billion in 2004. Total operating expenses for year-to-date 2005 of $3.00 billion increased 8%, or $235 million, compared to $2.77 billion in 2004. For the nine months ended September 30, 2005, return on shareholders’ equity from continuing operations was 15.1%, compared to 13.8% in 2004.

Results for the third quarter and first nine months of 2005 compared to the 2004 periods reflected higher servicing, management, securities lending and trading services fee revenue, partially offset by slightly higher operating expenses. The growth rate of revenue exceeded the growth rate of expenses for both 2005 periods.

Overall results for third quarter and year-to-date 2005 included a net loss from discontinued operations of $107 million (charge of $165 million reduced by related tax benefit of $58 million), or $.32 per share. During the third quarter of 2005, State Street committed to a plan to divest its ownership interest in Bel Air Investment Advisors LLC (“Bel Air”). State Street’s decision to divest will allow the Corporation to further sharpen its strategic focus on accommodating the needs of global institutional investors. Given the above, the Corporation realigned its business line organizational and reporting structure for Bel Air. The above-mentioned charge consisted primarily of the write-off of goodwill associated with the original investment and write-downs of tangible assets to fair value less costs to sell. Results of operations for Bel Air for current and prior periods have not been reclassified to discontinued operations because these results are not material to those of the consolidated Corporation. Additional information concerning the Bel Air divestiture is included in Note 2 to the Consolidated Financial Statements in this Form 10-Q.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Including the loss from discontinued operations, net income for the three and nine months ended September 30, 2005, was $143 million and $589 million, respectively, or $.43 per share and $1.76 per share, respectively. Results for both periods included a gain of $16 million, or $.03 per share, from the final settlement of the 2003 sale of the Private Asset Management (“PAM”) business. Results for the nine months ended September 30, 2005, also included a pre-tax charge of $26 million, or $.05 per share, related to a sub-lease agreement with an unrelated third party.

Results for the third quarter of 2004 included $16 million of merger and integration costs, or $.03 per share, associated with the acquisition of a substantial portion of the Global Securities Services (“GSS”) business of Deutsche Bank AG (“Deutsche Bank”). For the first nine months of 2004, these merger and integration costs were $50 million, or $.10 per share.

State Street Corporation’s second-quarter earnings per share were $.66, up 2% from $.65 in the second quarter of 2004. Revenue of $1.36 billion in the second quarter of 2005 increased 6%, or $74 million, compared to $1.29 billion in the second quarter of 2004. Total operating expenses for the second quarter of 2005 of $1.03 billion increased 8%, or $75 million, compared to $953 million in 2004. Net income of $220 million was flat from a year earlier. For the second quarter of 2005, return on shareholders’ equity was 14.4% compared to 14.9% in the second quarter of 2004.

For the six months ended June 30, 2005, earnings per share were $1.33, up 4% from $1.28 for the comparable period in 2004. Revenue of $2.67 billion in 2005 increased 7%, or $163 million, compared to $2.51 billion in 2004. Total operating expenses for year-to-date 2005 of $1.99 billion increased 7%, or $133 million, compared to $1.86 billion in 2004. Net income was $446 million for the first six months of 2005, up $9 million compared to $437 million a year earlier. For the six months ended June 30, 2005, return on shareholders’ equity was 14.7% compared to 14.9% in 2004.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)

Results for the three and six months ended June 30, 2005 included $26 million of occupancy expense, or $.05 per share, related to a sub-lease agreement with an unrelated third party. Results for the second quarter of 2004 included $16 million of merger and integration costs, or $.03 per share, associated with the acquisition of a substantial portion of the Global Securities Services (“GSS”) business of Deutsche Bank AG (“Deutsche Bank”). For the first six months of 2004, these merger and integration costs were $34 million, or $.07 per share.

Results for the second quarter and first six months of 2005 compared to the 2004 periods reflected higher revenue, particularly servicing and investment management fees and securities lending revenue, partly offset by lower gains on sales of available-for-sale investment securities and higher operating expenses.

The impact of seasonality is expected to temper the Corporation’s rate of growth in market-driven revenue, particularly from securities lending, for the third quarter of 2005. See the section titled “Financial Goals and the Factors that May Affect Them” for a discussion of State Street’s financial goals.

In October 2004, State Street announced its intent to divest its ownership interest in Bel Air Investment Advisors LLC. This divestiture, expected to occur in 2005, will result in a pre-tax charge of approximately $150 million to $170 million.